Product engineering captives in India would see a reduction in cost by 10-12 percent over the next 12 months

Our detailed study on ‘Operations Cost Benchmarking for Product Engineering Captives in India’ gives an assessment of the cost of running a product engineering captive in India based on a survey conducted amongst 25 R&D centres spread across locations such as Bangalore, Hyderabad and Pune, which happen to be the key locations for R&D Offshoring in India.

In the year 2008, the cost of running an R&D centre in India has come down by at least 6 percent when compared to 2007 in absolute dollar terms. The current manner in which these captives are taking proactive measures for optimizing their cost points, coupled with the declining trend of Rupee against dollar can be favourable and may help reduce costs by about 10-12 percent over the next 12 months. The total cost of running an R&D centre in India is estimated at about USD 39,000/ FTE for the year 2008. This ratio of cost/ FTE, which had seen an increase of more than 15 percent till 2006, witnessed a decrease in the same for the first time ever, in the last 5 years.

Owing to the global economic meltdown and strict budgetary constraints, R&D centers in India were mandated by their HQs to manage costs effectively over the last 12 months. In addition to this, currency depreciation against all major currencies (i.e. USD, EUR and JPY) favored reduction in cost across MNC R&D centers in India. On a yearly average basis, there has been depreciation in the Indian currency by about 9 percent against the US dollar from the year 2007 to 2008. Moreover, it also slipped by 25 percent against the USD from January 2008 to December 2008.

Providing specifics of the survey conducted with 25 R&D centres, the study revealed that the median of the cost for companies with headcount range of 500-1000 employees at the centre level incurred costs significantly lower when compared to small-sized centres (i.e. less than 500 employees). Infrastructure occupancy, along with people related investments in growth phase came up to be some of the key reasons for increased cost for smaller R&D centres. A similar analysis of the time of existence of the centre in India revealed that the centres with more than 7 years of existence in the country incurred lesser costs when compared to centres with less than 7 years of establishment.

People cost is the single largest contributor to the entire pie of operations cost and salary escalations will be in control in the foreseeable future and will only start picking up in the next 2-4 years. In fact, due to increased availability of skilled talent pool at the junior level, salaries are expected to fall below the current levels in the near times to come. The downturn has indeed helped these India R&D centers in multiple ways to come up with modes and methods to reduce costs significantly. Some measures like lower base-lining of infrastructure cost components such as rentals will further help reduce cost escalations. In addition to this, emphasis on high-end communication solutions such as Telepresence will help put travel cost in control which did account for about 5 percent of the total cost last year.

With India continuously moving up the R&D value chain, there would be increased requirement of experienced talent with enhanced domain/ technical expertise in the future, leading to a moderate increase in the cost. However, the overall outlook for operations cost for these product engineering captives looks promising in the near future. Increased focus on important aspects like productivity at the India center would also help companies leverage maximized value on every single dollar spent on R&D.

The study concluded that a majority of these R&D centers are now looking at every single cost component to optimize their investments. India’s unique positioning of a low cost destination has strengthened with the cost optimization focus by these centers. With the economy starting to show signs of ‘coming back to life’, this advantage will help build a strong case for increased offshoring to India. Zinnov had estimated the R&D Offshoring market to grow at about 23 percent last year and the study still sees the average being maintained by 2013.

Praveen Bhadada
Engagement Manager

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