Research and Development in a distributed world…

To take my previous entry here on Globalization being an innovation imperative further, I am going to elaborate on my learning from performing multiple globalization benchmarking and portfolio optimization studies in the past couple of years.
I am going to cover all the corporate wide functions (detailed below) in individual entries.
Research & Development – Covered in this blog
Marketing & Sales
Finance & Accounting
Human Resources
Internal IT
Procurement
End Customer Services & Support
Quick disclaimer – The data/ insights are for technology product companies spanning across software, computer hardware, telecom/ networking, semiconductor verticals; In my opinion offshore locations typically mean India & China, I would not to the extent of including Israel here because the cost is significantly high and the engineers there for some reason have ridiculously high innovation levels.
Ok so moving on from introductions and disclaimers, technology product companies typically have spent about 16% of their net sales on research & development. This number is higher for companies in hardware/ infrastructure intensive verticals such as telecom/ networking or semiconductors by about 5 – 6 percentage points. A lot of changes have happened to this number over the last 6 – 8 quarters because of our friends in Wall Street. But historically speaking, the companies that have bet their money on R&D and innovation have assured future revenue streams and are actually doing much better than the others even in the short term.
Talking on the headcount context, Research & Development accounts for about 32 – 38% of the global headcount of the companies.  These two numbers show how the whole globally distributed R&D team is neatly packed cost wise.  The average leverage ratio (Headcount outside of the HQ country to the total Headcount) for these companies is about 47%. That’s huge considering that the large sized companies like Microsoft or Cisco have about a total of over 30,000 people working under R&D.
In my earlier post, I have elaborated how the offshore teams predominantly exist to offset costs or cater to the lower end of R&D value chain. This saps about half of the innovation bandwidth of a company. Although I am not saying that innovation does not happen in offshore locations like India or China but the “innovation gap” is so huge that if plotted on an excel chart, it would take a person six feet high standing on the offshore column to reach the column for the HQ.
The large sized companies (Net Sales > USD 20 Bn) have got it right, at least now, largely through trial and error but nevertheless right. Some of them have even gone to the extent of having dedicated 30 member research (not R&D, just hard core research) teams in the remotest, hostile locations deep in the south American rain forests or Siberia, Russia and hire the smartest of the talent in that country and are able to independently innovate.
The root cause of all the innovation related challenges in the offshore locations can be understood by looking at how the globalized R&D value chain looks like in this distributed world – The core and most critical part of the value chain, Product Conceptualization, is predominantly restricted to the HQ. The chunks of less complex tasks are sent to these offshore locations who engage with the service providers, who honestly don’t know the “I” in product innovation.
In my opinion companies should have regional leadership teams who handle the entire product development cycle from the offshore locations itself. This solves two purposes first one being the complete and effective leverage of the local talent and the second being reverse innovation.
Stay tuned for more insights about the globalization insights into the other corporate functions.

To take my previous entry here on Globalization being an innovation imperative further, I am going to elaborate on my learning from performing multiple globalization benchmarking and portfolio optimization studies in the past couple of years.

I am going to cover all the corporate wide functions (detailed below) in individual entries.

  1. Research & Development – Covered in this blog
  2. Marketing & Sales
  3. Finance & Accounting
  4. Human Resources
  5. Internal IT
  6. Procurement
  7. End Customer Services & Support

Quick disclaimer – The data/ insights are for technology product companies spanning across software, computer hardware, telecom/ networking, semiconductor verticals; In my opinion offshore locations typically mean India & China, I would not to the extent of including Israel here because the cost is significantly high and the engineers there for some reason have ridiculously high innovation levels.

Ok so moving on from introductions and disclaimers, technology product companies typically have spent about 16% of their net sales on research & development. This number is higher for companies in hardware/ infrastructure intensive verticals such as telecom/ networking or semiconductors by about 5 – 6 percentage points. A lot of changes have happened to this number over the last 6 – 8 quarters because of our friends in Wall Street. But historically speaking, the companies that have bet their money on R&D and innovation have assured future revenue streams and are actually doing much better than the others even in the short term.

Talking on the headcount context, Research & Development accounts for about 32 – 38% of the global headcount of the companies.  These two numbers show how the whole globally distributed R&D team is neatly packed cost wise.  The average leverage ratio (Headcount outside of the HQ country to the total Headcount) for these companies is about 47%. That’s huge considering that the large sized companies like Microsoft or Cisco have about a total of over 30,000 people working under R&D.

In my earlier post, I have elaborated how the offshore teams predominantly exist to offset costs or cater to the lower end of R&D value chain. This saps about half of the innovation bandwidth of a company. Although I am not saying that innovation does not happen in offshore locations like India or China but the “innovation gap” is so huge that if plotted on an excel chart, it would take a person six feet high standing on the offshore column to reach the column for the HQ.

The large sized companies (Net Sales > USD 20 Bn) have got it right, at least now, largely through trial and error but nevertheless right. Some of them have even gone to the extent of having dedicated 30 member research (not R&D, just hard core research) teams in the remotest, hostile locations deep in the south American rain forests or Siberia, Russia and hire the smartest of the talent in that country and are able to independently innovate.

The root cause of all the innovation related challenges in the offshore locations can be understood by looking at how the globalized R&D value chain looks like in this distributed world – The core and most critical part of the value chain, Product Conceptualization, is predominantly restricted to the HQ. The chunks of less complex tasks are sent to these offshore locations who engage with the service providers, who honestly don’t know the “I” in product innovation.

In my opinion companies should have regional leadership teams who handle the entire product development cycle from the offshore locations itself. This solves two purposes first one being the complete and effective leverage of the local talent and the second being reverse innovation.

Stay tuned for more insights about the globalization insights into the other corporate functions.

Author: Anand Tatambhotla, Consultant

*Unless specified Views/Opinions Expressed in the blog are those of an Individual Consultants.

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