Globalization of R&D
Tags : R&D, Offshore Product Development, Globalization, Development Cost, IP Protection, Quality Products
Outsourcing or off-shoring a part or whole of a company’s business operation is a well-known concept based on the principles of comparative advantage. Companies, especially in the traditional manufacturing industries of automotive, textile or steel have a long history of setting up production lines in developing markets where labour is cheap and there is access to fast-growing markets. Outsourcing has come a long way since then and focus has shifted from low-cost labour-intensive work to standardized production systems reaping economies of scale and finally to high end research and development carried out in state-of-the-art R&D setups employing skilled scientists and engineers.
Globalization of R&D
This globalization of R&D refers to the decentralization of R&D with diverse research groups, including outsourced R&D teams, located at different locations and time zones collaborating to achieve the set targets. This has been motivated by multiple factors of which the Internet and the resulting ease of communication is just one factor.
Access to Talent
The first motivation for companies is the constant need to innovate and bring out new products in highly compressed time schedules. Companies need access to a large pool of highly skilled researchers and engineers that are available in emerging markets like India and China.
Access to fast-growing markets
The second motivation is to meet the demands of fast-growing markets. Companies realize that they can best address the needs of fast-growing markets by keeping the R&D close to their prospective customers. Research is carried out at these locations to extend core products and tailor them to the needs of particular markets.
Cost, cost and cost
The third motivation is cost. Most of the companies surveyed by the Economist Intelligence Unit did list cost as their motivation though it was low down on their priority. While emerging economies do provide cost benefits in areas including lower-cost labour, real-estate and office rental and tax breaks, companies realize that unless they can orchestrate the distributed R&D network well, they might in fact face escalating costs.
Software Product Outsourcing
With these motivations, software companies are increasingly looking to outsource their core product design and development to a new breed of vendors who specialize in developing products. This phenomenon is called Software Product Outsourcing (SPO) and is expected to grow from current levels of US $3 billion to US $11 billion in India by the year 2008 as projected by India’s National Association of Software Companies (Nasscom). SPO vendors like Aditi Technologies, Imfinity and Aspire Systems are able to successfully deliver value to their clients by focusing on hiring and training the best available talent, inculcating a culture of innovation and putting in place the processes that ensure timely development and quality.
Despite the political tones in certain countries, outsourcing makes business sense to companies and is expected to flourish. Consulting company McKinsey estimates that by 2010, the U.S. IT industry will save US $390 billion through offshore outsourcing of software development. As outsourcing evolves and encompasses core operations like product design and intellectual property (IP) development there is a growing need for companies to be aware of emerging issues especially that of IP protection.
The IP concern
A survey conducted by the Economist Intelligence Unit shows 38% of companies surveyed placed IP protection as their primary concern to outsourcing R&D. The concern is valid when viewed in the light of the increased onus placed on IP by the knowledge driven economy. The concern is heightened in the case of startups and SMEs where IP could be a large portion of the company’s assets.
In this light it is quintessential for a company to know upfront how the outsourced R&D partner measures up in protecting shared IP. Further, IP assets are defined and governed in varying ways across national boundaries and make issue resolution complicated in the unfortunate event of an IP dispute.
Addressing this concern is critical for any SPO vendor. IP protection is ensured by the vendor taking steps at multiple levels starting from putting in place legal contracts that clearly define what is considered IP in the given context and the associated ownership details. This is augmented by the physical and procedural controls implemented company-wide that dramatically lower the incidence of IP falling into wrong hands or being used in detrimental ways.
SPO vendors who deliver from countries that have a strong legal framework have a relative competitive advantage in being able to assure peace of mind to their customers. Like in the case of Singapore, which has championed itself as the ideal place to conduct R&D, other countries need to secure their legal framework to reassure potential customers and continue the flow of R&D investment.
Summary
Globalization of R&D is an evolving phenomenon. There are strong motivations to leverage on outsourced R&D to ensure continued competitive advantage and market expansion. New SPO vendors are entering the market even as the incumbents solidify their position by demonstrating a good track record. For companies planning to outsource their core development, this is a good sign as there is a wider pool of vendors to choose from. This is especially a boon for smaller companies and startups which can now have the access to high quality product development. There are of course issues that the companies need to think through before selecting a vendor. This includes evaluating and selecting a vendor which fits your need best and ensuring that the vendor is on the same page as you when it comes to respecting and handling your company’s intellectual property.
Resources
World Intellectual Property Organization
http://www.wipo.int/sme/en/documents/outsourcing.htm#intro
Economist Intelligence Unit
Scattering the Seeds of Invention:
http://graphics.eiu.com/files/ad_pdfs/RnD_GLOBILISATION_WHITEPAPER.pdf
