IEEE does an annual survey of engineering jobs. This year’s survey, presented in the Feb issue of IEEE Spectrum (subscription required), has interesting bits about R&D offshoring.
Not surprisingly, though, when we asked those who said yes where they planned to outsource, Asia was the big winner, with 39.1 percent plumping for India, followed by China at 32.6 percent. Interestingly, the United States came in third, with 28.3 percent, representing 13 respondents—nine of whom are based in the Asia/Pacific region, suggesting that the flow of outsourcing is not just from West to East.
Across the board, the No. 1 reason for offshoring R&D is lower labor costs. But lower labor costs are not the only reason for offshoring—also rated high was “Access to additional knowledge and skills.”
Sure enough, most feel that R&D offshoring doesn’t work well. The survey finds that…
…just 9 percent of 133 respondents whose organizations currently offshore R&D reported “No problems.” The biggest headache was “Language, communication, or culture” barriers, as reported by 54.1 percent of respondents, followed by “Insufficient oversight of projects” and “Results are not high quality.”
The reality is that effective R&D offshoring remains a black art. There is still enormous variation in operating models across firms and even within firms. In normal course, the best operating models get identified and convergence takes place around those. Consequently the variation in business practices across firms comes down. IT Services has gone through this cycle. Proven global delivery models now exist and everybody is embracing them. This hasn’t happened to R&D offshoring. It remains less mature. While individual success stories exist, they haven’t yet become repeatable.
Why hasn’t R&D offshoring matured as quickly as IT services? After all, both have been around for about the same time. This is the question that I have often been asked.
I think there are 5 reasons why India-shoring of R&D has matured so slowly…
1. Lack of strategic clarity. The strategic goal behind R&D offshoring is often not clear or communicated. Is it about structural cost savings and therefore about margin improvements? Or is it about redefining the competitive landscape through re-invigorated product innovation? Is it both? In the absence of clarity, R&D offshoring becomes an exercise in budget management. This leads me to the next point.
2. Executive tentativeness. The reality is that R&D offshoring is disruptive. No matter how you do it, through captives or otherwise, there is a disruption involved. If the strategic goal is not clear then the disruption is hard to undertake. Executives become tentative. This is natural as the stakes are high. You miss an ERP implementation by a few months and it’s not end of the world. Missing the product release window often has bigger revenue and competitive positioning consequences.
3. Organizational inertia. In any case, bringing about change is not easy. Product development teams have enormous inertia. They are generally slow to embrace new tools, practices and methodologies. There are many cultural reasons for this which I won’t go into right now.
4. Informal knowledge. Knowledge about effective globalization models is still in the heads of a few people. It’s not yet codified or broadly understood. IEEE Software is beginning to tackle this (see my article in the Sep’06 issue) but more needs to be done. There aren’t any authoritative books out yet (though that will change soon once Deependra Moitra’s future book comes out).
5. Poor benchmarking. I have long advocated that we need something equivalent to the Gartner Magic Quadrant for India-shoring of R&D. This idea is slowly catching on. In the 2007 Strategic Review of Indian IT Industry, NASSCOM has now included an early version of such a chart (on page 70; I don’t have an electronic copy). More comparative analysis in the offshore product development space will accelerate the convergence around successful models.
Global sourcing of product development is no longer an optional strategy. Indeed, products developed without R&D offshoring will be late to market at non-competitive costs. So it is time for the industry to get its act together.
[You may want to read an article that I wrote last April, “From Managing Budgets to Driving Business”. Also relevant is this summary of the first workshop, held in De’06, on Software Product Development Challenges in India]
[Update: Also see “A Practical Framework for Successful Product Offshoring”]
Nice post Sharad. Here are some more reasons that I can think of: Why R&D offshoring has matured so slowly.
I’ve been following your commentary on issues around off shoring.
You made a reference to following book in your post.
“There aren’t any authoritative books out yet (though that will change soon once Deependra Moitra’s future book comes out).”
I was hoping that you would post a review of this book.
It is now available here.
Looking forward to your review.
Deependra Moitra has a book in the works that addresses the various issues of offshoring. His current book (the one you reference in your comment) is more about China and India. But I’ll happy to review this book in the future. I’ll add to my list.
I like your analysis of 5 reasons why India-shoring of R&D has matured so slowly. However, this debate on R&D globalization is a bit like the rhetorical question “why Indians are great at services and not products.” Lot many viewpoints and perspectives floating around but a few who can execute are already doing so without much noise, right?