'India has great potential for product R&D'

Despite negative factors like cost escalation, talent crunch and slowdown, India is poised to become a leading player in the field of R&D, feels Pari Natarajan, CEO of Zinnov, provider of research and IT consulting solutions.

The slowdown in the growth rate of the overall IT industry has also had its effects on the R&D scenario in the country. But, feels Nataragan, India, with its installed base of about 2, 50,000 R&D engineers who have understood the know how’s of the product development, can make it big in the R&D space in the days to come.

And India stands to gain a leg up over its competitors like China. In an interview with B.F. Firos of CyberMedia News, Pari Natarajan talks about the overall challenges, prospects and future of R&D captives in India.

What are the key challenges being faced by R&D captive in today’s business climate in India like attrition?

The top challenges that captive centers are in the four areas of cost escalation, productivity issues, alignment with headquarters (communication issues) and Inability to hire and retain top talent. Salary costs are rising at 12 – 15 per cent every year in India.

When compared to mature market like United States this is high. The US is used to see three per cent increase in salary and it’s very unusual for the HQ to see the salary cost rising at such fast pace in India. This in turn has increased the operations cost per FTE (full time employee).

We have observed the operating cost increase in captives is in the range of 12 – 15 per cent. Increase in operations cost has made way for few questions around productivity of India centers.

In a survey conducted by Zinnov among R&D center heads it was observed that most of the country managers perceived that India center is only 70 per cent as productive as headquarters. There are few quantifiable metrics to measure productivity and most of the discussions around this topic is based on perception.

Alignment of India organization with HQ is the third challenge companies are facing. Communication, organization and strategic issues are the result of alignment of captive center with HQ. Hiring and retaining top talent is another challenge companies live with.

Efforts like Ability of the company to localize HR policies, hire strong leadership team help in mitigating the risk. Project models also play a crucial role in employee hiring and engagement process.

Employee productivity in India is 30-40 per cent lower than some of the more mature R&D markets in the world. What do you think can be the measures to take care of this aspect?

There is no definitive way to measure productivity. We at Zinnov have a productivity analysis and improvement plan for companies. As part of the process we look at factors which impact productivity drivers in companies and collect metrics around these parameters.

Impact of productivity drivers on actual metrics is measured over a period of time and baselines are set for improvement. Few other measures companies have initiated to take care of this aspect are: to increase the average years of experience at the India center, seed expatriate talent in India, move to product ownership model, and increase local customer interaction for product management function etc.

Is innovation alone the key to face the challenges as far as the captives are concerned?

Innovation is a subset of value creation from India. Captive centers are looking to create high business impact by focusing on innovation.

Building products for Indian market and taking it to other emerging markets, contributing to version one of the products from India, leadership support from India to other geographies, strategies to tap India market opportunity etc, are few other focus areas.

What do you think is the best way for Indian captives to grow better, vendor partnerships or organic route?

There is no one prescription which would suit all the captives. Choosing organic vs. vendor partnership depends upon size of the captive, type of work being done, quality of talent, project model, cost model etc.

However, it can be observed that captives leverage vendor partnerships for QA (quality assurance), sustenance etc. Keeping the core R&D in house and working with vendor ecosystem to build the products should be the focus for captive centers going forward.

What do you think are the major areas of focus for vendors in R&D in India in the coming days?

Vendors are now growing high up in the value chain. Building deep domain/technology expertise is very crucial for vendors. Other key areas are revenue model innovation, value quantification, localization expertise for emerging markets etc. Building Center of excellence is the way forward for vendors.

Why potential growth of captives is slower when compared to vendors which are growing at 28%?

Growth for captives is expected to be around 20% year on year. This is triggered by the expansion plans of existing large captives along with the entry of new captives.

More captives are expected to enter India in the areas of embedded and engineering services. Growth for vendors is triggered by offshoring from various geographies along with increased outsourcing from captive centers locally.

The maturity of captive centers in India and the ability of local management teams in these centers to take outsourcing decisions will certainly help vendors. We expect large captive centers to carve out some of the engineering activities from captive centers and work with vendors. Working with vendors will help captive centers to manage cost and quality under strict SLA’s (Service Level Agreements).

Seven firms have shut their R&D operations in India and moved to other parts of the globe. What do you think are the key reasons apart from escalating costs?

If we look at the number of companies folding their operations in India its very few compared to the number of companies who have setup their center. Cost alone is not the reason for these companies to shut down their centers in India.

There are numerous other reasons like leadership instability, change of focus, wrong project selection for offshoring, inability to retain talent etc. Captive centers are working hard to get their strategies right.

These days underperforming captives are seen transferring operations to providers? Is the step in right direction or disastrous?

Transferring operations to service providers is seen mostly among smaller captive centers that are not able to manage the center effectively. It’s definitely a good step for captive centers as they can maximize/derive more value of offshoring, by working with service providers, which would provide the necessary scale and best practices to the captive center headquarters.

Do you think captive centers in India will lose ground to the R&D service providers in the near future mainly due to increasing costs?

This depends on the goal of offshoring set by the company. If the intention is to operate small teams and look at India as a low cost destination then definitely service providers would score more than captives.

However, if the offshoring decision is more strategic to tap India not just for cost but high quality talent and market opportunity then captive model would be preferred. We got to note that both the models have some advantages and disadvantages associated.

Do you see great potential in product R&D in India?

We definitely feel India has great potential for R&D. India has an installed base of about 2, 50,000 R&D engineers who have understood the know how’s of the product development. India still has to offer about 1:3 cost savings for R&D compared to the US. We believe it’s difficult to get this scale of talent in other parts of the world.

What will be the emerging industry verticals in the R&D space in future?

R&D in the area of engineering services specific to manufacturing, consumer electronics and semiconductor vertical is expected to emerge as high growth areas. With large companies setting up their manufacturing base for telecom and mobility we see more R&D centers to expand operations in India.