A Discussion with Dr. Saikat Chaudhuri, Assistant Professor of Management, The Wharton School, University of Pennsylvania. A Wipro Council for Industry Research Initiative
Mention offshoring and most businesspeople think of expert engineers creating new IT applications or cheerful representatives answering phones in call centers. But did you know Wipro is the world's largest independent research and development (R&D) services provider, according to Booz Allen Hamilton and NASSCOM's Offshore Engineering Report, 2006 and among the Best 10 Global leaders in R&D services space by International Association of Outsourcing professionals (IAOP) 2009 list of Global Outsourcing 100? In 2009, 29 percent of the company's revenues came from R&D services.
"Most companies think about outsourcing processes they don't think are core," observes Dr. Saikat Chaudhuri, Assistant Professor of Management at the Wharton School, University of Pennsylvania. "But they actually have needs in core areas, too, like R&D."
For example, their engineering needs could be as simple as supporting a sunset product that still has an installed base or something more sophisticated like working on next generation products.
Service providers are investing in labs as business grows
Today, the Penn professor says service providers are investing in labs. In addition to Wipro, TCS, Infosys, and HCL have them. Scientists work on innovations and file for trademarks and patents. "They need to have the expertise their customers will value. Service providers can't work for their buyers if they don't clearly understand their business," says the professor.
Outsourcing R&D is not new, adds Dr. Chaudhuri. He points out Apple focuses on the architecture and operating system, leaving much of the design work and production to a close-knit ecosystem of exclusive suppliers. Automobile manufacturers work the same way.
What is new, however, is the scale in outsourcing, according to the professor. Today large teams at the service provider are toiling away on bigger projects. "Now they have a critical mass," he says.
Why companies outsource their engineering
Cost savings drive most ITO and BPO offshoring initiatives. But in 2009, the key driver for offshore outsourcing of engineering services was the lack of access to qualified domestic personnel, according to a Duke University study. "Service providers can have expertise companies need but don't possess," Dr. Chaudhuri explains. In addition, high-tech manufacturing firms outsource R&D because of the "ebbs and flows" in their development cycles. "They get resources fluent in their work when they need them, providing an extended engineering team," he adds.
In the consumer electronics area, Dr. Chaudhuri says companies may outsource the entire build of a prototype product. "If the product sells, the company moves it into its mainstream production," he explains. Testing new markets is another popular area for engineering outsourcing, he adds.
Of course, lower cost is still an important secondary driver, he points out. Dr. Chaudhuri says billing rates for R&D software development are comparable to IT services prices. But hardware and other engineering projects could command higher rates of up to 25 percent over IT outsourcing.
How R&D outsourcing engagements differ from the traditional
Outsourcing R&D engagements are different from a typical BPO or ITO engagement because the service provider doesn't necessarily take over the task or process for a fixed price. Sometimes the service provider will work for future royalties, especially when completing end-to-end development of a new product or line, points out the professor.
Companies that outsource R&D have to have "a change in mindset," continues Dr. Chaudhuri. "The buyer/service provider model doesn't work. This is more like creating an alliance," he says. For example, the buyer and service provider typically have "a designer to designer interaction rather than a buyer-supplier relationship, often requiring an alignment of work processes and tools," explains the professor. In addition, there is "much tighter integration" in compliance standards.
Buyers have to behave differently to achieve outsourcing success, continues the professor. "Buyers have to invest more time and effort, especially on coordination, collaboration, and communication," he observes. "The cost/ benefit equation is different."
For example, what is the optimum onsite/offsite ratio? In traditional engagements, buyers try to keep the number of onsite people low. Here, however, the mix may be different since there is more interdependence and a need for closer coordination between client and provider workers.
Also, these projects "don't happen overnight." Instead, the buyer and the service provider have to build a partnership and that may take years. "The projects go from the easiest, most peripheral activities and move closer to the core," he observes. (He calls this "the onion peel approach.") He says Wipro's typical R&D engagements lasted between three and 18 years.
A case study: Motorola
Its engagement with Wipro began in 2005. The manufacturer reached out for help in developing component software for a mobile handset. Wipro provided a team of 17 engineers who worked on developing applications for the phonebook, multimedia, and messaging components. Motorola paid Wipro on a time and materials basis.
Over the years Wipro picked up full ownership for the development of several of these components. In 2007 the service provider took over the complete ownership of all the application software that resided on the phone. Now, the service provider has a risk/reward sharing arrangement with Motorola with the potential to earn royalties from the sales.
By 2009 the Wipro team grew to 200 employees working on seven different products. The service provider works on Motorola"s current technologies but also invested in technologies it envisioned Motorola would use in the future.
Results included Wipro reducing the development time on average from seven months to five.
Wipro's PES offering
Wipro first began working formally in product engineering and R&D services in 1993; it was one of the first Indian service providers to enter this market segment. The company started engineering work designing computer systems and peripherals, then extended to other domains like telecom, automotive, and consumer electronics, to name a few. It also has a large capability in electronic board and ASIC/LSI design, according to S. M. Balasubramaniyan, Vice President, Mission: Quality, Technology, Media, and Telecom SBU.
Wipro has designed subsystems to full systems composed of mechanical and electronic hardware, software, firmware components, and interfaces. Its labs also have the capability and the infrastructure to test them for certification and industry compliance needs, Balasubramaniyan adds.
Wipro currently has three different types of labs. Approximately 15,000 people in them.
- Customer-specific labs. These create a seamless development and engineering environment for the Wipro and customer's teams. The labs are equipped with the customer's products to provide a real-time environment for testing. The tools, systems, and development environment are the same as the customers; Wipro also has access to the customer's intranet and resources. Examples of such labs are a telecom lab for optical networks work, a printer lab for a Japanese manufacturer, a mobile testing lab for a handset maker, and a devices lab for a chip maker, to name a few.
- Engineering division practice groups' labs. Different technology practice groups own them. They serve as incubation centers for the current and new technologies in the practice. Teams also use them for practice support work. Examples are aero simulation and interoperability labs.
- Centers of Excellence. These labs are devoted to a theme. Examples are cloud computing and unified communication.
Two kinds of projects now account for the majority of PES work at Wipro:
- End-to-end development of a single product. Wipro tries to do most of the work in India, with one or two people located on-site with the client for constant interface.
- Wipro serves as an outsourced R&D department. Here Wipro becomes the offshore development center for a client. In one case a computer printer manufacturer with multiple products wanted a new font compression technology that would work across all its product lines. This manufacturer did not have the resources in-house to develop the technology, so it turned to Wipro. The service provider became the capability owner for this technology and then applied it to the buyer's products.
Dr. Chaudhuri says last year competition "became widespread in the PES industry in India," as the volume of services offered reached a certain scale and client demand increased with firms seeking to become more effective and efficient innovators. This year that competition should increase. And that's good for buyers and ultimately the consumers who get to enjoy their new discoveries.
Lessons from the Outsourcing Journal:
- Outsourcing R&D engineering is not new. But last year the scale and competition grew, especially in India.
- This type of offshoring differs from BPO and ITO engagements in the following ways:
- Payment may be different. Payment can even be in royalties.
- The onsite/offshore mix is different because there is more interdependence.
- These relationships look more like an alliance.
- Buyers have to invest more time in them to receive successful results.
- They are long-term, running as long as 18 years.
- Wipro has three different types of labs to meet customer's needs and grow its expertise.
Wipro set up the Council for Industry Research, comprised of domain and technology experts from the organization, to address the needs of customers. It specifically looks at innovative strategies that will help them gain competitive advantage in the market. The Council in collaboration with leading academic institutions and industry bodies studies market trends to equip organizations with insights that facilitate their IT and business strategies. For more information on the Research Council visit www.wipro.com/industryresearch or email [email protected].