With the Indian R&D outsourcing market expected to touch $13.1 billion by the end of the this year, Indian IT outsourcing companies are witnessing a sea change in the projects being outsourced to them. After the success of Indian software products in recent years, these firms, that were mostly engaged in basic functions such as testing a few years back, are now producing end to end products for some of the biggest technology players in the world in sectors such as consumer electronics, personal device segment, medical electronics and telecom and automotive sectors.
According to companies such as Wipro and HCL, majors in the outsourced product development (OPD) segment have started to move away from merely implementing details of engineering, and gone are the days of being given product requirements and specifications based upon which products would then be engineered.
Clients are increasingly shifting towards handing over the entire product lifecycle responsibility to vendors, including conceptualizing the product and its go-to market strategy, designing the technology architecture and delivering the integrated product.
Says Hari Rajagopalachari, executive director of consultancy firm PricewaterhouseCooper, ?Software products such as Finnacle from Infosys have done well in the last few years, boosting the confidence in Indian products globally. While lower end work continues to form a larger chunk of the industry, customers are increasingly entering long term partnerships spanning the entire life cycle of products with vendors such as HCL, Wipro, Patni, and also midtier companies such as Mindtree, and Persistent.?
?It is still nascent, but such partnerships are definitely growing,? Based on estimates, such deals account for $1.1 billion of the total market at present.
Sunil Singh, managing director, of OPD firm Globallogic India says that with marketing and sustaining an existing product in the market against competition eating up all the attention of product companies, they no longer have time to focus on the new, and that is where OPD partners become crucial to sustainance. Pointing at cases of Microsoft losing out to Google, and Nokia losing out to Apple and Samsung as a result of not focussing enough on new products, Singh says, ?When we first started in 2000, the client would tell us, you guys do the engineering, we?ll do the thinking. Now we have reached a stage where they look at us as partners in innovation. Very often we get only a one line brief. And then we take over from there, take that vision and deliver the product.?
For instance, recently the Wipro Product Engineering and Mobility Solutions team received a one line problem statement from a consumer electronics major which stated, ?Develop a TV distinct from any television in the US market and help us launch it by Christmas 2011?. In response, Wipro says it created an end-to-end solution ? a product it calls the ?Christmas TV?, along with the go-to market strategy. The company has also developed products in telehealth, automotive connectivity, and connected television. Last quarter, Wipro’s R&D services business was about 13.9% of Wipro’s IT services revenue.
HCL, in the past one year, has released over 20 solutions, including a home automation product called ?Aegis?, a cloud based platform ?Agora?, and a framework for medical devices ?rMed?. Engineering and R&D Services contributes to 18% of HCLT?s overall global revenue, and the company has seen a 26% YoY growth in the R&D services business last fiscal.
A study released by Zinnov Management Consulting in May this year had ranked Wipro at the top as a global R&D service provider. The survey, which had covered geographies such as India, China, Eastern Europe, Russia and Eastern Europe, had ranked HCL after Wipro, followed by Patni, Infosys, Mahindra Satyam and MindTree. Mid-tier players such as Persistent, Symphony, Tata Elxsi and Aricent had also been reported to be growing.
The greatest challenge, experts unanimously feel, is that of human resources. Across the board, companies believe that hard core product engineers are hard to come by in India, possibly due to a long history in services and a lack of product oriented culture.
Sandeep Kishore, global head, sales and practice, Engineering and R&D Services, HCL Technologies says, ?Given the rapid scale of engagement expansion, there is a shortage of high value engineering talent in India ? at senior technical levels like principal architects, global program managers, and product technical managers. We have utilized and leveraged our global delivery centre strategy to attract talent in US and in European local markets to address this opportunity.? Another issue that plagues the industry, is lack of a manufacturing support base in India. ?While Indian manufacturing support base has made some progress in the last few years, it?s still way behind global manufacturing powerhouses in China and Far East. With growth of India local consumption market, there needs to be increasing focus towards establishing manufacturing cluster in the high value product market,? Kishore adds.
Case in point, says Rajagopalachari from PwC, is India?s experience in embedded systems. While India had the edge in developing embedded systems products so far, it may soon lose out to China due to its manufacturing strength, as embedded systems does not require high English language competency.
While there is a small component of a cost arbitrage involved in outsourcing R&D to India, analysts believe that the real driver is localisation of their products, and developing for emerging markets.
?You can?t call India low cost anymore. What companies are really looking to do is providing their core technologies and transforming their products to meet local demand in emerging markets such as India. Outsourcing of R&D has a very strong component of localisation to it,? says Kamlesh Bhatia, research director, Gartner.
Despite challenges, R&D, according to those who study the sector, is the way forward for Indian IT companies, who have have been struggling to find a way out to the next level and ?climb up the value chain? for a few years now. Saikat Chaudhuri, a management professor from The Wharton School says, ?It has been difficult for IT Services firms to get into the high value zone through a consulting type of approach like an IBM, or Accenture. Companies are finding that maybe this is the way to offer higher value services in terms of outsourcing.?
Chaudhuri, alongside academicians from the London Business School had recently conducted a study of over 230 global R&D projects, using Wipro as a sample vendor. According to his findings, offshoring and outsourcing of R&D, has set into motion a change in the way business are structured.
?There is now a blurring of organisational boundaries, calling into question traditional notions of firm boundaries and organizational forms,? says Chaudhuri.