The cost of running product engineering captives in India is expected to come down by about 10-12 per cent over the next 12 months, owing to the efforts of these centres to optimise their cost points and depreciating rupee against the dollar.
According to a study by management consulting firm Zinnov, the cost of running R&D centres in India has already come down by 6 per cent in the year 2008, when compared with the previous year, in absolute dollar terms. The report said that owing to global economic meltdown and strict budgetary constraints, “R&D centers in India were mandated by their headquarters to manage costs effectively over the last 12 months.”
Currency depreciation against all major currencies including US dollar , euro and yen has favoured reduction in cost across the multinational R&D centers in India. On a yearly average basis, the Indian currency has depreciated by about 9 per cent against the US dollar from the year 2007 to 2008.
“The downturn has indeed helped these India R&D centers in multiple ways to come up with modes and methods to reduce costs significantly. Some measures like lower base-lining of infrastructure cost components such as rentals will further help reduce cost escalations. In addition to this, emphasis on communication solutions such as telepresense will help put travel cost in control which did account for about 5 per cent of the total cost in 2008,” said Praveen Bhadada, Engagement Manager, Zinnov Management Consulting.
The Zinnov study is based on a survey the company had conducted amongst 25 R&D centres spread across Bangalore, Hyderabad and Pune, which are the key locations for R&D offshoring in India.
The study revealed that the median of the cost for companies with headcount range of 500-1000 employees at the centre level incurred costs significantly lower when compared to small-sized centres which employ less than 500 people. Infrastructure occupancy, along with investments on human resources in the growth phase are some of the key reasons behind the increased cost for smaller R&D centres. Centres which have been operating in India for more than seven years incurred lesser costs cumulatively when compared with the centres which have been operating in India for less than 7 years.
“We have found people cost to be the single largest contributor to the entire pie of operations cost. The salary escalations will be in control in the foreseeable future and will only start picking up in the next 2-4 years. In fact, due to increased availability of skilled talent pool at the junior level, salaries are expected to fall below the current levels in the near times to come,” added Bhadada.
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Going forward, the report says, as India keeps on moving up in the R&D value chain, there would be increased requirement of experienced talent with enhanced domain expertise in the future, leading to a moderate increase in the cost. However, the overall outlook for operations cost for these product engineering captives look promising in the near future.
The report says that majority of these R&D centers are now looking at every single cost component to optimise their investments. India’s unique positioning of a low cost destination has strengthened with the cost optimisation focus by these centers.
According to an estimate by Zinnov, the R&D offshoring market grew by about 23 per cent last year. The same grown is expected to be maintained till 2013 with the economy starting to show signs of ‘coming back to life’, it added.