Operating cost of running R&D centers in India dipped by an average 4.0% in USD terms in FY 2010; R&D operating costs to increase by a CAGR of 6.7% through FY 2020
Zinnov Management Consulting Pvt. Ltd, a leading management consulting firm, today launched its study titled ‘R & D Operations Cost 2010- The Need to look beyond Cost Control’. The released study highlights that the cost of running R&D centers in India has continued to decline over the last two years and currently stands at INR 18.2 Lakhs (USD 38,199 or EUR 27,028) per person per year. It brings to light that the cost has declined by 0.9% in INR, 4.0% in USD and 3.3% in EUR terms in FY 2010, indicating signs of continued cost optimization due to the constrained economic environment. It also reads that the decline was primarily driven by strict budgetary constraints by MNC R&D centres in the form of minimal or no salary increments, focus on variable pay, freeze on hiring, and cost optimization across infrastructure, travel & communication.
As per the study, R&D centers in India have generated significant cost savings to the headquarters because of the lower operating costs over the years. In a conservative estimate highlighted in the study, R&D centers in India have helped the parent organizations save a cumulative of USD 40 billion for the last 3 years. The report reads that the future outlook also looks promising and with right strategies and long term view, companies will be able to continue to optimize costs. The study also forecasts an expected inflation in costs in FY 2011 with companies planning around 10% salary hike for FY 2011, hiring laterals, escalation in rents and opening up of travel. However, the report also reads that in a long term scenario the costs are expected to go up only by 6.7% CAGR through FY 2020 to reach INR 35 Lakhs per person per year.
Speaking about the findings, Mr. Pari Natarajan, Co-Founder and Chief Executive Officer, Zinnov Management Consulting, said, “Though India offers a significant cost arbitrage when compared with the costs in US and Europe, the R&D centers in India are losing out on certain key aspects because of excessive focus on cost. While cost control is the top priority, aspects like innovation, competency creation and leadership roles often get over looked. While a few companies have been fairly successful in uplifting the maturity of the centers in India, others should also start looking beyond cost control to bring in global leadership and innovation capabilities at the center which would help them move up the value chain and become critical centers for the parent organization”
Bringing into perspective a comparative analysis of cities, the study said that Bangalore based companies incur higher cost as compared to the other cities. On an average, costs in Pune are around 3.5% lesser than Bangalore, with Tier 2 locations like Madurai, Coimbatore, Baroda, etc. almost 25% cheaper. In terms of size, smaller centers (0-400 employees) incur higher costs as compared to their mid-sized counterparts (400-1000 employees). However, the cost further increases for very large centers (1000+ employees).
Speaking about the Maturity levels of R&D activities in India, Mr. Praveen Bhadada, Engagement, Zinnov Management Consulting Pvt. Ltd, said, “The current level of maturity of R&D related work in India for many of the centers definitely has a scope of improvement, given the strong R&D ecosystem that India has been able to build over the last 25 years. While there were companies which started their India R&D operations with low levels of maturity, few of them have continued to stay there even after 10-15 years of operations in India which is not providing them the edge. There is an urgent need for MNC R&D centers to focus beyond cost efficiency and aspire to become global strategic partners. The good news is we already have examples of companies who have been able to transform completely and we expect others to follow suit in the near future”
About the study ‘R&D Operations Cost 2010- The Need to look beyond Cost Control’
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The study has analyzed data from over 40 MNC R&D centers in India (includes one company having multiple centers in India as well). The sample had a good mix in terms of location, years of existence in India, headcount range as well as R&D work category (software product development, engineering services & embedded systems).
Zinnov has segmented the operating costs into multiple components like payroll and payroll benefits, Infrastructure, travel, professional services and government & regulatory to analyze the operating cost of running the R&D centers in India.
About Zinnov Management Consulting Pvt. Ltd
Founded in 2002, Zinnov – meaning Zeal in Innovation – is a leading Globalization Advisory firm, providing services in the area of Offshore Advisory, Market Expansion and Human Capital Optimization to Fortune 1000 companies. Zinnov works collectively with clients to tackle prevailing organizational challenges by analyzing the changing dynamics, improving performance, and building institutional capability. The services delivered to its clients through advanced reasoning and analytical techniques, provides solutions that help in integrating organizational vision, business definition and processes.