Operational Costs Benchmarking Study 2012
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Operational Costs Benchmarking Study 2012

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1. MNC R&D centers in India contributed to a net savings of over US$70 Bn for the headquarters in the last 5 years ...

1. MNC R&D centers in India contributed to a net savings of over US$70 Bn for the headquarters in the last 5 years
2. While the average operating costs for MNC R&D centers in India declined in US$ terms, there was a marginal 3% increase in terms of INR
3. The average salary increments of 13% in Q4 for FY12 resulted in a slight increase in the overall operating cost in India in INR terms
4. Infrastructure costs are on the rise with real estate increments seeing a 5%-13% rise, and over 80% of organizations getting affected by STPI withdrawal
5. Organizations are starting to explore potential in tier-II cities where per-employee operating costs are 30% lower on average as compared to tier 1 cities
6. Demand for engineering/ embedded R&D related skills is increasing in India

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    Operational Costs Benchmarking Study 2012 Operational Costs Benchmarking Study 2012 Presentation Transcript

    • Operations Cost Benchmarking Study 2012This report is solely for the use of Zinnov client and Zinnov personnel. No part of it may be circulated, quoted, or reproduced for distribution outside theclient organization without prior written approval from Zinnov
    • Agenda 1 MNC R&D Landscape in India 2 OCB Study 2012 – Key Findings
    • MNC R&D landscape in India has rapidly grown in the last decade Number of Companies Establishing R&D Center Each Year (FY 1980 to FY 2012) 154 415 companies established This period of extraordinary growth R&D Centers in India (2003- is the outcome of the increased 2007) interest in verticals other than traditional* offshoring Industries. 95 89 90 67 74 70 72 44 38 33 37 11 Pre 1990- 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011- 1990 2000 12 Adventurous - 11 Early Adopters - 154 Followers - 709Note: *-Software, Internet, SemiconductorSource: Zinnov analysis of MNC R&D ecosystem in India
    • Over 200,000 professionals work at the MNC R&D centers in India Total IT-ITeS Talent Pools in India Vertical Wise Distribution of MNC R&D Talent in India, 2010 Domestic MNC ER&D Total, 204196 BPO exports IT service exports Software/ Internet, 67240 3000 Telecom, 26880 2500 Semiconductor, 22150 560 Automotive, 17208 2000 527 500 Electronic Equipment, 210 14911 204 192 Industrial, 13270 1500 835 Computer hardware, 11679 738 770 1000 Pharma. / Life Sc./ Medical device, 9500 Networking, 6696 500 935 766 799 Storage, 6243 0 Aerospace, 3637 FY2009 FY2010 FY2011E BFSI, 2177 Others 4669Note: 4Source: : Zinnov Captive Report, 2010
    • More than 50% of the MNC R&D talent pool is concentrated in Bangalore Region; Tier-2 cities are valuable source for fresh talent pool Overall MNC R&D Talent Distribution by Location 2.0% 9.8% 3.7 Fresh Talent Pool distribution 19.2 by Location Bangalore NCR NCR Other Locations Chennai 10% 13% 4% 6% Hyderabad 16.5% Mumbai Region 12.5% 7% 17% Pune Hyderabad Region 8% Coimbatore Bangalore 23.0 31.1 13% Region 9% Jaipur 12% Nagpur 6.5% Chennai Trivandrum 52.7% Region Others* 24.0 102.5 35% Total MNC R&D Talent in India in 2011 ~ 210k M Mean Value :Headcount per MNC R&D CenterNote: 5Source: Zinnov Talent Report 2011
    • India is strengthening its R&D position as many large companies set up their large R&D presence in India Headcount Wise Distribution of MNC MNC R&D Centers by Headquarter Location R&D Centers in India 69.4% Bangalore 166 162 41 7.2% 21.6% NCR 43 55 13 0.4% 1.4% No. of Centers North America Europe Pune 45 51 15 Japan APAC Rest of the World Hyderabad 32 51 14 Global Revenues Vs. India R&D Headcount Less More Headcount/ 200- than 500-1000 than Revenue 500 200 1000 Chennai 42 44 5 Less than $1Bn 262 70 14 NA Mumbai 27 23 3 $1Bn to $10Bn 59 45 33 15 Small Medium Large $10Bn and Above 56 29 19 40 < 99 100 - 999 > 1000Note: 6Source: Captive landscape in India – NASSCOM-Zinnov study - 2009
    • Agenda 1 MNC R&D Landscape in India 2 OCB Study 2012 – Key Findings
    • An in-depth analysis was conducted for 55 MNC R&D Centers in India Location Wise Split Headcount Wise Split Industry Wise Split Others* SPD 7% 1500+ EMB &ES NCR & EMB 15% 3% 3% 9% 1000 - 1500 0 – 250 SPD & ES Pune & Bangalore 9% 36% 17% Mumbai 49% 50% 13% EMB 501 - 1000 SPD Hyderabad 14% 16% 11% ES Chennai 251 - 500 14% 11% 24% 55 MNC R&D Centres • Analysis of nearly 37,000 R&D employees; Overall spending of nearly USD 1.7 billion in operating costs for FY12 (Apr-11 to Mar-12) • Quarterly data for the last 8 quarters ending March 2012 has been taken into consideration for the yearly analysis. Currency conversion ratio for the same periods have been applied for data standardizationNote: * Tier 2 & Tier 3 Cities; SPD – Software Product Development; ES - Engineering Services; EMB – Embedded Systems/Semiconductor/EDA; 8Source: Zinnov analysis of data collected during May to July 2012 towards the Operations Cost Benchmarking Study 2012
    • A robust methodology was followed to analyze cost related data Methodology Across Industry Verticals Across Locations Across Headcount The Study - Software Product <250 analyzes the Development 251-500 operations cost data for - Embedded systems/ 501-1000 55 MNC R&D Semiconductor/ EDA Centers 1000-1500 - Engineering Services 1500+ Collation & Analysis Data Collection Reporting of Data • Questionnaire to collect • Zinnov proprietary tool is • Final analysis presented quantitative information used for collating and for both qualitative and pertaining to various analyzing data gathered quantitative data. Cost cost heads; analysis presented via • Robust internal quality excel report and a • Qualitative Data checks at various levels detailed presentation collected through highlighting qualitative telephonic interview insightsNote: 9Source: Zinnov analysis of data collected during May to July 2012 towards the Operations Cost Benchmarking Study 2012
    • The overall operations cost was segmented into 5 broad categories 1 Payroll & Payroll Related Benefits 5 2 Infrastructure Government & (Including Regulatory Cost Communications) Components Cost of Operations Cost 4 3 Professional Travel Cost Services Cost Final Report is an in-depth study of the various cost components, qualitative insights along with future outlook of the R&D landscapeNote: 10Source: Zinnov analysis of data collected during May to July 2012 towards the Operations Cost Benchmarking Study 2012
    • FY 2012 was marked with a variety of changes in the operating cost dynamics a • Weakening of Rupee vis-à-vis USD and EUR helped gain advantage Overall operating cost • Focus on talent pyramid optimization resulted into cost savings declined by 6% in USD terms • Expansion into Tier 2 cities reduced the overall operating costs • Aged centers were better able to optimize cost based on experience b India centers delivering • Approx $70 Billion have been saved by Indian centers for the significant cost savings to HQ headquarters in the last 5 years c High operating cost for • Approx 35% difference in per employee operations cost when compared semiconductor companies to software product companies d Increased focus on contract • Contract resources account for 9% of the total MNC R&D population and resource hiring the trend is expected to continue e STPI withdrawal not driving • Around 80% of the R&D centers have been impacted by the STPI SEZ movement yet withdrawal but there is no clear trend of moving to SEZNote: 11Source: Zinnov analysis of data collected during May to July 2012 towards the Operations Cost Benchmarking Study 2012
    • a The overall Operating cost per employee has decreased in USD terms owing to weakening of rupee and consistent efforts by companies towards cost optimization MNC R&D Centers Operating Cost/Employee - FY11 Vs FY12 Currency 2011-12 2010-11 %Change INR 1,950,602 1,897,973 3% USD 40,604 43,174 -6% EUR 29,311 32,671 -10% Percentile Distribution of Operating Cost/Employee in USD for MNC R&D Centers 80,000 -9% 70,000 -12% 60,000 73,289 -9% -6% 50,000 66,609 40,000 -4% -2% 59,119 30,000 42,945 43,174 52,151 20,000 26,702 28,830 29,450 40,604 27,859 47,295 10,000 0 10th %ile 25th%ile Average 50th%ile 75th%ile 90th%ile 2011-2012 2010-2011Note: 12Source: Zinnov analysis of data collected during May to July 2012 towards the Operations Cost Benchmarking Study 2012
    • a Over the past few quarters, the rupee has weakened drastically compared to USD and EUR Quarterly Exchange Rates – USD to INR Quarterly Exchange Rates – EUR to INR INR 52 51.52 INR 72 51.12 INR 51 11% INR 70 69.46 INR 50 INR 68 INR 49 66.99 INR 66 65.15 65.37 INR 48 INR 64 62.73 INR 47 46.66 INR 62 7% INR 46 45.89 46.19 60.20 INR 60 61.62 45.72 INR 45 45.31 45.28 INR 58 INR 44 58.29 INR 43 INR 56 INR 42 INR 54 Apr to Jul to Oct to Jan to Apr to Jul to Oct to Jan to Apr to Jul to Oct to Jan to Apr to Jul to Oct to Jan to Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar 2010 2010 2010 2011 2011 2011 2011 2012 2010 2010 2010 2011 2011 2011 2011 2012 Weakening of Indian Currency (INR) against major currencies such as USD and EUR proved favorable as it brought down the overall Operations Cost in USD for the India R&D CentersNote: 13Source: Quarterly exchange rates from Oanda.com
    • a The savings from the overall currency depreciation has helped companies balance the salary increases and real estate increments Real Estate Rental Increments at MNC R&D Salary Increase at MNC R&D Centers, in India, Centers in India, FY 2012 Q1 CY12 Average 8% Average 13%90th%ile 13% 90th%ile 17%75th%ile 11% 75th%ile 16%50th%ile 5% 50th%ile 13%25th%ile 5% 25th%ile 11%10th %ile 4% 10th%ile 10% 0% 5% 10% 15% 0.0% 5.0% 10.0% 15.0% 20.0% • MNC R&D industry witnessed a salary increase of 13.0% on an average with companies looking at hiring a mix of entry level and senior level resources to balance the overall cost • Real estate increments have been in the range of 5% to 13%, thus adding to the increasing Infrastructure cost. Companies looking for cheaper options in the outskirts to cut down on the Infrastructure spend.Note: 14Source: Zinnov analysis of data collected during May to July 2012 towards the Operations Cost Benchmarking Study 2012
    • a There has been an increased trend among companies in balancing the pyramid in order to optimize on the overall people cost Change in Experience Pyramid of R&D Resources for FY11 & FY12 6% 9% 100% 18% 16% 80% 12+ years 60% 42% 35% 8 to 12 years 40% 4 to 8 years 34% 40% 20% 0 to 4 years 0% 2010-11 2011-12Note: 15Source: Zinnov analysis of data collected during May to July 2012 towards the Operations Cost Benchmarking Study 2012
    • a Tier 2 cities prove to be more cost effective with approximately 30% difference in cost compared to tier 1 cities Location Wise Split of Overall Operating Cost/Employee 40.0 35.0 34.1 32.2 30.0 28.1 24.7 25.0 23.5 In INR Lakhs 20.3 22.3 22.5 20.8 22.9 19.3 19.5 20.0 19.5 18.4 17.3 16.6 16.2 15.7 16.1 13.7 14.7 15.0 12.6 14.8 12.9 13.4 13.5 13.1 11.1 10.0 5.0 0.0 Overall Bangalore Hyderabad Chennai NCR Pune Tier 2 Industry 10th %ile 50%ile Average 90th%ileNote: 16Source: Zinnov analysis of data collected during May to July 2012 towards the Operations Cost Benchmarking Study 2012
    • a The R&D ecosystem around tier 2 cities in India is starting to mature Growth Drivers for Emergence of Tier-2 Cities Chandigarh NCR Jaipur Approx 30% to 40% saving in overall Per Cost Arbitrage Employee cost when compared to Tier-1 over Tier-1 Cities cities Ahmedabad Vadodara Tier-2 cities have an efficient and rapidly Support Nagpur Ecosystem growing service provider ecosystem in place Pune Hyderabad A significant portion of installed talent pool Availability of in Tier-1 cities hails from Tier-2 cities, Talent Pool which acts a huge advantage for Tier-2 cities Bangalore Chennai Attrition in Tier-2 cities is much lower than Comparatively Tier-1 cities due to lack of competition and Coimbatore Lower Attrition unwillingness of people to migrate to Tier- 1 cities Trivandrum Tier 1 Tier 2Note: 17Source: Zinnov analysis of data collected during May to July 2012 towards the Operations Cost Benchmarking Study 2012
    • a There have been significant efforts by companies to optimize cost for categories other than People Cost Cost Components as a %age of Total Cost People Cost 64.8% • Increased focus to optimize on the travel cost by increased usage of technology and limiting travel for only critical projects Infrastructure/Comm 22.4% unications Cost • Redesigning of cubicle space, consolidation of multiple offices Areas of cost into a single facility are some of Travel Cost 5.5% ~35% optimization the steps taken by companies in ensuring optimum usage of space Professional Services • Negotiations on third party vendor 4.2% Cost fees, building in-house talent specially in areas of finance/accounting has helped Govt/ Regulatory Cost companies bring down 3.1% professional services cost 0% 20% 40% 60% 80%Note: 18Source: Zinnov analysis of data collected during May to July 2012 towards the Operations Cost Benchmarking Study 2012
    • a With increasing number of years in the Industry, per employee Operating Cost tends to decrease for the MNC R&D centers in India Operating Cost/Employee Analysis Basis Years of Existence of the R&D Center in India 25.0 Median Values in INR Lakhs 22.0 20.0 20.1 18.6 15.0 17.4 10.0 5.0 0.0 0-2 Years 2-5 Years 5- 10 Years 10+ Years • With increasing headcount, companies try to establish economies of scale around various operations and try to stabilize their per employee cost • MNC R&D centers in India are now aggressively focusing on building technical leadership, customers in emerging markets, ecosystem connect and creating global roles from IndiaNote: 19Source: Zinnov analysis of data collected during May to July 2012 towards the Operations Cost Benchmarking Study 2012
    • b Over the past 5 years, India R&D Centers have been able to provide nearly $70 billion in cumulative cost savings for the HQ Year on Year Cost Savings by MNC R&D Centers in India for the Headquarters 80 70 16.9 60 50 14.9 40 71.5 14.8 30 20 13.3 10 11.6 0 Overall FY 2008 FY 2009 FY 2010 FY 2011 FY 2012Note: 20Source: Zinnov analysis of data collected during May to July 2012 towards the Operations Cost Benchmarking Study 2012
    • c On an average, the per employee operations cost is highest for Semiconductor/Embedded companies followed closely by Engineering Services companies Industry Wise Split of Overall Operating Cost/Employee 40.0 35.0 32.3 33.2 33.4 30.0 24.6 26.1 In INR Lakhs 25.0 22.4 23.6 19.6 19.3 20.0 16.5 16.3 15.0 12.5 10.0 5.0 0.0 Software Product Development Engineering Services Embedded systems/ Semiconductor/ EDA 10th %ile 50%ile Average 90th%ile • Owing to the years of existence in India, software product development R&D centers are more mature compared to the recently set up engineering R&D and semiconductor companies • Though global sourcing began primarily in the 1990s, the most active period in the globalization of semiconductor R&D was in the years 2000 - 2006Note: 21Source: Zinnov analysis of data collected during May to July 2012 towards the Operations Cost Benchmarking Study 2012
    • c The evolution of semiconductor R&D centers is a nascent phenomenon Evolution of Semiconductor R&D Centers in India 12 Period of extraordinary growth 9 8 8 7 5 4 5 5 1 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 City Wise Distribution of 88 MNC R&D Centers 60 54 25000 MNC R&D headcount Bangalore accounts for ~70% 50 of the total MNC talent pool 20000 40 for semiconductor R&D in India 15000 30 10000 20230 20 13849 11 5000 8 7 6 10 1907 2 0 0 India Bangalore HyderabadNote: 22Source: Zinnov analysis of data collected during May to July 2012 towards the Operations Cost Benchmarking Study 2012
    • c Semiconductor companies tend to pay higher compared to the overall R&D industry owing to task complexity and associated skills Median Total Cash (INR Lakhs) Across Select Positions for FY 2011-12 8% 11% 8% 11% 2% 4% -1% 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0 Associate Engineering Engineering Application Associate QA Senior QA QA Lead Software Lead Manager Architect Engineer Engineer Engineer Overall R&D Industry Semiconductor VerticalNote: 23Source: Zinnov analysis of data collected during May to July 2012 towards the Operations Cost Benchmarking Study 2012
    • d MNC R&D Industry is witnessing an increased trend of hiring employees on contract basis Contract Employees Vs Work Experience Wise Split of Contract Vs Full-Time Resources Full Time Employees 40% 37% 36% 35% 31% 30% 30% 9% 25% 22% 20% 16% 15% 91% 10% 9% 5% 4% 5% 5% 4% 1% 0% Contract Employees 0 - 1 Years 1 - 4 Years 4 - 8 Years 8 - 12 Years 12 - 15 Years 15+ Years Full-time Employees Full-Time Contract • Increased trend among companies to hire employees on contractual basis in order to optimize on people cost, bring in flexibility and stability in the system and quickly respond to changing economic and business conditions • The work performed includes quality/testing, some level of product development, coding and support function related activities , thus helping companies focus on their core business areasNote: 24Source: Zinnov analysis of data collected during May to July 2012 towards the Operations Cost Benchmarking Study 2012
    • d Even though the trend for hiring employees on contract basis is likely to increase in future, this comes with its own set of challenges • Substantial time investment • Attrition remains a key by full time employees to challenge as ramping up train contract resources as new resources requires they are unaware of the big additional effort and time picture vis-à-vis project at hand Domain Longevity Knowledge Co- Quality Employment • Common challenge faced by • Co-employment poses the companies in building risk of vicarious legal liability quality consciousness where in employees can among the contract claim same benefits as full resources which at times time resources results in re-workNote: 25Source: Zinnov analysis of data collected during May to July 2012 towards the Operations Cost Benchmarking Study 2012
    • e STPI withdrawal has impacted 80% of the analyzed sample of R&D centers; However, moving to SEZ is not an option considered by many Moving to SEZ – Not an Option for Premise Type Split of MNC R&D many… Centers in India Client Verbatim 7% “Profit from STPI will be taxed at the normal corporate tax 4% rates and hence there will be an increment” 9% “No Immediate Impact for few companies as discounts from MAT will offset the tax burden for at least few years” “There is no proposal to move to SEZ, as of now, because 80% this would mean new investment in assets for a value of 80% or more” STPI SEZ EOU Others “SEZ unit does not seem to be much beneficial to the small & mid size software units considering the fact that minimum alternative tax is payable as per current rule” “Moving existing business to SEZ is difficult as it has to be a new business, which means additional HC can be housed in SEZs. ”Note: 26Source: Zinnov analysis of data collected during May to July 2012 towards the Operations Cost Benchmarking Study 2012
    • Zinnov Management Consulting 69 "Prathiba Complex", 4th A Cross, Koramangala Ind. Layout 5th Block, Koramangala Thank You Bangalore – 560095 Phone: +91-80-41127925/6 11, First Floor, Paras Downtown Center, Golf Course Road, Sector 53, Gurgaon – 122002 Phone: +91-124- 4028888 3701 Patrick Henry Dr. Building 7 Santa Clara CA – 95054 Phone: +1-408-716-8432 21, Waterway Ave, Suite 300 The Woodlands TX – 77380 info@zinnov.com Phone: +1-281-362-2773 www.zinnov.com @zinnovThis report is solely for the use of Zinnov client and Zinnov personnel. No part of it may be circulated, quoted, or reproduced for distribution outside the client 2organization without prior written approval from Zinnov 7