R&D Operations Cost 2010

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R&D Operations Cost 2010

  1. 1. Executive Summary: R&D Operations Cost 2010 ~ The need to look beyond cost control~ July 2010 For Additional information, contact info@zinnov.comThis report is solely for the use of Zinnov client and Zinnov personnel. No part of it may becirculated, quoted, or reproduced for distribution outside the client organization without priorwritten approval from Zinnov
  2. 2. R&D operating cost in India has continued to decline for the last 24 months; Companies have 1 generated significant cost savings to the Head quarters India R&D Center Adjusted Operating Cost/ FTE1/ Year in INR Lakhs Year on Year Cost Savings by India R&D Centers 20 40% (USD Billion) 18.5 18.4 18.2 17.1 30% 15 14.6 2010 14.8 16.8% 20% 15.5% INR (in Lakhs) 8.2% 10 10% Net Saving 2009 13.3 ~USD 40 Bn 0% -0.7% -0.9% 5 -10% 2008 11.6 0 -20% 0 5 10 15 20 FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 Total Cost/FTE/annum YoY GrowthNote: 1Full Time Equivalent; Adjusted for FY 2006 to FY 2010 based on data compiled for the participating companies ZinnovSource: Zinnov analysis based on information provided by the participating companies Confidential
  3. 3. While most of the R&D centers in India do not hedge for cost, the relative strengthening of INR 2 against USD had a marginal adverse impact on further declining cost India R&D Center Adjusted Operating Cost/ Percentile Break up of Total Cost/ FTE, FTE1/ Year in USD FY 2010 (in USD)45,000 50% 42,335 39,795 90th 57,737 38,199 Percentile 40% 35,576 31,207 30% 75th 49,65930,000 Percentile 19.0% 19.0% 20% 14.0% 50th 36,065 Percentile 10%15,000 25th 0% 26,573 Percentile -4.0% -6.0% -10% Average 38,199 0 -20% FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 0 15,000 30,000 45,000 60,000 Total Cost/FTE/annum YoY GrowthNote: 1Full Time Equivalent; Adjusted for FY 2006 to FY 2010 based on data compiled for the participating companies ZinnovSource: Zinnov analysis based on information provided by the participating companies Confidential
  4. 4. The cost of operations decreases as the company size increases due to cost optimization and 3 further increases with increase in headcount due to overheads Percentile Break up of Total Cost/ FTE, FY 2010 (in INR Lakhs) 40 0-400 employees 400-1,000 employees 1,000+ employees Sample = 63% centers Sample = 17% centers Sample = 20% centers 30 Advanced Implementation Higher maturity, investments in of best practices ownership of work, people & from market investment in peopleINR (in Lakhs) infrastructure learning & infrastructure 20 27.3 26.4 26.6 10 20.6 18.7 15.7 16.0 12.0 7.9 0 10th Average 90th 10th Average 90th 10th Average 90th Percentile Cost Percentile Percentile Cost Percentile Percentile Cost Percentile Effective Conversion Rates for FY 2010: USD 1 = INR 47.6, EUR 1 = INR 67.3Note: ZinnovSource: Zinnov analysis based on information provided by the participating companies Confidential
  5. 5. Bangalore being the costliest in terms of people cost, witnesses the maximum cost of 4 operations in India Percentile Break up of Total Cost/ FTE, FY 2010 (in INR Lakhs) 40 Bangalore Pune Others Sample = 63% centers Sample = 16% centers Sample = 21% centers 30 Higher cost of Relatively lesser as Cost lesser than talent & compared to Bangalore by 24.2% on infrastructure Bangalore but fast an average. Much lesserINR (in Lakhs) catching up for tier 2 locations 20 27.4 26.3 10 19.8 21.2 19.1 13.6 15.0 10.8 10.1 0 10th Average 90th 10th Average 90th 10th Average 90th Percentile Cost Percentile Percentile Cost Percentile Percentile Cost Percentile Effective Conversion Rates for FY 2010: USD 1 = INR 47.6, EUR 1 = INR 67.3Note: ZinnovSource: Zinnov analysis based on information provided by the participating companies Confidential
  6. 6. Excessive cost control focus is restraining centers to move up the value chain faster 5 Unmet needs: • The current state of maturity of R&D centers is low and only about 4% of the products R&D is in the highest level of maturity (Product/ business ownership), indicating a significant scope for improvement • Product concept and design related work is still in the nascent stage and in India and product maintenance, QA/ testing & support continue to be the key focus areas (86% of total work) for majority of the MNC R&D centers in India • More than 80% of the total installed R&D talent pool in India is less than 8 years of experience and witness lack of technical and product management talent in the current landscape • Attrition is a again a key perceived challenge with attrition peaking up to reach 19.2% (YTD basis) after witnessing a downfall during the economic downturn Zinnov Confidential
  7. 7. The future outlook looks promising and with right strategies and long term view, companies 6will be able to continue to optimize cost going forward Future Outlook: • Companies will focus on increasingly optimizing the people related costs while choosing the optimal pyramid structures and controlled salary increments. Also increasing infrastructure utilization, and optimizing of travel will ensure controlled inflation in costs oHowever, with companies planning for a near 10% salary increment for FY 11, hiring laterals, escalation in rents and opening up of travel, the costs are expected to go up in FY 2011 • The aspiration to move up the maturity value chain will force R&D centers to hire experienced talent pool but will also look to optimize the experience pyramid to manage costs efficiently • With increased availability of low cost talent and ever improving infrastructure in tier 2/3 locations, companies will be running pilot efforts with non-core activities in these locations to start with Zinnov Confidential
  8. 8. Companies need to make a paradigm shift beyond cost control to strengthen the R&D value 7proposition from emerging locations 1 Focus beyond cost efficiency 5 2 Enhance technical Aspire to become leadership & product global strategic management partners Increasing R&D Value Proposition 4 3 Emerging/ Global Accelerate ecosystem From cost focus to market innovation partnerships focus innovation & global leadership Zinnov Confidential
  9. 9. About Zinnov 8Zinnov helps organizations globalize their business and improvepeople strategy.Our consulting solutions are based on rigorous research techniques, data analytics and communities Zinnov Research: http://www.zinnov.com/white_papers.php Zinnov Blog: http://zinnov.com/blog/ Zinnov Services: http://zinnov.com/services.html Zinnov Events: http://www.zinnov.com/zn_events.php @zinnov For additional details on the topic, contact info@zinnov.com Zinnov Confidential
  10. 10. Thank You 69 "Prathiba Complex", 4th A Cross, Koramangala Ind. Layout 5th Block, Koramangala Bangalore – 560095 Phone: +91-80-41127925/6 Vatika Business Centre, 2nd Floor, Block B, 1st India Place, M.G Road, Gurgaon – 122002 Phone: +91-124- 4028888 575 N. Pastoria Aveinfo@zinnov.com Suite J Sunnyvalewww.zinnov.com CA – 94085 Phone: +1-408-716-8432 21, Waterway Ave, Suite 300 @zinnov The Woodlands TX – 77380 Phone: +1-281-362-2773

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