Operational Costs Benchmarking Study 2012

Operations Cost Benchmarking Study
2012

This 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 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 - 709

Note: *-Software, Internet, Semiconductor
Source: 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 4669

Note: 4
Source: : 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 Center

Note: 5
Source: 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 > 1000

Note: 6
Source: Captive landscape in India – NASSCOM-Zinnov study - 2009

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 standardization

Note: * Tier 2 & Tier 3 Cities; SPD – Software Product Development; ES - Engineering Services; EMB – Embedded Systems/Semiconductor/EDA; 8
Source: 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 insights

Note: 9

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 landscape

Note: 10

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 SEZ

Note: 11

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 2010-2011

Note: 12

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 Centers

Note: 13
Source: 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%




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: 14

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 2011-12

Note: 15

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%ile

Note: 16

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 2
Note: 17

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: 18

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 India

Note: 19

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 2012

Note: 20

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 - 2006

Note: 21

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 Hyderabad

Note: 22

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 Vertical

Note: 23

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 areas

Note: 24

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-work

Note: 25

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: 26

Zinnov Management Consulting

69 "Prathiba Complex", 4th 'A'
Cross, Koramangala Ind. Layout
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Bangalore – 560095
Phone: +91-80-41127925/6

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TX – 77380 info@zinnov.com
Phone: +1-281-362-2773 www.zinnov.com
@zinnov

This 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 2
organization without prior written approval from Zinnov 7

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