Companies spending less on emerging countries

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Companies spending less on emerging countries
Bangalore: Only about 15 percent of the total R&D budget is being spent on emerging geographies by software product companies, leaving a huge opportunity untapped, according to the latest report by Zinnov Management Consulting. The study said that the total Global Software Product Market currently stands at $300-320 billion, of which the Total R&D Spend (approximately 15 percent) stands at $45-48 billion. $6.8 - 7.2 billion of the total R&D spend is allocated to emerging geographies by these companies. Speaking about the study, Praveen Bhadada, Engagement Manager, Zinnov Management Consulting said, "As the MNC centres move up the value chain, work associated with the low-end of the product lifecycle value chain is increasingly moving to the service providers ensuring the growth of both MNC centers as well as service providers. Most of the ISVs we speak with are planning to generate at least 20 percent of their revenue from new products over the next three years with a major focus on emerging markets such as India and China. It would require increased R&D investment in these products and one of the strategies will be to move more work associated with mature/sunset products to low cost offshore destinations such as India and China to get investment dollars for new products, keeping the total R&D spend at the same level." While the R&D spend on software products continue to grow at a relatively lower pace owing to the global economic crisis, companies have also re-aligned their R&D spend strategy to focus on new revenue streams (emerging markets), new customers (SMBs) and new models (such as SaaS). Additionally, companies are willing to leverage the offshoring/outsourcing models to save on R&D investment dollars and invest them in the areas of focus while going forward. In fact, many of the consumer software (including mobile software, gaming) companies are now looking towards India and China for the next wave of their revenue growth owing to the availability of a fast pace of technology adoption in these two geographies. The study elaborated that for larger companies, most of the R&D investments (more than 80 percent) are still being kept in the U.S, as they believe that high quality talent to work on next generation products is tough to find in remote locations. Small to mid-sized software product companies (less than $1 billion in revenue) have been faced by more cost pressures and hence they continue to offshore a significant portion of their R&D to low cost destinations such as India and China. While revenue expectations from these companies on new products continue to increase, they are looking to keep the total R&D investments low. And this has mandated them to aggressively leverage globalization in order to reduce investments on mature and existing products. The study brought to light that the current outsourcing to third party service providers is very less (less than five percent of the total R&D spend). Large companies taking the outsourcing route are looking at the value that they can derive and pure cost arbitrage is no longer appealing, the study highlighted. Some companies are already moving maintenance/sustenance of sunset products to service providers in a revenue share agreement, the study reported, highlighting the case example of Cisco-HCL partnership for a network management product. Service providers are also being leveraged as channel partners for product sales due to the extended reach that they can provide in the domestic market. On the other hand, service providers are also willing to invest on R&D (IP led solutions) to augment their offerings with their customers' products. L&T Infotech and Wipro have recently come up with platforms for OEMs/ISVs to develop/enhance products. Zinnov anticipated a vibrant R&D ecosystem in India by 2019 comprising of increased domain expertise, skilled talent pool, strong start-up ecosystem, and strong domestic market. While more and more MNC centres will operate in strategic independence mode of maturity, service providers will make significant R&D investments and will have capability starting from conceptualization to manufacturing. There indeed is a huge opportunity in the offshoring space, and thereby industry stakeholders have to start acting as globalization agents, and play a key role in the overall R&D ecosystem development.