R&D Centers in India seen as areas for cost arbitrage

By siliconindia   |   Friday, 16 July 2010, 23:22 IST   |    2 Comments
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Bangalore: The decline in operating costs of R&D centers in India quite evidently highlights the fact that organizations could resort to this measure as the only way to optimize costs. The parent organizations headquartered abroad view India as a center for cost arbitrage and this defocuses them from bringing in innovation. Many product teams in India are in lower maturity levels of R&D activites and there is lack of talent pool in India, with people having less than eight years of experience. The most important obstacle is the rate of attrition among employees with an industrial stint of four to eight years. "One of the other reasons is the way expatriates deal with the local employees. They should make an effort to culturally connect to people reporting to them," said Jayen Desai, Head- Global Q&R Center, Applied Materials. Companies should preferably partner with universities, start ups and Government to strengthen R&D in India. "The Government of India has some advanced and well facilitated infrastructure for the purpose," added Desai. The world might have reeled under the pressure of the global economic downturn but the recession controlled the increasing rate of attrition in the IT sector for a trifle stretch of time. In a latest study by Zinnov, titled 'R&D Operations Cost 2010- The Need to look beyond Cost Control,' it has come up with many observations which covered every aspect of R&D centers of MNCs in India and has proposed some solutions on how R&D centres in India should move towards innovation. Out of the total cost incurred by the companies across the world, 60.7 percent of the total operating cost comprises of the maintenance of human capital and the rest of the costs are taken up by infrastructure, travel and professional services. "Centers with more than seven years of expertise in R&D operations follow better methods for cost optimization compared to younger and smaller centers, which usually have an employee count up to 400 employees. The reason being, organizations with considerable number of years in R&D operations know the method of optimizing costs at all levels and plan the salary increments in a controlled manner," said Pari Natrajan, Co-Founder and CEO, Zinnov Management Consulting. The Indian R&D centers witnessed net savings of $40 billion for their respective parent organizations as the operating cost for R&D in India was on a decline in the last 24 months. The cost was drawn towards a close by 0.9 percent (INR) in FY 2010. "The reason for this decline is global recession, uncertainties in the market which turned investors reluctant and the depreciation of the Indian Rupee," added Natrajan. While analyzing data for a period of four months from over 40 R&D centres in India with a global presence, Zinnov compared that, R&D centers in Bangalore incur higher costs than any other city in India and now companies should concentrate more on Tier II cities like Baroda, Madurai, Coimbatore, which will be almost 25 percent cheaper than the cost borne in Bangalore. In addition to it, the cost of running an R&D center in India comes at 18.2 lakh per person per year. As the R&D centers in India are more perturbed about cost, the research emphasizes that, innovation, creating competencies among employees and leadership roles should now be taken into account.