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Beyond the cusp of the R&D services wave
Sharad Sharma
Thursday, November 1, 2007
Standing in front of the AT&T R&D center in New Jersey on a bright morning in the early 1990s I thought, ‘Boy! What a façade.’ I had then wished that Bangalore too be home to at least one such building housing an R&D unit, without giving too much of thought to the possibility of the realization of that wish. Looking at India’s Silicon Valley today, I am at times amazed at the way the R&D space, in the form of OPD firms and captive R&D centers, has proliferated here.

In the last 10 years the rise of the Indian IT industry has undoubtedly belonged to the offshored R&D services space. By all counts, this wave has done well, shaping the careers of many among us, as well as the image of Indian IT worldwide.

This success, however, also demands some caution on our part. Look around and you will realize that we are at the top end of this R&D wave. The business riders are changing. Despite having an operating margin of around 30 to 35 percent, most of the R&D units (that is, outsourced product development firms and captive units) face an immense supply pressure. Costs are escalating; there is an intense struggle in hiring and retaining talent, not just within the country, but in other emerging R&D hubs like China as well. Couple this with increasing risks and the Law of Diminishing Returns and it is not difficult to see that we are nearing an epochal change, one that will bring about the best and worst in each of the existing players. Only the fittest will survive the struggle. Before I elucidate, however, let me cite an anecdote from my career.

Riding the crest of the wave
In a seminar I was attending sometime in the 1990s the presenter asked all the participants to stand up. “Those of you who started programming in the Google era, sit down,” he said and a few participants took their seats. “Now, those of you who started programming in the COBOL era, sit down.” The relevant bunch of participants followed suit.

“I’m not worried about the two groups that sat down,” he went on to say. I was among the standees, the group of people who had started programming in the era of C. “The first set has no legacy to worry about. They’ll embrace the new and no doubt do well. The second set has been through a change of the curve earlier,” he stated, “they have survived the onslaught once, done well in the new era, and will no doubt do it again. Then, as if addressing us directly, he said, “But I’m worried about you people. I don’t know whether you will be able to survive in the world of programming, albeit rise to the demands of the imminent epoch.”

I liken my condition then to the one that the captives and Outsourced Product Development (OPD) providers are in today. They are looking at the proceedings with a perspective akin to the one I had during that seminar. They too are at the cusp of a wave, and the near future with its inherent proliferation of a new kind of a problem will necessitate them to fight it out. This new problem, in its crude form, is anchored in the ‘reality of the Nokia phone’. Essentially, it can be broken into three components:

The first concerns the number of models Nokia releases annually. While the number was around 10 to 15 four years back, it now stands close to 55. Given the way the market has proliferated in the last few years, any company focusing on a large customer base faces this problem; it must release a diverse range of models catering to the varied market segments against devilish time constraints.

The second component in the ‘reality of the Nokia phone’ phenomenon concerns its competitors. The Finnish giant today faces stiff competition from the American Motorola, Japanese Sony, Korean Samsung, Chinese Huawei, and a host of others. In other words, gone are the days when your major competitors hailed from your own country, thereby giving you ready access to and a certain amount of knowledge of their business and product attributes.

Third, the capital intensiveness of starting businesses is fast plummeting. Today, thanks to services like Amazon’s Easy Tool SP, investment in computing infrastructure has become redundant. With Easy Tool, it is possible to build a YouTube-like venture without investing a single penny in setting up a data center. This particular service is elastic in nature, meaning that the consumer firm pays based on the use; if it consumes nothing, it pays nothing. If you remember, a similar occurrence had shaken up the chip designing industry in the late 1980s. There were only a handful of chip designing firms worldwide then, due to the high capital investments. In came a Taiwanese firm that offered merchant foundry services. The resultant spawning of chip designing firms has helped create chips specific to single applications, unthinkable till the previous decade or so.

There is similar innovation happening in many fields that could revolutionize the respective markets. Take the case of mash-ups. At any point of time you could make them ‘quick and dirty’, but the lack of a distribution channel arrested the possibility of any success in the market. It goes without saying that setting up your own distribution network would prove to be too taxing financially. Today, with the advent of surge startup UTV’s book community on Facebook, and their throwing open of the same as a distribution network, a mash-up creation and distribution venture is no longer capital intensive. Further, even the creation of UTV’s community was cheap and super quick. All it took was an application on Facebook and two days to get the house in order. Within a span of seven weeks, the community had raked in over 7000 members.

In brief, therefore, the issues that organizations at the cusp of the R&D services wave must address in order to make it to the next stage are:
* Market proliferation and related pressures
* Diversity of competition
* The plummeting capital intensiveness of businesses owing to ‘merchant services’.

Market insight, highly important
So, how can the captives and OPD firms tackle these concerns? The rejoinder to this, again, has three parts: First, they must develop market insight. Simple as it may sound, this aspect is immensely important, as could be proved with the example of, once again, Nokia. The Finnish firm could have come to India with the mindset that one out of their thousands of models would work here and that there was no need to design a phone specifically for the local market. On the contrary, it adopted the tougher approach. Drawing from its market insight, it designed the LED equipped dust-resistant Nokia 1100 which went on to become the company’s largest selling phone in India. OPD providers and captives must develop and use similar market insights in the geographies they operate in, to create new products or variants of existing ones.

Secondly, they must architect smart platforms which could be easily deployed in similar conditions across the globe. Thirdly, all global or aspiring-global firms must revamp their organizational structure; as against the prevalent practice of having one R&D hub, they must make way for a network of hubs sewn together by a strong organizational policy.

Hereafter, captives and OPD providers need to follow separate paths. Captives, on their part, must look at graduating from being merely satellite units to hubs for emerging markets (in the Indian context). Becoming a global ‘Center of Excellence’ for a particular platform could be their focus.
On the part of OPD providers, they must aggressively pursue the adoption of a risk-sharing model. The cases of Airbus and Boeing beautifully illustrate what our OPD firms are and what they ought to be. Airbus works on a model whereby it gives its OPD partners responsibility of a particular component of the aircraft viz. wings, avionics, fuel, etc. in lieu of a contracted amount. Boeing, on the other hand, does all that its competitor does, but with a slight difference; it does not pay the partner for what it supplies. Rather, it pays its partnering product development firm a part of the revenue it derives from selling the aircraft. All OPD players must move towards similar risk-sharing arrangements.

The individual and intrapreneurship
But what of the individual amidst this entire muddle, this change of wave, you might ask. In my view, in order to survive the imminent epochal change, the individual must have an aspiration to be world class. Never mind if you are working with a small firm today, you must aim at becoming ‘world-class’ in a specific area; you must at the very least aim at working for a world-class firm.

For those of you who are already a part of such world-class firms, the dynamics are starkly different. You must now look at exploring intrapreneurial opportunities. In essence, an intrapreneur is an entrepreneur within the company. He, with his employer’s support, establishes a new business, often in a new geography. In the firm that you work for, you have a dream partner, one that you could leverage to create a new line of products and employment for hundreds. Never mind the barriers and challenges that such an effort entails, the way the market has proliferated provides immense scope for new ventures. For the same reason, the organization you work for too would be more than glad to extend its support in an area where it would benefit its business.

There are some bottom-lines you must, however, adhere to. First of all, remember that there are no ‘market forces’; it is we who, through our maneuvers, create them. Thereby, in effect, we are the market forces. Also, in pursuance of your chosen path, you must be passionate but resist becoming an ideologue. This means that you must, under any given circumstance, be the first to realize that your thinking has gone out of date. Mould it as per the new realities and you will surely be a part of many seminars similar to the one I mentioned at the outset, for you would’ve survived that many epochal changes!

The author is CEO, Yahoo! India R&D. He can be reached at shards@yahoo-inc.com
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