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India still makes sense -- for doing R&D. But for how long?
Doing R&D in India: Cost effective-- so far: Zinnov study

Globalization advisors, Zinnov Management Consulting,  have released a study: ‘R & D Operations Cost 2010- The Need to look beyond Cost Control’. The study shows that the cost of running R&D centres in India has continued to decline over the last two years and currently stands at US$ 38,199 per person per year. It brings to light that the cost has declined 4.0% in dollar terms in the financial year 2009- 2010. The decline was primarily driven by strict budgetary constraints by MNC R&D centres in the form of minimal or no salary increments, focus on variable pay, freeze on hiring, and cost optimization across infrastructure, travel & communication.

R&D centres in India have generated significant cost savings to the headquarters because of the lower operating costs over the years. In a conservative estimate highlighted in the study, R&D centres in India have helped the parent organizations save a cumulative of $ 40 billion for the last 3 years. The study also forecasts an expected inflation in costs in FY 2011 with companies planning around 10% salary hike hiring laterals, escalation in rents and opening up of travel. However, the report also reads that in a long term scenario the costs are expected to go up only by 6.7% CAGR through FY 2020.
Pari Natarajan, co-founder and CEO, Zinnov Management Consulting, says, “Though India offers a significant cost arbitrage when compared with the costs in US and Europe, the R&D centres in India are losing out on certain key aspects because of excessive focus on cost. While cost control is the top priority, aspects like innovation, competency creation and leadership roles often get over looked.”

The study found that Bangalore based companies incur higher cost compared to the other Indian cities. Costs in Pune are around 3.5% less than Bangalore, with Tier 2 locations like Madurai, Coimbatore, Baroda, etc. almost 25% cheaper. In terms of size, smaller centres (0-400 employees) incur higher costs as compared to their mid-sized counterparts (400-1000 employees). However, the cost further increases for very large centres (1000+ employees).

Praveen Bhadada, Engagement, Zinnov, says, “There is an urgent need for MNC R&D centres to focus beyond cost efficiency and aspire to become global strategic partners. The good news is we already have examples of companies who have been able to transform completely and we expect others to follow suit in the near future”

The study has analyzed data from over 40 MNC R&D centres in India (includes one company having multiple centres in India as well). The sample had a good mix in terms of location, years of existence in India, headcount range as well as R&D work category (software product development, engineering services & embedded systems). Zinnov has segmented the operating costs into multiple components like payroll and payroll benefits, Infrastructure, travel, professional services and government & regulatory to analyze the operating cost of running the R&D centres in India.

Link toPDF ( executive summary of report):  
July 22 2010