R&D centres save $40 bn for parents

R&D centres of global companies in India have generated significant cost savings for their headquarters because of the lower operating costs over the years. According to a study ‘R&D Operations Cost 2010 — The Need To Look Beyond Cost Control’ brought out by Zinnov Management Consulting Pvt Ltd, a management consulting firm, the cost of running R&D centres in India has continued to decline over the last two years.

Presently, the cost of running R&D centres in India stands at Rs 18.2 lakh ($38,199 or ¤27,028) per person per year. It reveals that the cost has declined by 0.9 per cent in Rupee terms, 4 per cent in US Dollar terms and 3.3 per cent in Euro terms in FY 2010, indicating signs of continued cost optimisation due to the constrained economic environment. It also says the decline was primarily driven by strict budgetary constraints of R&D centres of global companies in the form of minimal or no salary increments, focus on variable pay, freeze on hiring, and cost optimisation across infrastructure, travel and communication.

As per the study, in a conservative estimate highlighted in the study, R&D centres in India have helped parent organisations save a cumulative of $40 billion for the last three years.

The report reads that the future outlook also looks promising and with right strategies, and long term view, companies will be able to continue to optimise their costs. The study forecasts an expected inflation in costs in FY 2011 with companies planning salary hikes of around 10 per cent for FY 2011, 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 rise only 6.7 per cent CAGR through FY 2020 to reach Rs 35 lakh per person per year.

Speaking of the findings, Pari Natarajan, co-founder and CEO, Zinnov Management Consulting, said, “Though India offers a significant cost arbitrage compared to the costs in the US and Europe, the R&D centres in India are losing out on certain key aspects because of their excessive focus on cost.” While cost control is the top priority, innovation, competency creation and leadership roles often get overlooked, he added.

While a few companies have been fairly successful in uplifting the maturity of the centres in India, others should also start looking beyond cost control to bring in global leadership and innovation capabilities at the centre which would help them move up the value chain and become critical centres for the parent organisation, he said.

In a comparative analysis of cities, the study said Bangalore-based companies incur higher costs compared to the other cities. On an average, costs in Pune are around 3.5 per cent lesser than in Bangalore, with Tier 2 locations like Madurai, Coimbatore and Baroda, among others being almost 25 per cent cheaper. In terms of size, smaller centres (0-400 employees) incur higher costs compared to their mid-sized counterparts (400-1,000 employees). However, the cost further increases for very large centre (1000+ employees).

The study has analysed data from over 40 global companies’ R&D centres in India (includes one company having multiple centres in India as well).