More Asian firms eye R&D outsourcing

Businesses operating in Asia are becoming more open to outsourcing core capabilities such as research and development (R&D) in a bid to derive greater operational efficiencies. But, industry watchers warn that these companies should take care when doing so.

The Economist Corporate Network (ECN) revealed last month that product development and product design were the least likely to be outsourced or considered for business process outsourcing (BPO) among companies with Asian operations. The study was based on a survey of over 130 companies in various verticals, of which 2.4 percent were from the IT sector.

However, the ECN report noted that the number of enterprises evaluating the potential of outsourcing product development and design, exceeded or was comparable with those that indicated likewise for human resource administration or finance and accounting. Part of The Economist Group, the ECN is a membership-based service that provides analysis on economic and business trends.

Ross O'Brien, director of the ECN in Hong Kong and author of the report, revealed that the company's tech industry clients were indeed stepping up engagement with third-party providers for R&D processes.

ECN clients, typically large multinationals, "deploy in-region R&D to help them create a virtuous cycle", he told ZDNet Asia in an e-mail interview.

"[A] locally-developed product, which responds to application needs, form factors and price-points of Asian markets, is increasingly needed as tech companies depend on sales in Asia to shore up their global growth objectives," explained O'Brien.

Jens Butler, Ovum's principal analyst for IT services in the Asia-Pacific region, concurred. He noted in an e-mail that there is "certainly an increase in BPO interest" among tech organizations of core capabilities such as R&D.

However, Butler added that companies tend to be selective about the R&D aspects to outsource, where the focus is usually on functions such as testing rather than the actual design and architecting of products and services.

R&D outsourcing not for all
Rolf Jester, Gartner's Distinguished Analyst and Asia-Pacific vice president for IT services, noted in a phone interview that there is a "decent amount of external R&D" being carried out in the industry today.

According to Jester, it is common for major software vendors to have outsourcing partners involved in product engineering. Mobile manufacturers also look to companies in China and Vietnam, for example, to develop embedded software, he said.

Sydney-based Jester added that one factor that could encourage businesses to outsource R&D is that a product has reached "commodity-stage" or is a common product with a large pool of providers.

In contrast, companies that deal with an "early-stage technology", such as a security company with leading-edge development, would want to keep a proprietary hold over its R&D-related processes, he noted. This category of businesses may still outsource some aspects, particularly if they deem outsourcing as the best option to obtain a specific expertise, the analyst said.

Ultimately, any organization that is considering R&D-related BPO needs to discern whether that function is a competitive differentiator, said Jester.

"Each company competes on different characteristics. R&D and the ability to truly design innovative things may or may not be one of those characteristics, and each company needs to make that decision," he explained.

For instance, he noted that Dell during its early days competed on the basis of having a supply chain that was heavily customized and ensuring that products were brought to market and delivered to the end-customer uniquely and quickly.

Butler added that while there may be proper structures in place for companies to govern the outsourcing of core capabilities, there may be reasons holding them back.

"As greater control associated with advanced architectures and more rigor are built into development functions, there will be 'stages' that will fit into an outsourcing function reasonably straightforwardly," the Ovum analyst said. "However, a lot also depends on the organizational culture, risk profile and strategic direction. More often than not, it requires a specific incident to drive organizations down this path rather than a gradual shift."

Singapore-based Data Security Systems Solutions (DSSS) is one organization that currently does not outsource any of its R&D work, and has no intentions of doing so.

In an e-mail, CEO Tan Teik Guan told ZDNet Asia that the "quality of the product is key to the success" of software companies such as DSSS.

"We choose not to outsource our product development and instead hire all our developers within the Singapore office to ensure security remains the highest emphasis during the product development cycle, and that the necessary security procedures and mechanisms remain in place while building the product," Tan said.

He added that another reason DSSS retains development work in-house is to play its part as a "responsible corporate citizen" by exposing the current and future generation of engineers in Singapore to "high-tech entrepreneurship".

Outsourcing core functions necessary for competitiveness
The ECN's O'Brien, however, cautioned that companies may increasingly have no choice but to look to a third-party, including BPO service providers, for product development.

"Whole-scale outsourcing of all core development requirements to a single partner is rarely considered a good thing. But, with cycle time and cost expectations being as intense as they are in the region, IT firms can hardly afford not to leverage partners increasingly higher up their own 'value stacks' to reduce cycle time," he pointed out.

"A portfolio management approach is how I am seeing firms mitigate this challenge," he said. He related that one ECN member, which plays in the mobile applications space, distributes its code development among several geographically-dispersed partners, ensuring that no critical mass of IP (intellectual property) is in a single service provider's hands.

According to O'Brien, in five years' time, the majority of organizations will have no choice but to seek efficiencies from R&D outsourcing, especially since they are increasingly unable to squeeze cost efficiencies out of low-value production coupled with higher wages in Asia.

The option, he observed, is not one to dread.

"We tend to think of R&D as being only rarified moments of white lab-coated 'Eureka!' innovation, while in reality much of it is debugging, simulating and other labor-intensive processes materially indistinguishable from good old-fashioned manual labor.

"I believe this failure to recognize a lot of R&D for what it truly is in the IT value chain, is causing decision makers to make bad calls with regard to the extent they have to outsource, to stay competitive," O'Brien said.