R&D Moves Offshore

Increasingly, companies are choosing to outsource research and development.

Research and development, once cherished as the crown jewels of competitive advantage at most companies, is increasingly becoming a global commodity.

The trend to hand R&D tasks to outsourcing partners has been gaining momentum in recent years. The movement cuts across a wide variety of industries, including IT, and encompasses companies both large and small. Customers are finding that tapping skilled researchers in all corners of the globe can save them from costly talent searches and help them get products to market faster.

The need for companies to get help in their R&D efforts was highlighted on June 14 when IBM announced it will be tuning its consulting operations to assist its customers in R&D projects, some of which IBM might carry out itself through its worldwide research capabilities. The initiative is being carried out by IBMs Global Consulting Services unit and complements the companys Technology Collaboration Solutions initiative, launched in March, in which IBM seeks to make its own R&D work available to customers.

"They want to teach clients how to fish," said Navi Radjou, an analyst with Forrester Research, in Cambridge, Mass. "There are some areas of R&D that are ripe for outsourcing, and IBM can do them. Its not body shopping, but brain shopping."

Radjou said companies, particularly in the United States, need R&D assistance because of a shrinking talent pool. In a report published in March, he reported that, since the mid-1990s, engineering and physics Ph.D.s in the United States have declined by 15 percent and 22 percent, respectively.

Indian outsourcer Wipro claims to be the worlds largest provider of R&D work, handling $800 million annually, or 37 percent of the companys annual revenue, according to Ayan Mukerji, Wipros senior vice president for product engineering solutions for North America, in Dallas.

Wipro typically works with the worlds largest companies, but smaller companies need help as well. LeftHand Networks needed a helping hand when it was creating its SAN/iQ product, an iSCSI storage platform. The Boulder, Colo., company found it in Patni Computer Systems, to which LeftHand outsourced automated testing.

Patni, with headquarters in Cambridge, Mass., and development offices in Mumbai, India, developed routines and test scripts, performing the work at a Mumbai facility. Working with Patni enabled LeftHand to go from its 1999 startup to its first product rollout in 2001.

The relationship continues, as Patni helps LeftHand move the SAN/iQ software from one hardware platform to another by doing the integration work necessary so that the software can run on such platforms as the Hewlett-Packard ProLiant DL380 server. LeftHand now does between $1.5 million and $2 million of work each year with Patni, which has approximately 35 employees on the contract.

"Our business model is to take our core SAN/iQ technology and open up as many channels as possible," said Bill Chambers, CEO of LeftHand Networks.

Third Brigade, an Ottawa startup vendor of server-based intrusion prevention systems, needed Solaris skills in a hurry, so it turned to an Ottawa neighbor, Macadamian Technologies, which works with several Indian and Romanian research houses. Macadamian found the right skills among its Indian partners and called on them to create a Solaris driver for Third Brigade at a price of $60,000.

One issue in all R&D outsourcing relationships is the status of intellectual property, which customers generally insist they retain. "Theres a trust level," said Terry Cass, director of product development at Third Brigade. "We have personal relationships with these guys."

Cass said good communication is also critical, especially in the requirements phase of the work. "We ran into that issue and resolved it by having them write the requirements, which we review," he said. Cass noted another hurdle: adhering to a budget. Having underestimated some projects, he found the best way to avoid uncertainty is to agree to a fixed price with an R&D outsourcing partner.

LeftHand and Patni address the communication issue by sending Patni employees who are new to the project to Boulder for three months. After that, Patni workers return to Boulder every 18 months to keep ties fresh, said Chambers.

Chambers said the single biggest stumbling block is the tendency of customers to wash their hands of projects once they turn them over to outsourcing partners. "People tend to look at outsourcing as turning over responsibility completely. Thats when projects fail. We look at Patni as an extension of what were doing. We look at them as our Mumbai development team," said Chambers.


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