Operations Cost Benchmarking Study 2013: Zinnov

Zinnov, a leading Globalization Advisory and Market Expansion firm, today released its findings from the ‘Operations Cost Benchmarking Study 2013', which assessed costs of MNC R&D Centres under five categories namely People, Infrastructure, Travel, Vendor Related and Government & Regulatory.

Based on the study's findings, Zinnov said that India centres are moving up the maturity curve and delivering significant value to the headquarters, at almost the same cost point, making India more strategic. It was observed that in the past five years alone, Indian R&D centres have enabled a net savings of about USD 81 Billion for MNC R&D organizations.

Key Takeaways:

While the overall cost/FTE has increased by 2 percent in INR terms it has decreased by 7 percent in USD terms
2. The average people cost/FTE increased by 6.5 percent in INR terms largely attributed to the increase in employee salaries and a strong focus on training & development and employee engagement
3. The average infrastructure cost/FTE has increased by 2 percent in INR terms due to investments in communication infrastructure and utilities. This is expected to increase as the investment in cloud infrastructure will be a strategic priority for organizations in the next few years
4. Given the unpredictable economic environment , organizations are allowing only need based travel
5. Vendor related costs decreased by 7 percent/FTE in INR terms
compared to the previous year. This is a function of companies taking advantage of economies of scale by consolidating vendor management functions and also moving to outcome based and risk-reward models
6. Government & Regulatory expenses have increased by 7 percent/FTE in INR terms owing to changes in transfer pricing policies

With a major dip in the rupee value as against the USD and EUR in FY2012-2013, Indian centers were able to optimize their cost of operations by controlling infrastructure, travel and vendor related costs, while in parallel focusing on initiatives to increasein-house leadership and technical competency, enhance employee engagement, drive up product ownership and R&D maturity and increase visibility in the headquarters. This paradigm shift has led India centres to focus on lateral and niche hires rather than mass hires, leading to a 4pc reduction in average hiring from 2012 to 2013.

Pari Natarajan, CEO, Zinnov said, "The Indian R&D industry is rapidly accelerating towards higher maturity levels. With the fall in rupee offering better cost arbitrage opportunities for Indian centres, MNCs are using this window to enhance the capabilities of the Indian engineering workforce. While in the short term this value push may result in an increase in cost, in the long term the net positive return on investment will be sizeable."

In an attempt to ensure higher organic growth, India centers have dedicated about 27 percent of their discretionary spend towards training and development initiatives and offering employees opportunities to scale up, the released study read. Companies are seeking expertise across domains and specializations in data analytics, technical architecture, product management and UI/UX designing. As a result of the industry wide focus on doing higher value engineering and innovation work, Zinnov anticipates that 20 percent or more organizations will move up the R&D maturity curve in the next couple of years.

It further added that MNC R&D Centers in India are also placing increasing emphasis on customer interaction and collaboration within teams. As a result, organizations have made significant investments in Internet connectivity, VoIP / video conferencing equipment and ERP systems. Organizations are also transitioning from traditional work spaces to Agile and centrally reconfigurable group workspaces with about 60 percent of the companies investing in this already.

On the infrastructure front, companies are optimizing their spend on facilities and utilities through better space utilization and focus on green initiatives. Some best practices that companies have adopted include use of renewable energy and light sensors to reduce energy utilization, efficient building energy management and optimal use of office supplies.

To optimize travel costs and increase visibility, India centers are planning better, using collaboration tools, aggressively encouraging strategic travel, investing in executive briefing centers, and positioning critical resources closer to the headquarters. As a result, travel costs have reduced marginally compared to FY12. The study also found that organizations are increasingly adopting risk reward and revenue share as engagement models with service providers to optimize costs and enable co-creation. They are also establishing Vendor management office (VMO) to streamline processes, consolidate negotiations and leverage economies of scale.

Another interesting fact that was brought to light was that about 90 percent of the centers continue to set up within SEZs and STPI as it provides various tax benefits such as exemption from customs duty, central excise etc. However, in-spite of these tax benefits, India centers continue to face litigation and are constantly under the radar of the Income Tax Authority for transfer pricing issues. The final set of Safe Harbor Regulations (SHR) was formulated in September 2013 to ease transfer pricing and minimize litigation issues but ambiguity and unclear definitions still hinder organizations from adopting it.

In-spite of these regulatory barriers in India, Zinnov predicts that India centers will continue to provide significant cost arbitrage opportunities for the headquarters and simultaneously are readying themselves to lead the future of engineering in the years to com.