Captive vs Service Provider : A Zero Sum Game?
About the author: Sidhant Rastogi is a Partner at Zinnov and leads the Global Engineering Service Provider practice.
I have run a tad rugged answering the R&D center versus engineering service provider question. At times am piqued with either side taking one or few data points out of context or plain opinions to construct tall arguments in favor of the respective sides.
Quick primer on Facts/Numbers:
1. Global Size 2015:
- Offshore In-house: Globally, there are over 2500 offshore in-house R&D centers delivering ~ $31B of Engineering work.
- Outsourcing: There are over 250 Engineering outsourcing partners across the world delivering ~ $36B of Engineering work.
2. Global Growth 2014–15:
- Offshore In-house: ~7.5%
- Outsourcing: ~8.5%
3. India Size 2015:
- Offshore In-house: India houses over 900 companies with in-house centers accounting for ~ $12.2B
- Outsourcing: India has over 75 outsourcing companies accounting for ~ $7.8B
4. India Growth 2014–15:
- Offshore In-house: ~9% (note the larger base)
- Outsourcing: ~12.5%
Therefore, from above data points, at the very least, we can establish that:
- Globally and also in India, captives and outsourcing partners are doing very well for themselves.
- India is growing faster than the global growth rate across captives and partners
So how do we solve this ‘debate’ as the facts point to a happy co-existence of both parties.
NON Zero-Sum Game:
The problem is that most people think of this as a contest — “captives versus service providers”. I must agree that to an extent, this is exactly how the premise was originally framed 15 years back. That was when a tsunami of companies set up their in-house R&D centers in India (500+ i.e. 50% of the current companies set up shop between 2002–2007). The service providers tried hard to ‘stop’ or gain share of this offshoring wave. Battles (now part of folklore) played out in the R&D offshoring company’s board rooms. Some of the veteran center heads and senior leadership at service providers still carry the ‘battle scars’.
However, a lot has changed in the last 10 years (like Apple launching the iPhone :) ). Following are the key developments on either side:
In-house R&D centers:
- Scale: Over 50 centers with 1000+ engineers; multiple above 10,000 engineers each!
- Maturity: From the initial days of ‘supporting’ basic engineering work such as test / validation and drafting / modeling to owning not just complete engineering but also product management of product lines out of the center. This has been achieved by investing in capability, labs and talent.
- Efficiency: Scale and Kaizen over time has allowed in house centers to keep their cost of operations per FTE flat (in fact reduce in USD or EUR terms) over the last few years.
- Market/Ecosystem Integration: In-house center engineers have aligned, and in many cases tied to the hip with the company’s sales teams to drive growth in India / emerging markets. Companies are also using their India centers as channel to reach out to the broader India innovation fabric — start-ups, universities, etc. Centers have invested on multiple start-up incubators, reach out programs.
- Power (for lack of better word): Many in-house R&D centers have elevated themselves to “seat on the table” at overall company level decision making. Many are now important stakeholders or owners in global procurement.
- Scale: Scale growth is undeniable. We now have 8 companies with only engineering revenues over $1B with the largest being over $2B.
- Capability: Partners also have made massive investments to build accelerators, solutions and plug-n-play IPs to help their customers. They have also made investments in large labs, test facilities, proto shops to enable full life cycle product development.
- Footprint: Outsourcing partners have moved away from India-only or Eastern EUR-only delivery models to a larger global footprint. They can now offer a choice of talent and ecosystem “plug-in” across continents and countries — Argentina, Mexico, Eastern Europe, China, India, Vietnam, etc.
- Near shoring: (not onsite staffing — landed or local). In the day and age of fast moving technology, companies want to iterate on certain engineering areas faster. Outsourcing partners are setting up shop close to the company engineering hubs or in nearby lower operating cost locations to enable greater collaboration and customer ‘comfort’. This is also leading to full cycle offshoring as the customer becomes more adept at carving out engineering work packages or the product they started working on together moves up the S-curve.
- Skin-in-the-game: Outsourcing partners are committing to unique engagement models. They have taken on complete product suites of say end-of- life products on a revenue share or upfront payment model. This not only helps companies focus management/engineering bandwidth on newer areas but also infuses/frees-up capital for new initiatives. Some partners are also working in outcome-only models such as payment linked only to quantum of reduction in the BoM cost of a component/assembly.
Also, in the last few years the in-house centers and outsourcing partners have warmed up to each other. They say money speaks the loudest — there is an estimated $350–400 Million of engineering work coming directly from India in-house captives to outsourcing partners. The engagement levels are improving from pure staffing to work-package and in many cases outright joint product development and technology collaboration.
Finally, from the product company perspective, both in-house and partner outsourcing models are tools to leverage during the process of Engineering globalization and innovation journey of a company. Each of the two models has its un-deniable value and both models can / are also being deployed simultaneously in multiple cases. I firmly believe that both models are here for good. It is high time we stop seeing this as a zero-sum game between in-house R&D centers and outsourcing partners.
Note: This post is only in the context of Engineering/R&D.
Source: Zinnov Global Insights Platform, Zinnov Globalization Accelerator Platform.