MNCs executing more R&D work at lesser budgets

by Manu Sharma    Mar 10, 2010

Multinational companies with their R&D subsidiary centres in India will need to re-define their approach towards globalization over the next 12 months, according to a study conducted by Zinnov Management Consulting. The study titled ‘Compensation and Benefit Study 2010′, highlights that changes will happen in terms of controlled salary increments; cut down on campus hiring; increase role for service providers and focus on Tier 2-3 locations for non-core functions.

The impact of the economic slowdown will continue to reflect in the salary increments this year and on an average companies will witness a salary increase of 6-10 percent for the next 12 months. However, it will take another 24 months before the salary increases restore to the 2005-08 levels. As the economy bounces back and companies start to backfill some of the positions, the industry will witness a short term spike in attrition.

Pari Natarajan, CEO, Zinnov Management Consulting said, "As the cost pressures continue to exist, we foresee companies trying to execute more R&D work at the same or even lesser budgets as compared to last year. Companies would be forced to focus on new growth engines in the form of emerging markets (such as India and China) and newer technologies (such as SaaS/Cloud). And this will fundamentally push all R&D centers to deliver higher value & higher productivity at lower costs".

In respect to focus on tier 2-3 locations for non-core functions, the study said that in a bid to reduce costs, companies will increasingly explore opportunities with low cost destinations within India.

Pari said that as the demand for talent pool continues to increase, companies are now looking at tier 2 locations for some of the non-core activities to begin with 43 tier 2-3 locations are emerging as IT hubs in India reducing pressure on tier 1 locations. On an average, these tier 2-3 locations are about 28 percent cheaper as compared to tier 1 locations in India.

He said with increased availability of low cost talent and ever improving infrastructure, companies will be running pilot efforts with non-core activities to start with. Already big MNC like Honeywell and Robert Bosch have set up another R&D centres in Madurai and Coimbatore. "These centres are focusing on lower-end work like testing and maintenance but likely to face the problem of relocating their staff to these centres," he said.

In fact, based on a recent NASSCOM survey of its member companies, about 60 percent of the centers are located in 15 challenger cities, and 28 percent are located in 12 follower locations in India. Of the 6,500 STPI units currently operational in India, about 25 percent of them are located in these tier 2-3 locations in India, the report said.

"It is unlikely that the centre would extend the tax subsidiary for IT/ITes firms beyond 2011 and so MNC would be forced to move to IT SEZs emerging across the country where in they would continue to avail the tax benefits that they enjoyed earlier," said Pari.

Regarding increased role for service providers, the study highlights that service providers will play a critical role in cost optimization and enabling higher efficiencies and companies would be keen to leverage the expertise of the service providers towards sunset/mature products and non-core activities so that they can focus on core innovation aspects of product development.