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Wednesday, March 10, 2010

R&D spend growth slipped by 5-10 percent in two years

Bangalore: While the economy is starting to recover, the R&D growth has so far been only minimal. According to the 'Compensation and Benefit Study 2010' released by Zinnov Management Consulting, R&D spend growth has gone down significantly in the last two years; wherein verticals like software witnessed a downward slip by 10 percent.

The study targeted at the MNC R&D centers in India, brings to light how compensation and benefit is shaping up post recession and what are the global changes and its impact on the centers in India.

According to the report, the diminishing cost arbitrage due to historic salary increments and overheads caused due to productivity differentials and inexperienced talent pool will be a cause of concern for the R&D fraternity this year. Centers in India would need to react to this by optimizing on the salary hikes for the current year and there on.

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 and higher productivity at lower costs. We also see that this demand for cost control will indeed force R&D centers in India to put a check on the salary escalations for the next couple of years."

The study highlights that the industry will see an average salary increment between 6-10 percent this year based on their growth at the India center and global performance of the company. It adds that companies will be forced to offset low hikes by creating more responsibility areas, increasing ownerships and defining attractive career path to retain critical resources. While companies will be cutting down on salary increments, the ever increasing experience pool will continue to put lot of pressure on costs.

Putting light on attrition, the study said that lesser increments could indeed result into a short term spike in attrition. However, with clear communication around the economic situation, career growth and performance led incentives, clubbed with the increased maturity of employee base, will put attrition in control over the next 12 months. Zinnov does not expect the average attrition figures for the year to go beyond nine percent.

Hiring will continue to be slow and selective. While the availability of talent pool will continue to exist, companies would be going slow on hiring and would only be looking at backfilling existing positions and selectively hire at new positions based on requirements. Campus hiring will be slow as deferral hiring from last year resulted in late joining for many fresher, it added. Companies would only maintain their existing working relationships with the universities and hire minimally from campuses.

Dwelling into the aspect of future outlook, it read that many of these R&D subsidiary centers in India will re-define their approach towards globalization over the next 12 months. In the drive to optimize costs, they would also explore opportunities with tier 2-3 cities in India to execute some non-core functions at these ultra low-cost destinations. A result of this focus on tier 2-3 locations is a fact that 43 tier 2-3 locations are emerging as IT hubs in India, thereby reducing pressure on tier 1 locations.

Last but not the least, the study brought to light that Service providers will also play an important role in the product development value chain. These providers would add significant value in cost optimization by undertaking non-core, non-complex functions, thereby allowing companies to save some funds for futuristic investments. At the same time, these 3rd party providers would also take increased responsibilities with mature/unset products in arrangements such as risk reward, revenue share and outcome based pricing. Mid-sized companies are also now likely to benefit as the service providers augment their focus on the long tail of product companies in the drive to explore new growth engines for their respective growths.

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