Flexibility is also an important factor. Offshore R&D facilities can serve as a low-cost safety valve in dealing with demand fluctuations. One large automotive supplier that participated in the Booz Allen/NASSCOM study described how its offshore facilities came into play when it had to cope with major design changes late in the product-development cycle. Those changes led to a serious work overload, which the supplier was able to hand off to its offshore operation, thus ensuring that the product got to market on time.
Balancing the Demands
Establishing a global innovation footprint, with all its potential benefits, can add new dimensions of sometimes maddening complexity. Such variables as market demand can shift without warning. Regulatory requirements vary from country to country and are always subject to change. Developing worldwide innovation operations is an intricate process, but the Booz Allen/NASSCOM study reveals that certain truths apply no matter what other factors may be in play. Consider:
• Innovation outsourcing requires engaging talent in new ways. Outsourced engineering work tends to be far more complicated than most of its nonengineering IT, manufacturing, and business process counterparts. It requires a high degree of technical sophistication and familiarity with sector-specific hardware and software. Competition for talent is fierce; some companies have experienced turnover as high as 40 percent per year. Well-educated engineers and programmers will stick around only as long as their minds are engaged and they are properly recognized and rewarded for their work.
• “Where” is critical. Companies must carefully choose offshored sites to optimize a mix of factors: access to a qualified work force, access to technology clusters or academic institutions, access to desirable markets, proximity to production facilities, and the presence of a welcoming business environment. One leading automotive supplier built its software and design center in India, its production facilities in Germany, and its main engineering centers in the U.S. and Germany — all to tap into appropriately skilled talent pools. But it tests cars in northeast China, rather than the more traditional choice, Sweden, because China’s winters are snowier (thus providing more challenging road tests) and its labor is less costly.
• IT infrastructure can make or break the network. The success of any global innovation network relies on mobility and the transferability of information across systems. That places a premium on standardized tools and processes to ensure that the network operates efficiently and effectively. (This raises a whole other set of security issues that can be addressed both by encryption and other technology-based solutions and by organizing the process to protect valuable intellectual property.) Apart from IT, it is also important to build physical infrastructure such as labs and testing facilities.
• Governance structure can help manage risk. Offshore innovation operations can take a number of shapes, each with trade-offs. Captives (wholly owned offshore operations) offer the most seamless network and the greatest security for intellectual property, but cost the most up front and take the longest time to set up. Joint ventures and strategic partnerships can be less costly to set up, but are harder for one partner to control. And third-party vendors are the quickest and least expensive way to launch an operation, but controlling risk is much more difficult because the client doesn’t actually manage the enterprise.
The Booz Allen/NASSCOM study found, by the way, that there is no trade-off in skills and performance from one business model to another. Once a company has found the right model, productivity and quality often exceed in-house levels. One automotive supplier that offshored 20 percent of its engineering found that 5 percent more often than American designers, its Indian contractors came up with designs that met specifications the first time out and did not need to go back to the drawing board. And they did that despite having a decade less experience on average than the auto supplier’s own team.