Global corporations are increasing their spending on Research and Development (R&D) but Indian IT companies
which offer product engineering and R&D services may not have much to cheer about.
Indian service providers witnessed a slower growth of 9 per cent in 2012/13 to nearly $6 billion from the segment, compared to 13 per cent growth it registered in 2011/2012, consulting outfit Zinnov said in a report released Thursday.
There are many reasons why the product engineering services
segment is proving a challenge for Indian IT firms.
Multinational companies are outsourcing more work to their own offshore captive centres rather than third parties. This is borne out by the faster growth MNC centres have seen - in 2012/13, such captive centres in India grew 12 per cent to register revenues of $10.4 billion.
Second, the recent re-organizations in Indian IT companies have meant less focus on the R&D service line - the go-to-market of many large-tier companies is now industry vertical-led and not service-line-led. Sales executives of different verticals are focusing more on selling the bigger pie of IT services and BPO rather than the much smaller product engineering services segment, Sundararaman Viswanathan, an analyst with Zinnov argued.
HCL Technologies, Wipro, TCS, Tech Mahindra and Infosys have sizeable businesses ranging between $500 million and $800 million in the R&D space. However, all Indian providers are now facing competition from companies and countries that hardly existed on the outsourcing map a few years ago. Chile and Argentina are emerging as major engineering service destinations because of the phenomenon of 'reverse drain'. In a near repeat of what happened in India, people of Chile and Argentinian origin, after working in the United States, are now returning to their own countries to start offshore centres and companies. Much of the new technology work is going to Latin-American companies such as Globant - a trend that has surprised many Indian companies.
There are two other trends Indian services providers need to worry about.
North America is re-emerging as the preferred destination for outsourced product development - Tier two locations in the United States, where costs can be 30 per cent lower than Tier one cities, are viable alternatives. And agile development practices, where research, design, development and testing teams all sit in one room for rapid response and faster product release cycles, have started to hurt offshoring. Indians had excelled at the "fountain method" of delivering projects where research, design, development and testing happened one after another. It is a time consuming methodology and shrinking product cycle times are favouring agile development.
Indian IT has a lot to think about.