The global Engineering R&D (ER&D) spend is, by various estimates, close to USD 2 trillion. According to NASSCOM, the ER&D sector in India is growing at a faster pace than the IT/ITES sector, and already accounts for 30% of global ER&D offshoring. This is expected to grow further.
Offshore ER&D centers came into being in the 1980s and have now become a globalization trend. ER&D has always been considered core and hence treated protectively. However, today, engineering, design, research and development are among the functions that are offshored or outsourced by large global corporations as they face increasing competitive pressures.
The huge gap between overall ER&D spend (USD 2 trillion) and offshoring (USD 93 billion) provides an opportunity to increase offshoring and thereby optimize cost and delivery. However, given the recent protectionist measures adopted by various countries, the US-China trade dispute, and now COVID-19, the brakes have been applied on ER&D offshoring.
What are the future prospects of ER&D offshoring? Will it continue to increase or will the current protectionist trends curtail it?
Let’s look at some broader trends that might impact ER&D offshoring.
- Cost - The cut in ER&D spending means that firms have to manage within curtailed budgets. That means they will have to continue to find options of cheaper and effective delivery which should ideally increase offshoring of ER&D functions.
- Global Protectionism Trends - With major economies struggling during and post COVID19, it is a no brainer that countries needs to protect local jobs. However, past trends show that protectionism has never made a major impact on offshoring and outsourcing. Both buyer and seller of services have generally adapted to different scenarios. Will it be any different this time? Unlikely.
- Data Privacy – Concerns related to data leakage and cybersecurity are already hot topics. Offshore centers and outsourcing providers have taken strong data protectionism measures; add to that firms that, in many cases, have mandated physical storage of data remains in the home country.
In nutshell, these are testing times for ER&D centers. They need access to the latest technology, talent and an ecosystem that drives higher value.
In my recent discussion with several leads at ER&D centers, there has, to date, been no major change in policy related to offshoring and outsourcing of its functions.
While the short term may not look very favorable for ER&D centers, in the long-term ER&D functions will continue to leverage the global delivery centers as it is key to their growth and innovation.
Some challenges ER&D centers continue to face that drive the case for offshore delivery:
- Talent and Skill gap – The right talent, skill and price continues to present a bottleneck for ER&D functions which increasingly rely on offshore delivery centers.
- Hardware to Software – ER&D centers are increasingly adopting more software technologies and products given the shift in demand for advanced-technology enabled products. This is leading to the need for more investment in technology, which requires higher capital investment. Leveraging a low-cost offshore center is going to support the business case.
- New Age Technology – ER&D centers need to adopt new age technology and churn out products and features faster than their competition. Embracing new age technology will require investing in offshore and regional centers to get best of breed solutions across the globe.
The majority of global ER&D centers are in countries like India and China, and will continue to benefit as long as they maintain a competitive advantage.
ER&D centers have to move beyond low cost destinations, however, to reposition their value as a Center of Expertise that can drive innovation and build new solutions.
