India Outsourcing Industry – Low R&D spend for Non Linear Revenues

Non Linear revenues are essential for revenue growth. Currently non linear revenues account for only 10%-15% of revenues currently for large IT companies and they are planning to increase these revenues to be 20% of total revenues in the next three years and 1/3^rd of total revenues in five years. Research and Development (R&D) spend is key for non linear revenues. Indian vendors have been investing in R&D for some time and they are not investing significant amounts of money. Infosys is the only vendor that has invested in R&D and it’s investing slightly more than 2% of revenue. HCL is investing 1.4% of revenue in R&D. TCS and Wipro are investing less than 1% of revenues in R&D and they are investing 0.3% and 0.7% of revenue respectively. This is far lesser than global players that invest close to 5-6% of revenues in R&D. Indian Vendors have exclusively set up innovation and research labs with close to 600-800 highly qualified and skilled employees working full time for developing new products and services. Chart: 1 is the R&D spends in Rupee Crore. Chart: 2 is % R&D spend to total revenue.

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Infosys Labs R&D is focused on applied research in software engineering and other areas of Enterprise IT. Finacle R&D unit is engaged in research of developing new technologies in banking domain. New strategic direction ‘Building Tomorrow’s Enterprise’ identifies new trends that are transforming the client’s business. Areas of research include semantic and language tech for information extraction from social media and for customer engagement, cloud computing, software engineering, security &privacy, etc. Research groups have published two books Raising Enterprise Applications- a Software Engineering Perspective and Process centric Architecture for Software Systems and 125 papers in leading journals in 2011.Infosys have an aggregate of 357 patent applications pending in India and US. The USPTO has granted 22 patents. Source: Annual report.

HCL Engineering, R&D Services group offers end-to-end engineering services and solutions in hardware, embedded, mechanical and software product engineering to aerospace and defence, automotive, consumer electronics, medical devices, networking and telecom, servers, storage and software industries. HCL has started a business unit with a dedicated team to focus on Defence, Space and Security. HCL is investing heavily in developing its own IPs and solutions to help customers' impact the overall product ecosystem faster and better. Solutions include a unified communication platform, a remote diagnostic reusable module, telematics and test platforms in multiple verticals. HCLT has partnered with Cisco, and filed multiple patents in the field of Mobility, Banking, etc. Source: Annual report

Wipro’s R&D focus is to strengthen the portfolio of Applied Research, Centers of Excellence (CoE), Solution Accelerators and Software Engineering Tools & Methodologies. In FY 2010-11, company had filed for 7 new patents and from the previous filings, 6 patents have been granted. The technology themes identified were Cloud Computing, Green IT, Social Computing, Information Management, Mobility, Collaboration and Open Source and resulted in creation of several new services like Cloud SI Services, Cloud Originator Services in areas of Mortgage Processing and Green Consulting. Wipro researches actively involved in Government committees to integrate Rupee sign into ICT environments. Source: Annual report.

TCS’ R&D organization is focused on creating intellectual capital for the Company and enabling innovation across the following three dimensions: Supporting the competitiveness of current business across industries and service lines; enabling the creation of new platforms for non-linear business growth; Exploring new areas and technologies for future new business opportunities. TCS has initiated ‘Research Scholar’ sponsorships to benefit research in the IT disciplines in Indian Academia. A number of innovation platforms, contests and awards were launched. The Company also hosted innovation forums in three continents and held over 40 innovation workshops and symposia. TCS’ researchers participated in more than 150 conferences and published close to 200 papers in prestigious journals. TCS increased its Intellectual Property Rights (IPR) significantly. 223 patents were filed in several countries in FY 2010-11. Until now, cumulatively, TCS has filed 448 patent applications of which 68 have been granted. In the current financial year 6 patents have been granted. Source: Annual report.

R&D departments need to further deliver more products and services and Vendors have to increase their R&D spend. They have to increase their collaborations and tie ups with other research and academic organizations and look to recruit more skilled and qualified professionals. Vendors have been trying to increase their R&D efforts and increase R&D contribution but they have not seen significant success. They have to look for ways to increase their R&D spending and also look for more contribution form the R&D department.