operational costs benchmarking study 2012

Operations Cost Benchmarking Study 2012

This report is solely for the use of Zinnov client and Zinnov personnel. No part of it may be circulated, quoted, or reproduced for distribution outside the client organization without prior written approval from Zinnov

Agenda

OCB Study 2012 – Key Findings 2

MNC R&D Landscape in India 1

MNC R&D landscape in India has rapidly grown in the last decade

Note: *-Software, Internet, Semiconductor Source: Zinnov analysis of MNC R&D ecosystem in India

Pre1990

1990-2000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011-12

11

154

33 44

67

95 89 90

74 70

37

72

38

Early Adopters - 154

415 companies established R&D Centers in India (2003-

2007)

This period of extraordinary growth is the outcome of the increased interest in verticals other than

traditional* offshoring Industries.

Number of Companies Establishing R&D Center Each Year (FY 1980 to FY 2012)

Adventurous - 11 Followers - 709

4

Over 200,000 professionals work at the MNC R&D centers in India

766 799 935

738 770 835

192 204

210 500

527

560

0

500

1000

1500

2000

2500

3000

FY2009 FY2010 FY2011E

Domestic MNC ER&D

BPO exports IT service exports Software/ Internet, 67240

Telecom, 26880

Semiconductor, 22150

Automotive, 17208

Electronic Equipment, 14911

Industrial, 13270

Computer hardware, 11679

Pharma. / Life Sc./ Medical device, 9500

Networking, 6696

Storage, 6243

Aerospace, 3637

BFSI, 2177

Others 4669

Total, 204196

Vertical Wise Distribution of MNC R&D Talent in India, 2010

Note: Source: : Zinnov Captive Report, 2010

Total IT-ITeS Talent Pools in India

5

More than 50% of the MNC R&D talent pool is concentrated in Bangalore Region; Tier-2 cities are valuable source for fresh talent pool

Bangalore Region

Chennai Region

Mumbai Region

NCR

Other Locations

Hyderabad Region

19.2

31.1 23.0

16.5%

9.8%

6.5%

12.5%

2.0%

M Mean Value :Headcount per MNC R&D Center

102.5

52.7%

Total MNC R&D Talent in India in 2011 ~ 210k

3.7

24.0

Fresh Talent Pool distribution by Location Bangalore

NCR

Chennai

Hyderabad

Pune

Coimbatore

Jaipur

Nagpur

Trivandrum

Others*

13%

12%

17%

13%

9%

8%

7%

6% 4%

10%

35%

Note: Source: Zinnov Talent Report 2011

Overall MNC R&D Talent Distribution by Location

6

India is strengthening its R&D position as many large companies set up their large R&D presence in India

Headcount/ Revenue

Less than 200

200-500

500-1000 More than 1000

Less than $1Bn 262 70 14 NA

$1Bn to $10Bn 59 45 33 15

$10Bn and Above 56 29 19 40

Global Revenues Vs. India R&D Headcount

69.4%

21.6%

1.4%

7.2%

0.4%

North America EuropeJapan APACRest of the World

MNC R&D Centers by Headquarter Location

No

. of

Ce

nte

rs

Headcount Wise Distribution of MNC R&D Centers in India

27

42

32

45

43

166

23

44

51

51

55

162

3

5

14

15

13

41

Mumbai

Chennai

Hyderabad

Pune

NCR

Bangalore

Small Medium Large< 99 > 1000 100 - 999

Note: Source: Captive landscape in India – NASSCOM-Zinnov study - 2009

Agenda

OCB Study 2012 – Key Findings 2

MNC R&D Landscape in India 1

An in-depth analysis was conducted for 55 MNC R&D Centers in India

8

Bangalore 49%

Chennai 11%

Hyderabad 11%

Pune & Mumbai

13%

NCR 9%

Others* 7%

0 – 250 36%

251 - 500 24%

501 - 1000 16%

1000 - 1500 9%

1500+ 15%

Location Wise Split Headcount Wise Split Industry Wise Split

• Analysis of nearly 37,000 R&D employees; Overall spending of nearly USD 1.7 billion in operating costs for FY12 (Apr-11 to Mar-12)

• Quarterly data for the last 8 quarters ending March 2012 has been taken into consideration for the yearly analysis. Currency conversion ratio for the same periods have been applied for data standardization

55 MNC R&D Centres

Note: * Tier 2 & Tier 3 Cities; SPD – Software Product Development; ES - Engineering Services; EMB – Embedded Systems/Semiconductor/EDA; Source: Zinnov analysis of data collected during May to July 2012 towards the Operations Cost Benchmarking Study 2012

50%

14%

14%

17%

3% 3%

SPD

ES

EMB

SPD & ES

EMB &ES SPD

& EMB

A robust methodology was followed to analyze cost related data

9

The Study analyzes the operations

cost data for 55 MNC R&D

Centers

251-500

501-1000

1000-1500

1500+

<250

Across Industry Verticals

- Software Product Development - Embedded systems/ Semiconductor/ EDA - Engineering Services

Across Locations Across Headcount

Data Collection Collation & Analysis

of Data Reporting

• Questionnaire to collect quantitative information pertaining to various cost heads;

• Qualitative Data collected through telephonic interview

• Zinnov proprietary tool is used for collating and analyzing data gathered

• Robust internal quality checks at various levels

• Final analysis presented for both qualitative and quantitative data. Cost analysis presented via excel report and a detailed presentation highlighting qualitative insights

Note: Source: Zinnov analysis of data collected during May to July 2012 towards the Operations Cost Benchmarking Study 2012

Methodology

The overall operations cost was segmented into 5 broad categories

10

Payroll & Payroll Related Benefits

Infrastructure (Including

Communications) Cost

Travel Cost Professional Services Cost

Government & Regulatory Cost

Components of

Operations Cost

Final Report is an in-depth study of the various cost components, qualitative insights along with future outlook of the R&D landscape


1

2

3 4

5

11

FY 2012 was marked with a variety of changes in the operating cost dynamics

Overall operating cost declined by 6% in USD terms

• Weakening of Rupee vis-à-vis USD and EUR helped gain advantage • Focus on talent pyramid optimization resulted into cost savings • Expansion into Tier 2 cities reduced the overall operating costs • Aged centers were better able to optimize cost based on experience

India centers delivering significant cost savings to HQ

• Approx $70 Billion have been saved by Indian centers for the headquarters in the last 5 years

High operating cost for semiconductor companies

• Approx 35% difference in per employee operations cost when compared to software product companies

Increased focus on contract resource hiring

• Contract resources account for 9% of the total MNC R&D population and the trend is expected to continue

STPI withdrawal not driving SEZ movement yet

• Around 80% of the R&D centers have been impacted by the STPI withdrawal but there is no clear trend of moving to SEZ


c

b

a

d

e

The overall Operating cost per employee has decreased in USD terms owing to weakening of rupee and consistent efforts by companies towards cost optimization

12

Currency 2011-12 2010-11 %Change

INR 1,950,602 1,897,973 3%

USD 40,604 43,174 -6%

EUR 29,311 32,671 -10%

MNC R&D Centers Operating Cost/Employee - FY11 Vs FY12

a


26,702 28,830 42,945

40,604 52,151

66,609

27,859 29,450 47,295

43,174 59,119

73,289

010,00020,00030,00040,00050,00060,00070,00080,000

10th %ile 25th%ile Average 50th%ile 75th%ile 90th%ile

Percentile Distribution of Operating Cost/Employee in USD for MNC R&D Centers

2011-2012 2010-2011

-4% -2%

-9% -6%

-12%

-9%

Over the past few quarters, the rupee has weakened drastically compared to USD and EUR

13

a

45.72

46.66

45.31

45.89

45.28

46.19

51.52 51.12

INR 42

INR 43

INR 44

INR 45

INR 46

INR 47

INR 48

INR 49

INR 50

INR 51

INR 52

Apr toJun

2010

Jul toSep

2010

Oct toDec

2010

Jan toMar2011

Apr toJun

2011

Jul toSep

2011

Oct toDec

2011

Jan toMar2012

Quarterly Exchange Rates – USD to INR

Weakening of Indian Currency (INR) against major currencies such as USD and EUR proved favorable as it brought down the overall Operations Cost in USD for the India R&D Centers

58.29

60.20 61.62

62.73

65.15 65.37

69.46

66.99

INR 54

INR 56

INR 58

INR 60

INR 62

INR 64

INR 66

INR 68

INR 70

INR 72

Apr toJun

2010

Jul toSep

2010

Oct toDec

2010

Jan toMar2011

Apr toJun

2011

Jul toSep

2011

Oct toDec

2011

Jan toMar2012

Quarterly Exchange Rates – EUR to INR

Note: Source: Quarterly exchange rates from Oanda.com

11%

7%

The savings from the overall currency depreciation has helped companies balance the salary increases and real estate increments

14

a

• MNC R&D industry witnessed a salary increase of 13.0% on an average with companies looking at hiring a mix of entry level and senior level resources to balance the overall cost

• Real estate increments have been in the range of 5% to 13%, thus adding to the increasing Infrastructure cost. Companies looking for cheaper options in the outskirts to cut down on the Infrastructure spend.

10%

11%

13%

16%

17%

13%

0.0% 5.0% 10.0% 15.0% 20.0%

10th%ile

25th%ile

50th%ile

75th%ile

90th%ile

Average

Salary Increase at MNC R&D Centers, in India, Q1 CY12

4%

5%

5%

11%

13%

8%

0% 5% 10% 15%

10th %ile

25th%ile

50th%ile

75th%ile

90th%ile

Average

Real Estate Rental Increments at MNC R&D Centers in India, FY 2012


4%

5%

5%

11%

13%

8%

0% 5% 10% 15%

10th %ile

25th%ile

50th%ile

75th%ile

90th%ile

Average

Real Estate Rental Increments at MNC R&D Centers in India, FY 2012

There has been an increased trend among companies in balancing the pyramid in order to optimize on the overall people cost

15

a

0%

20%

40%

60%

80%

100%

2010-11 2011-12

34% 40%

42% 35%

18% 16%

6% 9%

Change in Experience Pyramid of R&D Resources for FY11 & FY12

12+ years

8 to 12 years

4 to 8 years

0 to 4 years


Tier 2 cities prove to be more cost effective with approximately 30% difference in cost compared to tier 1 cities

16

a


12.9 12.6 16.1

13.4 13.5 13.1

11.1

19.5 22.9

19.3 16.2 15.7

13.7 14.8

20.8 23.5

20.3 19.5

17.3 16.6 14.7

32.2 34.1

24.7

28.1

22.3 22.5

18.4

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

OverallIndustry

Bangalore Hyderabad Chennai NCR Pune Tier 2

In IN

R L

akh

s

Location Wise Split of Overall Operating Cost/Employee

10th %ile 50%ile Average 90th%ile

Tier 1 Tier 2

The R&D ecosystem around tier 2 cities in India is starting to mature

17

NCR

Bangalore Chennai

Pune Hyderabad

Jaipur

Coimbatore Trivandrum

Ahmedabad

Nagpur

Vadodara

Chandigarh

Growth Drivers for Emergence of Tier-2 Cities

Cost Arbitrage over Tier-1 Cities

Approx 30% to 40% saving in overall Per Employee cost when compared to Tier-1 cities

Support Ecosystem

Tier-2 cities have an efficient and rapidly growing service provider ecosystem in place

Availability of Talent Pool

A significant portion of installed talent pool in Tier-1 cities hails from Tier-2 cities, which acts a huge advantage for Tier-2 cities

Comparatively Lower Attrition

Attrition in Tier-2 cities is much lower than Tier-1 cities due to lack of competition and unwillingness of people to migrate to Tier-1 cities

a


3.1%

4.2%

5.5%

22.4%

64.8%

Govt/ Regulatory Cost

Professional ServicesCost

Travel Cost

Infrastructure/Communications Cost

People Cost

0% 20% 40% 60% 80%

Cost Components as a %age of Total Cost

~35% Areas of cost optimization

There have been significant efforts by companies to optimize cost for categories other than People Cost

18

a

• Increased focus to optimize on the travel cost by increased usage of technology and limiting travel for only critical projects

• Redesigning of cubicle space, consolidation of multiple offices into a single facility are some of the steps taken by companies in ensuring optimum usage of space

• Negotiations on third party vendor fees, building in-house talent specially in areas of finance/accounting has helped companies bring down professional services cost


With increasing number of years in the Industry, per employee Operating Cost tends to decrease for the MNC R&D centers in India

19

17.4

20.1

22.0

18.6

0.0

5.0

10.0

15.0

20.0

25.0

0-2 Years 2-5 Years 5- 10 Years 10+ Years

Me

dia

n V

alu

es

in IN

R L

akh

s

Operating Cost/Employee Analysis Basis Years of Existence of the R&D Center in India

• With increasing headcount, companies try to establish economies of scale around various operations and try to stabilize their per employee cost

• MNC R&D centers in India are now aggressively focusing on building technical leadership, customers in emerging markets, ecosystem connect and creating global roles from India


a

Over the past 5 years, India R&D Centers have been able to provide nearly $70 billion in cumulative cost savings for the HQ

20

b

Year on Year Cost Savings by MNC R&D Centers in India for the Headquarters

71.5

11.6

13.3

14.8

14.9

16.9

0

10

20

30

40

50

60

70

80

Overall FY 2008 FY 2009 FY 2010 FY 2011 FY 2012


On an average, the per employee operations cost is highest for Semiconductor/Embedded companies followed closely by Engineering Services companies

21

• Owing to the years of existence in India, software product development R&D centers are more mature compared to the recently set up engineering R&D and semiconductor companies

• Though global sourcing began primarily in the 1990s, the most active period in the globalization of semiconductor R&D was in the years 2000 - 2006

c


12.5 16.3

19.3 16.5

22.4 24.6

19.6 23.6

26.1

32.3 33.2 33.4

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

Software Product Development Engineering Services Embedded systems/Semiconductor/ EDA

In IN

R L

akh

s

Industry Wise Split of Overall Operating Cost/Employee

10th %ile 50%ile Average 90th%ile

The evolution of semiconductor R&D centers is a nascent phenomenon

22

c


20230

13849

1907

0

5000

10000

15000

20000

25000

India Bangalore Hyderabad

MNC R&D headcount Bangalore accounts for ~70% of the total MNC talent pool for semiconductor R&D in India

Evolution of Semiconductor R&D Centers in India

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

5 4

8

12

7 8

9

5 5

1

Period of extraordinary growth

54

11 8 7 6

2

0

10

20

30

40

50

60City Wise Distribution of 88 MNC R&D Centers

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

AssociateSoftwareEngineer

EngineeringLead

EngineeringManager

ApplicationArchitect

Associate QAEngineer

Senior QAEngineer

QA Lead

Overall R&D Industry Semiconductor Vertical

Semiconductor companies tend to pay higher compared to the overall R&D industry owing to task complexity and associated skills

23

8% 11% 8% 11% 2% 4% -1%

Median Total Cash (INR Lakhs) Across Select Positions for FY 2011-12

c


9%

30%

36%

16%

5% 4%

37%

31%

22%

5% 4% 1%

0%

5%

10%

15%

20%

25%

30%

35%

40%

0 - 1 Years 1 - 4 Years 4 - 8 Years 8 - 12 Years 12 - 15 Years 15+ Years

Work Experience Wise Split of Contract Vs Full-Time Resources

Full-Time Contract

MNC R&D Industry is witnessing an increased trend of hiring employees on contract basis

24

• Increased trend among companies to hire employees on contractual basis in order to optimize on people cost, bring in flexibility and stability in the system and quickly respond to changing economic and business conditions

• The work performed includes quality/testing, some level of product development, coding and support function related activities , thus helping companies focus on their core business areas

9%

91%

Contract Employees Vs Full Time Employees

Contract Employees

Full-time Employees

d


Even though the trend for hiring employees on contract basis is likely to increase in future, this comes with its own set of challenges

25

d

Longevity Domain

Knowledge

Co-Employment

Quality

• Attrition remains a key challenge as ramping up new resources requires additional effort and time

• Substantial time investment by full time employees to train contract resources as they are unaware of the big picture vis-à-vis project at hand

• Common challenge faced by companies in building quality consciousness among the contract resources which at times results in re-work

• Co-employment poses the risk of vicarious legal liability where in employees can claim same benefits as full time resources


STPI withdrawal has impacted 80% of the analyzed sample of R&D centers; However, moving to SEZ is not an option considered by many

26

80%

9%

4% 7%

Premise Type Split of MNC R&D Centers in India

STPI SEZ EOU Others

e

“Profit from STPI will be taxed at the normal corporate tax rates and hence there will be an increment”

“No Immediate Impact for few companies as discounts from MAT will offset the tax burden for at least few years”

“There is no proposal to move to SEZ, as of now, because this would mean new investment in assets for a value of 80% or more”

“SEZ unit does not seem to be much beneficial to the small & mid size software units considering the fact that minimum alternative tax is payable as per current rule”

Client Verbatim

“Moving existing business to SEZ is difficult as it has to be a new business, which means additional HC can be housed in SEZs. ”

Moving to SEZ – Not an Option for many…


Zinnov Management Consulting

27

Zinnov Management Consulting

Thank You 69 "Prathiba Complex", 4th 'A' Cross, Koramangala Ind. Layout 5th Block, Koramangala Bangalore – 560095 Phone: +91-80-41127925/6 11, First Floor, Paras Downtown Center, Golf Course Road, Sector 53, Gurgaon – 122002 Phone: +91-124- 4028888 3701 Patrick Henry Dr. Building 7 Santa Clara CA – 95054 Phone: +1-408-716-8432 21, Waterway Ave, Suite 300 The Woodlands TX – 77380 Phone: +1-281-362-2773

[email protected]

www.zinnov.com @zinnov

This report is solely for the use of Zinnov client and Zinnov personnel. No part of it may be circulated, quoted, or reproduced for distribution outside the client organization without prior written approval from Zinnov

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