Product Development in a Flat World

Couple of recent deals announced, one I mentioned earlier by Nokia Siemens and another by Rockwell Collins to open an outsourced offshore design center illustrate the growth in R&D outsourcing.

The current (June 2007) issues of R&D Magazine has a cover story (R&D Outsourcing Becomes More Strategic) that describes the result of a May 2007 survey on R&D outsoucing. The report quotes several other studies and the number of firms conducting some R&D outsoucing varied from 30% to 65%. Interestingly 51% of respondents stated that the main reason for outsourcing R&D was that the external organization had more expertise while cost was 4th behind manpower shortage and workload!

An analysis and 50 year outlook on R&D outsourcing by the Delta Scan forum produced by the Institute for the Future, a Silicon Valley think-tank, states that the traditional large organizations such as Bell Labs or Xerox PARC have become less competitive versus companies like Cisco that either outsource or acquire innovation. They predict that there is going to be a major shift in the geography of R&D in the future.

Over the next 20 years, the geography of R&D may shift again – from regional clusters in the developed world to global networks with large outsourced operations in the developing world. India and China, in particular, will provide large pools of highly skilled workers at 25% to 50% of the cost of their counterparts in the West and Japan. The Indian government estimates that outsourced R&D in India currently generates about $1 billion annually; this is projected to rise to $11 billion by 2008, mostly in software. China’s manufacturing capacity gives it a natural advantage in computer hardware R&D. Both nations also have the long-term potential for large-scale work in pharmaceuticals and biotechnology.

However the studies state that quality and concerns over IP protection are still key impediments preventing organizations from using outsourcing for breakthrough innovations. Will R&D outsourcing really parallel the offshoring of manufacturing in the 1990s and of routine services in 2000 and later as Delta Scan suggests? Not likely. Once the offshore geographic locations start becoming strategic R&D outsourcing locations, very soon innovation will be driven from these locations which can be major threat to the existing R&D clusters.

History shows that regional R&D clusters like Silicon Valley and Boston attracted top talent from around the world. However in the flat world, will there still be regional innovation clusters?

Edit: There is a very interesting article on the future of Silicon Valley that discusses innovation clusters and SV in particular and their future by Dave Llorito. I thought it a pertinent addition to this post.