Some Good Reasons to Consider Outsourcing your R&D

Short Term Benefits of Outsourcing

Most companies tend to look at getting their R&D done externally only in the event of an internal problem that needs a quick fix or fast response. Typically, the sorts of events that prompt a company to outsource R&D include:

• The need to respond quickly to a new offering by a competitor
• The need to find and fix unexpected bugs in released software code
• The need to accelerate a project that is running overtime
• The need to overcome quality problems, and
• The need to overcome the departure of key staff

All these issues are common enough in any industry.

The knee-jerk reaction of most businesses to many of these sorts of issues is to try to hire more staff.  But this is not always possible and always takes longer than planned. Finding, interviewing and appointing capable new hires, bringing them up to speed, getting them to work as a team (etc, etc, etc) can be vastly time consuming and can make or break a company’s response to the problems noted above.

At Hydrix we have a virtually permanent job ad posted seeking good design and development engineers. We only employ the best and brightest (i.e. Honours degrees or Postgraduate and a demonstrable track record of success) and in our experience we find it can take between three and nine months (depending upon the seniority) to find, filter, interview and appoint quality, proven designers - who won’t then take another six months to get up to speed.

Strategic Benefits of Outsourcing

There are a number of less obvious but nonetheless extremely valuable strategic drivers as to why you may want to consider getting some or all of your R&D done externally. Such drivers are often proactive and complex, and typically driven by company reorganisation or refocussing, the potential to enter new markets or take advantage of new technologies.

The major strategic drivers to outsourcing R&D include:

• Allows senior management team to have  renewed focus on the core business competencies of the company — whether that be sales and marketing, brand, IP generation, new product ideas or something else
• Mitigation of risks — whether they be financial targets, the time to market, the system or product complexity, new technology etc
• Improved end-customer satisfaction and/or enhanced internal process— through the introduction of improved development processes, design rigour or external insights not previously part of a company’s culture or experience
• Reduced staffing overheads — hardware, office space, training, retention, access, upgrading, management, super, payroll taxes etc become the responsibility of your outsource R&D partner
• Swift access to expertise the company may lack – eg mobile application development, legacy systems integration, new or emerging technology

What About Cost ?

One of the key differentiators between in-house and out-sourced design and development is cost.

One major problem with cost analysis is the failure to consider the overheads of the department. While staff costs and individual salaries are easy to calculate, the cost for the support, administration, redundancy, sickness, paternity leave, training, capital investment, IT infrastructure, skills updating etc. is usually less clear.

R&D Magazine published an insightful cover story for its July 2007 issue on the future of outsourcing. Titled ‘R&D Outsourcing Becomes More Strategic’, the article shared the results of its May 2007 survey on outsourcing.

Interestingly, according to the story, 51% of those who responded to the survey disclosed that the major reason for outsourcing was the expertise of the external R&D company. Manpower came in second on their list of reasons, while third was workload.

Surprisingly, cost ranked fourth.

Other Benefits Include:

• Project enhancement through the introduction of better program management methodologies or technology infusion from a wider knowledge resource — often from more experienced or expert sources
• Better and improved overall visibility of cost accounting -  as project performance is now a business-to-business process, so providing cost reductions, reduced volatility of cost, etc.
• Reduced capital investment in equipment, facilities and plant
• Added potential to release assets or convert assets from the balance sheet
• Competitive response in the need for faster time to market, inherent shorter product life and more customisation needs.

Tax Benefits

Most companies routinely claim any R&D expenses in their annual tax returns.  In Australia for local companies, or international companies with an Australian presence, an additional and very significant financial benefit occurs if they outsource their R&D to an Australian government  Registered Research Agency like Hydrix - namely, they can pre-claim contracted R&D expenses before the fact even for small projects.

Normally companies claim their R&D expenses at the end of a project and then perhaps 12 to 24 months later get the R&D Tax concession back via a reduced tax liability.

By contrast, if a company contracts with an RRA for its eligible R&D it can claim the tax concession up front & before the project has even started. For every $100k contracted to be spent on R&D a company can claim and receive a cheque up front from the Tax office for between $37k to $45k (depending upon your R&D tax concession claim history).

In effect, companies that use and RRA for the R&D are getting the government to underwrite 37-45%  of their R&D.

Moreover, there is no minimum R&D spend required when an RRA is used. Normally to be eligible a minimum R&D spend of $20k is required.

Summary

So while an immediate gut response to outsourcing R&D might be that it’s ‘too hard’ or ‘too expensive’, a deeper analysis of the longer term growth objectives of the company  may well highlight a significant  strategic  advantages and benefits that will accrue by considering this path.

This article draws on a number of papers including:

• 'Outsourcing R&D’ – Tim Champion, Cambridge Consultants
• 'The future for R&D: a business process to be outsourced or integrated in-house?’ © Radio Telecom Networks Ltd