The Hidden Costs of Outsourcing R&D and How to Mitigate Them

June 15, 2016

By Steve Mezak

woman-sitting-at-table-and-using-laptop-with-tea-cup-in-background.jpgOutsourcing research and development (R&D) is a valid method for reducing costs and increasing profits, but to see the positive results, organizations should approach the practice with some care. Outsourcing has a number of hidden costs, which can result not only in hefty price tags, but also a product that either isn’t delivered on time or fails to perform as expected.

Outsourcing R&D is also different from outsourcing lower-level tasks. Business process outsourcing (BPO), for example, generally entails elements outside a company’s core functions, such as a call center. Outsourcing these jobs has a higher probability of decreasing operating costs while improving business agility, so companies can see the benefits rather quickly in their bottom line balances. The same, however, can only be said of R&D when the outsourced partner has been carefully selected and both the technical skills and company culture are a match with your needs.

Because of these factors, organizations considering outsourcing their R&D efforts should review the hidden risks and take steps to mitigate them. We address the six main culprits in more detail below.

 

Vendor Acquisition

Finding a solid R&D partner takes time and effort. At least, it does if done well. Companies should always carefully evaluate a potential outsourced firm, even if it’s one recommended by an associate or other business acquaintance. Referrals are a common practice in the outsourcing industry, but it can be risky to accept them without doing due diligence first.

On the other hand, seeking out an R&D team without any assistance means submitting a full-fledged Request for Proposal (RFP), visiting with potential partners and sometimes traveling to or bringing a partner’s team onsite. The time and travel expenses add up quickly, sometimes ranging between 0.2 percent and 2 percent of the total contract value.

The best way to mitigate this time and cost is through a balanced approach that utilizes a curated network of providers, such as the one offered by Accelerance. With it, businesses experience the benefits of trusted referrals at an affordable price point.

Companies working with an outsourcing provider will also want to be specific about team and technology requirements and aim for outcomes that are predictable and well defined. They should also start small to keep costs, time and effort low, and develop a realistic budget based on needed skillsets and experience. When it comes to R&D outsourcing, price should come second, because the short-term savings inevitably are at odds with long-term business success.

 

Transition Drag

Transition, or onboarding, periods can be one of the most cost-intensive facets of outsourcing. No outsourced team works at 100 percent productivity immediately. It takes time to get them up-to-speed and familiar with your organization, your engagement goals and your culture.

And left unmanaged, the transition can be equally costly. An outsourced team that never hits peak performance will require additional time, effort and money as the in-house team scrambles to correct mistakes or other concerns. For the outsourced R&D initiative to be successful, the external team has to be managed for the lifetime of the engagement.

But the R&D team isn’t the only one in need of oversight. The internal team and executive management should be carefully managed, too, and their expectations aligned with reality. If the organization isn’t completely onboard with the effort, they may resist working with the outside team members or slash the outsourcing budget. And, if in-house employees aren’t made aware of the outsourcing effort prior to it taking effect, their morale and overall productivity can decrease, too. The only way to mitigate those possibilities is to develop a realistic timeline and achievable objectives that justify the solution and expense.

To solve for these challenges, companies should spend more time and money on onboarding the outsourced team members. While seemingly paradoxical, the time and money spent upfront will only increase productivity and business results in the end. We’re also huge proponents of regular visits with your outsourced team, both in-person and via video-conferencing software. This helps build a rapport with your team, as well as ensures that everyone remains up-to-date on the stages of current projects and helps build cross-cultural awareness on both sides.

 

Project Management

Management is another costly piece of the outsourcing equation; however, the dedicated oversight is critical. For an outsourced agency to be effective and to help meet business objectives time after time, it’s critical to effectively manage the external team and their work. Projects and tasks don’t get done in another culture halfway around the world on their own.

Solving for this challenge encompasses technology, processes and people. The human factor will be the most important; cultural differences left unaddressed will only lead to miscommunication and bruised egos. Because of this fact, it’s important to build relationships with outsourced firms, treat them as partners, and give them all the tools and information they need to generate momentum and get to work.

Documenting processes also helps when managing projects and outsourced R&D teams. By investing in them, companies can create steady, predictable workflows that everyone—both inside and outside the organization—follow. Such processes set expectations for behavior and empower individuals for success.

Another necessary aspect of good project management is communication. In general, it’s best to over-communicate to avoid misunderstandings and scope creep. It also helps businesses be more agile and respond to changing conditions either in the marketplace or inside the company.

Communication should occur regularly, perhaps weekly. Anything the company can do to facilitate a good working relationship is critical; it will keep both parties happy and lead to a longstanding and mutually beneficial partnership.

 

Productivity Differential

Even with a successful transition and best-in-class project management, outsourced R&D partners might not perform as anticipated. A number of external factors can be at play, including cultural differences, connectivity and even those tricky time zones. That doesn’t mean R&D partners shouldn’t be held to performance standards; they usually can meet them and are often as dedicated and productive as an in-house team.

To ensure an outsourced agency achieves desired productivity levels, their work performance should be evaluated during the partner acquisition stage and managed accordingly. A good ballpark figure is productivity in the top quarter percentile of an internal team’s ability, generally 75 to 100 percent.

Another data point to review is the partner’s turnover rate. If it’s high, steady and sustainable productivity will never occur because the team has to constantly ramp up and be read into the project. At Accelerance, we choose our partners specifically based on their low turnover rates. We see a range of 5 to 9 percent, similar to what would be found in any office.

 

Data Security and Privacy

Intellectual property (IP) theft does happen, as do breaches and hacks. While the R&D partner might not be directly responsible for the latter, their security and privacy policies could be. Not all companies follow strict governance measures or attempt to protect databases or copyrighted information.

PwC’s 2016 security survey proves the case. While employees remain the most common source of compromise in the enterprise, cyber incidents attributed to business partners have continued to climb over the years, coming to rest at 22 percent. Businesses aren’t turning a blind eye to the matter; 52 percent have implemented security baselines and standards specifically for third parties.

In addition, businesses with outsourcing strategies are spending more time in the partner selection phase. They vet all firms and only partner with those who have a proven security and privacy track record. They also choose outsourced agencies that either have a similar legal system or are U.S.-based. India is an example of the former; the country follows many of the same regulations and guidelines as the U.S.

The businesses build security into processes and workflows, too. Companies should only give necessary information to partners and keep the rest private. They should also keep all shared work in a secure cloud and maintain a log of all access activity.

 

Currency

Paying partners is a question of currency and geopolitical risk. Choosing to pay partners in local currency exposes companies to price fluctuations. It’s great when those fluctuations are in the company’s favor, but not so much when they move against it.

Some partners are also situated in what can only be called “dicey” locations. Their economies and politics are volatile, increasing a company’s risk. The concern isn’t only monetary; geopolitical conditions can affect communication and deliverable dates, among other things.

Successfully fielding this concern requires companies to contract only with firms who are willing to be paid in U.S. currency. It also means staying up to date with the R&D partner’s in-country economic, political and market conditions.

 

The Accelerance Solution

The hidden costs of outsourcing R&D are many, but companies can minimize them by working with Accelerance, an offshore software development authority. We take the guesswork out of partner procurement and management, acting as a trusted outsourcing advisor.

In terms of acquisition, Accelerance has spent 15 years researching potential partners, which decreases the time and money typically spent on due diligence processes like references, background checks and aptitude tests. Most of our clients see the acquisition period, which traditionally takes anywhere from six months to a year, decrease to just six weeks.

Accelerance can also reduce transition drag through coaching and helping clients establish processes and workflows. We have years of experience and hundreds of clients, so they have the necessary wherewithal and expertise to guide almost any client to a successful conclusion.

Clients are responsible for day-to-day management; however, Accelerance again acts as a coach when needed, sharing tips and tricks for effective management, as well as for managing work performance expectations. We’ll also step in to mediate any problems that arise, acting as an impartial third party.

Finally, Accelerance only works with partners who work in the cloud and use best security practices regarding IP and other data. Because of that, our clients have yet to experience any issues with IP theft. They also have never had any problems with currency; all Accelerance partners contract in U.S. dollars. In addition, Accelerance stays abreast of geopolitical activities in our partners’ countries, and our team travels to visit with partners regularly.

Outsourcing R&D initiatives can be a smart way to gain an edge in the marketplace. Accelerance is here to assist businesses in doing just that through helping them understand the hidden costs and sharing best practices for mitigating them. If you’re looking for a global outsourcing partner, look no further. Accelerance is here for you. Contact us today to get started with your next outsourced relationship.

 

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