There are a lot of companies that have outsourced their research & development (R&D) projects offshore and many others considering it. There are distinct economic advantages of outsourcing R&D, but there are also a few disadvantages that one must be completely aware before the decision to outsource is made.
The advantages of outsourcing R&D are often based around economics. There are huge financial gains associated with outsourcing because salaries in foreign countries can be considerably lower than in the United States. In addition, the materials and actual cost of location for the research center can be less expensive offshore. One of the key advantages of outsourcing R&D is also often related to US regulations surrounding R&D. For example, numerous US pharmaceutical companies engage in outsourcing R&D to conduct clinical trials in foreign countries. The rules for clinical research are strict in the United States, so companies can achieve greater innovation by being allowed to engage in a broad array of testing offshore. Another advantage of outsourcing R&D is that companies can build strategic research alliances with foreign companies and/or universities. Mutual interests bring together both domestic and foreign knowledge to achieve innovation.
In any relationship such as outsourcing, there will be challenges. It is extremely important to have solid trust and communication between parties. In some foreign countries, there may be questions in regard to the researchers’ training, competence and commitment. Speed of delivery and level of quality might also be an issue. In order to avoid difficulties, it is always wise to agree in advance on formats, technical detail, progress reporting and so forth. Establishing clear delivery guidelines, milestones and measures and writing them into the service agreement will ensure compliance. Nothing beats face-to-face discussions and joint problem solving, so costs for travel must also be incorporated into the R&D budget.
Importance of R&D
The goal of R&D is to achieve the company’s business objectives by economically capitalizing on new knowledge or inventions. R&D directly impacts a company’s bottom line in both the near and distant future. In any successful company, research and development must be prioritized so that the company stays ahead of their competitors by consistently making improvements in operational processes, creating and improving products, and enhancing customer service strategies. All improvements are designed to generate economic profit. Research and development is important to the success of the company because it drives innovation, competitiveness and economic performance. R&D teams are the critical engines responsible for coming up with tomorrow’s goods and services.
Typical R&D Budget
R&D spending is usually measured as a percent of a company’s overall sales. For example, in 2011, Toyota spent roughly 10% of their total sales on R&D activities. Companies in healthcare tend to spend about 20% of their budget on R&D activities because innovation in healthcare occurs so rapidly. Technology companies tend to invest up to 30% of their budgets on R&D activity to develop new technological advances. Considering the economic benefits of being innovative, it is no surprise that the best companies dedicate a large percentage of their budget to this endeavor.