Software product market has become one of the key elements of the global business, the size of the global software product market is in the range of USD 300 – 320 Bn. R&D spend of companies in software product vertical is in the range of USD 45 – 48 Bn i.e. 15% of their company revenue. In the past few years, the rate of growth of software product industry has significantly come down owing to the global economic conditions.
Also, the industry is going through a significant transformation in their licensing, delivery and support models. Companies are forced to focus on new revenue streams (emerging markets), new product portfolio (solutions), new customer base (SMBs) and delivery models (SaaS etc). These new revenue streams are transforming the business models of the product companies. As these initiatives increase the R&D investments, companies are forced to evaluate opportunities to optimize their cost through global delivery models and invest into new initiatives.
While the R&D spend on software products continues to grow at a relatively lower pace, expectations from the customers and markets is forcing companies to reevaluate their operations. One of the key strategies evaluated by the companies is the global delivery model. In the past 15 years, many R&D companies have successfully leveraged global sourcing to optimize their bottom line and improve their top line revenue. Due to these successes, more and more companies across the revenue spectrum are willing to leverage the offshoring / outsourcing models for optimization.
Apart from the significant cost advantage, availability of talent, maturity of vendor eco-system, process innovations, collaboration tools etc. have contributed to the growth of R&D sourcing from emerging geographies such as China, India, Russia and Eastern Europe.
As these emerging economies are growing at a rapid pace, companies believe that these markets will play a critical role in their revenue growth as well. Many ISV companies are planning to generate over 25 percent of their revenue from these emerging markets.
R&D Landscape – Emerging Geographies
In the past 5 years, small to mid-sized software product companies (less than USD 1 billion in revenue) are especially faced with cost pressures and increased revenue expectations. These companies have significantly leveraged the global sourcing models as they are look to keep the R&D investments low. Strategies leveraged by these companies include transition of entire product portfolio to offshore countries, expanding engineering capacity from combination of onsite and offshore resources, leveraging vendor partners in risk reward models, providing value added services from remote centers etc.
As these remote operations mature, companies are moving up the value chain for their activities supported from these locations. Today, many MNC captive centers and service providers are taking complete ownership at product or module levels in serving their customers.
Based on a study conducted by Zinnov on Software R&D globalization, we found that ISV companies are spending about 15% of their R&D budgets in emerging geographies though these remote operations constitute about 30% of their head count.
As companies become cost conscious and operate in shorter timeframes, they are increasingly leveraging the partner eco-system to optimize their operations. As service providers gain confidence, new engagement models are being tested by the industry. Models such as SLA based deliverables, Risk-Reward model are very promising and compelling to the customers who are reassured to the partnership model. Companies are already moving maintenance/ sustenance of sunset products to service providers in a revenue share agreement. Service providers are also being leveraged as channel partners for product sales due to the extended reach that they can provide in the domestic market. On the other hand, service providers are also willing to invest on R&D (i.e. IP led solutions) to augment their offerings with their customers’ products.
In our study, we also learnt that only 5% of this R&D spend is currently being spent on outsourced partnerships, which means about 95% of the R&D is conducted by companies in-house (HQ, Captive models). This presents tremendous opportunity for OPD companies for growth.
(Vamsee Tirukkala is the Co-founder and Managing Principal at Zinnov LLC., a consulting and advisory company focused on R&D globalization)
Attend Global Services webinar on "Globalization Opportunities in Software Development for Enterprises and ISVs" featuring the author.
About the webinar:
This webinar will help enterprises and ISVs look at various models, locations, and provider capabilities to do this. Some of the key questions covered during the webinar are: What are the value levers available to an enterprise to optimize its software development efforts? What models work best? What are the emerging locations that enterprises and ISVs need to look at for offshoring software product development? How could an ISV release more R&D dollars for new products keeping the total R&D spend at the same level?