Outsourcing hits product engineering

Outsourcing, or “off-shoring,” research and development of products and services once was seen as a crime against the nature of telecom, which traditionally saw innovation as a competitive advantage that must be held, like a poker player's hand, close to the breast. But that stigma is fast disappearing as both service providers and vendors increasingly look to outsource R&D and other engineering tasks to a rising group of mostly international firms that are rich in engineering talent.

That group most notably includes Aricent, GlobalLogic and Tech Mahindra, three fast-growing firms that all have ties to the inexpensive, but highly skilled engineering labor pools of India and Eastern Europe. Other firms with at least peripheral interest in the market include Korea's NexTop and Level Seven in the U.K., along with U.S. heavyweights such as Telcordia and IBM.

Aricent is the newest of the bunch. Formerly the software development business of Flextronics International, the firm was spun off and consequently sold an 85% equity stake to private equity firms Kohlberg Kravis Roberts & Co. and Sequoia Capital.

Sanjay Dhawan, executive vice president and chief strategy officer for Aricent, said the company is looking to help manufacturers and service providers that are bending under competitive pressure to get products and services to market more quickly while controlling or reducing operational expenses.

"Our customers come to us in different stages of development of their solutions, and our pitch is that we supplement their research and development efforts," he said. "We improve the reach of their R&D dollar."

Aricent has about 6700 employees — roughly the size of an R&D organization for a Cisco Systems, Dhawan said — and about 90% of them are located in offices in India and Eastern Europe. But cheaper labor isn't the only motivation for outsourcing, Dhawan said. "A lot of what happens in R&D — about 70% to 80% — is non-core to a business. It's repetitive work. It's just the putting together of standard building blocks," he said "Today, nobody is really thinking about having a big software organization in-house to do this."

But that's not to say that the outsourcing firms are focusing only on non-core or low-level R&D. Dhawan said Aricent recently developed many of the elements and product features for Motorola's highly touted Q device and also has about 900 employees dedicated to next-generation projects for Nokia.

Aricent's launch is the latest news from a busy sector that is seeing its share of new investment, corporate strategizing and growth-driven consolidation. GlobalLogic, formerly called Induslogic, has long marketed itself as a provider of agile distributed product engineering services, and this year it has made two acquisitions to fuel its growth. Those deals include the April purchase of India-based Lambent and the late September acquisition of Bonus Technology, a New Jersey-based software engineering services firm with operations in Eastern Europe.

GlobalLogic CEO Peter Harrison said at the time of the Bonus merger, “More and more, software companies need to globalize their research and development to benefit from the worldwide pool of talent. Creating their own captive subsidiary halfway around the world is increasingly risky, takes too long and involves too many non-core activities.”

Tech Mahindra once was an R&D unit of BT, but it has since been spun off. Late last month, the company reported 373% revenue growth for its third quarter, compared to the same quarter in 2005.