Recently CNBC reported Alcatel Lucent may sell its R&D centers at Bangalore.
Global telecom giant Alcatel-Lucent is likely to sell its research and development (R&D) centers in India. CNBC-TV18 learns that it has approached three IT firms for a possible buy. These include Wipro, Infosys and Cognizant. The combined value of arm is expected at Rs 250 crore, informed a source.1
Of course, the news was immediately denied by official sources, which claim that R&D is “strategic asset” to drive “innovation”.
Core competence?
What is strategic? There is one notion, that of core competence, which says that something is strategic if you can do it better than anyone else and is hard for your competition to copy.2 For most parts of R&D, which could be routine maintenence, routine development of software etc., service companies are better suited. They can use their scale to drive efficiency in these parts. Billing rates of IT services companies, which could be seen as one measure of efficiency, have shown flat to downward trend.3 This demonstrates their ability, in general, to drive efficiency.
Business critical?
Could it be that R&D is critical to the business of Alcatel-Lucent? Criticality of component does not, by itself, drive a make decision. Forged components that go into making engine parts, for example, are critical to the performance of automobiles, but they are outsourced anyway. The decision here would be driven by the knowledge that this critical component is not a differentiator in the marketplace (i.e., all auto manufacturers need it) and that there is an external party that can aggregate all this demand and operate more efficiently.
Driver of innovation?
Could it be that R&D is strategic because it is the only way to drive innovation, without which there would be a disadvantage to Alcatel-Lucent at the marketplace? On the face of it, this argument holds water. But, we need to ask ourselves: what amount of R&D that takes place in-house actually drives innovation? A lot of maintenance activities and routine development of product software is also grouped under R&D, there is a case to be made that this would be done much more efficiently by services companies. A case could be made to separate out only innovation driving R&D (mostly, bell-labs) from other parts.
New paradigms
Of course, the notion of what is “core” and what can be outsourced is continuously being changed. For example, Bharti has now outsourced most of its network. This would have been sacrilegious some time ago.
There could be a notion of semi-core developing here. Something that is critical to the business, yet not a differentiator. If any such sale does materialize, it would be interesting to see how IT services companies could aggregate work from various such semi-core activities that keeps their clients satisfied that they are not being put to a disadvantage while also driving efficiency.
References & Footnotes- Alcatel-Lucent may sell India R&D centers: Sources,Published on Tue, Oct 06, 2009 at 14:00 , Updated at Wed, Oct 07, 2009 at 11:14 Source : CNBC-TV18 [↩]
- Prahalad, C.K. and Hamel, G. (1990) The core competence of the corporation, Harvard Business Review. pp. 79–91. [↩]
- IT Services Business Trends Report, October 2008, Specifics Incorporated, Fairmount Partners, Investment banking, Billing rates pressured, pp 6. [↩]
Dear All,
This is sheer impossible; if Alcatel-Lucent desires, it can acquire small companies which are agile and lean; not hurt it self into its core skills of Reseach especially when we read about 2009 Nobel for Physics
Hi Kishore,
Thanks for reading and for your comment.
I’m not sure if the current quarter-to-quarter climate is suitable for long term open ended research that bell-labs once conducted. Given that, I am not sure if your Nobel prize reference is relevant to this discussion.
Further, I am not sure if you can acquire your way to efficiency, if that is what you meant.
What you said works great in theory but success relies on execution. Bharathi, as you pointed out, succeed in getting it right. But most companies dont! Boeing did something that is far more drastic back in the day (1). They got the theory mostly right but one of their suppliers (equivalent to service companies in your writeup) held Boeing hostage. The supplier was owned by Carlyle group at that point and they figured there is money to be made off this setup. Getting the execution, i.e. the structure and incentives part, can be tricky when there are lots of moving parts. Boeing thought it was getting its suppliers attain economies of scale by supplying to both Boeing and Airbus (noble goal of doing away with wastage). Boeing also thought that suppliers will take part of the capital risks and let them have proportional returns (including IP). And to Boeing’s credit, they got most of it right too. But getting most right is not good enough in most industries today. Boeing was lucky that airline industry was in a downturn and most of its customers (who had paid upfront for dreamliner) did not demand delivery right away. More over Airbus did not have anything similar to offer. So Boeing got away scotfree. Do you think Lucent has a similar luxury in its industry space?
1 – http://www.businessweek.com/magazine/content/06_05/b3969417.htm
@Harish
Thanks Harish for reading and for the comment.
It is an interesting point that you bring up. The risk of being held hostage due to a critical component being outsourced. It may still be very early in the game to say whether Bharti got it fully right either!
However, given a scenario where efficiency is paramount even for survival, getting it right may be the only option for some companies.
@Rajesh
Well in a way this is classic make vs buy decision. The difference is that the company picked “make” but is now turning towards “buy” because of other (may be financial) considerations.
@Harish
Yes. It is just that what motivated “make” decision over the years has been evolving. From conglomerates of the 60s to outsourcing of “core” these days.
Rajesh,
Good analysis. I would like to make one point here about your comparison to Bharti. That if you look at Bharti and ALu business, Marketing & Operations become key to a service provider like Bharti, while Marketing & R&D become key to a Telecom R&D co like Alu. However in former case, Marketing can be very be well separated out from operations and focus on marketing bring better effeciency in the co. In the latter case I believe Marketing and R&D are both inclusive and cannot be separated. Here I dont mean sales by the term marketing, rather more text book meaning of identifying the need and satisfying (developing it)…so in the case marketing is inclusive of the research part as what Bell labs is doing and Development is what ALu is doing. So in my opinion it may not be fair to assume that Telecom R&D cos have to follow their customers in terms of strategic outsourcing. However I agree to your point of outsourcing legacy and maintenance work which was well explored to the core by every possible software co from last dotcom burst.
However these are just my views and I may not have understood any finer details that may have lead to R&D cos (I am including other cos) thinking in these lines.
Manoj
But Alcatel is closing R & D in chennai.All Business units are now sold with other companies.(wipro,TCS,Tech Mahindra)