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”.
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.
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.
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. [↩]