INTRODUCTION: Corporate R&D refers to research and development activities carried out by corporations to enhance and build new products as well as create intellectual property which helps companies remain competitive. The primary goal is to therefore enhance profitability and any scientific breakthrough is a by product or happenstance. The goal of research in universities and government labs is to enhance and build scientific knowledge and therefore any scientific breakthrough in a university is the result of several years of dedicated pursuit.

Offshoring refers to performing a business function or part of a business function in another country. Lower development costs in countries like India and China has been a major reason for offshoring but other strategic reasons are becoming increasingly important.

In my previous articles I have stated some common mistakes when offshoring embedded software development and argued that socialist systems like universities are much better at innovating. Here I would like to explore why corporate R&D specially from the US needs to move to lower cost countries and how this would be a win-win-win situation for companies-shareholders and employees in technology.

CAREER PATHS AND DREAM JOBS FOR ENGINEERS AND SCIENTISTS:

As there may be several paths that Engineers and Scientists can follow let us see typical career paths for Electrical Engineers and Computer Scientists. According to IEEE USA[1], Electrical Engineers usually have a Bachelors or Masters in Electrical Engineering and spend the first few years of their career learning about a company’s product. After this period he/she needs to choose a technical specialty with job responsibilities including design specification and research of new products. An electrical engineer may also choose to pursue a career in managing technology. Computer scientists usually follow a path similar to Electrical Engineers but with greater focus on computers or might choose a research stream, where they apply mathematical and scientific concepts to solving technical problems.

In both cases we can see that the career path heads towards a management position with decreasing technical knowledge or a research position with increasing technical knowledge. It would therefore be logical to conclude that a creating a large number of research and management positions would be great for Electrical Engineers and Computer Scientists.

In my previous paper “Innovation Occurs When Market Forces are absent”[2], I have shown why socialist systems are best suited to innovate and why capitalist systems are great at creating wealth and tinkering with products. Corporate R&D is definitely a capitalist system. No CEO can admit with a straight face that he/she does not expect any returns from his R&D department or that he/she is ready to wait for decades before a breakthrough in technology.

Yet socialist systems are exactly where most breakthrough innovations occur and this is the setup where Electrical Engineers and Computer Scientists seeking a technical job, would choose to work provided they are compensated adequately. The other career path heading towards technical management is currently open to few people due to hierarchy in every organization. Therefore for every 15-20 engineers you can have only one technical manager leaving the other 19 frustrated. Companies in the US are hardly growing at the rate needed to fulfill managerial aspirations of their technical employees.

Offshoring R&D creates a surprisingly large number of technical management positions as companies seek to handle offshore suppliers. The savings obtained from cheaper labor costs can be used to fund universities to create more research positions fulfilling the aspirations of those seeking to pursue a technical line. No doubt the US government can help by taxing corporate profits from offshoring and using this to fund research labs and universities. The net result will be society with a large number of technical management and research positions. The only worry is if the number of new positions created is equal to those off shored. The answer is most likely yes as the rapid growth of China and India will create not just places to offshore but markets to expand, which can be exploited by well positioned US companies. In no way is this scenario even remotely similar to that painted by offshoring opponents. According to them offshoring will simply result in a loss of jobs from the US, with no benefit or benefiting only management.

As the major concern of employees regarding offshoring of R&D has been addressed we can now look at other reasons why it makes sense to move R&D to lower cost countries.

HUGE INCREASE IN ROI:

R&D is basically a high risk operation. For every molecule that becomes a drug like Lipitor there are 99 that fail to make it. Even for molecules that do make it to the market there is no guarantee the drug will be a ‘blockbuster’ (i.e. hugely profitable), new research keeps throwing up simple remedies which can be as effective as a ‘blockbuster’ drug.

Lowering risk and pursuing development activities may not really lead to any strategic advantage. Automotive companies Ford, GM and Chrysler routinely spend over $13 Billion on R&D[3]. Michigan is second only to California when it comes to R&D spending, but the state is merely playing catch up with stronger Japanese competitors and is therefore spending most of this money on pure development activities. Hence it does not come as a surprise that few associate Michigan with innovation.

These higher costs come at a time when few executives are happy about their company’s innovations. A good way to avoid higher costs would be use cheaper offshore resources. This would reduce risk to companies as savings on R&D offshoring are significant. Even if the R&D activity is not fruitful, amount wasted is tiny. A unique feature of R&D offshoring is that risk mitigation can be achieved along with cost savings. R&D is a low leverage operation, in the sense that higher costs do not translate into more or better innovation[4].If the R&D activity is successful it would lead to greater ROI.

STRATEGIC ADVANTAGE: A low cost R&D base which cannot be copied by competitors is a definite strategic advantage. US companies, with English as their language of communication can establish R&D bases in low cost countries with a large number of English Speaking graduates like India and the Philippines. European and Japanese companies cannot do the same as their language of communication is not spoken in many low cost countries. Besides cultural differences between Europe and some low cost countries, most technical documents are in European languages (other than English) or in badly translated English, which makes communication with low cost countries very difficult. We have thus encountered an efficient way of doing research which cannot be easily copied by competitors. Clearly this is the definition of Strategic Advantage.

OFFSHORE R&D CENTER IS A BEACHHEAD IN RAPIDLY GROWING COUNTRIES:

Most companies in the US try to sell existing products or modifications of existing products in rapidly growing countries like India and China. One of the impediments to greater local customization of products is the home country location of most R&D facilities. Products are primarily designed for the US market and customized for another market. This is done mainly to avoid the cost associated with creating new products for each market. However when cost of doing R&D decreases, it is possible to create new products for several markets. An R&D center in a low cost country can be tasked to create products designed for the local market. Considering the fact that India and China are growing at almost double digit rates, products designed for these markets have the potential to be very profitable. Thus an offshore R&D center provides a good point of entry into potentially large markets.

[1] http://www.ieeeusa.org/careers/yourcareer.html

[2] Embeddedoutsourcer.wordpress.com

[3] http://findarticles.com/p/articles/mi_m0UDO/is_5_16/ai_94892352

[4] http://www.finfacts.com/irelandbusinessnews/publish/article_10008033.shtml

UNDOCUMENTED WORKERS:
There have been few commentaries on the effects of Undocumented workers on inflation. However no one can deny that the estimated 11-20 million undocumented workers form an integral part of the US workforce and must be taken into account when calculating the unemployment rate. US Department of Labor has clearly mentioned in its reports that questions regarding ‘legal status’ are avoided when taking employment surveys. It goes on to say that many undocumented workers are counted as part of the labor force. The problem with this approach is that undocumented workers are not likely to claim unemployment benefits and are very unlikely to claim that they are looking for a job(due to fear of deportation). It is therefore not possible to gauge whether they are looking for a job. These workers won’t be covered in any of the other surveys by DOL. Hence the presence of a large number of undocumented workers will necessarily lead to a lower unemployment rate.

PRESENCE OF TEMPORARY GUEST WORKERS:
From DOL survey methods it is not clear if they are accounting for guest workers coming to the US on various work visas like L, H etc. These workers can be called a migratory workforce as they cannot legally remain in the US once they stop working unless they change their visa status. They constitute a significant portion of the workforce. For the year 2006 approximately 1.709 million non-immigrant work visas were handed out. Their effect on unemployment rate is very similar to that of undocumented workers, i.e. they tend to lower unemployment rates as their jobs are counted when they are working but their numbers are not counted when they are unemployed.

EFFECT ON UNEMPLOYMENT RATE (1995-2005):
The number of undocumented as well as guest workers is clearly dependent on overall economic growth. To measure their effects on unemployment rate we can assume a threshold GDP growth of 3.0 %( Considered as the threshold growth rate to create sufficient jobs to cover increase in population. Growth rates above this number will likely result in a decrease in unemployment rate and an economic incentive to undocumented workers, growth rates below this number will be an economic disincentive to undocumented workers).
US GDP growth exceeded this threshold during 1996 – 2000 and 2004-2005.Therefore during 1996-2000, there was a clear incentive for undocumented workers to come to the US. We can infer that their numbers increased substantially during 1996-2000.

EFFECT ON INFLATION RATE AND WHY THE PHILIPS CURVE CAN STILL BE USED (1995-2005)
During 1996-1998, US inflation rate declined from 2.93 to 1.55 . During this period, unemployment also decreased from 5.41% to 4.22% . This can be attributed to a large influx of undocumented workers. Presence of a large number of workers ready to work at very low wages will drive down inflation. However the wages of DOCUMENTED workers will still increase as they are in a premium during periods of strong economic growth. Therefore the basic premise of the Philips curve still holds true and there is an inverse relation between wage inflation (as measured for documented workers) and unemployment. The overall inflation rate does not follow wage inflation due to presence of undocumented workers.
The year 2000 saw a decent 3.7% US GDP growth. The previous years of above threshold growth had reduced the number of both undocumented as well as legal workers in the US. The full effect of low unemployment was visible and the inflation rate spiked to 3.38
During 2000-2002, the inverse relation between inflation and unemployment seems to hold good and we can also see that growth was below 3.0% indicating an economic disincentive for undocumented workers.
The period 2003-2005, also has an inverse relation between inflation and unemployment, telling us that the Philips curve can still be used. The point to note here is a GDP growth during 2004-2005 was above the threshold (3%), indicating an economic incentive for undocumented workers. However border security and workplace enforcement were greatly increased after 2001, taking many undocumented workers out of the workforce.

CONCLUSION:
We can see that the Phlips Curve is a handy tool to economic planning despite the presence of several technological improvements as well as different options available to employers. One reason may be that outsourcing and automation can only remove a tiny percentage of jobs and won’t effect the overall inverse relation between inflation and unemployment.

Socialist systems have silently been innovating while capitalist systems have been tinkering and taking both credit and profit for these innovations.

Socialist/Capitalist systems refer to a particular sector in the economy, example: the defense sector might have a Socialist system,i.e. it is insulated from market competition although other sectors of the economy might be Capitalist. Each system has its own value and an economy formed with a correct mix of systems is likely to be more successful than one that relies heavily on a Capitalist system.

Socialist systems are simply unbeatable when it comes to innovation. Looking at two examples of socialist systems — Universities and Government funded research labs; we find that most of the new ideas which transformed society have originated at places insulated from market competition. Universities (at least the established ones) rarely face pricing pressure and university employees do not experience the same level of job uncertainty as workers in a capitalist system. Government funded research labs would fall into the same category, secure jobs and zero market pressure. Yet the level innovation from these socialist systems is greater than capitalist systems by several orders of magnitude. Nearly every breakthrough in science/technology in the 20th century originated from these systems.

Edmund Phelps (wsj.com, 10/18/2006), writes about capitalist systems producing new commercial products like semiconductor chips, internet browsers, television etc. which transformed society. What he does not mention is that the breakthrough which enabled these new products came from a socialist set up. Its easy for the public to forget where innovation really took place when corporations begin to take credit for churning out new products. How many people remember Stanford University when they hear about Intel’s Centrino Duo or recollect the University of Helsinki when they work with Linux? Corporations have managed to do very little original work and yet they claim to be founts of innovation. Phelps also says that jobs have become more interesting as a result of innovations by corporations and due to dynamic capitalism. However most corporations have only tinkered with innovations and made them more accessible to the common man. So jobs may have become a tad more interesting but the credit should go to those who innovated not those who marketed them.

Capitalist systems are good at delivering products/services to people and creating wealth. This is probably their best and worst point; they efficiently deliver products/services only when profit is guaranteed. They are thoroughly averse to taking risk or indulging in charity. Despite recent concerns about value to society, corporations still exist primarily to create wealth and not to innovate.

What then explains the spectacular failure of innovation in socialist economies? The simple reason is the lack of wealth, i.e. they did not have the resources needed to innovate. Indeed whenever a socialist economy has received funding, innovations have sprung forth quickly. One example would be the well funded Soviet space programs during the 70’s. The mistake these economies made was not having a correct mix of systems, i.e. they did not use capitalist systems to deliver products or create wealth. They overemphasized Socialist systems, failed to create wealth and provide adequate resources to their centers of innovation. The Chinese seemed to have learned from this example. Their delivery systems are mainly capitalist but their Universities, research labs and other centers of innovation are still socialist. We can therefore predict a large increase in innovation from China within a few years. India seems to have taken a different path and is trying to introduce a capitalist system for innovation. We can thus expect to see several tinkered products and technologies but no real innovation.

INTRODUCTION: Outsourcing refers to the process of handing over a business function or part of a business function/process to a third party. The onset of the digital era has made it possible to seamlessly perform business functions across different countries. Most fortune 500 companies have taken advantage of cheaper labor costs in developing countries and have moved business functions/processes offshore either by outsourcing to third parties or by establishing offshore development centers. The words ‘offshoring’ and outsourcing are used interchangeably.

One of the early candidates to move offshore was embedded software development. Intel was a pioneer when it opened an offshore center in Haifa, Israel, way back in 1974[1]. This was followed by industry giants Texas Instruments[2] (Bangalore, India, 1985) and Motorola (Russia, 1997)[3]. Some of the early efforts at offshoring embedded software development were complete disasters. Companies tried to move peripheral application software development with vaguely defined specifications resulting in software full of errors and cost overruns greatly exceeding anticipated savings. Unlike IT applications which are loosely coupled with hardware and have intuitive requirements, Embedded Software applications are written exclusively for specific hardware platforms and requirements are dictated by the system and environment in which they are used. Regular project management practices usually yield little or no benefit when trying to move Embedded Software development offshore. Coupled with unexpected problems relating to cultural differences with the offshore center, companies have managed to create a unique set of worst practices as described below.

1) Outsourcing too little or incomplete modules of software

Nearly 97% of companies surveyed by the Offshoring Research Institute[4] stated cost as a reason for offshoring, yet the size of deals seems to be shrinking and specialized players are getting smaller contracts.[5]The problem with smaller contracts or trying to offshore few software modules is that additional management at the client’s location can very well exceed any savings. An advantage is that risk is significantly reduced by having smaller contracts besides the benefit of expertise offered by smaller niche companies.

Embedded software though is a different creature. Each software module is intricately linked to the rest of the system; even peripheral application software has strong linkages to the environment the system operates in. It is therefore unlikely that offshoring smaller pieces of software will yield substantial savings. A good approach to estimate savings is by using software estimation and project control tools like SEER-SEM (by Galorath)[6]. Such tools give the user an option of selecting inputs like Size (Number of lines of code), Environment, Complexity etc. and give an estimate of the Cost and Effort involved in the Project. As Embedded Systems have greater complexity and Environment factors, using such tools tells us that cost per module is high for a fewer number of modules but decreases as number of modules increase.

[Figure Deleted]

(Inputs and Outputs of SEER-SEM, Project Management Tool

(Copyright: GA-SEER Technologies))

2) Trying to define a specification in great detail

The specification is usually intended as a first step in software development after specifying the system as a whole. Companies in their eagerness to cut risk or minimize errors, when offshoring Software Development, think that this as a great way to proceed. This approach fails miserably with Embedded Software Development. To examine a better approach we need to see what is inside a Software Functional Specification. A typical software functional specification needs to contain the following sections[7]

A) Introduction

B) Overall Description

C) System Features

D) External Interface Requirements

E) Other non functional requirement (regulatory requirements)

F) Other requirements

Using this template to Embedded Systems brings out some interesting observations. Section D and E (External Interface and Non Functional Requirements) are typically much more detailed and extensive when compared to IT applications as they have information about underlying hardware. Non functional features (features relating to safety, security and regulations) have a large impact on System Features. In fact most System Features in Embedded Software originate from the interaction between External Requirements and Non Functional Requirements. Also it is impossible to predict all System Features without computer simulations. Yet most companies, new to offshoring try to write a specification in great detail, resulting in several project management problems as well as cost overruns. This approach of trying to define a specification in great detail leads to witch hunting (pinning the blame on an individual) and slowing down learning, according to Pawel Brodzinski[8]. We can therefore conclude that this approach not only leads to poor results but also undesirable organizational behavior.

A better alternative is to use an Operational Specification in the first stage of design[9]. An Operational Specification is the user’s view of the system without going into details of its working. Sharing this view of the system with the offshore center is a vital first step towards better understanding and communication. Other important ‘to-do’s’ are having a prototype and imparting sufficient knowledge of hardware. Both these points are discussed further

3) Failing to tutor by prototype and relying mostly on formal training

Several job training methods are available to prepare an offshore center. Most companies prefer to minimize training expense as it increases cost and reduces the incentive to offshore. Many offshore suppliers claim to have ‘trained staff’ ready to take on projects at a moments notice. The cold reality however is that some form of training is unavoidable when moving work to a different location. Many company specific technologies and protocols are completely unfamiliar to people with several years of experience in Industry. So it makes sense to look at various training options and choose the best (cost effective) option. Some common training methods include[10]:

a) Lecture

b) Demonstration

c) Seminar

d) Conference

e) Panel

f) Simulation

g) Self-Discovery

i) On-The-Job

Without going into details of these methods, the most popular methods in the Embedded Systems industry are Lecture/Seminar and On-The-Job training. Industry conferences and Trade shows provide a good introduction but the bulk of learning must be On-The-Job. Nearly 80% of learning takes place on the job and by looking at how others are performing their duties. Yet this vital component is missing in an offshore center. Among other options available to replace this vital component, Self-Discovery seems the best bet. Most offshore locations have people with reasonable engineering skills and the ability to look at a prototype and understand it. If a prototype of the Embedded System is not available, any previous project or Embedded Controller/Processor software provides a useful starting point. Looking at a previous project and its software output tells a lot more than Formal Lecture based training, which seems to be the current preferred option for offshore centers.

4) Imparting little or no knowledge of hardware/system

Embedded Software essentially consists of two components. A device driver component which has instructions to run the microprocessor and the application software which has most of the functionality. Both components interact with either the Hardware or the System. The device driver component has traditionally been handled by the manufacturer of the microprocessor or a closely linked supplier. The reason for this trend is best captured by this statement from microcontroller.com:[11]

“Developing device drivers for a highly integrated microcontroller can be daunting, partly due to the sheer complexity of the device, but also due to some other difficulties”

Trying to offshore device driver development needs in depth knowledge of the processor and several conventions and processes peculiar to each manufacturer. It goes without saying that knowledge of hardware (microcontroller/processor) is a basic requirement.

Developing application software for Embedded Systems needs familiarity with the system/environment. Trying to develop software for controlling an Engine without knowing how an Engine works is very difficult and likely to result in several errors. Despite knowing fully well the importance of familiarizing the offshore center with system/hardware, most companies attempt to offshore both device driver and application software development with a detailed specification in the hope that adhering to the specification will result in code free of errors. We have seen previously why this approach is bound to fail.

Another aspect often ignored while offshoring is the lack of intuitiveness in Embedded Software. For example in IT applications one can guess expected behavior when a button named ‘close’ is pressed due to the fact that behavior is obvious and somewhat standard across a variety of applications. However it is difficult to predict requirements for a temperature sensor failure in an Engine Control Unit (A good example of an embedded system) of a car. Even people with several years of experience in the automotive industry need to think carefully before deciding on the Algorithm. The offshore center usually gets blamed for incorrectly developing software but in reality the problem lies in a misunderstanding of requirements, which are usually not intuitive in Embedded Systems. This is one of the major reasons for lack of satisfaction from an offshore provider. It scores higher than culture/language barriers which are often stated as the major obstacle to offshoring.

5) Trying to impose processes and standards without taking local conditions into account

Most major corporations have software development standards and processes. Several have followed the V-model for software development shown below:

V-Model for Software Development

[figure deleted]

Most job descriptions and functions closely follow this model. For example there is typically one person performing requirements analysis, another performing Architecture Design and yet another performing Unit Testing. When work is moved to an offshore location, this model as well as job descriptions and functions are adhered to scrupulously. It is assumed that people will be found and ready to work in one of descriptions suggested by the model. If employees are not satisfied with their job functions, they are moved around but seldom is the model/job description tinkered with.

The advent of modern tools for software development like autocode generators and model based design tools has made the V-model redundant. Several models like Prototyping and Rapid Application Development (RAD) have proved superior to V-model[12]. Some of them have even been adopted successfully by companies. Job descriptions though have remained faithful to the V-model resulting in skewed job functions.

An offshore location with a different culture adds another dimension of misfit to this problem of ill-defined job descriptions. Jobs in Embedded Software attract the best Engineers at offshore locations. They are usually not satisfied with the quality of work leading to high rates of attrition. To remedy this problem, a complete overhaul of the development model as well as job descriptions/processes must be carried out.

6) Organization not prepared for offshoring:

To prepare companies for a global development environment, management usually adopts cultural sensitivity, diversity seminars etc. Although they serve as a vital first step towards preparing a company to operate globally several other aspects need to be considered before adopting a global development model. Two commonly overlooked aspects pertaining to software development are mentioned below –

• Ignoring or not accounting for negative attitudes towards offshoring

Nearly half the US population believes that the US is being harmed by the global economy; only a quarter believe it is benefiting. Nearly 70% of US residents believe that outsourcing hurts the US economy. Despite overwhelming evidence about the benefits of globalization, [14]majority of US residents and by implication employees are opposed to it. Yet few if any companies have conducted surveys to assess their employee’s willingness to participate in offshoring projects. With project management being performed by employees with negative attitudes, it is very likely that projects will fail.

• Not having proper project management at the point of offshoring

Similar to ignoring negative attitudes, very few project managers have been trained to handle offshore projects. Though offshore suppliers have tried to make things easier by providing project managers, there need to be trained personnel at the client company who can take charge of deliverables as and when required.

7) Failure to define a strategy for the offshore location:

When considering a project to offshore it is necessary to include it as a part of a Global Development Strategy (GDS). This strategy implies that some parts of the business or some processes will be handled entirely from an offshore location. Rather than select arbitrary projects to send offshore, a Global Perspective while framing any project will help a company become more competitive and eliminate some of the problems mentioned above.

The overall failure rate in offshoring Embedded Software projects has been enormously high. Yet the pressure to include new features in Cell Phones, Navigation Systems, Cars etc. in a cost effective manner are forcing companies to look at offshore locations. Avoiding the common mistakes mentioned above will likely make life easier for both offshore location as well as the client company.

[1] http://www.matimop.org.il/newrdinf/company/c142.htm

[2] http://www.koramangala.com/korasoft/2000/03.htm

[3] http://www.russoft.org/docs/?doc=54

[4] http://www.managementlogs.com/2006/03/reasons-for-offshoring-changing.html

[5] http://www.thehindubusinessline.com/ew/2005/05/09/stories/2005050900060100.htm

[6] http://www.galorath.com/tools_sem.html

[7] http://www.processimpact.com/process_assets/srs_template.doc

[8] http://blog.brodzinski.com/2007/08/dont-look-back.html

[9] Software Specification and Design: An Engineering Approach, By John C. Munson,2006

[10] http://ky.essortment.com/jobstraining_rshn.htm

[11] http://www.microcontroller.com/wp/DeviceDrivers/device_drivers.htm

[12] http://www.stylusinc.com/Common/Concerns/SoftwareDevtPhilosophy.php

[13] http://www.pollingreport.com/trade.htm

[14] http://www.cfr.org/publication/7749/trade.html