TELECOM Digest OnLine - Sorted: Outsourcing Innovation -- and Why Apple Doesn't

Outsourcing Innovation -- and Why Apple Doesn't

Marcus Didius Falco (
Sun, 13 Mar 2005 21:36:09 -0500

Some excerpts from the latest Business Week 'Technology' issue:
From Business Week:

Outsourcing Innovation

First came manufacturing. Now companies are farming out R&D to cut
costs and get new products to market faster. Are they going too far?

As the Mediterranean sun bathed the festive cafs and shops of the Cte
d'Azur town of Cannes, banners with the logos of Motorola (MOT ),
Royal Philips Electronics (PHG ), palmOne (PLMO ), and Samsung
fluttered from the masts of plush yachts moored in the harbor. On
board, top execs hosted nonstop sales meetings during the day and
champagne dinners at night to push their latest wireless gadgets.

Outside the city's convention hall, carnival barkers, clowns on
stilts, and vivacious models with bright red wigs lured passersby into
flashy exhibits. For anyone in the telecom industry wanting to shout
their achievements to the world, there was no more glamorous spot than
the sprawling 3GSM World Congress in Southern France in February.

Yet many of the most intriguing product launches in Cannes took place
far from the limelight. HTC Corp., a red-hot developer of multimedia
handsets, didn't even have its own booth. Instead, the Taiwanese
company showed off its latest wireless devices alongside partners that
sell HTC's models under their own brand names. Flextronics
Corp. demonstrated several concept phones exclusively behind closed
doors. And Cellon International rented a discrete three-room apartment
across from the convention center to unveil its new devices to a
steady stream of telecom executives. The new offerings included the
C8000, featuring eye-popping software. Cradle the device to your ear
and it goes into telephone mode. Peer through the viewfinder and it
automatically shifts into camera mode. Hold the end of the device to
your eye and it morphs into a videocam.

HTC? Flextronics? Cellon? There's a good reason these are hardly
household names. The multimedia devices produced from their prototypes
will end up on retail shelves under the brands of companies that don't
want you to know who designs their products. Yet these and other
little-known companies, with names such as Quanta Computer, Premier
Imaging, Wipro Technologies (WIT ), and Compal Electronics, are fast
emerging as hidden powers of the technology industry.

They are the vanguard of the next step in outsourcing -- of innovation
itself. When Western corporations began selling their factories and
farming out manufacturing in the '80s and '90s to boost efficiency and
focus their energies, most insisted all the important research and
development would remain in-house.

But that pledge is now pass. Today, the likes of Dell (DELL ),
Motorola, (MOT ) and Philips are buying complete designs of some
digital devices from Asian developers, tweaking them to their own
specifications, and slapping on their own brand names. It's not just
cell phones. Asian contract manufacturers and independent design
houses have become forces in nearly every tech device, from laptops
and high-definition TVs to MP3 music players and digital
cameras. "Customers used to participate in design two or three years
back," says Jack Hsieh, vice-president for finance at Taiwan's Premier
Imaging Technology Corp., a major supplier of digital cameras to
leading U.S. and Japanese brands. "But starting last year, many just
take our product. Because of price competition, they have to."

While the electronics sector is furthest down this road, the search
for offshore help with innovation is spreading to nearly every corner
of the economy. On Feb. 8, Boeing Co. (BA ) said it is working with
India's HCL Technologies to co-develop software for everything from
the navigation systems and landing gear to the cockpit controls for
its upcoming 7E7 Dreamliner jet. Pharmaceutical giants such as
GlaxoSmithKline (GSK ) and Eli Lilly (LLY )are teaming up with Asian
biotech research companies in a bid to cut the average $500 million
cost of bringing a new drug to market. And Procter & Gamble Co. (PG )
says it wants half of its new product ideas to be generated from
outside by 2010, compared with 20% now.

Competitive Dangers Underlying this trend is a growing consensus that
more innovation is vital -- but that current R&D spending isn't
yielding enough bang for the buck. After spending years squeezing
costs out of the factory floor, back office, and warehouse, CEOs are
asking tough questions about their once-cloistered R&D operations: Why
are so few hit products making it out of the labs into the market? How
many of those pricey engineers are really creating game-changing
products or technology breakthroughs? "R&D is the biggest single
remaining controllable expense to work on," says Allen J. Delattre,
head of Accenture Ltd.'s (ACN ) high-tech consulting practice.
"Companies either will have to cut costs or increase R&D

The result is a rethinking of the structure of the modern corporation.
What, specifically, has to be done in-house anymore? At a minimum,
most leading Western companies are turning toward a new model of
innovation, one that employs global networks of partners. These can
include U.S. chipmakers, Taiwanese engineers, Indian software
developers, and Chinese factories. IBM (IBM ) is even offering the
smarts of its famed research labs and a new global team of 1,200
engineers to help customers develop future products using
next-generation technologies. When the whole chain works in sync,
there can be a dramatic leap in the speed and efficiency of product

The downside of getting the balance wrong, however, can be
steep. Start with the danger of fostering new competitors. Motorola
hired Taiwan's BenQ Corp. to design and manufacture millions of mobile
phones. But then BenQ began selling phones last year in the prized
China market under its own brand. That prompted Motorola to pull its
contract. Another risk is that brand-name companies will lose the
incentive to keep investing in new technology. "It is a slippery
slope," says Boston Consulting Group Senior Vice-President Jim
Andrew. "If the innovation starts residing in the suppliers, you could
incrementalize yourself to the point where there isn't much left."

Such perceptions are a big reason even companies that outsource
heavily refuse to discuss what hardware designs they buy from whom and
impose strict confidentiality on suppliers. "It is still taboo to talk
openly about outsourced design," says Forrester Research Inc. (FORR )
consultant Navi Radjou, an expert on corporate innovation.

The concerns also explain why different companies are adopting widely
varying approaches to this new paradigm. Dell, for example, does
little of its own design for notebook PCs, digital TVs, or other
products. Hewlett-Packard Co. (HPQ ) says it contributes key
technology and at least some design input to all its products but
relies on outside partners to co-develop everything from servers to
printers. Motorola buys complete designs for its cheapest phones but
controls all of the development of high-end handsets like its
hot-selling Razr. The key, execs say, is to guard some sustainable
competitive advantage, whether it's control over the latest
technologies, the look and feel of new products, or the customer
relationship. "You have to draw a line," says Motorola CEO Edward J.
Zander. At Motorola, "core intellectual property is above it, and
commodity technology is below."

Wherever companies draw the line, there's no question that the
demarcation between mission-critical R&D and commodity work is sliding
year by year. The implications for the global economy are
immense. Countries such as India and China, where wages remain low and
new engineering graduates are abundant, likely will continue to be the
biggest gainers in tech employment and become increasingly important
suppliers of intellectual property. Some analysts even see a new
global division of labor emerging: The rich West will focus on the
highest levels of product creation, and all the jobs of turning
concepts into actual products or services can be shipped out.
Consultant Daniel H. Pink, author of the new book A Whole New Mind,
argues that the "left brain" intellectual tasks that "are routine,
computer-like, and can be boiled down to a spec sheet are migrating to
where it is cheaper, thanks to Asia's rising economies and the miracle
of cyberspace." The U.S. will remain strong in "right brain" work
that entails "artistry, creativity, and empathy with the customer that
requires being physically close to the market."

You can see this great divide already taking shape in global
electronics. The process started in the 1990s when Taiwan emerged as
the capital of PC design, largely because the critical technology was
standardized, on Microsoft Corp.'s (MSFT ) operating system software
and Intel Corp.'s (INTC ) microprocessor. Today, Taiwanese
"original-design manufacturers" (ODMS), so named because they both
design and assemble products for others, supply some 65% of the
world's notebook PCs. Quanta Computer Inc. alone expects to churn out
16 million notebook PCs this year in 50 different models for buyers
that include Dell, Apple Computer (AAPL ), and Sony (SNE ).

Now, Taiwanese ODMs and other outside designers are forces in nearly
every digital device on the market. Of the 700 million mobile phones
expected to be sold worldwide this year, up to 20% will be the work of
ODMs, estimates senior analyst Adam Pick of the El Segundo (Calif.)
market research firm iSuppli Corp. About 30% of digital cameras are
produced by ODMs, 65% of MP3 players, and roughly 70% of personal
digital assistants (PDAs). Building on their experience with PCs,
they're increasingly creating recipes for their own gizmos, blending
the latest advances in custom chips, specialized software, and
state-of-the-art digital components. "There is a lot of great
capability that has grown in Asia to develop complete products," says
Doug Rasor, worldwide strategic marketing manager at chipmaker Texas
Instruments Inc. TI often supplies core chips, along with rudimentary
designs, and the ODMs take it from there. "They can do the system
integration, the plastics, the industrial design, and the low-cost
manufacturing, and they are happy to put Dell's name on it. That is a
megatrend in the industry," says Rasor.

Taiwan's ODMs clearly don't regard themselves as mere job shops. Just
ask the top brass at HTC, which creates and manufactures smart phones
for such wireless service providers as Vodafone and Cingular as well
as equipment makers it doesn't identify. "We know this kind of product
category a lot better than our customers do," says HTC President Peter
Chou. "We have the capability to integrate all the latest
technologies. We do everything except the Microsoft operating system."

Or stop in to Quanta's headquarters in the Huaya Technology Park
outside Taipei. Workers are finishing a dazzling structure the size of
several football fields, with a series of wide steps leading past
white columns supporting a towering Teflon-and-glass canopy. It will
serve as Quanta's R&D headquarters, with thousands of engineers
working on next-generation displays, digital home networking
appliances, and multimedia players. This year, Quanta is doubling its
engineering staff, to 7,000, and its R&D spending, to $200 million.

Why? To improve its shrinking profit margins -- and because foreign
clients are demanding it. "What has changed is that more customers
need us to design the whole product," says Chairman Barry Lam. For
future products, in fact, "it's now difficult to get good ideas from
our customers. We have to innovate ourselves."

Sweeping Overhaul India is emerging as a heavyweight in design,
too. The top players in making the country world-class in software
development, including HCL and Wipro, are expected to help India boost
its contract R&D revenues from $1 billion a year now to $8 billion in
three years. One of Wipro's many labs is in a modest office off dusty,
congested Hosur Road in Bangalore. There, 1,000 young engineers
partitioned into brightly lit pods jammed with circuit boards, chips,
and steel housings hunch over 26 development projects. Among them is a
hands-free telephone system that attaches to the visor of a European
sports car. At another pod, designers tinker with a full dashboard
embedded with a satellite navigation system. Inside other Wipro labs
in Bangalore, engineers are designing prototypes for everything from
high-definition TVs to satellite set-top boxes.

Perhaps the most ambitious new entrant in design is Flextronics. The
manufacturing behemoth already builds networking gear, printers, game
consoles, and other hardware for the likes of Nortel Networks (NT ),
Xerox (XRX ), HP, Motorola, and Casio Computer. But three years ago,
it started losing big cell-phone and PDA orders to Taiwanese
ODMs. Since then, CEO Michael E. Marks has shelled out more than $800
million on acquisitions to build a 7,000-engineer force of software,
chip, telecom, and mechanical designers scattered from India and
Singapore to France and Ukraine. Marks's splashiest move was to pay an
estimated $30 million for frog design Inc., the pioneering Sunnyvale
(Calif.) firm that helped design such Information Age icons as Apple
Computer Inc.'s original Mac in 1984. So far, Flextronics has
developed its own basic platforms for cell phones, routers, digital
cameras, and imaging devices. His goal is to make Flextronics a
low-cost, soup-to-nuts developer of consumer-electronics and tech

Marks has an especially radical take on where all this is headed: He
believes Western tech conglomerates are on the cusp of a sweeping
overhaul of R&D that will rival the offshore shift of
manufacturing. In the 1990s, companies like Flextronics "completely
restructured the world's electronics manufacturing," says Marks. "Now
we will completely restructure design." When you get down to it, he
argues, some 80% of engineers in product development do tasks that can
easily be outsourced -- like translating prototypes into workable
designs, upgrading mature products, testing quality, writing user
manuals, and qualifying parts vendors. What's more, most of the core
technologies in today's digital gadgets are available to anyone. And
circuit boards for everything from cameras to network switches are
becoming simpler because more functions are embedded on
semiconductors. The "really hard technology work" is migrating to
chipmakers such as Texas Instruments, Qualcomm (QCOM ), Philips,
Intel, and Broadcom (BRCM ), Marks says. "All electronics are on the
same trajectory of becoming silicon surrounded by plastic."

Why then, Marks asks, should Nokia (NOK ), Motorola, Sony-Ericsson,
Alcatel (ALA ), Siemens (SI ), Samsung, and other brand-name companies
all largely duplicate one another's efforts? Why should each spend $30
million to develop a new smartphone or $200 million on a cellular base
station when they can just buy the hardware designs? The ultimate
result, he says: Some electronics giants will shrink their R&D forces
from several thousand to a few hundred, concentrating on proprietary
architecture, setting key specifications, and managing global R&D
teams. "There is no doubt the product companies are going to have
fewer people design stuff," Marks predicts. "It's going to get ugly."

Granted, Marks's vision is more than a tad extreme. True, despite the
tech recovery, many corporate R&D budgets have been tightening. HP's
R&D spending long hovered around 6% of sales, but it's down to 4.4%
now. Cisco Systems' (CSCO ) R&D budget has dropped from its old
average of 17% to 14.5%. The numbers also are falling at Motorola,
Lucent Technologies (LU ), and Ericsson. In November, Nokia Corp. said
it aims to trim R&D spending from 12.8% of sales in 2004 to under 10%
by the end of 2006.

Close to the Heart

Still, most companies insist they will continue to do most of the
critical design work -- and have no plans to take a meat ax to R&D. A
Motorola spokesman says it plans to keep R&D spending at around 10%
for the long term. Lucent says its R&D staff should remain at about
9,000, after several years of deep cuts. And while many Western
companies are downsizing at home, they are boosting hiring at their
own labs in India, China, and Eastern Europe. "Companies realize if
they want a sustainable competitive advantage, they will not get it
from outsourcing," says President Frank M. Armbrecht of the
Industrial Research Institute, which tracks corporate R&D spending.

Companies also worry about the message they send investors.
Outsourcing manufacturing, tech support, and back-office work makes
clear financial sense. But ownership of design strikes close to the
heart of a corporation's intrinsic value. If a company depends on
outsiders for design, investors might ask, how much intellectual
property does it really own, and how much of the profit from a hit
product flows back into its own coffers, rather than being paid out in
licensing fees? That's one reason Apple Computer lets the world know
it develops its hit products in-house, to the point of etching
"Designed by Apple in California" on the back of each iPod.

Yet some outsourcing holdouts are changing their tune. Nokia long
prided itself on developing almost everything itself -- to the point
of designing its own chips. No longer. Given the complexities of
today's technologies and supply chains, "nobody can master it all,"
says Chief Technology Officer Pertti Korhonen. "You have to figure out
what is core and what is context." Lucent says outsourcing some
development makes sense so that its engineers can concentrate on
next-generation technologies. "This frees up talent to work on new
product lines," says Dave Ayers, vice-president for platforms and
engineering. "Outsourcing isn't about moving jobs. It's about the
flexibility to put resources in the right places at the right time."

It's also about brutal economics and the relentless demands of
consumers. To get shelf space at a Best Buy (BBY ) or Circuit City
often means brand-name companies need a full range of models, from a
$100 point-and-shoot digital camera with 2 megapixels, say, to a $700
8-megapixel model that doubles as a videocam and is equipped with a
powerful zoom lens. On top of this, superheated competition can reduce
hit products to cheap commodities within months. So they must get out
the door fast to earn a decent margin. "Consumer electronics have
become almost like produce," says Michael E. Fawkes, senior
vice-president of HP's Imaging Products Div. "They always have to be

Such pressures explain outsourcing's growing allure. Take cell phones,
which are becoming akin to fashion items. Using a predesigned platform
can shave 70% of development costs off a new model, estimates William
S. Wong, a senior vice-president for marketing at Cellon. That can be
a huge savings. As a rule of thumb, it takes around $10 million and up
to 150 engineers to develop a new cell phone from scratch. If Motorola
or Nokia guess wrong about the market trends a year into the future,
they can lose big. So they must develop several versions.

With most of its 800 engineers in China and France, Cellon creates
several basic designs each year and spreads the costs among many
buyers. It also has the technical expertise to morph that basic phone
into a bewildering array of models. Want a 2-megapixel camera module
instead of 1-megapixel? Want to include a music player, or change the
style from a gray clamshell to a flaming-red candy-bar shape? No
problem: Cellon engineers can whip up a prototype, run all the tests,
and get it into mass production in a Chinese factory in months.

Moving Up the Food Chain

Companies are still figuring out exactly what to outsource. PalmOne
Inc.'s collaboration with Taiwan's HTC on its popular Treo 650 smart
phone illustrates one approach. Palm has long hired contractors to
assemble hardware from its own industrial designs. But in 2001, it
decided to focus on software and shifted hardware production to
Taiwanese ODMs. PalmOne designers still determine the look and feel of
the product, pick key components like the display and core chips, and
specify performance requirements. But HTC does much of the mechanical
and electrical design. "Without a doubt, they've become a part of the
innovation process," says Angel L. Mendez, senior global operations
vice-president at palmOne. "It's less about outsourcing and more about
the collaborative way in which design comes together." The result:
PalmOne has cut months off of development times, reduced defects by
50%, and boosted gross margins by around 20%.

Hewlett-Packard, a company with such a proud history of innovation
that its advertising tag line is simply "invent," also works with
design partners on all the hardware it outsources. "Our strategy is
now to work with global networks to leverage the best technologies on
the planet," says Dick Conrad, HP's senior vice-president for global
operations. According to iSuppli, HP is getting design help from
Taiwan's Quanta and Hon Hai Precision for PCs, Lite-On for printers,
Inventec for servers and MP3 players, and Altek for digital
cameras. HP won't identify specific suppliers, but it says the
strategy has brought benefits. Conrad says it now takes 60% less time
to get a new concept to market. Plus, the company can "redeploy our
assets and resources to higher value-added products" such as advanced
printer inks and sophisticated corporate software, he says.

How far can outsourced design go? When does it get to the point where ODMs
start driving truly breakthrough concepts and core technologies? It's not
here yet. Distance is one barrier. "To be a successful product company
requires intimacy with the customer," says Azim H. Premji, chairman of
India's Wipro. "That is very hard to offshore in fast-changing markets."
Another hurdle is that R&D spending by ODMs remains relatively low. Even
though Premier develops most of its own cameras and video projectors, "the
really core technology," such as the digital signal processors, is invented
in the U.S., says vice-president Hsieh. Premier's latest wallet-size video
projector, for example, was based on a rough design by Texas Instruments,
developer of the core chip. With margins shrinking fast in the ODM
business, however, Premier and other Taiwanese companies know they need to
move up the innovation food chain to reap higher profits.

That's where Flextronics and its design acquisitions could get
interesting. Inside frog's hip Sunnyvale office, designers are
working to create a radically new multimedia device, for an unnamed
corporate client, that won't hit the market until 2007. The plan, says
Patricia Roller, frog's co-CEO, is to use Flextronics software
engineers in Ukraine or India to develop innovative applications, and
for Flextronics engineers to design the working prototype. Flextronics
then would mass-produce the gadgets, probably in China.

Who will ultimately profit most from the outsourcing of innovation
isn't clear. The early evidence suggests that today's Western titans
can remain leaders by orchestrating global innovation networks. Yet if
they lose their technology edge and their touch with customers, they
could be tomorrow's great shrinking conglomerates. Contractors like
Quanta and Flextronics that are moving up the innovation ladder,
meanwhile, have a shot at joining the world's leading industrial
players. What is clear is that an army of in-house engineers no longer
means a company can control its fate. Instead, the winners will be
those most adept at marshaling the creativity and skills of workers
around the world.

By Pete Engardio and Bruce Einhorn
With Manjeet Kripalani in Bangalore, Andy Reinhardt in Cannes,
Bruce Nussbaum in Somers, N.Y., and Peter Burrows in San
Mateo, Calif.

Commentary: Apple's Blueprint for Genius
Handling its own design work is one reason for best-sellers reason for
best-sellers like the iPod and Shuffle. Steve Jobs is the other
By Peter Burrows

"Designed by Apple in Cupertino."

The words are printed in such small type on the back of Apple's (AAPL
) tiny new iPod Shuffle MP3 player that you have to squint to read
them. But they speak volumes about why Apple is standing so far out
from the crowd these days. At a time when rivals are outsourcing as
much design as possible to cut costs, Apple remains at its core a
product company -- one that would never give up control of how those
products are created.

In this age of commodity tech products, design, after all, is what
makes Apple Apple. This focus is apparent to anyone who has used one
of its trailblazing products. While the Silicon Valley pioneer sells
only a few dozen models, compared to the hundreds offered by many of
its rivals, many of those "designed in Cupertino" products are
startling departures from the norm -- and they often set the
directions for the rest of the industry. Examples abound, from the
iPod, to the flat screen look of the new iMac, to the simple smallness
of the new Mac mini PC.

What's the secret? The precise details are almost impossible to get,
because Apple treats its product-development processes like state
secrets -- going so far as to string black drapes around the
production lines at the factories of the contract manufacturers it
hires to assemble its products. In one case, says a source who once
worked on an Apple project, the outfit even insisted that its wares be
built only on the midnight shift, when fewer prying eyes might be

"INSANELY GREAT." But the general themes are clear. Most CEOs are
focused on achieving their financial and operational goals, and on
executing a strategy. But Apple's Steve Jobs believes his company's
ultimate advantage comes from its ability to make unique, or as he
calls them, "insanely great" products.

Jobs's entire company is focused on that task. That means while rival
computer makers increasingly rely on so-called outsourced design
manufacturers (ODMs), for key design decisions, Jobs keeps most of
those tasks in-house. Sure, he relies on ODMs to manufacture his
products, but the big decisions on Apple products are made in Silicon

Jobs himself is a crucial part of the formula. He's unique among big-time
hardware CEOs for his hands-on involvement in the design process. Even
product-design experts marvel at the power of the Jobs factor.

FIRST, AN IDEA. "I've been thinking hard about the Apple
product-development process since I left," says design guru Donald
Norman, co-founder the design consultants Nielsen Norman Group, who
left Apple in 1997. "If you follow my [guidelines], it will guarantee
good design. But Steve Jobs doesn't want good design. He wants great
design, and my method will never give you that. That takes a rare
leader, who can bring both the cohesion and commitment and style. And
Steve has it."

Many executives believe that outsourcing design allows them to lower
the salaries they must pay, and lets them have engineers working on
the products across all time zones. Jobs thinks that's
short-sighted. He argues that the cost-savings aren't worth what you
give up in terms of teamwork, communication, and the ability to get
groups of people working together to bring a new idea to life. Indeed,
with top-notch mechanical, electrical, software, and industrial
designers all housed at Apple's Infinite Loop campus in Cupertino,
Calif., the company's design capability is more vertically integrated
than almost any other tech outfit.

Typically, a new Apple product starts with a big idea for an unmet
customer need. For the original iPod, it was for an MP3 player that,
unlike earlier models, could hold and easily manage your entire music
collection. Then, Apple's product architects and industrial designers
figure out what that product should look like and what features it
should have -- and, importantly, not have. "Apple has a much more
holistic view of product design," says David Carey, president of
design consulting firm Portelligent. "Good product design starts from
the outside, and works its way inside."

HALF MEASURE. Already, that's different from the process by which the
bulk of tech products are made. Increasingly, tech companies meet with
ODMs to see what designs they have cooked up. Then, the ODMs are asked
to tweak those basic blueprints to add a few features, and to match
the look and feel of the company's other products.

That's where the "design" input might end for most companies. But
since it's almost always trying to create one-of-a-kind products,
Apple has to ask its own engineers to do the critical electrical and
mechanical work to bring products to life.

In the iPod Shuffle, for example, designers cut a circuit card in two
and stacked the pieces, bunk-bed style, to make use of the empty air
space created by the height of the battery in the device. "They
realized they could erase the height penalty [of the battery] to help
them win the battle of the bulge," says Carey, whose company did a
detailed engineering analysis of the iPod Shuffle.

SCREW-FREE. Even more important, Apple's products are designed to run
a particular set of programs or services. By contrast, a Dell (DELL )
or Gateway (GTW ) PC must be ready for whatever new features Microsoft
(MSFT ) comes out with, or whatever Windows program a customer opts to

But Apple makes much of its own software, from the Mac operating
system to applications such as iPhoto and iTunes. "That's Apple's
trump card," says one Apple rival. "The ODMs just don't have the
world-class industrial design, the style, or the ability to make
easy-to-use software -- or the ability to integrate it all. They may
some day, but they don't have it now."

Of course, Apple also sets its self apart by designing machines that
are also little works of art -- even if it means making life difficult
for manufacturers contracted to build those designs. During a trip to
visit ODMs in Asia, one executive told securities analyst Jim Grossman
of Thrivent Investment Management about Steve Jobs's insistence that
no screws be visible on the laptop his company was manufacturing for
Apple. The executive said his company had no idea how to handle the
job and had to invent a new tooling process for the job. "They had to
learn new ways to do things just to meet Apple's design," says

TOUGH CUSTOMER. That's not to say Apple is completely bucking the
outsourcing trend. All its products are manufactured by ODMs in
Asia. Just as it buys chips and disk drives from other suppliers,
sources say Apple lets ODMs take some role in garden-variety
engineering work -- but not much. "This is an issue for Apple, because
the A-team engineers [at the ODMs] don't like working with Apple. It's
like when you were a kid, all your dad let you do was hold the
flashlight, rather than let you try to fix the car yourself," says an
executive at a rival MP3 maker.

In fairness, Apple's reliance on a smaller number of products than its
rivals and go-it-alone design means it's always a dud or two from disaster.
But at the moment, it's proving that "made in Cupertino" is a trademark for

Burrows is Computer editor in BusinessWeek's Silicon Valley


R&D Jobs: Who Stays, Who Goes?

A recent in-depth outsourcing study of a hypothetical 1,000-person team
found only 722 needed to be kept. Others say that's way too many

After decades of streamlining and downsizing practically every aspect of
their businesses, corporate budget-cutters and efficiency wonks are zeroing
in on one of the most sacrosanct areas of the organization: research and
development. R&D can account for anywhere from 5% to 18% of the costs of a
major electronics company.

Human considerations aside, the task is fraught with risk. Do nothing,
and a company could end up at a severe disadvantage against nimbler,
lower-cost rivals that have mastered the art of using networks of
contractors, design partners, and technology providers in India,
China, or Eastern Europe. But cut too deeply, and the whole
product-development process could go out of whack. Over the long run,
a company could even lose its ability to generate future breakthrough

"PORTABLE" POSITIONS. So how to assess which jobs must remain
in-house and which ones can safely take place more cheaply and
efficiently offshore? This is a red-hot question in management
circles today, with consultants busily applying cold calculus to each
step of the product-development process. "R&D used to be treated as
one big black box," says Vivek Paul, CEO of Indian info-tech services
giant Wipro Technologies (WIT ), whose contract R&D service employs
8,000 engineers. "Now, companies are deconstructing the whole R&D
chain, sorting out what's strategic and what's not."

To help provide answers, Parametric Technology (PTC), a Needham
(Mass.) producer of collaborative design software for 31,000 clients
worldwide, commissioned a study of a typical R&D workforce of a
typical electronics company. It concluded that about 30% of the jobs
were "portable," meaning companies could shift them offshore.

The PTC study used two basic questions: First, how critical is a
particular job to the company's competitive advantage? Second, how
easy is it to physically transfer that taskn to a remote location?

CREATING CRITERIA. More specifically: Does an employee add enough
value to the company to justify the higher cost of keeping that slot
on the U.S. payroll, or is the employee doing more routine, low-value
work that an offshore worker could accomplish for much less pay? Is
the staffer mainly upgrading or reducing costs of existing product
lines, or devoted to future products? Is he or she integral to
creating technology that the company regards as part of its strategic
core, or can the intellectual property be purchased on the market?

Deciding whether a job can move also involves even deeper issues: Can
it be digitalized and done entirely on a computer, or does it require
close personal contact with customers or other members of a team? Can
the entire task fit into one distinct piece, or "module," that can be
plugged in or out of a product-development project, much as a chassis
or seat assembly can be bolted onto a car? If so, can that entire
module of work move out of the company? Does a staffer have special
institutional knowledge of the corporation's culture, needs, and
history that any outsider lacks?

Using such criteria, the PTC study classified each R&D position as
"most critical," "moderately critical," or "less critical." It then
estimated how many of the jobs in each category were easily
transportable. Starting with an R&D operation of 1,000 engineers,
PTC's details its opinion as to whittling down the operation:

Most critical: Only about 150 staffers fall into this category. It
includes product managers who develop and guide strategies for product
lines, and program or project managers who monitor development
milestones, schedules, and budgets. Systems engineers, who define a
product in its broadest terms, also rank as critical. They set
specific performance standards, for example, for core components such
as certain digital displays, microprocessors, and software
platforms. Only 9 of the 150 positions can be outsourced, the PTC
study estimates. Head count: 991.

Moderately critical: Mechanical analysts who determine if designs hold
up to certain levels of stress and electrical engineers who scrutinize
the performance of a circuit board fall into the moderately critical
category. So do engineers who translate conceptual designs into
working prototypes as well as computer engineers who supply the
information-technology systems needed to develop a product. Of the 600
jobs in this category, PTC tags 144 for outsourcing. Head count: 847.

Less critical: Here's where the real downsizing can take place. Those
who can go: designers of auxiliary systems the company can purchase
from the outside and "value engineers" who mainly upgrade products
already on the market or find ways to reduce their manufacturing
costs. "Documentation specialists," who do detailed schematic drawings
for the factory, write operating manuals, or compile lists of
components also come under this category. Some 250 of the 1,000
workers do these types of jobs, and 135 of them can be
outsourced. Final head count of R&D staff: 722.

Of course, many other analysts find this figure conservative. Wipro's
Paul believes anywhere from 40% to 60% of an electronics company's R&D
jobs can be farmed out overseas. One thing that's clear: R&D jobs may
not stick around, but outsourcing them will.

Copyright 2000-2004, by The McGraw-Hill Companies Inc.

John F. McMullen

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