An Overview of Global R&D Benchmarking Service Zinnov LLC

An Overview of Global R&D Benchmarking Service Zinnov LLC This document is solely for the use of Zinnov client and Zinnov personnel. No part of it may be circulated, quoted, or reproduced for distribution outside the client organization without prior written approval from Zinnov

Agenda Insights and Key findings Scope & Methodology Key Benefits and Zinnov Value Participation Information 2

Zinnov benchmarking studies in the last few years has revealed several insights which answers key questions of Global stakeholders; Confluence 2010 validated these insights (1/2) R&D Spend Cost savings is one of the key expectation for globalization of R&D. On an average companies have been able to save 40 60% by moving their R&D activities to global locations Companies are increasingly looking to invest into new products (Today 75% of R&D investment is on mature products) which typically give them better margins. This has forced them to optimize their R&D dollars across product portfolio. Customers are forcing companies to offer new delivery models (SaaS, Cloud Computing) and new pricing models (pay per use, retainer fees etc) which are forcing companies to invest to deliver yet under tight cash flow scenarios Emerging Markets About 15% of companies have started to look at their global centers in India/ China very strategically to address unique demands of emerging markets (Ex: Cisco has positioned India as the HQ of the east and has relocated 15-20 % of senior management talent from HQ to India) Investments into reverse innovation is enabling companies to offer products and services not only to emerging economies but also to value focused customers in developed countries. Our survey indicates that less than 10% of global organizations are currently working on reverse innovation programs Talent For most of the software product companies, the R&D headcount in remote location is 30 60% of the total R&D headcount. Few small companies have above 80% of their total R&D talent in China & India. Domain expertise is on raise in few domains where industry leaders have cultivated talent in past 10+ years. Most product companies have also seen a dramatic raise in the senior engineering talent with average experience raising to 4+ years Over 30% of large companies have partnered with local universities and educational institutes to train the talent at early stages 3

Zinnov benchmarking studies in the last few years has revealed several insights which answers key questions of Global stakeholders; Confluence 2010 validated these insights (2/2) Innovation Over 25% companies with global R&D operations mentioned that Innovation is key to their success in those locations. Ownership at product level is increasing at global R&D centers with 20% of the centers operating at engineering leadership maturity levels 15% of the companies surveyed are leveraging service providers for incremental innovation for their products Productivity Only 15% of the companies surveyed have metrics or frameworks to measure productivity of their global teams, yet 70% of the companies surveyed perceives the productivity of their global teams to be lower than their HQ teams Companies felt that their global R&D centers productivity increased as they transition from codevelopment model into some level of ownership at their remote centers Engagement Model About 95% of the R&D budget for companies is spent in in-house R&D efforts (Includes spend on captives) Over 80% of the surveyed companies have preferred the captive model as opposed to the working with partners for high e, however less complex/down stream activities across PDLC such as testing, support and product sustenance have been outsourced to partners along side with captives Less than 5% of companies are engaging in risk-reward or revenue sharing models with their with vendor partners and 25% companies surveyed have or planning to have 360o partnerships with their vendors Location Preference By Activity For business continuity & growth objectives, companies are increasingly evaluating new cities with in India and China. For development related activities all the peer companies prefer to leverage India and China. India & China have over 670 and 980 MNC R&D subsidiaries respectively For research related activities the favored destinations are India, China and Israel apart from the HQ 4

Based on our interviews with multiple R&D stakeholders, we have found that there are several challenges faced by companies today Innovation Enabling global centers to Innovate for future products Increase the risk taking abilities and creation of an engine for innovation Leveraging service providers ecosystem for innovation 6 1 R&D Spend Percentage of R&D investment that should be allocated to new products Optimal investment across PDLC value chain Optimal R&D investment across various geographies and percentage of R&D spend outsourced to vendors Globalization Footprint of globalization across different geographies Outsourcing percentage split between captives and vendors 5 2 Emerging Market Strategy Percentage of Research Projects on Products for Emerging Geographies How do we arriving at pricing model for emerging markets Talent Optimal R&D headcount break-up for function and geography Percentage of leadership team based in emerging markets Increase in cost by setting the product management team in global centers 4 3 Process Productivity expectation at global centers Fair methodology to measure productivity Top 10 engineering metrics Implementation of agile at global centers 5

To address the need of hour, Zinnov has designed a unique benchmarking model which captures data across R&D spend, revenue and globalization R&D Spend and Revenue Analysis Innovation and Process Addresses the key issues of Innovation, process and productivity by studying various parameters like number of patents, publications, tools and technologies used, number of full release cycles, productivity perception etc Cost Helps in understanding the various components of cost per head like people, travel, infrastructure etc Analysis of Vendor vs. Captive cost per head Engagement models Analyzing the industry wide investments & revenues in various phases of PDLC, various geographies, type of products, captive Vs. vendor spend etc Zinnov s R&D Benchmarking Model Talent Pool and Organization Structure Key metrics for developed and emerging R&D locations in terms of talent pool, capability development and organization structure Emerging Markets Creating strategies required to penetrate emerging markets by understanding customer uniqueness, reverse innovation, localization, revenue generated by peers, future projected growth rates etc Globalization Metrics Detailed benchmark metrics on globalization landscape, best practices adopted by companies, trends etc. 6

Best Practices and recommendations will enable organizations to mature their R&D operations and enable innovation at their global centers (1/2) Details of R&D Benchmarking R&D Spend & Revenue Analysis R&D Spend Investments in New vs. Mature products Investments into new and current revenue streams Spend by product *(best practice) Budget allocation across the PDLC Spend allocation across various geographies % of R&D spend outsourced to vendors R&D spend on people, infrastructure and others Revenue Analysis Contribution of New vs. Existing products Contribution from emerging vs. mature markets Contribution across traditional licensed vs. new delivery models Contribution across license, support, services and royalty Revenue contribution from partnerships with vendors % Of Research projects funneled into revenue stream Emerging Markets %of Research Projects on Products for Emerging Geographies Growth rate of revenues from emerging markets Strategy for emerging market (Localization, Reverse innovation etc.) % of revenue contributed by reverse innovation Future projected growth rates for emerging market revenue Channel strategy Customer uniqueness Globalization Metrics Average number of global centers Year of establishment of global centers Globalization footprint across PDLC Outsourcing percentage split between captives Vs. vendors R&D centers consolidation trends R&D center expansion trends Vendor billing rates based on type of activity and engagement model type Engagement model preference Level of maturity of R&D centers Number of new products from Global centers Number of research labs * Product type: New to the world, new to company, product line extension, Improvement to existing product 7

Best Practices and recommendations will enable organizations to mature their R&D operations and enable innovation at their global centers (2/2) Details of R&D Benchmarking Talent Pool Cost Process & Innovation Talent Pool Headcount break-up by function and geography Number of product managers as a ratio of total center headcount Average years of experience across the center % of leadership team based in emerging markets University ecosystem and partnerships Capability Development Leadership development Programs and best practices Training budget spent per engineer Split of training budget by training type Cost Per Head (CPH) by function Vendor Vs. Captive CPH comparison Captive CPH variance based on headcount Captive CPH increase/decrease percentage for last 3 years Innovation Number of patents filed from global centers Number of publications from global centers Number of features conceptualized from global centers Process PDLC process for global centers (Agile, Waterfall etc.) Tools/Technologies used to enable PDLC process Number of full release cycles from global center Organization Structure % break-up of talent based on experience Levels Number of expatriates in global locations Reporting structure Sales and R&D collaboration at local level Frequency of Executive review of global center operations CPH analysis (% break-up of People cost, travel, infrastructure etc.) Number of travel trips per engineer from global center Productivity Top 10 key engineering metrics measured by companies Percentage of metrics collection automated Productivity perception Best practices to improve productivity 8

Zinnov will follow a multi-step methodology to solicit participation, collect and validate data and analyze the key trends 1 Solicit Participation Zinnov will solicit participation across the length and breath of the industry to ensure data consistency and validity for benchmarking 2 Data Collection Creation of the data templates for collecting all the necessary data points from all the participants Working closely with all the participants in collection of data accurately 3 4 Discussion with Participants and Industry Experts Validation and Consolidation Create a list of relevant topics for discussion from the preliminary analysis of the data collected Setting up of interviews with industry experts and participants This process is accompanied with secondary research from various sources like analysts reports, reports from industry bodies, press/media releases and Zinnov Knowledge Base Triangulation of the data collected from primary and secondary research Consolidation of the key trends and insights for further validation 5 Zinnov Analysis Analysis of the quantitative data obtained from the steps 2, 3 and 4 Creation and testing of the modeler 6 Insights and Best Practices Abstraction Generate the report to present both qualitative and quantitative data that can be comprehended easily Robust internal quality check at various levels - Report generator, Peer, Account Manager 9

1.R&D Spend & Revenue Analysis To address the need of hour, Zinnov has designed a unique benchmarking taxonomy Cube Model which will help address the critical questions faced by decision makers Roll-up Methodology of six dimensions Zinnov Cube Model Face 1 Face 4 Face 2 Face 3 Face 6 3. Globalization Metrics 2. Emerging Markets 5. Cost 4. Talent Pool & Organization Structure 6. Innovation & Process Face 5 10

Scenario 1: Showcases the key metrics across 4 dimensions of analysis i.e. R&D Investment, Globalization Metrics, Innovation & Process and Talent pool Scenario 1 Globalization Metrics Cost R&D Spend and Revenue Analysis Globalization Metrics Innovation & Process Talent Pool and Organization Structure Emerging Markets R&D Spend and Revenue Analysis Innovation & Process Talent Pool & Organization Structure R&D Spend and Revenue Analysis Globalization Metrics Innovation & Process Talent Pool and Organization Structure R&D Investment as Percentage of Revenue (Software Vertical) 15% Number of global centers (For companies with Revenue USD 5 10 Bn) 6 Average number of patents filed per global center 20 Average number of Product managers at a mature global center 8 Spend allocation across various geographies and percentage of R&D spend outsourced to vendors 75:25 Average number of Vendor relationship with ODC establishment 2 Average number of features conceptualized from global center\product line (Subsidiary) 3 Training budget spent per engineer $ 300 11

Scenario 2: Showcases the key metrics across 4 dimensions of analysis i.e. R&D spend and revenue analysis, emerging markets, cost and Innovation Scenario 2 Globalization Metrics Cost R&D Spend and Revenue Analysis Emerging Markets Cost Innovation & Process Emerging Markets R&D Spend and Revenue Analysis Innovation & Process Talent Pool & Organization Structure R&D Spend and Revenue Analysis Emerging Markets Cost Innovation & Process R&D investment in emerging locations (Percentage of R&D spend) 15% Average percentage of companies using localization strategy for Emerging market 85% CPH for captives working in new product development (Country: China) $ 55K Average productivity of global center resources 70% Contribution of New vs. Existing products (Next 3 yrs) 30:70 Average revenues from emerging markets (As percentage of total revenue) 3% Billing rate /hr of Tier 1 vendor for product sustenance $ 24 Average number of new products released from global center (Version 1) 1 12

Zinnov has developed an excel based modeler to analyze and generate intuitive reports which are quintessential for decision making (1/2) 13

Zinnov has developed an excel based modeler to analyze and generate intuitive reports which are quintessential for decision making (2/2) 14

Globalization is a journey, Not a destination; Our benchmarks will help you make tough business decisions in the best interest of growth all through this journey 1 Yr 10 Yrs 20+ Yrs Recent Entrants Zinnov benchmarks will enable you to understand the uncertainties of globalization. Our benchmarks will help in clearly defining the next steps Mature Adopters Cost Savings Relative Positioning R&D ROI Cost Savings Access to New Markets Strategy Reset Relative Positioning Holistic Strategy Innovation Consolidation Innovation Access to New Markets Revenue Growth Align for Expansion Revenue Growth Talent Access Design for optimal Size Productivity Value Talent Mobility and Enablement Our benchmarks will help you find your relative positioning in the market and help you reset/re-define growth strategies in emerging markets High Low 15

Over the years Zinnov has built strong capabilities in both Primary and secondary research areas to collect robust data for benchmarking 1 Primary Research Contacts Network 6 R&D Globalization Council 2 Secondary Research Information Sources 5 Key Global Partnerships 3 Global Vendor Network 4 Databases 16

Zinnov has created an ecosystem comprising of over 700 companies comprising of product companies, their subsidiaries and reputed third party providers Congruence 2009 Over 325 invited attendees 200+ product companies participated 60 speakers from the industry 17

A tried and tested, structured research framework will be employed for performing the core research activity Research Methodology A Review 2-3 authoritative summaries about the domain from reputed journals to obtain a fair overview of the focus area 1 Obtain understanding of domain Progress tracking & source list update 5 Track the changes in the source list. Further, add new, relevant sources that become available when performing data review Based on the understanding and the client context, identify the top focus areas that require deep research 2 Identify focus area within domain Raw data compilation & cross-referencing 6 Compile all relevant raw data in rough format, and provide any cross-references that exist Identify, compile, classify and prioritize potential sources for the focus areas identified (contact details, links etc.) 3 Data source compilation Data synthesis 78 Synthesize and classify data into logical groups Review data systematically, starting from the highest priority sources and working downwards. Verify credibility of source 4 Data & Credibility review A Data representation 8 Determine and develop the best suited representation for the compiled data with emphasis on clarity and main insight from the data 18

Zinnov will have an excellent blend of companies across the following parameters to gather data and provide right benchmarks Demographics Of Companies Participating In The Study Verticals Telecom/ Networking Semiconductor Software (Application Software, Mobility, Online, Search, EDA etc.) Revenue Category USD 0 5 Bn USD 5 10 Bn USD 10 20 Bn USD 20 Bn + $ 0 Bn $ 20 Bn Global Operations Most companies participating in the study will have multiple global R&D center and vendor partnerships Globalization Maturity Early adopters along side with nascent entrants will participate HQ Most companies will have their registered headquarters in US Other Info. Fortune 500 companies Top 100 Global companies 19

Phased deliverable approach will help stakeholders to start planning for next fiscal cycle Deliverable Time Deliverable Contents 2 Weeks Data collection templates and interview schedule Zinnov will share the data collection template sheet few days before the meeting. Interview will focus on validating and gathering data for further analysis 5 Weeks Interim Deliverable R&D Globalization Best Practices Globalization Risk Mitigation Strategies 8 Weeks Final Deliverable Benchmarking Report & Analysis: R&D spend analysis on product development, new vs. matured products, people and infrastructure R&D revenue analysis through globalization (Emerging markets, new delivery models etc) Emerging market analysis ( Revenue, localization, channel strategy) R&D talent pool numbers for various countries Capability development CPH and billing information for vendors, captives across multiple geographies Key innovation and R&D process metrics in various locations Other key globalization metrics Updated documents on R&D Globalization Best Practices and Risk Mitigation Strategies Future consolidation and expansion trends in R&D across the globe 20

The time line for the R&D Benchmarking engagement will be 8 weeks Weeks Activity 1 2 3 4 5 6 7 8 Solicit Participation Data Collection Discussion with Participants and Industry Experts Validation & Consolidation Zinnov Analysis Report Generation First Deliverable Interim Deliverable Final Deliverable For more information please email chandramouli@zinnov.com Chandramouli CS, Director Globalization Advisory 21

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