Based on the history of the IT offshore development and outsourcing market, as well as the experience of Russian and Belarusian companies, the article speaks about contract developers and electronics design centers. The author explains how to cut the development cycle and reduce the product s cost. He also shares his advice on the protection of investments and know-how, as well as suggests the best patterns of partnership with external developers. Formation and development of the Russian and Belarusian market of custom development of embedded devices In the early 90 s, companies sprung up in the world market, which provided services for the development of custom electronics and embedded systems from PCB design and writing system software to turn-key electronic products development. These companies are called by various names: contract developers (OED, original equipment design); electronics design centers (EDS, electronics design services, or IDH, independent design houses). This led to the creation of a market for offshore outsourcing in electronics and embedded software development. It is important to understand that in Russia, Belarus and other former Soviet countries, business models for electronics design and manufacturing began to be shaped about 10 years later than in the West. Indeed, the information technology industry as such, with the possibility of integrating into international business, emerged only after the collapse of the Soviet Union in the early 90s, with the advent of private business. In today s offshore IT market, software development is one of the key services offered by Russian and Belarusian IT companies in the world. Companies which are in the business of electronics design also have good development prospects. Russia, Belarus and Ukraine have had a strong engineering school, as well as a number of distinct geographical and cultural advantages over the countries of the Asian region. The first bold steps in custom electronics development in the CIS countries were taken as early as 2000. In 2005, the first prominent market players appeared, and by 2010 some of them grew into large and important corporations with an extensive customer portfolio. Competition appeared, but so far we cannot say that this market has been fully shaped. Today we have limited information on the situation in the industry: the amount of development by private companies, the geography of their design centers and other parameters of the market map are still understudied. Thus, in our evaluation, we can still rely solely on the opinions of various experts, customers and companies working in the electronics development market. Cutting the time and cost of the product s offshore development cycle There are a number of ways to cut electronics development times and costs. One of them is a platform based development (PBD). The second way is placing an order with a contract developer or a design center specializing in the area, for developing part of the product, the whole product or a product Page 105
in a system. Again, Russia and Belarus are about a decade behind the world market in these areas. It is important to understand that only a company that is mature in terms of internal processes can evaluate the effectiveness of this technique and hand a project over to an offshore outsourcing design center. Why? To objectively evaluate the cost of development, it is necessary to be able to make in-house calculations, but to do this you have to allocate resources to this job, take into account the work of engineers and administrative staff, direct costs for the purchase of components, overhead costs related to the development process and, most importantly, indirect costs, such as training, subject study and other project activities in preparation for the project (they are not obvious and often do not stand out clearly). Once all this has been calculated, you can evaluate the effect of using a third party developer. Otherwise it will be very difficult to compare both options. In what case should you turn to a contract developer or leave the project for in-house implementation? As a rule, independent development teams working in small companies with 15-20 engineers often have strictly defined technical specializations. This means we should employ them for jobs that lie within their expertise. Their services can be cheaper than using the company s own engineers. Typically, these companies create a product prototype, but do not launch it into mass production. The customer receives a quality development, but they have to handle the manufacturing process on their own. Larger engineering companies (contract developers and design centers) can have sector affiliation. It is economical to use their services when you need a developed product ready for mass production. In their projects, these companies allow for pre-production stages, integration testing and preparation for certification (if needed). If the expertise of the customer s engineers is not sufficient, the customer receives competent management and project supervision. Therefore, these companies can hand over for outsourcing an entire system including a variety of electronic devices. It is important to note that a contract developer or design center undertakes part of the guarantee, but product support and modification is usually the customer s responsibility. They have to think in advance about areas of influence for their company and the contractor. Also, the company should retain its core competence (or business logic) because it enables quick changes and is also a means of protection. Here is an example from measurement electronics. The customer company builds expertise in high-precision measurements. Of course, a design center will not be able to overcome this gap in knowledge and experience, but a good external specialized team can help create a measurement platform: develop electronics, low-level software, a graphic interface - the bulk of the work associated with the product s development, modeling the product s durability, selecting materials - all of which can be outsourced to save your time and money. In this case, the customer should retain the know-how of measurement algorithms; it is one of the means of protection. Thus, design center experts in applied fields will be in a better position compared to the customer s in-house developers, but it is unlikely that they know Page 106
the specifics of the subject in and out unless they have been involved in a project like this before. Protecting investment and knowhow in offshore development: an overview of methods and means The customer s core competence, key algorithms and business logic of products and systems should remain within the company when outsourcing your development. Option 1: Documents and contracts The basic method of protection is competent design, as well as correctly signed contracts and agreements. The most basic document you want to draft, discuss and sign with any counterparty is a non-disclosure agreement (NDA). On the one hand, we should not overestimate its capabilities because information leakage in today s world may happen even to the world s market leaders. We learn from mass media that this happens even in countries with developed legislative systems. However, the NDA should be taken very carefully. Judging by the attitude that it takes to your contractor, you can already see how it handles information accurately and takes care of the customer s interests. In the NDA, you define the rules and allow for part of your own protection. Although there is an NDA in a specific contract with your contractor, it is necessary to indicate who owns property rights for any developed module, if your counterparty can issue information on this development in mass media, how the information is to be transferred, what rules regulate information transmission and protection and what sanctions will be applied in case of violation of these agreements. In order to protect their interests, a proper contract for a manufacturer of final products involves the transfer of exclusive property rights to the development result. While it is the most reliable contract in terms of security, it is not always the most profitable one. It requires a case-by-case approach. Perhaps some of the rights can be reserved for the subcontractor. An example would be the rights to any software library designed for development without further customer requirements. This can be a software module that the developer expands and maintains at their own expense, or some element of the development, which is not a key property for the customer. It is also noteworthy that there are different approaches to drafting development contracts in different parts of the world, which should be taken into account. Design houses in the EU countries try not to assign their rights and documents to the customer to compensate for lost profits in the further manufacturing of the product. In this case you will depend on your contractors in the manufacturing. If you use a subcontractor from South-East Asia where ODM business models and platform design, which we mentioned before, are very popular, you should understand the specific nature of the market. In most cases you will find it difficult to trace repeated use of the development and prove the violation of your intellectual property. An immature subcontractor market in the CIS region, especially in Russia and Belarus, has Page 107
its own advantage - at present you can buy exclusive rights at a moderate price. As the market matures, it will become either more complicated or more expensive. Option 2: Know-how and patents No doubt, one of the most effective means of protection is to keep your know-how inhouse. Unlike a patent, which should be published, knowhow is not made public. Example: a specific algorithm, based on many years of experience in a specific industry, which you have not published or patented. It is good for a company to have its own patents. It increases its value and provides more opportunities to protect its rights, especially in international law. But we always should weigh pros and cons for know-hows and patents and possibly utilize an additional protection method. In some cases, you should first release the product and then start the patenting process. Often you can see startups do just the opposite: they patent their development and then try for several years to create the product and sell it to the investor together with the patent. Ultimately, they end up not knowing how to realize their idea. Meanwhile, their patent will finally lose value because it will be implemented by others using similar ideas and new technologies. Option 3: Getting ahead of competitors and developing your services The best means of protection, of course, is to be ahead of your competitors, be the first to enter the market with a product with unique functionality and realize, before others do, what will be the product s next model, what functionality will be implemented in the next version of the software, etc. Today it is becoming more popular to make money not just from selling the product, but also from offering supporting services that come with the product. This is a global trend. Today, large amounts of information we use are not stored on local devices, but in the World Wide Web, cloud computing and business logic executed on server processor capacity. Accordingly, perceived value for the customer shifts from the product to additional services. It is this component that we should invest in. Thus, there will no point in stealing documents for electronic devices because it will not give your rivals a chance to get ahead of you. Option 4: Distribution of competences, manufacturing and sales You can implement this option in a variety of ways, depending on the company s work specifics and in-house resources. There are trivial ways to protect commercial information, such as employing different subcontractors who are responsible for different tasks - manufacturing, sales and promotion. By distributing the tasks and information among them, you can secure control and reduce risks. You should not centralize everything under one company because it does not protect or make you more competitive. Moreover, as the IT industry develops, it becomes much easier to disclose trade secrets. It is better to take some competences outside the company - different parts of the product are manufactured in various places and assembled in the most trusted location or under direct supervision. For example, better-quality enclosure products are manufactured in Southeast Asia. You can select the company and area for PCB mounting depending on the Page 108
purchased technology components. CKD assembly can be done in free economic zones or in the customs zone of the sales market. This ensures an economic effect and protection. Option 5: System engineering The most comprehensive method of protecting investment and know-how is the systems engineering approach to the design and development of new products. This is a business process concept, which is very telling regarding the maturity of the customer company. In this case, a technical problem is viewed as a system which is split into separate components. This is followed by selection of contractors with relevant competencies, and the system assembly remains the customer s own responsibility. Unlike option 4, which involves functional division of the product development process, the system engineering approach is applied to component-wise division, which significantly increases protection. Advantages of this approach: - High level of protection achieved by concealing from the subcontractor the operational principles of a system as a whole. - The customer enjoys great flexibility in selecting subcontractors with specified technical competences. This helps reduce risks while performing certain jobs (duplicating jobs in major projects), as well as choose in the market of development services a subcontractor with the highest level of relevant technical competence. The drawback of this approach is that the customer should get high-level experts, such as system architects (system engineers), to work for him. Therefore, the customer can hand over specific tasks or the whole project for offshore outsourcing in Russia or Belarus, using the competence of outside contractors, cutting the product s development cost and time, thus reducing their risks through a variety of methods to protect investment and know-how. About the author: Roman Pakholkov is a founder and CEO at Promwad Innovation Company with more than 15 years of experience in management, business and product development within electronics development industry. Promwad implements a full cycle of electronics development, including industrial design, hardware and software development, testing, certification, prototyping and mass production support for customers in Western and Eastern Europe, USA and Canada. The company s official partners are IPC International Association, and global vendors of electronic components, such as Texas Instruments, Marvell, STMicroelectronics, Fujitsu and Analog Devices. Promwad development centers are located in Moscow (Russia) and Minsk (Belarus), while there are also the company s agents and representatives all over the world. Contact: info@promwad.com. Visit: www.promwad.com/en. Page 109