The Pros and Cons of Outsourcing R&D

Since its introduction to the UK in the year 2000, claims under the R&D Tax Credits scheme have increased every year. The latest figures show that a total of £1.36 Billion was claimed in the tax year 2012-13. With regards to expenditure on the R&D itself, figures released earlier this year showed that £27 Billion was spend on R&D in 2012.

As a consequence of increased globalisation and rapid technological changes over the past few years, many companies who perform R&D have started to outsource their research and development, or at least consider the option. We look at some of the main pros and cons below:

Pros

R&D in non-core elements of the business can be outsourced

Often companies need to innovate in non-product areas. For example, a company that manufactures mining equipment may require a new app for it’s employees, or software for its customers. The mining manufacturer already carries out R&D with regards to the development of its products. However, they have no experience or expertise in creating software or apps, and therefore decide to outsource this to a company who has the expertise, whilst maintaining full control over the innovation of its products.

Access to a larger talent pool

Generally the largest companies with strong reputations in their respective industries will attract the bulk of the talent. Tech giants like Google and Apple are very good at attracting “the best”. However, it is extremely rare for all of the most talented individuals in a particular market or industry to be work for the same company. This enables a company outsourcing R&D to gain access to a more global talent pool.

Tap into local markets

In 2004, Google saw that many users in Asia were using its search function via mobile, whereas most of the users in Europe and the US were still using laptops and computers. Google started research and development projects in countries like India so it could tap into consumer sentiment and use those insights to improve its services across the world. If you’re considering creating a new product and releasing it in another country, outsourcing R&D in that particular country may help to give you a competitive advantage.

Increased Flexibility

When it comes to undertaking completely new R&D projects that are unlike anything that you have done in the past, or if this is the first time your company is investing in R&D, it can be much cheaper and faster to look at outsourcing options rather than setting everything up in-house. A good outsourcing company will also have robust systems and processes in place to ensure the project is delivered on time, within budget, and to the agreed specifications. Outsourcing also helps to keep your business and its resources focused on what it is already doing best.

It is also important to note that in most circumstances, you will be eligible to claim R&D tax credits when you outsource your R&D.

Cons

Increased Complexity & Bureaucracy

Although in theory outsourcing R&D should be an efficient process, the opposite can occur if expectations are mismanaged, differences of opinion arise about the nature and quality of the work taken place, or if the requirements of the project change once the research and development is underway. Therefore, it is essential to ensure that both parties have complete clarity on the project before it begins.

Timing

Often the most complex projects to outsource are the ones that are already significantly underway, as staff currently involved with the project will have to explain every element of it in great detail to the company who will be taking over. Your company will likely utilise different methods and may measure progress in a different way to the outsourcing company, which can also present issues. The best way to address this is to discuss your requirements and the work already carried out in great detail with the company who you plan to outsource to. The company should have a process to go through all of this with you.

Limited understanding of your Product/Company

Although outsourcing companies typically specialise in one particular industry, market or niche, it is often very difficult for them to have the same level of understanding of your product and market that you do. This can be more of an issue when outsourcing your R&D to a company in a different country, where two identical industries could have completely different characteristics, making it harder for that business to relate to your business goals and strategic objectives.

Trust and Confidentiality

Management of intellectual property, and the leakage of information to other sources and/or your competitors can be easier to manage, and less likely to happen when all of your R&D occurs in-house. Before choosing a company, do your due diligence - look at their track record and check their policies on protecting your intellectual property, and what their policies and procedures are if these policies are breached by their staff. If outsourcing to a company based in another country, make sure you are aware of their laws with regards to how information about the R&D project will be handled and stored. It is worth seeking legal advice if you are unsure.

If you want to discuss your eligibility to claim R&D Tax Credits, please call us on 0203 004 9243 or fill out our contact form.