The outsourcing concept is well established in the modern corporate world. We all know that such functions as finance or marketing can, and even should, be given to external professionals. However, with the R&D function things are more complicated. Many people consider R&D to be the heart of the company. But how can you outsource your heart?

Let’s turn back to the business terms, what exactly stops companies from using outsourcing services for their R&D departments? How does outsourcing work in the field of R&D in general? When should we use it, and what are the possible pitfalls? To answer all these questions, we talked to Stanislav Slustovsky, the head of R&D department at Gauss Group and an expert in R&D management with more than 20 years of experience.

Stanislav Slustovsky

Today we discuss a topic that is not so obvious for people not directly involved with R&D. Tell us why outsourcing of R&D processes is relevant and important now?

For R&D specialists this is a fairly obvious issue. Our company Gauss Group was formed out of a larger R&D division of another company. We provide research and professional development services. We often face the problem that top management of large Russian companies is strongly against any R&D outsourcing. As if there is such a basic belief: “We will do everything ourselves. We better hire new people and create new divisions for each task than attract someone from the outside to do our R&D”. Somehow, R&D outsourcing is a painful topic for the Russian market, which causes mostly negative feelings. Perhaps, this happens because people do not know how it really works. Therefore, I believe that it is important to talk about outsourcing opportunities so that there is more transparency in this topic.

When I was the head of the R&D department of a large company, I understood that we lacked human resources. At some point, it became obvious to me that we had to use outsourcing. Attracting and nurturing new employees is a much more complex and costly process than finding external specialists and addressing them. Many R&D departments face this problem, too. There are very few large companies that can afford a full development cycle, maybe only a few in the world. Outsourcing comes in handy for the rest of the firms.

Outsourcing is a huge opportunity for R&D. It is cheaper and faster than a full-fledged independent development. Moreover, it gives a specific result and does not require internal management effort. The main thing is to know which tasks and parts should be outsourced, and what to focus on within the company.

So, how can one understand which of the R&D tasks can be given to third-party companies, and which should always be done only by internal efforts?

There is one basic rule: you should never outsource your know-how, something that gives you a competitive advantage. For example, if a software company has a unique algorithm, no parts of it can be given to third parties. But if we are talking about additional accessories or technical equipment to support the main product, all this could be produced outside the company. This is how most companies in the world work nowadays. Everything that is not a secret and is relatively easy to execute should be done by external specialized companies. Thus, everyone focuses on what they can do best.

The “counterfeit money” case

Let’s consider a rather specific and narrow field – technologies for verifying the authenticity of money. In any currency, there are certain signs of authenticity on cash banknotes, but no one knows what these signs are. Usually they are checked by special sensor technologies, and these technologies can be developed by any third-party company, even a foreign one. Such a company gets a clear technical specification, which indicates what the sensor should be able to do, what characteristics it should have, on what principle it should work. But the developer company does not know exactly how the data from this sensor will be processed in the future. They only develop it according to the specific requirements. Later, the customer company integrates some unique algorithm into the finished sensor.

Let’s say the company has decided to outsource R&D partially. What are the advantages of this decision?

It depends on the type of outsourcing that you use. Generally speaking, outsourcing is a potential resource that is ready to start working at any time and complete the task by the specified deadline. If you use this resource correctly, it can greatly facilitate the working process of the entire R&D team.

The “fast bioanalytics” case

I have another example. There is a company in Poland which provides specific research services related to chemistry and biology. Their clients are mostly large FMCG companies that are not ready to do research on narrow specific markets themselves. So, they outsource such studies. It turns out to be a good collaboration. A small company focuses only on specific scientific research according to clearly formulated technical tasks, and then large companies receive high-quality professional studies faster and cheaper than if they hired and trained the right specialists themselves.

You have already mentioned different types of outsourcing. Tell us more about these types, what they are and how they differ from each other?

There is no generally accepted classification. Rather it is our internal one, which helps us to better navigate the market. We distinguish 3 types of outsourcing for R&D:

  1. Freelance
  2. Amateur development
  3. Professional development

Freelance

Usually, freelance implies one or two people who are ready to perform a small task in a short period of time. It’s better to use this option when you have a specific task that does not require a deep dive or a full-fledged development of something new. For example, you have a certain electronic circuit, and in order to implement it, you need to transfer this circuit to the real physical world: to separate the printed circuit board. This task may be given to an external freelance specialist who will complete it in a couple of days, according to clear specific requirements in a certain CAD system.

What is important when working with freelance, is to give only those tasks that you understand well and can do yourself. If you do not understand something and just hope that someone else can do it for you, you will not be able to check the result later. So, in the end it can backfire. Another important advice is to look for specialists in advance, not at the last moment when deadlines are tight. It is always better to find several potential specialists and give them some non-urgent tasks in order to test the format of interaction. This does not require a lot of money, but it will help you save time and stress in the future.

Amateur development

The term “garage development” that we use in Russia is not very good, but we got used to it. It is the most common type of outsourcing in Russia today. It is often used by customers when they do not fully understand the task and do not want to dive into R&D processes deeply enough. Such a customer hires an external R&D specialist to develop a device or an algorithm without clear requirements or understanding how exactly the project should be completed. In this case, a customer expects only a working product as a result. In fact, it is rather a personalized device order than real R&D.

Usually, in such cases the customer does not think about the future. For instance, they neglect the documentation for the device, which may be needed in the future, and the intellectual property. The customer is only focused on solving the problem now. If something happens to the device in the future: if it breaks down or needs improvement, it will be very difficult to deal with it. Sometimes it is impossible to contact the same developer company again, so new specialists will not be able to deal with the product without the appropriate technical documents. This does not mean that this type of outsourcing cannot be resorted to. It’s just important to understand that such solutions are always temporary.

Professional development

Unlike amateur development, this type of outsourcing has all appropriate documentation. Sometimes even the device itself may not be developed, although usually there is a working prototype, which confirms the correctness of the technical solutions described in the documentation. Usually the documentation list is agreed upon at the beginning of the project. However, there are several documents that should always be present: drawing documents, bill of materials, methodology of testing the device and test report, as well as operating manual. Other elements can be added or changed depending on the specifics of the project. There are often prescribed special requirements for the program code. For example, the presence of comments in the code is not less than X percent. This should be done so that any other developer can understand the code. In general, the main purpose of the documentation is that other specialists can use it to understand how the device works and, if necessary, how to change it.

Let us not skip the issue of intellectual property (IP) today. If you outsource the R&D function, what happens to the IP rights for the developed products and algorithms?

If we talk about freelance, these are usually simple and routine tasks that are not really related to the IP in any way. This is more about mechanical work, which does not imply the joint creation of something new. This is a quite primitive level.

If we talk about amateur development, it is impossible to carry out any transfer of IP because there is no documentation. And if there is no documentation, then formally the entire IP remains with the developer. In this case, the customer receives only the final product.

On the other hand, in professional development, it can work in different ways. The main document for such interaction is a contract with clearly defined requirements, including requirements for IP. Also, an NDA (non-disclosure agreement) is often signed between the customer and the contractor. This is done to protect the customer as much as possible. In my experience, when professional R&D development is outsourced, the IP rights are always given to the customer.

And finally, can you share some tips or recommendations, where should a company start from, if it wants to outsource the R&D function?

The most important thing, I believe, is to establish research and development processes within the company, so that all the employees are aware of their responsibilities and operating procedures. While this is not the case, it is too early to turn to outsourcing. It will rather confuse everyone than help in any sense. So, as soon as the internal R&D processes are established, there is a clear understanding of how the company works, it becomes obvious which elements of R&D and in what form can be given away to the external specialists. We can say that the company has become ready to use outsourcing services. 

And one last thing. As I have already said, the main difficulty in implementing R&D outsourcing practices in Russia is the internal resistance of company top-management, a mentality “we will do everything ourselves”. It was a really good approach in the past, but now the world works differently. Each company focuses on what it does best. Today we understand that it is impossible to be experts in everything at once. Everyone knows their own strengths, in which fields they are professionals. The main thing is to find such people for all the tasks and be able to trust them!