Services market to hit $15b in 2011: IDC

THE Australian technology services market will grow at a compound rate of 4.4 per cent annually to reach A$15 billion by 2011, according to research IDC, though skills shortages will present the sector with ongoing challenges.

The IDC report found the Australia services market in 2007 was worth $12.6 billion.

IDCs IT services research manager Margaret Banaghan said the outlook for the broader Australian economy and for IT services remains “buoyant” and that end user organisations were addressing a range of business issues that would underpin growth in the services sector.

“Executives are turning to IT services firms to assist with issues including Green IT, SOA (Services Oriented Architecture) and web services, selective sourcing including offshoring and mobility services,” Ms Banaghan said.

Meanwhile the report found the outsourcing market in Australia, which is approximately 50 per cent of the total IT services market, was as vibrant and dynamic as ever.

IDC research manager for outsourcing and BPO Aprajita Sharma said there would likely be a decline in so-called “global mega-deals” in the short-term, but that this would “result in increased and heated competition in the IT outsourcing segment, especially on the pricing front as players tread on competitor territory.”

The report said skills shortages in the services industry continued unabated, and that as a result “smaller players are finding themselves in greater demand by government and business clients alike, as they often possess skills in a particular technology that have become scarce.

The report also found that market consolidation activity in 2007 was solid. There was a healthy rate of acquisition activity in the Australia IT services arena over the past year which is expected to continue over the next 12–24 months as players strive for growth and an extension of skills or geographic reach.

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Managed security boom hits 20% CAGR

THE managed security services market in Australia will expand at a compound annual growth rate of 20 per cent until at least 2013, according to new research from analyst group Frost & Sullivan.

The Asia Pacific Managed Security Services 2006-2013 found revenues in the Australian market were $240 million in 2006 and were forecast to grow to $880 million by the end of 2013.

While the managed security services (MSS) market was still in its early stages of growth in the region, Frost & Sullivan analyst Arun Chandrasekaran said the MSS model had started to gain wide acceptance, particularly in advanced countries like Australia, Japan, Singapore and Hong Kong.

The potentially enormous market in India had also showed promising growth on the back of ongoing liberalisation in the telecommunications sector.

“Additionally, there is a growing realisation that information security investments should no longer be viewed as IT investments but more strategically in the business risk context,” Mr Chandrasekaran said.

“Engaging with a strong MSSP allows organisations to share risk management and gain access to skilled resources for risk mitigation,” he said.

Mr. Chandrasekaran said globalisation and mobility, small and medium-sized businesses faced the same issues as larger enterprise – like fading security perimeters, complex converged networks and data security issues”.

“Hence the security requirements for SMB in Australia are not too different from the large enterprises. However, the awareness levels and willingness to pay still separate these two horizontal segments.”

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UXC acquires Getronics Australia

ASX-listed information technology firm UXC has acquired the Dutch-owned technology services provider Getronics Australia for an undisclosed sum.

With calendar year 2007 revenues of some $126 million, Getronics Australia will be the largest acquisition that UXC has completed.

Headquartered in Sydney, Getronics Australia provides national coverage to metropolitan and regional centres and employs 525 staff nationwide.

The acquisition strengthens UXC’s existing professional and communications services capabilities and provides a significant new Managed Services capability.

The transaction also provides further scale to UXC and is a strategic fit into UXC’s Business Solutions Group.

Getronics Australia will join the UXC Business Solutions Group as a business unit in its Infrastructure division. Getronics Australia managing director Paul Timmins will report to UXC Business Solutions Group chief executive Cris Nicolli.

The company originated in 1972 as Wang Australia, before being purchased by the Dutch group Getronics in 1999, which itself was purchased in 2007 by KPN, a leading Dutch provider of IT and telecommunications services.

KPN's strategy to focus on major markets to service the international client base and work through service partners in other markets gave its Australian operations with the opportunity to join UXC.

“We view joining UXC as providing the company with the opportunity to both continue and accelerate the growth path we have been on in the last couple of years,” Getronics managing director Mr Timmins said.

“We anticipate that working with a local parent, within the UXC business model of freedom within boundaries, will provide us with a higher degree of agility and flexibility,” he said.

“We expect that this will improve our prospects, responsiveness to customers and efficiency, and thus our bottom line.”

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IBM Cloud facility for China

IBM has unveiled plans to open its first Cloud Computing facility in China, giving emerging Chinese software companies the ability to tap into a virtual computing environment to support development activities.

The centre is to be built in Wuxi and will be established through an agreement signed between IBM and Wuxi Tai Lake Industry Investment and Development Company.

The China Cloud Computing Center will be a shared facility providing each software company in the park with its own virtualised computing resource. Such virtual environments can replace the traditional data center model, in which each company owns and manages its own hardware and software.

“Cloud computing is helping to foster the growth of new software companies in China,” IBM Software senior vice-president and group executive Steve Mills said.

“Like many new software companies seeking growth opportunities both locally and abroad, these Chinese software companies will rely on technical infrastructures built on open standards and delivered as a service. This open approach to computing will help them deliver innovation and pursue global market opportunities.”

Cloud computing is an approach to shared information technology (IT) infrastructure in which large pools of systems are linked together to provide IT services.

Cloud computing lets corporate data centres to operate more like the internet by enabling computing resources to be accessed and shared as virtual resources in a secure and scalable way.

The centre will be built using IBM's ‘Blue Cloud’ technologies, a series of cloud computing offerings based on open standards and open source software which link together computers to deliver Web 2.0 capabilities such as mashups, open collaboration, social networking and mobile commerce.

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Strong growth for outsourcing market

THE worldwide outsourcing market will continue to grow at a healthy 8.1 per cent in 2008, while the Australian market will expand at a more modest 4.7 per cent to A$10.9 billion for the calendar year.

But despite the strong market acceptance of outsourcing practices, Gartner warned customers that hiring outside ICT expertise was not without complications.

“Although organisations often have fundamentally sound procurement departments to initiate outsourcing contracts, for many, their IT sourcing strategies and governance structures are still immature, lacking altogether, or misaligned with enterprise objectives,” said Gartner research director Kurt Potter.

“Because they lack the basic building blocks for successful vendor management, expected cost savings and other benefits are difficult to obtain,” Mr Potter said. “In extreme cases, the lack of needed trust and control to optimise the outsourcing relationship results in deal failure.”

Although outsourcing continues to grow, publicly reported IT outsourcing (ITO) and business process outsourcing (BPO) contract values decreased overall by 50 per cent worldwide in 2007, Gartner said.

Companies are outsourcing more, but electing to use a multi-provider strategy and more deals are simply smaller in size, with many of these deals not large or ground shaking enough to report.

“In 2008, we expect to see some early adopters of multisourcing to consolidate around fewer providers to reduce their service integration costs and harvest the benefits of better relationship management with fewer strategic suppliers,” Mr Potter said.

In 2007, Australia enjoyed a buoyant economy resulting in outsourcing business growth for the many multinational and local as well as offshore service providers who have a growing in presence in Australia, according to Gartner research vice-president Jim Longwood.

“Australia is a mature market in terms of outsourcing, where enterprises are now signing second- and third-generation deals. In 2007, they moved toward more-selective outsourcing and multisourcing deals, where incumbent service providers usually retain core infrastructure services and specialist providers take over peripheral services. The business process outsourcing (BPO) market for back-office functions also started to take off, mainly in the transportation, telecommunications and financial services sectors,” said Mr Longwood.

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Hostworks acquired for $69 million

ADELAIDE-based hosting and managed services firm Hostworks has been acquired by Broadcast Australia for $68.9 million.

Hostworks has been an industry pioneer, and is one of the largest full-service web hosting companies in the region. Its customer base includes NineMSN, ABC, SBS, News Ltd, Optus, and AAMI.

More than 15 per cent of all page views each month by Australia’s 10 million internet users are hosted by Hostworks.

Hostworks’ board of directors unanimously recommended that shareholders accept the Broadcast Australia offer. Major Hostworks shareholders including managing director Marty Gauvin and non-executive director Stephen Chapman granted Broadcast Australia an option over a 19 per cent parcel of Hostworks shares.

In the eight years since foundation, Hostworks has become recognized as Australia’s leading provider of managed services for on-line media and entertainment companies and management and hosting services for a broad range of critical applications.

“Broadcast Australia’s proposal represents an excellent outcome for our shareholders as well as providing significant benefits for customers and employees,” Mr Gauvin said in a statement.

Broadcast Australia is a wholly-owned subsidiary of the ASX-listed Macquarie Communications Infrastructure Group.

“We are pleased to have entered into an agreement to acquire Hostworks, which enhances Broadcast Australia’s core business of being a trusted provider connecting content owners to customers across multiple platforms,” said Broadcast Australia managing director, Graeme Barclay.

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ATO briefs on massive contract

THE Australian Taxation Office will conduct its first briefing for potential tech suppliers to its $1 billion outsourcing plan.

The briefing covers the first stage of a program that will eventually replace the nine-year outsourcing contract the ATO has held with US services giant Electronic Data Systems (EDS).

The ATO announced through the Commonwealth tenders website it would meet with interested suppliers to the Managed Network Services component of its plans on Monday December 17.

The Tax Office said its sourcing plans called for market testing of various services between mid-next year and mid-2010. It plans to issue a series of Expressions of Interest (EoIs) and Requests for Tender (RfTs) during that period.

The first EOI, for Managed Network Services, will be released in late January. It will cover areas ranging from voice, mobile and data carriage services, desktop handsets and PBX systems, network switches and security gateways.

Following the EOI, the Tax Office is expected to select a shortlist of suppliers to participate in further briefings and workshops before being invited to respond to a formal RfT.

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HP unveils automated services tools

US tech giant HP has bolstered its service offerings with a suite of new software and services to help customers transform their IT operations and automate the management of business operations.

The HP Automated Operations 1.0 offering is a set of products that automates IT operations, eliminating labor-intensive tasks and ad hoc, error-prone manual processes. The company says the product dramatically lowers the day-to-day cost of IT operations.

The HP Automated Operations 1.0 software suite is composed of IT Service Management, Business Service Management and Business Service Automation solutions.

It also launched its HP Business Service Automation software, a single platform to automate all IT processes and drive change across applications, servers, networks, storage and clients.

“We have been aggressively expanding our software portfolio in the last two years to broaden and deepen our capabilities to help customers improve their top and bottom lines,” HP’s Software senior vice-president Tom Hogan said.

IDC Enterprise Management Service research director Stephen Elliot said business service automation was an opportunity for IT organisations to more closely align with business objectives such as compliance, security, and cost reduction, and the delivery of innovative products.

“The legacy manner in which many IT organisations execute enterprise infrastructure management processes is quickly becoming obsolete as they are too static, take too long to execute and lengthen time to market cycles,” Mr Elliot said.

“IT organisations must mature toward processes and technologies that enable a more dynamic, business-driven impact.”

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Hostworks calls for strengthened backbone

THE Federal election ‘last mile’ broadband debate missed a more fundamental point, according to the region’s largest hosting and managed services provider: Australia does not have adequate backbone capacity.

Hostworks managing director Marty Gauvin warned the incoming Rudd Labor Government that Australia’s ability to compete internationally was being hindered by capacity problems in backbone infrastructure.

If fact, Mr Gauvin said if Labor successfully implements its ambitious ‘last mile’ plans, “it will create a massive online gridlock.”

“The critical issue is not how fast it goes into people’s houses: It is how fast it runs across the country and the speed of backbone data links for commercial service providers like Hostworks,” Mr Gauvin said.

Hostworks is one of the largest enterprise application outsourcing firms in the region, providing hosting and managed services to corporate customers like Network Ten, SBS, News Digital Media, ninemsn, realestate.com.au, SEEK, Ticketek.

“If Australia wants to succeed internationally as the online economy evolves, we need to start thinking much more innovatively. As well as building the infrastructure to support the online population we want, we need strategies to aggregate our online content to make it much more accessible and compelling,” he said.

Mr. Gauvin said the “choke points” created by broadband infrastructure represented a failure of market forces to deliver the best outcome for the country. “If we leave solving this problem to market forces, then Australia will just go backwards,” he said.

“The new government has an opportunity here to demonstrate real leadership. While the bulk of what online consumers want is overseas, Australia will continue to be diminished in its ability to have a content industry based here.

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Fujitsu Oz invests $15 million in services

FUJITSU Australia has announced plans to invest $15 million over the next 12 months on a business transformation program to improve its delivery of IT services to customers.

The intitial $15 million investment aimed to consolidate its “industrialisation of IT services” based on the company’s Triole processes.

The “industrialising” of IT aimed to reduce cost, reduce complexity, and improve delivery of IT services by using standard components in IT service offerings wherever possible.

“This investment represents a tangible commitment to deliver on our vision to lead the industry with a new standard for IT service delivery by industrialising our offerings and processes,” said Fujitsu Australia-New Zealand chief executive Rod Vawdrey.

“We are now engaged in a program that will embed this approach at the heart of everything we do, a strategy to which we are fully committed because we believe it will deliver tremendous value for our customers,” said Mr Vawdrey.

Fujitsu’s Triole is modelled on the highly successful industrialisation of the Japanese car industry. Manufacturers like Toyota standardise on 80 per cent of a motor vehicle’s components, allowing customers to specify their options for the 20 per cent of the car that reflects their unique needs.

“Like motor vehicles, IT solutions share about 80 per cent functionality in common, providing an opportunity for us to save our clients time and money by standardising on those components, our methodologies and delivery processes,” said Fujitsu’s Infrastructure Services Division executive general manager Peter McFarlane.

Fujitsu plans to focus its initial business transformation efforts on Infrastructure Services since this area offers the greatest potential for immediate benefits for customers.

“Through an intensive program of continual enhancement and testing, we will be able to guarantee superior performance and reliability to reduce the risk associated with projects adopting an industrialised approach.

“At the same time we will free up resources to focus our innovation capabilities on the 20 per cent of a solution that represents a client’s unique business requirements and the key opportunity for differentiation,” Mr McFarlane said.

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Aussie chief for CSC Asia

TECH services giant Computer Sciences Corporation (CSC) has re-arranged it senior management in the region, with its Australian chief promoted to head the CSC Asia Group.

Mike Shove had been president of the CSC Australia Group since 2003 before being promoted to the regional role this week. He will be based at CSC Asia headquarters in Singapore and responsible for the company's operations and clients in China, Hong Kong, Japan, Korea, Malaysia, Singapore and Vietnam.

Prior to running the Australian operation, Mr Shove had been vice-president for the Enterprise Business Solutions group in Australia

Mr Shove will be replaced by Nick Wilkinson, who is currently vice-president of Chemicals, Energy and Natural Resources for CSC’s Global Outsourcing Services organisation.

Both men will report directly to CSC chairman, president and chief executive, Michael Laphen.

“Mike has proven his ability to grow revenue, enhance profitability, increase customer satisfaction and grow our client base through significant local wins," Mr Laphen said in a statement.

“His experience and track record make him ideally suited to take on an expanded role in Asia.”

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EDS buys public sector specialist

OUTSOURCING giant Electronic Data Systems is to acquire public sector software and service specialist Saber Corporation for US$420 million (A$468 million) in cash.

Under the terms of the agreement, Saber chief executive Nitin Khannan and chief operating officer will retain a 7 per cent stake in the firm while running it as an EDS unit.

Founded in 1997, Saber is one of the fastest-growing providers of software to state and local governments.

“This transaction creates a growth opportunity for EDS as Saber brings complementary capabilities to EDS’ already strong presence in the U.S. state and local government market, and is consistent with our strategy to move aggressively into higher-value application services,” said EDS executive vice-president Corporate Strategy and Business Development Joe Eazor.

“The combination of Saber’s industry-leading applications portfolio, geographic breadth and deep understanding of government technology needs, together with EDS’ global resources and demonstrated strengths in systems integration, will provide unmatched, end-to-end solutions for clients,” Mr Eazor said.

The US state and local government market for IT services is a highly attractive growth segment valued at approximately US$50 billion by research firm INPUT and is estimated to have a compound annual growth rate of nearly 8 percent, driven by modernization of legacy systems and strong demand in new market segments for software and service solutions.

Last year, approximately US$3.3 billion, or 16 percent, of EDS’ revenue came from U.S. Government clients.

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GSA lets massive US$50b tech contract

IN one of the largest single information technology contracts ever announced, the
US General Services Administration has signed on the dotted line with 29 suppliers for US$50 billion (A$59 billion) worth of IT goods and services.

The so-called Alliant contract is US government-wide acquisition contract (GWAC) that gives federal agencies a centralised source for procuring integrated IT solutions at best price.

The deal, which took more than a year to negotiate, has a five year base, with an option for another five years.

Big winners in the Alliant deal include IT services giants like EDS, CSC, Unisys and IBM, as well as consulting houses like Accenture, BearingPoint and Booz Allen.

GSA serves as a centralised procurement and property management agency for the US federal government, managing more than 20 per cent of the government’s total procurement dollars and influencing the management of US$500 billion in federal assets.

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Fuji Xerox acquires Kaz business process unit

FUJI Xerox has boosted its Australian business process outsourcing resources with the acquisition of the BPO operation of Kaz Group, the wholly-owned IT services subsidiary of Telstra.

Fuji Xerox managing director Andy Lambert said the Kaz BPO division would be integrated in to the Fuji Xerox Global Services unit.

The terms of the sale were not disclosed.

FXGS general manager Andy Berry said the acquisition would give the company the opportunity to leverage its existing strengths in outsourcing and document management.

“The purchase of the KAZ BPO division strengthens our service delivery capability, increasing the value delivered to both our own, as well as to KAZ BPO customers,” Mr Berry said.

“We expect seamless business continuity for KAZ BPO customers and foresee long term growth for staff and customers alike.”

Kaz managing director Mike Foster said the BPO unit was not considered core to the company’s operations and that clients would be better sold with the unit in the hands of a specialist.

“We considered a number of options for the KAZ Business Process Outsourcing (BPO) division and determined that as it was not core to our ICT services strategy, it would be in the best interests of our employees and our clients to take a decision now to sell the business to Fuji Xerox Australia,” Mr Foster said in a statement.

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Satyam opens Brisbane development centre

INDIAN outsourcing giant Satyam Computer Services has opened a new software solutions development facility in Brisbane, its fourth IT services facility in Australia.

Based in the central business district, the new facility will support Queensland-based clients across a variety of IT platforms, but with an emphasis on enterprise applications-based solutions.

Satyam already operates development centres in Melbourne and recently launched a regional solutions hub in North Sydney adding up to 7,500 square metres of space. It also has a development centre in Canberra.

The company has used its expansion in Australia to continually bolster its follow-the-sun Virtual Global Delivery Model.

Satyam co-founder and managing director Rama Raju said the Brisbane facility would enable the company to meet the specific regional needs of its Queensland clients from the local government, finance, insurance and mining sectors.

The centre, which officially opened a week ago but has been operational for two months, currently employs 40 professionals, with Satyam expecting to add a further 50 in the near future.

“Satyam is already well established in Australia and today’s announcement reinforces our ongoing commitment to collaborating with customers –wherever they need us – to transform their organisations,” Mr Raju said.

The company currently employs about 1,200 associates serving the Australian market, of which about 800 are based in Australia. The company said it placed an emphasis on employment generation, with 42 per cent of its associates in Australia being Australian nationals.

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IBM signs $1.6 billion outsourcing deal

IN one of its biggest outsourcing agreements of recent years, IBM has signed a seven-year, US$1.4 billion (A$1.6 billion) IT infrastructure services agreement with health and pharmaceutical giant AstraZeneca

The agreement renews and extends an existing outsourcing arrangement between IBM and AstraZeneca, which covers the provision of IT infrastructure services in more than 60 countries across the globe.

The new deal also includes the addition of internal tech-related functions within AstraZeneca.

Under the terms of the agreement, IBM will provide a single global technical infrastructure, managing IT services for AstraZeneca across its worldwide organisation – including server and storage hosting, service desks, PC management, network and communications services, including e-mail, and computer operations support.

AstraZeneca retains control of its overall IT strategy and the development and support of its application systems.

AstraZeneca chief information officer Richard Williams said the agreement would provide the company with more consistent infrastructure services globally, which should allow for faster and more efficient roll-outs of new technology.

“In allowing IBM greater autonomy on methods of delivery, the agreement will result in cost efficiencies when compared with running in-house systems,” Mr Williams said.

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Unisys bags global BT service contract

US services provider Unisys has inked a deal with British carrier BT to provide network monitoring and management services as part of outsourcing programs for Unisys clients globally.

The agreement means that BT network montoring and management services are now part of the core Unisys IT outsourcing solution. Unisys intends to implement the BT services as part of its suite of managed network solutions for its global client base.

Unisys and BT also intend to collaborate on innovative business solutions for next-generation communications capabilities – especially in converged local area network/wide area networking (LAN/WAN) which the companies say can substantially enhance enterprises’ market competitiveness and improve productivity.

“Drawing on a long-term relationship between our companies, this agreement with BT strengthens the value Unisys can deliver to our clients around the world,” Unisys Global Outsourcing and Infrastructure Services president Randy Hendricks said.

“Combining BT’s worldwide scale and networking expertise with Unisys comprehensive IT services management experience extends our ability to provide next-generation network support today, and help clients innovate for the future.”

This agreement with BT is the latest milestone in the services relationship between the two companies.

Unisys already provides BT Global Services with managed network products and services as a key element of select Unisys IT outsourcing client engagements where the two companies collaborate. Unisys also delivers fulfillment services such as staging, installation and maintenance of servers and routers, on behalf of BT Global Services in more than 100 countries.

“Unisys and BT have a strong collaborative relationship, capitalszing on complementary strengths in numerous client engagements,” BT Global Services chief executive Francois Barrault said.

“By adding BT network management services to the Unisys outsourcing portfolio, we can expand global operations and build on a relationship that goes from strength to strength,” he said.

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EDS inks $361m CommBank desktop deal

SERVICES firm EDS has a five-year, US$310 million (A$361 million) extension to its desktop and end-user services contract with the Commonwealth Bank.

The deal strengthens EDS’ already deep relationship with the bank. It follows the signing last year of a new US$350 million master IT&T agreement involving enterprise processing services (EPS) for mainframe, mid-range and data storage until 2012.

The new desktop contract covers all computing services directed at end-users, including support and help-desk, email, messaging, MS Outlook web access and mobile information security. It also includes the service contract for ATMs.

“These services will provide enhanced user capabilities for the first time and provide a consistent consumer computing experience at home and also at work,” said the bank’s group executive for Enterprise IT Michael Harte.

“The demand for improved interactivity and convenience are greater today and our users are seeking improved quality.”

“The review process was conducted to capture business needs and external capabilities to give us a better understanding of market capability for desktop and service desk services, which meant that pricing for these services, could be accurately assessed,” Mr Harte said.

The agreement includes a new set of service levels which will ensure the quality of services provided.

“The service levels we have agreed to are at a level equal or better than those typical from others in the industry,” he said. “We believe this extension will be beneficial for both our businesses.”

“It is the Commonwealth Bank’s aim to ensure that the other organisations who are working to support this announcement are also required to raise the standard of service to meet the new arrangements. These organisations include: Dell, HP, Cisco, Microsoft, Xerox, Fujitsu, Ricoh, NetApp, NCR and Diebold.”

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Now India’s turn for skills shortage pain

FOR years Indian IT services companies have attracted customers to the sub-continent by undercutting global rivals because of their access to a seemingly limitless supply of high-skilled tech workers.

Now Indian firms are facing some of the skill shortage pain their developed economy customers have suffered for years.

Financial services firm Dun & Bradstreet has issued a report profiling 184 of India’s top technology companies, finding their biggest challenge to continued growth will be the availability of skilled human resources.

Wages growth is expected to become a major challenge for the industry in India, just as it is already a challenge in developed economies.

The Indian IT industry last year generated about US$47.8 billion (A$58.6 billion) in revenue and is expected to grow to US$90 billion (A$110.5 billion) by 2010.

The D&B report, titled “India’s Top IT Companies 2007” found most Indian tech firms reported employee costs of between 35 per cent and 45 per cent of revenues.

Because employee costs represented such a large portion of revenue, any significant rise in those costs would put strong pressure on margins, the report found.

A growing gap between skills supply and demand, high attrition and turnover rates and the fast increasing participation of global companies in the Indian domestic market were all factors affecting IT skills costs.

“Under these circumstances, managing the employee cost will remain a key challenge for Indian IT industry. It is believed that Indian IT firms will continue to face an average wage inflation of 10-20 per cent annually at various levels,” the report says.

The Indian tech industry’s contribution to the country’s GDP had grown from 1.2 per cent in 1999-2000 to 4.8 per cent in the 2006 financial year, and would break through five per cent this year, Dun & Bradstreet India chief executive Manoj Vaish said.

“The Indian IT Industry has emerged as the flagship of Brand India across the world, and continues to grow at a rapid pace,” Mr Vaish said.

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Innovation costs push R&D offshore

THE cost and complexity of the innovation process is forcing some large organisations to outsource and offshore parts of their research and development functions, new research shows.

The Economist Intelligence Unit says that rather than maintaining R&D as a central function, companies are adopting a “global innovation network” model and sending aspects of their work overseas.

The “Sharing the Idea: The Emergence of Global Innovation Networks” report found that 65 per cent of companies current perform at least some parts of their R&D tasks overseas, a figure expected to grow to 84 per cent in three years.

Similarly, 65 per cent of organisations say they currently outsource part of their innovation process, which is likely to grow to 75 per cent in three years. Though the report focuses on UK companies, the trends it identifies are thought to be common across companies in developed economies.

Companies found that disaggregating R&D globally had advantages in greater efficiency, speed to market and access to talent. But the respondents said there were also challenges related to the global innovation network model – most notably the concerns about loss of control.

Some 44 per cent of companies surveyed were also concerned about theft of intellectual property as a key concern in using the global innovation model.

“Increased competition, the cost and complexity of innovation and a surplus of ideas are encouraging many companies to restructure their approach to research and development,” the report’s editor Rob Mitchell said.

“Our survey shows a considerable shift towards greater outsourcing and offshoring of R&D in what we term a global innovation network model, despite concerns about loss of control over a function that is often considered core to a company’s identity,” Mr Mitchell said.

Cost was a primary driver for companies using the model. While 70 per cent said their management viewed investment in R&D as vital to the company’s success, the R&D function was increasingly under pressure to curb costs nonetheless.

The other key driver to using the global innovation network model was that shortages of specialist talent in home countries meant that companies looked further afield to destinations where skills were in greater supply and more affordable.

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