Launching an R&D Center: An Expert Addresses Key Questions
Both small businesses and large enterprises can reap the benefits of launching research and development centers (also known as R&D centers) located in offshore or nearshore zones. Thanks to these centers, companies have a chance to tap into a treasure trove of skilled tech talent to work on their software products and bring in innovations. To delve into the intricacies of launching an R&D center, we spoke with Dmytro Malashevskyi, Head of Business Development at nCube. In his role, Dmytro helps clients start R&D centers across such skilled tech hubs as Eastern Europe and LATAM. In the following interview, we address some important questions on this subject. Let’s begin!
What makes R&D centers stand out among other outsourcing models?
The main difference between outsourcing and a stand-alone R&D center lies in their respective models of cooperation. Unlike outsourcing, an R&D center serves as an extension of the client’s parent company. It operates as an autonomous branch under the client’s brand with an independent infrastructure and dedicated employees who handle the tasks of the client’s parent company. This assumes having a separate organizational structure, Chief Operating Officer (COO), management, HR and office managers, and other supporting teams. It comes with its own cookies and tea as well 🙂
When does it make sense to launch an R&D center and why do companies do it?
That’s a great question with a fairly simple and understandable answer. The best time to create a research and development center is when the need for further evaluation of the company arises. At this point, companies get a chance to report and present their R&D centers as part of their assets, which elevates their overall value. That’s the main reason why a company would prefer to launch a research and development center instead of going for outstaffing or outsourcing services.
A good reason for a company to start an R&D center is to benefit from instilling its own culture within its remote branch. The matter is that R&D centers suit long-term projects as opposed to short-term ones of startups. With an R&D center, you will get an opportunity to work with a stable team for as long as you need it. Such an approach reduces the risks for the parent company. If anything goes awry at some point, for instance, a change of plans occurs, it’ll be easier (and cheaper) for the client company to scale down an R&D center than disband their local team.
Is it legal to run an R&D center in an offshore region?
This one is tricky and falls under the “Everything which is not forbidden is allowed” category. As a matter of fact, it all depends on the goals and preferences of the parent company. My recommendation is to choose countries that offer incentives for establishing IT companies. For example, some countries boast reduced tax rates or even zero taxes policies up to 2 million Euros per year, for instance, Estonia. It’s also crucial to define whether your R&D center will be a profit-generating entity. With that in mind, you should answer the following question: Will your research and development center generate revenue for the parent company, or will it be a subsidiary that only handles software development tasks? In the latter case, it is not as important where you establish the legal entity.
What are the factors affecting the price of an R&D center? What are the main components of the cost in this model?
Since an engineering research and development center is an intellectual and talent-dependent business, the majority of expenses are related to Human Resources. In fact, employees’ salaries account for a lion’s share of the expenses within an R&D center model.
Besides that, there are also additional costs in this model that are typically covered by the provider. Those include the costs of office space rent, one-time investments like office equipment, furniture, and appliances as well as expenses for establishing a legal entity, managing taxes, office maintenance and management, and HR support aimed at employee retention. It’s also common to put down a deposit equivalent to two months’ rent, along with an upfront payment for the office lease.
What is the average price of an R&D center and how is the price defined?
There’s no universal answer as to how much it costs to open an R&D center. Above all, it depends on the number of people and the size of the office. For instance, in Ukraine, it’s now possible to rent an office space of 250 square meters for $3,500, which would be sufficient to comfortably accommodate 20-25 people, according to standard requirements. There’s also the cost of establishing a legal entity, which is usually covered by the provider. On average, launching an R&D center of this scale requires an investment of approximately $50,000. This one-time investment should suffice to cover various expenses such as office rent and equipment, legal entity registration, and legal support, including the necessary deposits.
Which countries are most favorable for launching R&D centers?
An ideal choice is a region with the most reasonable cost-quality ratio when it comes to the talent you will engage in your research and development center. Despite the risks involved, Eastern Europe remains one of the best options. Portugal is another noteworthy location for an R&D center. One of the reasons why clients consider launching R&D centers in Portugal is the abundance of engineers from Eastern Europe who have relocated there. Thanks to the policy of attracting IT talent through its digital nomad program, Portugal has now accumulated a lot of developers.
Furthermore, despite the risks, we receive requests from companies willing to launch R&D centers in Ukraine, particularly in Kyiv. That’s due to the large pool of candidates and the excellent infrastructure. Another popular location for an engineering research and development center in Ukraine is Lviv. This tech hub is close to the European Union, easily accessible, and boasts a large pool of IT talent as well.
What steps should be taken to organize an R&D center for EU & USA companies?
The easiest way to set up an R&D center is by hiring a provider to arrange the entire process for you. Regardless of the country where you plan to launch your R&D center, it’s vital that you hire a local director or manager who is familiar with the local business landscape, understands local business practices and laws, and knows the ins and outs of local tax regulations. The provider will also assist you in finding the right kind of manager who will be in charge of your R&D center.
The challenge with establishing an office in another country is that service providers like to overcharge, especially when it comes to rent. A local manager is a guarantee you’ll receive the best services at a reasonable price. That I believe is the first step and an essential condition for a successful kickoff of your R&D center.
The next step is to build the core team of your engineering research and development center. As your office expands to around 20 people, as your next step, it’s reasonable to hire a dedicated HR professional. Until this stage, the provider takes care of HR functions using their own resources.
Is it possible to launch an R&D center without a provider?
It’s possible, but company leaders should consider the risks I mentioned earlier. Chances are it’ll be more expensive, and time-consuming, not to mention that you risk facing local legal issues, unfamiliar business environments, and other speed bumps. Thus, it may turn out to be a rather challenging journey for you.
How to establish proper management, Agile development processes, and culture in an R&D center?
Above all, it’s important to find a suitable managing director who will embody the values of the parent company and instill those values within the research and development center.
When it comes to culture, it doesn’t appear out of thin air. As a visionary, the client defines the culture of communication and business processes. Then, the managing director will communicate that vision to the newly formed R&D center. Additionally, the provider (given that they have a lot of experience in building research and development centers) will focus on hiring people who meet the demands of the client in terms of culture. For instance, the client may require individuals with advanced soft skills, open-mindedness, and agility. These requirements are documented in the hiring specifications, and the provider will hire people who best fit the client’s vision of an ideal employee. That’s the best way to crystallize and spread the culture of the client company within an R&D center.
Furthermore, the HR team of the provider will shape the distinctive culture of the client through team building, working with people, and establishing processes that reflect the culture of the parent company.
What services regarding the R&D center are covered by the provider?
Firstly, it’s sourcing the right kind of talent. That’s the primary function that companies entrust to providers of research and development centers. With that in mind, the provider should aim to hire employees who meet clients’ expectations in the best way possible. The right people bring the right results.
Secondly, the provider takes care of hiring contractors who will provide services to the R&D center. This includes contracting workers who handle office maintenance, catering, water delivery, office repairs, equipment procurement, and more.
The next responsibility that rests on the provider’s shoulders is people management. The provider takes on all HR-related functions, such as employee retention services, legal and taxation support, payroll, accounting, sick leave and vacation management, organizing team building activities, facilitating employees’ professional development, conducting one-to-one meetings with Human Resources managers, and so on.
How to evaluate a company considering that the R&D center is a separate entity and asset?
A legal entity such as an R&D center is typically a component of the provider’s company. When the client company plans to enter the stock market and attract more investment, it can buy out the entire R&D center, including the office, legal entity, and personnel after 1-2 years of collaboration. It would then become a part of the parent company and a subject for evaluation. Alternatively, companies can mention an R&D center as their asset during negotiations with investors to secure better terms during investment rounds.
To wrap up, what advice would you give to leaders who want to launch an R&D center?
I’d strongly recommend considering this decision carefully. It’s important to clearly define reasons why you want to go with an R&D center. Frankly, hiring a team through an outstaffing model will be a more cost-effective option, as it eliminates the need for additional expenses such as office space rental, reduces administrative issues, and provides greater flexibility in terms of staff. Therefore, take into account the additional costs and organizational efforts associated with a research and development center. If your goal is to create a competitive organization in an offshore zone with more cost advantages than your local market can offer, then an R&D center is a reasonable choice.
Creating an R&D center also makes sense if you’re a large startup aiming to attract funding and are looking for better evaluation. That way, you can showcase your R&D center as an additional asset to potential investors.
Besides that, if you’re focused on building a global employer brand, a separate office under your brand can become one of the “puzzle pieces” within your brand ecosystem or company/group of companies. On the other hand, if you have a short-term project or lack a clear purpose for establishing an R&D center, it’s best to go with an outstaffing or outsourcing model, which can fully cover your software development needs.