By Roman Pakholkov,
founder and CEO of Promwad Innovation Company
This article is about contract developers and electronics design centers. It is based upon the history of the IT offshore development and outsourcing market and the experience of Russian and Belarusian companies as well. The author tells how to reduce the development cycle and the product’s cost. He also recommends how to protect investments and know-how, and gives his advice how to build partnership with outside developers.
The history of the market of custom embedded devices in Russia and Belarus
In the early 1990’s, companies which provided services for the development of custom electronics and embedded systems began to appear in the world market. Many of them began from PCB design and development system software and they evolved to turn-key electronic products development. Those had various titles: contract developers (OED, original equipment design); electronics design centers (EDS, electronics design services, or IDH, independent design houses). Such position of those companies led to the formation of offshore outsourcing market in electronics and embedded software development.
We also have to note that fact that in former Soviet Republics including Russia and Belarus, electronics design and manufacturing businesses began to develop a decade later than in Western countries. In fact, the IT industry in this region began to participate in the international market and integrate into it only after the fall of the USSR in the early 1990s, when private business began to grow up. One of the main service which Russian and Belarusian IT companies offer is software development - that is what they can offer for the world’s offshore IT market. Electronics development business here has great prospects for its growth. Current engineering school in Russia, Belarus and Ukraine has solid roots and great reputation. In comparison with Asian countries, we have a convenient geographical position and cultural advantages.
Companies engaged in the business of custom electronics development of the CIS began to announce about themselves in the early 2000s. The first famous and outstanding players emerged in 2005, some of them became large and important corporations with great portfolios.
Though there is some competition, but it is hard to say that the market has been shaped in full. There is limited information about the situation in the industry nowadays: the number of private developers, their locations and other features in regards of their locations are still not well studied. So when we make our evaluation, we can only rely upon the opinions of various experts, customers and companies which operate in the business of electronics development.
Optimizing the time & cost of the product development outside the country
There many options how to decrease time and cost of ways electronics development. One of such options is a platform based development (PBD). The second way is to place an order with a contract developer or a design-house specialized in a specific area in order to develop just one part of a product, the whole product or a product in a certain system. And we have to repeat once again that Belarus and Russia are about ten years behind the market in this industry.
It is significant to note that only a company which is experienced enough in internal processes is capable to evaluate the effectiveness of this technique and hand a project over to an offshore outsourcing design-house. Why is that? In order to make an objective evaluation of the cost of development, it is necessary to have capabilities to make in-house calculations, but to do this, you have to allocate resources to that task, you also have to include the following: cost of engineers’ work and administrative staff, direct costs to obtain components, additional 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 not very clear). As soon as everything is calculated, it is possible to evaluate usefulness a third party developer. Otherwise comparison of both options is very difficult.
When do you have to address to a contract developer and when can you leave the project for in-house implementation? Usually, independent developers are represented by small companies with 15-20 engineers in their staff and often have narrow specialties. It means that we should assign them to do that job which lies within their expertise. Their services are usually cheaper than in-house developers. Typically, such companies create a product prototype, but do not launch it into mass production. A customer receives a quality development, but he has to deal with manufacturing process by himself.
Contract developers and design-houses of larger size can have various sectors and departments. From economical point of view their services are very attractive when you need to develop a product ready for mass production. Such companies are able to provide their customers pre-production stages, integration testing and preparation for certification (if needed). If expertise levels of customers’ engineers are not sufficient, such clients can get competent professional management and project supervision. Therefore, these companies can order outsourced services for the entire system including development of a variety of electronic devices.
It is necessary to remember that contract developers or design-houses undertake only a part of the guarantee, but the rest of the product support and its modification is usually the customer’s responsibility. They have to think in advance about the areas of influence for their company and the contractor. Also, the company should stick to its core competence (or business logic) because it gives possibilities of making quick changes and is also provides with a means of protection.
For example, there is a company engaged in measurement electronics. A customer’s company is an expert in high-precision measurements. Sure, a design center most probably cannot overcome such gap in knowledge and experience, but a professional team of experts in electronics development can help creating a measurement platform: to develop a necessary electronic device, low-level software, a graphic interface - the bulk of the work related to the product development, modeling the product’s durability, can handle material selection - all of that can be outsourced in order to save your time and money. In this case, the customer has to retain the know-how of the measurement algorithms; it is one of the protection means.
We see that experts from an outsourced design-house, having their expertise in applied fields, can be in a better position than a team of customer’s developers, but probably the outsourced engineers don’t know all of the specifics of the subject or the specialty of the customer, unless they have been involved in a similar project in the past.
Protection of investments and knowhow in offshore development: methods and means overview
Core competence of the customer, main algorithms, products and systems’ business logics, all of that has to stay inside the company when outsourced developers work on you project.
Option 1: Documents and contracts
The main way of protection is qualified design and detailed contract which includes all necessary provisions. A Non-Disclosure Agreement (NDA) has to be the first document you need to prepare, discuss and agree on with any counterparty. From one hand, we should not overestimate its capabilities because nowadays information might leak even from the market leaders who put all efforts and resources to protect themselves from such leaks. We can see that from TV reports, newspaper articles and internet posts that it happens even in countries which have the most developed legislative systems. However you have to be very careful when you sign an NDA. You can learn a lot about your contractor even at early stage, seeing how they handle information, whether they do that accurately and take care of their customer’s interests or not. The NDA helps you defining the rules and provides you with certain level of protection.
Although you sign an NDA which related to a specific contract or a project with your contractor, it is necessary to understand who is the owner property rights for any developed device or a module etc., if the other party fells free issuing information on this development to mass media, there is a big question how the information can be transferred, what rules will regulate transmission of information, its protection and what sanctions and penalties can be applied in case NDA obligations are violated.
In order to protect customer’s interests, a properly made contract provides the transfer of exclusive property rights for the final products in order to start manufacturing it While it is the most reliable form of a contract in terms of security, it is not necessarily the most profitable one because it requires a step-by-step approach. Maybe some rights may not be exclusive and can be shared with the subcontractor. A good example would be the rights to any kind of software library designed for development without further customer requirements. It can be a software module which the developer expands and maintains at their own expense, or some kind of development element which is not a key property of the customer.
It is important to note that in different parts of the world they use different approaches to making contracts for product development, and one has to take into account that difference. It is not typical for design centers Europe to assign their rights and documents to the customer to cover their profit losses in the further manufacturing of the product. There is a great dependence on your contractor during manufacturing process.
For Southeast Asia ODM business models and platform design are very popular, and you use developers from that region, it is necessary to take into account the features of that market. In most cases you will not be able find that the development was repeated, and there won't be any proof found of intellectual property violation.
Subcontractors located in CIS region, and in Russia and Belarus in particular, may provide you great advantages since the market there is immature - at present you can obtain exclusive rights at a moderate price. As the market becomes more mature with the time course, it will become either more complicated or more expensive.
Option 2: Know-how and patents
Of course, one of the most effective way to protect yourselves is to keep your know-how in-house. Unlike a patent, which has to be published, knowhow is not to announced in public. For example: you have a specific algorithm which you developed after many years of hard work, you became experienced in a specific industry, and such algorithm you do not want to be published or patented.
Sure, it is important for a company to have its own patents. They help increasing company’s value, and patents provide more opportunities to protect company’s rights, especially in the international law. But we always need to consider all whether apply additional protection for our know-how or start patenting process. Sometimes, it is necessary to make the first release a product and after that begin to patent it. Often startups do the opposite, and we often see that: they patent their development and then spend several years to make the product and sell it together with the patent to the investor. Finally they have to stop at the stage when they don’t know how to implement their idea. During the time process that patent will finally lose its value because others will implement it applying similar ideas and new development technologies.
Option 3: Overcoming competitors and developing your services
The most effective way to be protected, of course, is to stay ahead of your competitors, be the first one who enters the market with a product which has unique features and function and then sell it, before others do. You have to be ahead realizing what the next generation looks like, its functions and features and how they will be implemented in the new version of the software, etc.
Nowadays it is popular making money not only selling the product, you also has to attract your customers by offering professional support which comes together with the product. It is a global trend. Today, large amounts of information that we use, are not simply stored on local carriers, they are available in World Wide Web, at cloud servers and business logic executed on server processor capacity. So, perceived value for the customer shifts from the product to additional services and bonuses which can the customer can get together with the product. This is the component that we should consider investing in. Thus, your competitors will not see any sense in stealing documents of electronic devices because they will not be able to provide further customer service and care, and you will maintain ahead of them.
Option 4: Distribution of competences, manufacturing and sales
This option can be implemented in a number of ways depending on specifics of the company’s work and on in-house resources. One of simple ways of commercial information protection is hiring different subcontractors, and each of them is responsible for a different task: manufacturing, sales and promotion. When you spread out tasks and information to them braking it in pieces, you can maintain control and reduce risks and thus secure yourself. Centralizing everything under one company will not make you more competitive and of course it will not protect you.
And the more IT industry develops the easier it becomes much easier to disclose commercial secrets. It is good to use offshore expertise when different parts of the product are manufactured in different locations, and the last stage, assembly should take place in the most trusted location and controlled by company’s supervisor. If you need to produce a high quality enclosure, manufacture facilities located in Southeast Asia are recommended. To mount a printed circuit board, you may pick a company and a geographical region based on the purchased technology components. You can conduct CKD assembly in a FEZ (a Free Economic Zone) or in a customs area of the sales market. Such steps provide an economic effect and additional protection.
Option 5: System engineering
The most all-embracing way to protect investments and know-how is the approach of systems engineering for designing and developing new products. Such concept or approach shows how mature the company is, which orders offshore electronics development. Such option allows viewing technical issues as systems which are divided into separate parts. After that relevant contractors are selected, and the system assembly remains the customer’s own responsibility.
Option 4 involves functional division of the product development process, the option with system engineering is applied to component-wise division, which greatly improves protection.
This approach has got the following advantages:
- A customer achieves a high protection level by masking from a subcontractor operational principles of an entire system.
- A customer has freedom to choose subcontractors who have certain specific expertise to do its part of the task. That eliminates risks while certain jobs are being conducted (duplicating jobs in major projects), along with risk elimination this approach allows selecting a subcontractor with the highest level of relevant technical competence in the market of development services.
But with such way or approach there is an obstacle: a client has to find high-level experts, such as system architects (system engineers) and employ them in his staff.
Thus we can conclude that a customer can hand over certain tasks or the entire project to an outsourced design-house located in Russia or Belarus, fully relying upon the competence of outside contractors, reducing the product’s development cost and time, thus eliminating their own risks through a variety of methods in order to protect investments and know-how.
About the author
The author of this article is Roman Pakholkov, a founder and the CEO of Promwad Innovation Company, with more than 15 years of experience in management, business and product development within electronics development industry. Promwad provides its customers with a full range of services in the field 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. Offices of Promwad are located in Moscow (Russia) and in Minsk (Belarus), while there are company’s agents and representatives all over the world as well.