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 a new 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 stand out among other outsourcing models? 

The main difference between outsourcing and a stand-alone R&D unit lies in their respective models of cooperation. Unlike outsourcing, R&D 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 answer. The best time to launch a new R&D 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 centres as part of their assets, which elevates their overall value. That’s the main reason why a company would prefer R&D instead of going for outstaffing or outsourcing services. 

A good reason for a company to launch an R&D center is to benefit from instilling its own culture within its remote branch. The matter is that R&D units suit long-term projects as opposed to short-term ones of startups. With R&D, 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 R&D than disband their local team.

Is it legal to launch 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 branch will be a profit-generating entity. With that in mind, you should answer the following question: Will your R&D centre 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 R&D? What are the main components of the cost in this model? 

Since R&D 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 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 launching a new R&D center and how is the price defined?

There’s no universal answer as to how much it costs to launch 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 a new 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 R&D efforts. Despite the risks involved, Eastern Europe remains one of the best options. Portugal is another noteworthy location for R&D. 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 R&D centre 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 hub for EU & USA companies?   

The easiest way to launch 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 branch, 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. 

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. 

The next step is to build the core team of your R&D. 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 centre? 

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 your R&D.

 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. Additionally, the provider (given that they have a lot of experience in launching R&D 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 R&D. 

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 R&D 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 R&D. 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 centre. 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 R&D is a separate entity and asset?

As a legal entity, R&D 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, 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 branch 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 a new 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 hub. 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 R&D. 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 centre is a reasonable choice.

Launching 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 division 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 launching an R&D center, it’s best to go with an outstaffing or outsourcing model, which can fully cover your software development needs.

Research and development (R&D) teams are among the main drivers of innovation in a wide array of industries. The principle is quite simple – these are the teams that research a specific niche and develop something that fills the gap in this niche. R&D teams can be either in-house or remote, but, in both cases, they are centered around proactiveness and a forward-looking approach. But how do R&D teams impact technological progress? What are the basics of their approach? How and why should you open an R&D center? Find answers to these questions in this article. 

What’s an R&D Center and what are its benefits?

An R&D center is a specialized tech unit dedicated to exploring, experimenting, and developing innovative solutions. Their primary purpose is transforming industries and shaping progress with various innovations. A software research and development center is also designed to conduct systematic research on software opportunities. It involves a team of progressive engineers whose task is to develop new products, improve existing ones, and research existing technologies to make the most of them for the good of their company. As a territory where developers can unleash their creativity, a research and development center brings many tangible benefits to IT companies. Let’s review them. 

A boost of innovation

Innovation is the core purpose of an R&D center. By investing in research and experimentation, digitized businesses can come up with software ideas that propel them ahead of the competition. Whether it concerns creating an innovative automation solution or a startup application that takes the market by storm, an R&D center is a good solution. These are the hubs for technology geeks where they can brainstorm, collaborate, and translate concepts into tangible applications. A research and development center is a great way to boost innovation both globally and at the company’s scale. 

Attraction for investors

Investors favor innovation-inclined companies. By presenting your organization as an R&D team with a forward-looking approach, you automatically become more attractive to potential investors. The key point here is to show a clear vision. R&D centers should articulate their long-term goals, showcasing how their innovative projects align with market demands and trends. If you manage to highlight the tangible benefits of your research for various industries, there will be people ready to invest in your organization and ideas. 

Strong potential for business growth

An R&D center can have a surprising impact on business efficiency. Even if a specific company is struggling to sustain the competition, a great R&D team can become a game-changer. A relevant innovation introduced at the right moment can immediately drive business growth. By being ahead of the curve, companies can improve their efficiency and profitability. Also, technological innovation is a great opportunity to attract new customers and expand into new markets. Even if the company is struggling to implement the promising idea properly, it can always raise money by selling the concept to other organizations. 

Better collaboration

R&D centers often bring together diverse experts from various fields, such as scientists, engineers, designers, and data analysts. In this case, great ideas can easily go beyond traditional software development. The collaboration between different professionals boosts progress and removes borders between different domains. Most IT companies work on traditional software solutions that provide specific functionality to specific professionals. With a research and development center, you can come up with an idea that provides unique value and responds to the challenges of many domains and teams. 

Improved product quality

An R&D team can help you uncover the optimal production method for the product. It can also come up with innovative testing methodologies ensuring that no issues will spoil the final result. A research and development center can cover your product’s compliance with various standards and its fit with the customer’s demands. As a result, you will deliver a product devoid of bugs and other issues ruining customer experience. 

Research and development centers: What are their tasks?

A research and development team (be it an offshore or in-house one) can handle a wide array of responsibilities. Typically, R&D team tasks are as follows:

  • Analyzing industry gaps and demands
  • Analyzing customer data
  • Research and analysis of customer experience
  • Market research and analysis
  • Product tests
  • Market tests
  • Product research and development
  • Implementing product updates
  • Ensuring product quality control

How to build an R&D team

If you are considering building a team for your research and development center, a good idea is to start by going over some key questions addressed by experts. The most important factors are the price, legal considerations, and, surely, the talent pool. A common approach is opening research and development centers in countries with a strong focus on IT offshoring. In this regard, Eastern Europe and LATAM prove to be one of the most popular destinations. 

An essential member of your R&D team must demonstrate the following qualities:

  1. Strong programming knowledge and experience
  2. Proficiency in various programming languages
  3. Comprehensive knowledge of data structures and databases.
  4. Skillful handling of cloud computing
  5. Proficiency in web development
  6. Extensive familiarity with integrated development environments
  7. Outstanding teamwork and collaboration skills
  8. Exceptional problem-solving capabilities
  9. Advanced analytical and critical thinking skills
  10. Profound planning and execution capabilities
  11. Excellent organizational proficiency
  12. Proven leadership skills

In conclusion

Launching R&D centers brings undeniable and wide-reaching benefits. They foster innovation and learning culture within organizations, driving the development of new products and services. R&D centers help businesses stay competitive, attract investors, and form strategic collaborations for long-term growth and leadership. A research and development center is a smart investment that is very likely to pay off if handled properly. The key point for doing everything the right way is hiring the right people. That’s where our team at nCube will come in handy. We can build your R&D center in Europe or Latin America, which includes the following services:

  • Setting up your own R&D office in the tech hub of your choice
  • Handle the team formation process
  • Cover all operational routines 
  • Support you in every aspect of launching your research and development center, from tax and accounting support to recruitment and team retention

Contact us and let’s discuss your need for an R&D division. 

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