People tend to think of lower-cost IT services -- and not "innovation" -- when Indian outsourcer Wipro Technologies' name is mentioned. So, it may come as a surprise that $1 billion, or about a quarter of Wipro's revenue last year, was generated through R&D services -- including designing semiconductors, automobile parts, and a variety of electronic devices. Looking ahead, Wipro says those R&D services will become an even bigger chunk of the company's business.

The Indian R&D services market is expected to grow from $5 billion last year to $40 billion in 2020, according to Sachin Mulay, Wipro general manager, citing figures from a study by Indian software industry organization, Nasscom.

Wipro is currently "the largest third-party R&D services company in the world," says Mulay in an interview this week with InformationWeek. And "R&D is the next big thing in India," he says.

R&D isn't exactly new at Wipro, it's been providing R&D services for about 25 years, Mulay says. However, Wipro's revenue from this business has been growing nicely lately, at about 30% annually. While the company won't provide "forward looking statements," it does anticipate it will continue to be a major player as the third-party R&D market in India grows eightfold over the next decade or so, he says.

Wipro's R&D services outsourcing business will grow organically and through acquisitions, Mulay says. In the last few years, the company has acquired a few R&D service type companies, including Detroit-based Quantech Global Services, a mechanical engineering design and analysis firm in the automotive industry.

While Wipro will provide local onsite R&D services to customers, the big draw in outsourcing this work to Wipro is the cost savings from having it performed in India. So that's where the bulk of the R&D activities take place. "The majority of design work will be done in India," even though Wipro does have small R&D teams in places like Mountain View, Calif., in the United States and in Germany.

Today, Wipro employs about 95,000 people worldwide, including 19,000 who work in its R&D services business, Mulay says. Fewer than 10% of those R&D services people are based at customer sites outside of India. Within the next two or three years, the company expects to have a total company headcount of about 200,000 workers.

Certainly, as Wipro looks to expand its R&D services business, the company faces other challenges. For one, Mulay admits that U.S. and other global customers can be uneasy about outsourcing R&D functions to third parties in India, but especially in making such moves public. Contracts with R&D customers "are extremely confidential, they're very sensitive," he says. Still, there are some customers willing to go public with these sorts of arrangements. For instance, Tivo has licensed Wipro-designed middleware that will be built into Tivo's high-definition DVRs, Mulay says.

Also, IT leaders often have their doubts about Indian firms' ability to bring innovation to the table. In an InformationWeek Research survey earlier this year, of 430 IT pros who work with Indian IT service providers, just 10% cite "innovative ideas" as one of the most significant benefits that would prompt them to use such services again; 72% cite lower costs.

Finding talent to work for third-party R&D services companies in India isn't easy, either. "The pool of people in R&D in India is quite limited," Mulay admits. For instance, the pool of R&D people in India tends to move around from employer to employer, often landing jobs at non-Indian companies that set up R&D shop in India.

"People like electronic engineers often end up taking jobs at captive R&D centers," he says. That's required Wipro to become "innovative in our recruiting, building stronger partnerships with engineering colleges" in India, he says. That means recruiting third-year engineering students to work for Wipro even before they graduate.

To help compensate for some of those challenges, it's Wipro's plan to expand its R&D services to cover "the complete ecosystem," he says.

For instance, along with its semiconductor design services for niche markets, Wipro will forge other partnerships to have those chips manufactured and delivered to the customer, as well. "In a sense, we're putting more skin in the game," he says. Instead of getting paid for the design of the chip, the company could instead generate revenue based on the market share that chip captures once it's shipped, he says. "We'll move from input revenue, to output revenue, to outcome revenue," he says. "We'll be joined at the hip with customers."

"We don't use outsource to describe our R&D services, we call it extended engineering," he says.

Would you extend your R&D functions to third-party companies in India?