Richard Welford takes a look at the evolution of Engineering Service Outsourcing
Every year over $300 billion is spent on outsourced engineering services and that figure is estimated to be growing three to four times faster than the rate of total spend on engineering. Engineering Service Providers (ESPs) are becoming an integral part of manufacturers’ business plans. But, why is outsourcing growing faster than the in-house equivalent investments? To understand this phenomenon, it is important to reflect on the way in which the Engineering Service Outsourcing (ESO) market has evolved, and how ESPs have become more than just suppliers of additional capacity.
The outsourcing of engineering services is nothing new. Some Western service providers are now familiar household names that have been in existence for a very long time. However, these service providers were typically specialist in nature, and the ESO market as we know it today, particularly the industry better described as Global ESO, has really only been in place for the past 30 years or so.
Traditionally, ESO was used as a means to manage overspill, a tactical response to insufficient heads – otherwise known as Staff Augmentation. Often through local suppliers, and dominated by contract agencies, companies would look outside to locate specific skills, retaining named heads on a time and materials model to address short term resource gaps. The advent of IT offshoring raised awareness of the potential to further augment those gaps by using a global talent pool, providing access to scale with the additional benefit of low rates.
The nature of the work outsourced was, however, basic in nature; documentation, 2D to 3D re-mastering, and simple finite element analysis. But, ESPs began progressively investing in their capabilities and, for those early adopters of global outsourcing, it became possible to move ESP suppliers progressively up the value chain, outsourcing increasing complex work. As competence, and confidence in the ESPs grew, the next phase of global outsourcing was born – as we moved towards the ‘noughties’, a movement from Staff Augmentation to Capacity Augmentation was occurring. Capacity Augmentation introduced the potential for outsourcing to move from headcount to outcome based models; still relatively straightforward engineering activity, but now including work-packages and services structured around the provision of repeatable engineering processes. However, the core of product development was still closely guarded and considered unsuitable for outsourcing.
It is important to consider the market dynamics for most of this century; a period of unprecedented global population growth, rapidly maturing emerging markets, technology evolving faster and technology adoption rates accelerating, product development cycles being compressed, and an increasing trend towards personalisation and customisation. The world was wanting more than ever, faster than ever, and better than ever before.
At the same time decades of neglect regarding the provision and development of critical STEM skills had created a skills crisis, especially in the West, that was beginning to starve product development companies of the very competences they needed to address the scale and pace of demand. Estimates for the UK alone currently put the gap between supply and demand at around one million additional level three and four engineers and technicians required by the end of this decade.
Enter the third major phase of global ESO – Strategic Outsourcing. Product Development businesses, driven by increasing pressure for cost reduction and shorter development lifecycles, needed help with reduction of time to market, acceleration of the product development process, entry into new markets and control of operating expenses. It was necessary to challenge the traditional protection of product development, and to overcome any fears of Intellectual Property (IP) leakage.
Our own studies, supported by the data from many other reputable consulting sources, have demonstrated that between 70 to 80 per cent of all engineering activities are generic in nature. The balance (20 – 30 per cent) addresses domain specifics and, very importantly, the real IP that differentiates one customer’s product from another. We refer to these two distinct groups as Non-Core vs Core. Using diagnostic methodologies it is possible to make visible these two groups and therefore architect an outsourcing strategy that protects a customer’s sensitive IP. Furthermore, that strategy can also be architected such that it makes possible effective deliverables based contracts and shared services models.
Inevitably this approach leads to Core work being managed in-house, and Non-Core work being outsourced. As such the ESP becomes more than simply a supplier – the ESP has now become a partner, and the success of both organisations are entwined. In many cases strategic outsourcing has evolved to such an extent that whole domains can be outsourced, or even complete product development; as demonstrated by Tata Technologies’ own automotive and industrial machinery vehicle programmes, the ESP can help accelerate product plan ambitions and capture market share.
The ESP market has taken this increasing responsibility very seriously, building dedicated facilities, continuing the progressive development of competences, acquiring new competences to address their client’s changing demands, and increasing scale through organic and inorganic means. The onshore component of the model now provides crucial client intimacy and expertise to manage complex product development programmes, with offshore providing access to a global talent pool at scale.
Such is the evolution of the ESP that the enlightened customer now recognises that the benefits of a longer term, strategic engineering partnerships extend beyond simply performing what used to be performed in-house. Particularly in the case of those ESPs that address multiple industries, clients can enjoy a level of industry and cross industry best practice, cross industry fertilisation of solutions, world-class Product Development Life-Cycle (PDLC) practices and best-in-class quality systems, at a level that would be unrealistic to build or sustain in-house. The value of the ESP therefore has extended beyond the Capacity to Create, to include the Process to Create, and expertise in the advanced manufacturing systems that enable benefits across the Connected Enterprise.
Both market conditions and the determined evolution of ESPs have therefore worked together to support the growth in the ESO market. The demands that have led to the rise of the Engineering Services Outsourcing sector are not subsiding and the pressure on manufacturers is increasing. What therefore is next for the sector? The answer to that question is already apparent. As engineering moves from traditional in-house and supply chain sources to the new ESP value chain, the fourth phase of ESO – the Strategic Innovation Partner – is placing an inevitable demand on ESPs to share the burden of innovation and IP creation. The ESPs that will continue to grow will be those that are able to create differentiated IP for themselves or drive product innovation on behalf of their customers.
Richard Welford is Chief Strategy Officer at Tata Technologies. Tata Technologies is a global engineering services firm that provides product development, product lifecycle management, and enterprise resource planning products and services for companies across the manufacturing sector. The company was formed in India in 1989 as a Tata Motors Ltd. subsidiary and in 1994 was spun off as an independent business. Today, Tata Technologies is a key partner of a number of the world’s most successful and recognised engineering companies.