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Why Should You Employ Engineering Services Outsourcing (ESO)?

Why Should You Employ Engineering Services Outsourcing (ESO)?
December 01, 2015

strategizing engineering

Engineering organizations today are moving beyond tactical outsourcing and are beginning to see outsourcing from a long term and strategic perspective. This means that ESO(Engineering Services Outsourcing) is becoming an integral part of the organization’s product development process and all decision-making with respect to an engineering outsourcing initiative would require inclusion of all stakeholders - CXO level support for managing available resources (money, people, time) to ensure successful engineering service outsourcing, Engineering Department buy-in and complete involvement to identify and offload low-end work from engineering value chain to suppliers, Procurement department to drive and coordinate the shortlisting and evaluation of suppliers and HR involvement for charting out growth plans, talent acquisition plans and incentive schemes. According to ISG, the global spend on engineering services is expected to reach $1.4 trillion by 2020. As global manufacturing companies are rapidly turning to ESO to improve their returns on investments, Engineering Research and Development (ER&D) spending among verticals has been led by Automotive sector followed by Consumer Electronics and Telecom sector.

ESO: Supplier Strategy

Why outsource?

Before analyzing what needs to be outsourced, organizations must first understand the rationale behind outsourcing becoming an integral part of the product development process. The reasons for outsourcing can be many, ranging from cost savings to labor arbitrage to innovation led SLAs. It is important to understand what all constitutes Benefit and what all directly and indirectly influences the Cost of outsourcing engineering services and build a financial business case around ESO decision to ensure that benefits outweigh the outsourcing costs.


Fig. 1: Value = Benefit – Cost

What to outsource?

To determine sourced to retained mix, organizations must evaluate their “core” versus “non-core” functions with respect to their criticality to organizational success. To precisely decide what needs to be outsourced, it’s essential to evaluate organization’s product development process. There are many ways that product development teams are organized - functionally (R&D/IP development team, drafting and modeling team, FEA/CFD team, manufacturing engineering team, testing and certification team, etc.) or vertically integrated teams (NPI (new product introduction) team, product sustenance team, etc.). Usually, it is a safe bet to outsource standard services rendered within each team (e.g. drafting and modeling, technical publications / documentation, testing / verification & validation, product maintenance/sustenance, manufacturing engineering, etc.). However, depending upon the service providers’ capabilities, it may be beneficial to outsource complex functions like FEA/CFD, product localization, certification support, performance analysis, etc.

How to outsource?

While some organizations prefer to manage a multi-vendor network to encourage competition and spread risks, most product and technology companies are now moving towards vendor consolidation to streamline their supply chain, achieve higher levels of vendor performance and draw other benefits from economies of scale. An organization can outsource to a vendor located in the same country working in the same time zones or it could choose to outsource to other low-cost countries gaining from cost arbitrage. A local-global model gives the customer the best of both worlds - a small team located right next to the customer to fast track interaction and an offshore team in a low cost country to ensure cost advantage. Depending on what is being outsourced, the vendor selection strategy should be defined - ESO work can be outsourced to large IT companies who also provide engineering outsourcing services, or to focused engineering services outsourcing companies. To suit to the engineering needs of global engineering majors, most ESPs have come up with innovative business models like Risk-reward sharing and outcome-based payout models. Large IT vendors with expertise in engineering services, like HCL Technologies, have a very wide suite of services to offer, with specialized focus on the product development process and also demonstrate proven capability of delivering complex services on a long term relationship basis.

ESO: Understanding the Supplier Side

Setting realistic expectations

The domain experience and capabilities of the ESP must be evaluated well before outsourcing any kind of engineering work to suppliers. Even then the supplier cannot be expected to perform miracles as soon as the work is outsourced. It is important to anticipate problems initially, track delays from the supplier side and be ready to tackle these issues. Many organizations make the mistake of giving highly complex and challenging work packages to their newly selected suppliers. Initial work packages that are given to the supplier need to be fairly standard work, and similar kind of work. It should be kept in mind that there are too many variables in action in the initial phase to create a conducive environment for the outsourced work - new technologies, new relationships between the people involved, new processes/standards/conventions, new tools, new way of working, etc.

Organizations should be ready to handhold their supplier during the initial stages to ensure outsourcing success. This includes sharing of domain knowledge, training on processes and methodologies, review with the partner to ensure proper understanding has been established at supplier end, ensuring frequent and open communication, etc. Identifying a champion within the organization whose KRAs (key result areas) are based on ensuring successful offshore outsourcing would be a good move to track outsourcing progress and make sure processes to handle issues and facilitate the removal of obstacles are well in place.

ESPs as strategic partners

ESPs have evolved to play a strategic role in the organizational success of global engineering organizations, leveraging their expertise to standardize and deliver innovative solutions scalable across industries. ESPs engage with the organizations to co-innovate by creating joint IPs, share best practices and facilitate technology sharing. As ESPs gear up to take their relationships with their customer beyond the contracts, joint innovation efforts and lucrative business models are poised to transform the ESO landscape - creating a win-win situation for both the manufacturing enterprises and the suppliers.