Changing paradigms of global engineering outsourcing
Today companies are being exposed to a changing business landscape due to macro-economic factors, greater-than-ever globalisation, and rapid advancements in technology.
The global economy is recovering but still sluggish. Companies have been engaging in significant cost savings and restructuring initiatives over the past several years to meet shareholder expectations. But business leaders are now beginning to realise that they cannot cut their way to growth. So companies now have a greater appetite to invest in developing new products, services and market reach.
Companies have become more globally integrated not only in terms of their markets and products but also in terms of internal operations which includes engineering, research and development. Captive development centres across the world are playing a more prominent and integrated role in the growth agenda of both larger and smaller companies. The work allocation distinction between service providers and captives is getting blurred.
Almost every company and their business models are being challenged by emerging non-traditional competitors. This is being fueled by rapid changes in technology and a world of hyper-innovation. Recent advancements in IoT, big data, and analytics have enabled new capabilities for almost every industry. The combined power of IoT and big data allows companies to perform very advanced analytics, provide new insights and experiences to customers. Growth in connectivity and miniaturisation are driving new form-factor and functionality in products. Digital manufacturing and 3D printing are redefining how new ideas quickly reach the market. Rapid consumerisation of new technologies is also raising expectations around impactful user experience and personalisation.
The technology landscape is changing quicker than it can transform macro level prevalent business models. In larger well-established businesses, these forces are driving creative tension and need for faster response; in smaller specific-innovation-driven companies these forces are driving the need for quickly developing sustainable profitable business. All of these factors impact product design and development.
Consequently there are new demands on product development and engineering functions:
- Increase the volume and velocity of new product development and product refreshes
- Create stronger differentiation in products and offerings through synergies between domain knowledge and IoT enabled data analytics
- Focus more strongly on design and user experience
- Engage in more adaptive product design and development
- Leverage broader ecosystem of market channel, technology and service partners
Companies have increasing expectations of return on engineering.
These changes are driving greater opportunities for outsourcing in the engineering space. By 2020, engineering outsourcing is expected to become a $145 billion industry. This space is expected to grow at a faster pace than IT and business process outsourcing.
In the past, outsourcing was driven primarily by following considerations:
1. Scalability of capability and capacity. When customers need to scale up resources to meet project demands or need skills in short supply internally, they tap into outsourcing companies for skill augmentation. In these instances, the outsourcing partner often brings experiences and best practices from other engagements that give and edge to their customers.
2. Reducing risks and fixed costs. Frequently customers want to insulate their salaried workforce from market vagaries and potential cost-cutting actions, and reduce risks in non-core projects or operations. At such times, customers look to outsource work usually for a fixed or known spend.
3. Labour arbitrage. Customers in high-cost economies without considerable development capabilities outside of their home base, often tap into outsourcing companies with global presence to reduce their cost of getting work done.
Now customers are looking for more. Here are some of the changing expectations:
- Customers want outsourcing partners to have a deeper understanding of their products and businesses so that they can put more context to the market dynamics.
- Customers want service providers to articulate their technical experiences in the context of their products and businesses.
- They are looking for more outcome-based services rather than skill-based services.
- People are now more open to outsourcing complete design and development of entire product(s).
- An increasingly large number of customers have well established captive centres and they want their outsourcing partners to collaborate with those captive centres instead of trying to compete with then or ignore them.
A large number of engineering service providers are offshoots of larger IT, BPO and consulting services companies. They have evolved in operating models which limits their ability to exploit the growing engineering outsourcing opportunities. Some of the salient contributing factors are:
- Lack of matured outsourcing models in engineering.
- Long legacy of working on defined scope and budget or staffing-based business models, which comes in the way of being able to take greater outcome ownership.
- Internal review processes are more pivoted on financial and execution metrics; industry domain knowledge growth discussions ends up taking lower priority.
- Risk aversion to new business models.
- Rapidly changing market and product landscape.
To overcome these challenges, and fully exploit the opportunities, services providers need a paradigm shift in their approach to customers and internal operating model. They have to become an integral part of their customers’ organisations. Here are some suggestions for service providers on how to improve engagement.
1. Understand your customer’s context. This involves understanding the purpose, vision, mission, goals, history, industry landscape, competitive environment and market impact. Some of the key knowledge dimensions that will aid this process are:
a. Products and services offered by your customer.
b. Economic model of the industry(s) in which your customer operates in.
c. How does your customer define and create value for their customers.
d. How does your customer create value for its enterprise.
e. The strategy and focus your customer has adopted for its business.
f. Competitive landscape of your customer.
g. The general macro-economic trends and technology trends which impacts your customers’ business.
2. Learn about your customer’s operations. As part of this study you need to understand your customer’s operating model and how it transacts business. Some of the key things you need to learn here are:
a) Business goals and plans.
b) Organisation model and structure.
c) Process model.
d) Skills, competencies, key strengths, gaps and geographic context to all of these factors.
e) Current outsourcing and subcontracting initiatives, future desired ones.
f) Key research and engineering initiatives.
3. Design your engagement model. Often service companies try to engage with customers by exploring how their offerings can be useful in solving some problems. This approach entails solutions looking for problems. You need to change the paradigm to solving problems specific for your customer. A few key actions you need to take in this regard are:
a) Identify the opportunity landscape where you have synergies of your capabilities and services with your customers’ needs.
b) Co-develop the engagement model which enables you to deliver value for your customer.
c) Build a relationship development plan to continue to understand your customer better and identify more opportunities to add value.
d) Co-develop a business plan for the engagement.
e) Create a model on how to co-exist with captives if that is a consideration.
There is a growing untapped market for engineering outsourcing. Unless service providers learn new rules of engagement and customer connect, a large portion of this will be lost opportunity for both parties to profit and create value. A deeper understanding of the customer and its ecosystem can build deep relationship with customers making service providers strategic business partners. It means both the parties can actually participate in strategic planning and execution to create value. A differentiated understanding of customer will transform them into clients creating a win-win situation.
The content of this article represents Sudhi Sinha’s own views and not those of the company he works for, nor any organisation with which he is associated.
About the Author
Sudhi Sinha is VP Product Development at Johnson Controls. He is a business leader with 18 years global experience in technology and general management. He started his career designing and developing database management systems and business intelligence systems. Currently responsible for global engineering and product development for building technology and services for Johnson Controls as Vice President of Product Development, Sudhi is also responsible for the various Big Data initiatives in Johnson Controls in this role.
Sudhi has worked in technology consulting, engineering, sales, strategy, operations and P&L roles across US, Asia and Europe. He has written extensively on various technical and management topics including applying Big Data in different aspects of business. His book titled Making Big Data Work For Your Business was published in October 2014 by Impackt Publishers of UK.
Sudhi holds a degree in Production Engineering from Jadavpur University, Kolkata, India. He currently resides in Milwaukee, USA.