The dollar value of global outsourced engineering services — either through captive engineering centers, joint ventures with local companies or through traditional outsourcing deals — will continue to grow at double-digit rates into the foreseeable future. It is expected to grow from a total of about $40 billion worldwide in 2007 to $80 billion in 2010, according to a 2005 study conducted by Booz Allen Hamilton and the National Association of Software and Service Companies (Nasscom), an Indian software-trade organization. As the level of engineering sophistication available globally will keep rising, the kind of services being offshored will grow in variety, as will the number of industries looking to offshore their engineering needs.

The number one motive for the rise of offshore engineering services has long been the desire to cut costs. Engineering services are expensive, and the opportunities for reducing labor costs alone by moving services offshore are significant. Ninety-six percent of respondents to the Booz Allen/Nasscom study cited lower cost as a primary motive for offshoring, with the second most common reason, easier access to overseas markets, was mentioned by just 36 percent.

When asked what their motives for outsourcing engineering services will be in 2010 to 2015, however, the number of respondents mentioning lower costs fell to 70 percent, yet the number that mentioned access to overseas markets almost doubled. That shift illustrates the growing influence of globalization on all aspects of corporate strategy, from innovation to production to selling into rapidly growing overseas markets. As those markets open up, corporations are looking to locate more activities locally, benefiting from direct contact with suppliers, manufacturers and customers.

Global Services PREDICTIONS

The captive model will continue to be preferred by some companies, and will not be overshadowed by the third-party model

Automotive and aerospace engineering services will drive the market

Russian service providers will gain a high share of engineering services work being outsourced by American and European companies.

India, Eastern Europe to Reign
That’s in part why by 2010 the trend toward greater choice in where to offshore engineering services will have sped opportunities in non-traditional markets. While India will hold its position as the place to go for software services and embedded electronics, Eastern Europe will continue to gain strength — Russia is strong in aerospace and industrials, Bulgaria in electronics, and Romania in traditional mechanical engineering, while the Czech Republic, Slovakia and Poland are growing in automotive and industrials. Elsewhere, Brazil and Malaysia have been outsourcing destinations for quite some time, while the Philippines and Vietnam are also becoming increasingly popular.

For companies looking to offshore through third-party outsourcing service providers, the big five, Tata, Satyam, Wipro, HCL and Infosys (all of them based in India, but operating globally) will continue to dominate the market. The rest will be divided among number of small but growing niche players, such as Infotech and QuEST, each concentrating on particular markets or processes.

Auto, Aerospace Industries to Outsource
Traditional, vertically integrated industries such as automotive, aerospace and marine engineering have been slow to make the move to outsourcing because of the lack of reliable technology linking engineering centers, the inherent complexity of the products being engineered, and competitive, legal or commercial issues. We expect to see that changing by 2010, as engineering collaboration technology improves and different industries come under increasing competitive pressure to develop products for worldwide markets.
A greater variety of industries are beginning to offshore their engineering services in part because of the trend to outsourcing increasingly complex engineering processes. Areas, such as integrated product development of highly engineered goods such as cars and planes, have lagged. But that is changing, as the engineering service offerings grow in complexity. Local engineering talent is becoming more sophisticated, and as local markets such as India begin to offer more and more complex products, they attract even more engineering talent. For instance, India’s expertise in automotive engineering is growing as it builds more small, fuel-efficient cars for its home market.

Europe to Send Engineering Work Overseas
U.S. corporations typically begin by outsourcing low-level, non-core services such as documentation, basic simulation and basic computer-assisted design work in hopes of cutting costs, then gradually move to more value-added processes as their confidence grows. While European companies have been slower to outsource, their approach has been more strategic and less cost-driven. The political and economic problems tied membership in the EU are declining, so we expect to see more European companies sending their engineering needs offshore. Japanese companies are still several years behind Europe in their willingness to outsource, but the globally oriented electronics firms such as Hitachi and Sony have long taken a strategic approach to engineering, and more traditional Japanese firms such as the automakers are beginning to follow.

Like any market, offshore engineering services too obey the laws of supply and demand. As cost pressures and the competitive need to take new products to new markets as quickly as possible continue to increase, companies are increasingly willing to offshore core processes. By 2010, we expect to see further evidence of the transformation of the offshore engineering services market as it learns to meet the increasingly diverse and increasingly strategic needs of global corporations.    

Kevin is the global leader of the firm’s innovation business. Vikas is an expert in offshoring of engineering services, business strategy, product design and development.