Drivers for ESO
On the demand-side, there are several key factors driving offshore engineering services, though the primary driver remains the ability of enterprises to access highly skilled, but less expensive resources. For example, India and China both have a very large pool of engineering graduates (India graduates over 4 million engineering and equivalent majors each year) available to support the product design, process design, prototyping, testing, QC and reporting functions. In addition, with many industrialized nations across North America and Western Europe leveraging offshore manufacturing capabilities to bring down production costs, the deep knowledge of manufacturing processes accompanying that experience in contract manufacturing provides the exporting countries with the ability, now, to offer services in upstream areas thereby further reducing the total cost of the production process.

The skills, knowledge and capabilities can be leveraged to lower cost (estimated at ~30 percent), reduce time to market (reductions of ~15 to 20 percent in product development cycles), acquire intellectual capital, gain access to markets in geographies where work is outsourced, and build flexibility into resourcing of the production process.

Business metrics For ESO Model
Metrics						ESO
Margins(EBIT)						Overall margins in ESO range between 30 to 40 percent
Utilization						65 to 80 percent
Attrition						10 to 15 percent
Salaries						Entry level salaries in ESO range between $6000 to $ 11000 per annum in India. Selected domains within Hi-Tech, Automotive can be  40 to 50 percent higher.
Technology Cost						Typical technology cost in ESO are similar to other BPO businesses — 25 to 30 percent of total cost, with high-configuration  hardware and high license cost of tools balanced by lower telecommunications and connectivity costs.
Source: BNI

On the supply-side, the focus on engineering services is being driven by better business metrics than the other traditional outsourcing services. Given below are the typical business metrics for an ESO model:

Service Provider Landscape for ESO
In 2007, Black Book of Outsourcing surveyed over 130 ESO suppliers globally from 17 countries. The top 20 service providers in the field of ESO, identified by the survey, were: EASi, Eicher, Entegee, eServ Perot, Geometric, HCL Technologies, Hero Global Design, Hoyt Engineeing, Infosys, Mahindra Engineering, NeilSoft, Onward Tech, Patni, Plexion, QuEST, Ranal, Rolta, Satyam, Tata Group and Wipro.

India and China were considered the two most important offshore ESO countries. However, given the shortage of the ‘employable’ resources, and the significant demand generated by the growing domestic economies, and other geographical regions, especially Eastern Europe and Latin America, are also likely to become highly competitive regions for ESO.

Companies providing ESO can be sub-divided into the following categories:

• Offshore IT service providers that are adding an ESO capability
• Pure-play offshore service providers with a primary focus on ESO
• Offshore Captive units of Multinational companies
• Foreign pure-play ESO service providers setting up delivery facility in offshore locations. (See the above table.)

Inhibitors to ESO
From the buyer’s perspective, investment in ESO is inhibited by the relative immaturity in managing the collaborative process across the multiple interfaces, and a deep concern for the loss of core Intellectual Property (IP) through lax security and IP protection standards among providers (See the chart below).
However, in our judgment, one of the primary inhibitors to the offshore engineering services industry is the supply issue — a significant dearth of qualified engineering resources available to support the business model. The ITO and BPO industries have been facing resource issues for several years, where rising salaries and increased attrition is challenging vendors in their ability to match customer expectations of quality and productivity. According to HR executives of IT service and BPO companies in India, only a quarter of the available pool of resources are employable.

These challenges are only exacerbated in the engineering services space, where the growth of economies like India and China, each of which is growing by double digits, is adding to the demand for strong engineering skills, leading to a severe resource constraint, especially in the industrial and construction engineering industries.