The Power of Engineering Services Outsourcing in a Challenging Market

April 12, 2011
Companies that are able to combine the resources of outsourced engineering services with their internal capability will have a much better chance to continuously innovate.

Companies around the world are experiencing the need to increase their engineering capability to keep pace with growing consumer demand for new products, ranging from smartphones and computers to hybrid cars. But, while such demand is good for business, it also is creating greater challenges.

Engineering operations of companies in most industries, such as industrial equipment, automotive mobile communications and aerospace, are under increasing pressure to more quickly design, manufacture and launch new products in the marketplace in response to ever-shorter product lifecycles and greater demand. Moreover, the need to accelerate the speed time of products to market is challenging the ability of companies to remain competitive, while placing a strain on their engineering workforces and processes, and significantly increasing costs.

According to market research and Accenture analysis, companies spend between 4%-10% of revenues on engineering, and many spend much more. To meet the constantly changing demands of the product development cycle, organizations are often required to manage uneven staffing needs, typically basing hiring decisions on peak demand periods. This often results in higher fixed costs.

A shortage of talent is also an issue. As existing engineering workforces age and fewer young people enter the engineering field in many western countries, companies must seek talent around the globe. In the U.S., unemployment rates among engineers buck the national trend and regularly track significantly below the national average, reflecting the continued demand for mechanical, chemical and electrical engineers.

For organizations expanding globally, securing talent is especially challenging, as they not only must find industry-knowledgeable individuals, but those that can meet the unique needs of local consumers in markets throughout the world. Companies are finding this more difficult than ever, as globalization has led to decentralized engineering operations. Today, design, development or manufacturing is distributed to regions where competitively they are most needed, limiting concentrations of available local talent.

This situation is complicated by the need to integrate engineering with other functions, such as supply chain, procurement and warranty management to drive greater efficiency and compete more effectively in the marketplace. Many recent high-profile product failures that have seriously damaged companies' brands and reputations have been the result of inefficiencies in the sharing of product and customer information. As consumer expectations for better and better product quality grow, this challenge will become even greater.

Overcoming Challenges

Despite these obstacles leading companies are succeeding by augmenting their existing engineering capabilities with outsourced services to meet today's product development needs, while reducing operating costs, and positioning themselves for sustained high performance.

In the automotive sector, it might include in-car services for consumers -- from infomobility and entertainment services, safety and security solutions, to car maintenance and e-commerce services. Elsewhere, one aerospace and defense company has achieved cost reductions of more than 30% through outsourced engineering services. With contracted service levels and a factory mindset, the organization also has been able to achieve continuous improvement in relevant work processes.

Companies like these are using outsourced services as one of the effective ways to reduce costs and optimize the return on their engineering investment. They have realized that engineering services outsourcing (ESO) can drive potential value for their particular business model. This impacts four key areas:

  • ESO Support -- This approach can support a variety of capabilities, including designing manufactured parts, working with a company's supply chain, or developing the aftermarket support for engineering and technical documentation. Information technology support also can help to make product development processes faster and more efficient. Through this arrangement, companies gain a partner to architect, implement and execute the business, augmenting all relevant engineering areas.
  • Cost -- Providers that have a global delivery presence, technology infrastructure and industrialized capabilities, can help companies typically achieve from 30% to 50% savings on labor costs by leveraging high-quality resources at low-cost locations. Bundling procurement and supply chain activities, tying warranty management to the manufacturing system, and using an extended supplier base, companies can generate 20% to 30% savings on the overall development lifecycle.
  • Talent -- Outsourcing gives companies access to experienced talent with knowledge of local needs, who speak the local language. Products tailored to the interests of local geographies can offer companies a critical competitive advantage in terms of increasing their market share in local economies around the globe.
  • Integration -- ESO can help companies more easily accomplish the needed integration of product development aspects with related functions, such as engineering, supply chain and warranty management. For example, organizations that integrate their warranty system with the engineering design function can receive more timely information from customers about design failures, resolve them, and resume production without impacting sales, while reducing warranty costs.

Innovating for the Future

As product cycles continue to rapidly change and contract, companies will need to produce a steady stream of innovation and new products to stay competitive and satisfy demand, particularly in fast growing emerging markets like China, India, Brazil and Russia. This challenge will be further compounded by the ongoing need to have greater access to more and more engineering talent, while operating in an increasingly high-cost marketplace, driven primarily by soaring raw materials manufacturing costs.

But, while organizations will continue to face these and other obstacles, those that can combine the resources of outsourced engineering services with their internal capability will have a much better chance to continuously innovate, increase speed time to market, and produce the products consumers want, while lowering operating costs. Embracing outsourced services as part of the company's growth strategy will give companies the ability to stay ahead of the competition and remain on the path towards high performance in an increasingly challenging, global market.

Ken Taormina is global managing director, Engineering Services at Accenture, a global management consulting, technology services and outsourcing company.

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