Who Controls the Engineering Service Outsourcing Market?

By 2016, the Global Engineering Service Outsourcing (ESO) market is expected to grow at a compound annual growth rate (CAGR) of 25.78 percent, according to TechNavio’s report “the …

By 2016, the Global Engineering Service Outsourcing (ESO) market is expected to grow at a compound annual growth rate (CAGR) of 25.78 percent, according to TechNavio’s report “the Global ESO Market 2012-2016.” Citing the need for cost reduction as one of the key driving factors, TechNavio also sees India as the main ESO provider. This should come as no surprise since India has historically been at the forefront of outsourcing, starting with IT services and call centers before moving into Legal Process Outsourcing (LPO) and ESO.

Steps Forward and Back 

According to the report “Global R&D Service Providers (GSPR) Rating 2013,” issued by management consulting and research firm Zinnov, India accounts for about 23% of the overall Engineering and R&D outsourcing market and the total exports in this segment from India stood at USD 16.3 Billion. Zinnov also predicts that India may soon have its first $1 billion product-engineering-services company, although it did not include the name of the firm in the report.

However, despite the fact that engineering colleges have sprouted up around India to meet the demand of more students who hope to take advantage of this latest outsourcing boom, the majority of them will graduate with a severe lack of knowledge and therefore be unemployable. “The crux of the problem,” says Srikantan Tan Moorthy, head of education and research at Infosys, “is that critical thinking, problem solving and the application of concepts are skills in short supply in fresh engineers.”

While students at lower-grade schools fail to get the education they need, those who attend the top-tier universities, such as the Indian Institute of Technology (which has campuses in several cities across the country), usually graduate with the skill set required by companies such as Unilever, Groupon and Expedia. This has helped to position – and maintain – India as the first choice for ESO services.

LatAm on the Rise 

In a white paper issued by the CBI Ministry of Foreign Affairs, not one Latin American country was listed as an “Important Outsourcing Destination” for services ranging from Aerospace to High-Tec/Telecom to Industrial/Construction, whereas India appeared three times. Contrarily, a 2010 report titled “Engineering Services in the Americas” issued by Duke University’s Center on Globalization, Governance & Competitiveness, examines engineering services performed in Brazil, Chile, Colombia, Peru and the United States (as a control). Using the definition of the engineering services industry provided by the US Census Bureau: “an industry comprised of establishments primarily engaged in applying physical laws and principles of engineering in the design, development, and utilization of machines, materials, instruments, structures, processes, and systems” as its guide, one of the principle findings of the report was that “regional trade of engineering services in Latin America has increased in the recent years. In the past, only developed countries were able to export this type of services.”

Interestingly, the report finds that Peru is a consumer of ESO while the other countries each specialize in a specific area: “While Chile exports mining services globally, Colombia is opening the Central American infrastructure markets. Brazil has emerged as a leading regional supplier of engineering services for the infrastructure sector. The country’s expertise lies in civil engineering.”

“Almost every global services country/region in the world is aspiring to play in the engineering outsourcing services space, so the battleground is intensifying,” said H. Karthik, Research Director at Everest Group, “In order to successfully compete, LatAm needs to do three things. First, clearly identify the skill domains where they have a differentiated play. Second, identify areas which play to LatAm’s natural advantages of language and time zone relative to India. Third, build the talent pool through targeted skill development programs.”

Like India, an increased number of engineering colleges has diluted the quality of education, leading to a mediocre and diluted workforce. As a result, there is a significant decline in the amount of qualified engineers both for the domestic and foreign markets. Chile, unlike the other countries studied, has established a formal accreditation program to assure the quality of its academic programs.

While the demand for high-level engineering services increases, so must the demand for high-level educational programs. Prospective students must be diligent in assessing the university’s reputation, the quality of the curricula, the expertise of the professors and the success rates of graduates.

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Anticipate Need, Stay in the Lead

In a May 2012 whitepaper, HCL, another Indian firm at the front of the ESO pack pointed out that “it is necessary to define the functions that are considered engineering services.” This is very important considering that the engineering field covers a wide swathe of operations and components, and there is no definitive definition of what ESO encompasses. HCL suggests: “Engineering services are tasks that involve the nonphysical acts of engineering, such as the preparation, design, and consulting work supporting engineering,” whereas the International Standard Industrial Classification (ISIC) of all economic activities classified by the United Nations refers to this category as “architectural and engineering activities and related technical consultancy.”

Obviously, the actual construction of a bridge or highway cannot be done through outsourcing; however, the design of such large-scale projects can be. Per HCL, “Engineering service providers solely focus on the services for engineering and rarely work on the engineering processes they establish, consult, and/or manage.”

Tata Consultancy Services (TCS) not only saw the need for these types of services before others did; the company also designed specialty lines of competencies such as Knowledge Based Engineering (KBE), Digital Manufacturing, Product Lifecycle Management (PLM), Technical Publications, Sourcing and Manufacturing services, Plant solutions and Integrated Asset Management to meet the anticipated needs of clients. This kind of foresight helped to make and keep TCS one of the leading ESO providers.

Wipro, another Indian leader in this space, vows that their “solutions help to manufacture products quickly with technology expertise in software, electronics and mechanical engineering, industry specific knowledge, partnerships and efficient processes.” Taking this a step further, Wipro has created product compliance and certification labs to test products before they are released to clients. Deepak Jain, Wipro’s Senior Vice President and Global Head of Workforce Planning & Development, wrote in an article for The Times of India, “Apart from the basic technical proficiency in the stream where one has graduated, every aspiring engineer should possess the following skills: strong conceptual knowledge of the fundamentals; problem-solving skills; curiosity to explore and do hands-on work; passion to innovate/learn new subjects, technologies and skills.”

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