Engineering activities form the backbone of many industries, from manufacturing to aerospace. The creation of new products drives business growth, turning the engineering sector into a massive market. Many companies spend about 4 to 10 percent of revenues on engineering services alone. A study estimated that global spending on engineering services in 2012 amounted to $930 billion, with a 1-2 percent compound annual growth rate. The market is projected to reach $1 trillion in revenues by year 2020.
Engineering process outsourcing is the transfer of responsibility for an organization's architecture, engineering and construction functions to a third party. Studies show that about 36 percent of companies outsource some engineering services, while 31 percent and 16 percent of companies outsource research and development (R&D) and product design, respectively.
Engineering process outsourcing has been growing steadily due to the many challenges that companies face. Building and maintaining internal engineering capabilities are some of the most expensive items in an organization's budget. There is also the pressure to accelerate time to market, the issue of high fixed costs during peak product development periods, and the shortage of qualified engineering talent. These challenges can overwhelm small and midsize business with limited resources and delay projects for larger businesses.
Why Companies Outsource Engineering Services
Many businesses work with experienced third parties to source engineering talent, improve internal engineering processes, and access the latest technology while controlling costs. Cost reduction is still the number one reason companies outsource their engineering activities. Most firms start with cost reduction in mind, and then extend their outsourcing campaigns for more strategic reasons. For example, a study showed that General Motors (GM) outsources engineering work to help reduce costs, while Toyota outsources product development to reach new markets and improve quality.
Analysts predict that strategic engineering process outsourcing will prevail over time, as companies squeeze more out of their outsourcing engagements to gain more value, drive innovation, and speed up time to market. Traditional engineering services powerhouses like the United States, Germany and Japan are already facing stiff competition from emerging economies which remain as cost-effective alternatives to developed countries struggling with skill shortages.
Key industry verticals that outsource engineering services include architecture and design, industrial equipment, oil and gas, automotive, utilities, and high tech. Each vertical has similar but unique drivers for outsourcing; the automotive industry mainly wants to reduce costs, access domestic markets and address skill shortages, while the construction and aerospace industries want to address skill shortages, reduce costs and speed up time to market.
Engineering Services Outsourcing Providers
The engineering market is going the way of the IT outsourcing market. Engineering process outsourcing today is moving from a process-defined approach to product excellence and business transformation. Established players have moved beyond filling critical engineering positions to providing continuous process improvement and innovation, standardized systems, data and software, advance analytics, and more value over time. Large engineering service providers are being challenged by smaller companies that provide high-value engineering talent. Those that can provide end-to-end capabilities are in high demand.
Top outsourced engineering service providers are expected to absorb most offshore high-end contracts, mainly due to sheer scale in terms of labor force and technological capabilities, and also strong infrastructure, cultural compatibility with the West, English proficiency, and IP protection laws. Third parties that provide low- to medium-end engineering services are still in the game, however, and will continue to attract companies looking to reduce costs.
Engineering Tasks That Can Be Outsourced
Engineering process outsourcing encompasses both engineering services and functions. Engineering services include planning, design, and consulting work that support physical engineering tasks. Engineering functions refer to actual, physical engineering activities. Designing forklifts is an engineering service, while building forklifts is an engineering function that third parties typically do not perform. Engineering service providers usually focus on providing design, consulting and management services, and rarely take on building, manufacturing or construction tasks. Engineering services providers are expected to gain a larger share of the engineering outsourcing market.
Engineering tasks that are often outsourced include:
Research and Development (R&D)
R&D or new product development is the number one engineering service that organizations outsource. Studies show that almost 40 percent of small and midsize businesses outsource R&D. The main driver for R&D outsourcing is faster speed to market, access to superior engineering talent, better quality products, and improved regulatory compliance. Key players are more likely to offer end-to-end services that cover all stages of the product development cycle, from concept to manufacturing, while smaller, niche providers are likely to offer low-end or specialized R&D services, such as hardware/software solutions.
R&D services include conceptualization (converting marketing requirements into concepts, styling, and packaging design), creation of feasibility studies, design optimization and validation, value engineering and virtual simulation, modeling, simulation and implementation, product engineering, and product manufacturing. Not all third parties undertake product manufacturing; it can be outsourced to another provider or performed in-house.
CAD and Drafting
Computer-aided design (CAD) and drafting are second only to R&D as the most commonly outsourced engineering service. CAD and drafting tasks include conversion of paper blueprints into electronic CAD drawings for easier retrieval, editing, sharing and archiving, conversion of 2D drawings to 3D formats and vice versa, creation of concept drawings, modeling, and prototyping. The outsourcing of CAD/CAM and drafting was especially common about a decade ago, when engineering services outsourcing was in its infancy. Back then, CAD and drafting outsourcing was done in a piece-meal way, but companies soon started subcontracting core, knowledge-driven design work to service providers to squeeze more value from the outsourcing contract.
Building Information Modeling (BIM)
Advanced 3D modeling technology has enabled service providers to create even more complex systems for their clients. Building information modeling (BIM) is one example. BIM is a 3D model-based process used in analysis and the design process. BIM generates accurate visual representation of a building or facility and extends building information to five dimensions, including time and cost. BIM software interprets the design as a combination of model elements, each of which contains attributes that provide cost estimates and other information. BIM allows virtual information sharing among all participants in a construction project, including the design team, the client and service provider. Accurate visual representation also allows builders to monitor operations easily and determine the real world implications of building construction.
Reverse engineering or back engineering is the process of capturing data from a finished product and using the data to reproduce the original or an entirely new product. Reverse engineering can be applied to products that range from electronics to computer software. The process usually involves taking apart the system and analyzing its components. The engineer generates a CAD model of the physical object using 3D scan or traditional measuring techniques. Scan data can be easily converted into a model that matches the original product's design features. Reverse engineering service providers obtain CAD data, design new components to fit the original parts, redesign components with manufacturing defects, update CAD models as needed, and improve manufacturing process efficiency.
Product Lifecycle Management (PLM)
PLM is both software technology and business strategy. Companies offload project or product lifecycle management to an outside expert that manages the product throughout its evolution, from the design stage to the disposal stage. The provider may manage the company's entire product portfolio, data and processes, as well as offer consulting, support and IT services to identify and implement process improvements. Some providers specialize in the creation and centralized management of data and technology used to access the data.
Document management is another service that can be outsourced to service providers. Electronic document management systems (EDMS) software provided by third parties is a comprehensive solution for the administration, operation and management of engineering documentation. Service providers may also offer document management systems consulting and implementation to improve process efficiency and data security.
Value Management and Benchmarking
Value management and benchmarking are cost reduction measures that focus on value drivers such as quality, safety, and time. Service providers can help companies extract more value from their implementation projects with value management services that execute projects within time and budget constraints. Value management and benchmarking services can also help managers identify the right projects and opportunities, track and optimize progress during implementation, and measure performance against industry peers.
Outsourced engineering consulting allows businesses to address challenges by developing strategy and roadmaps and reinventing engineering processes. The goal is to improve ROI and engineering process efficiency, and align technology adoption with business results. Consulting services vary by industry. For example, in the geotechnical sector, service providers offer geological and feasibility studies, design recommendations, materials specifications, and review and sample testing. In the environmental sector, providers offer environmental site assessment, groundwater sampling, natural resources evaluation, and HAZMAT studies.
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