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The next big thing in offshoring

A large talent pool and requisite infrastructure are the key reasons why India has the potential to control 25 to 30 per cent of the offshore engineering design services market by 2020, writes Faiz Askari.

First it was software development that was outsourced by companies in the US to offshore service providers. Then it was the turn of the BPO segment. Now experts believe there’s another offshoring wave looming to hit the Indian shores—Engineering Design Outsourcing.

"The strong track record of Indian vendors in BPO and ITO is also likely to boost the confidence of would-be global clients regarding India’s capabilities" - Sunil Mehta Vice-President, Nasscom

Recently, Nasscom in association with Booz Allen Hamilton, released a study on this industry segment that takes a systematic and comprehensive view of the role of emerging markets in engineering services and assess the evolution of the engineering market between 2005 and 2020.

Both existing vendors as well as captive centres are expected to flourish in this space. “There is room for growth in both the size of existing vendors and captive operations, and for new entrants. To prosper, engineering offshoring requires a vibrant ecosystem, a strong set of capabilities, the ability to scale across various technical disciplines, and a strong support infrastructure,” says Sunil Mehta, Vice-president, Nasscom.

Based on the current momentum of the market it should generate about $3 to 5 billion by 2010.

Ved Narayan Vice-president, Asia-Pacific, SolidWorks explains, “Most MNCs have a strategy to deal with India and China. India has some unique opportunities that can be leveraged using its existing IT infrastructure. The country has a world-class industry today with established business processes and working knowledge of how to interact with multinationals.”

The Indian IT industry needs to tap the latent need for outsourcing engineering design that exists t MNCs. Statistics reveal that third-party service providers are much better at delivering cost savings than captive centres.

G H Rao, Corporate Vice-president, HCL observes, “Engineering functions have been successfully offshored to India in the past. Initial estimates of cost savings from offshoring, once thought to be aggressive, have turned out to be on the mark. An examination of the results from offshoring engineering services has brought out some interesting findings. While India-based captive centres delivered higher cost savings than a vendor-based model, in line with initial expectations, vendors outperformed the captive model when the actual cost benefits were compared to the initial estimates. In addition, captive models underperformed relative to expectations, while independent service vendors outperformed expectations.”

Advantage India

India has some inherent strengths that could well transform it into a potential powerhouse when it comes to engineering services. At the top of the list is the widespread availability of highly-skilled, English-speaking engineers. India accounts for 28 percent of all of the available ESO and BPO talent in low-cost countries. The next largest source of low-cost talent, Russia and China, contribute only 11 and 10 percent, respectively.

Mehta of Nasscom says, “The strong track record of Indian vendors in BPO and ITO is also likely to boost the confidence of would-be global clients regarding India’s capabilities. It’s hardly a secret that many marquee names have found India to be a reliable service partner. Indeed, many multinationals could easily have an ‘India Inside’ label printed on their products.”

He adds, “A third positive factor for India is the fact that many vendors who will evolve into engineering services providers are likely to have already gained a great deal of experience winning and retaining BPO and ITO contracts. The delivery models are well-established, and after a decade or more in business, these vendors are likely to have developed the ability to maintain a high level of quality control.”

“India has a large market for domestic goods which will help drive market growth and, ultimately, the engineering to support that market. The fact that the country is English-speaking will continue to help domestic companies establish overseas relationships and strengthen its position in the global marketplace,” says Narayan of SolidWorks.

Pavan Kumar, Managing Director, Altair Engineering, India & ASEAN highlights another aspect, “Initially India was considered as an outsourcing destination purely from the cost perspective in the design engineering domain which resulted in low-end work being outsourced to the country, but today, innovation is critical in any design development process, and global players are setting up design centres to leverage the base of experienced engineers coupled with the cost advantage to outsource high-end engineering. The cost-value proposition is one of the principal reasons for attracting global players.”

Rising global spending

Rao of HCL says, “The global spend on engineering services has been growing at a high rate, in keeping with the emphasis on product development and innovation. Across sectors, spend on engineering services is expected to maintain its high rate of growth.”

That said, some sectors will outperform in terms of spending on engineering—sectors like high-tech and telecom will continue to lead driven by the pace of product introductions and the global nature of their products.

Bejoy George, Vice-president (Marketing & Business Development), Quest Global states, “Companies are racing toward building an optimal innovation footprint. The reason why US-based companies are outsourcing these services to emerging countries will change over time because these markets can offer a lot more than labour arbitrage. Countries are positioning themselves as sources for innovation, offering a number of incentives and also forcing corporations to invest locally in innovation as a fee to operate in the local market.”

“Lower cost is the primary reason why companies look to offshore engineering services at present,” acknowledges Mehta.

Narayan of SolidWorks informs, “From the CAD perspective, clearly, 3D design technology has the potential. If we are going to reach the mainstream market, the largest number of potential users to adopt 3D in the future will be people who are using 2D systems today.”

Kumar of Altair adds, “Virtual Validation and Prototyping (Computer Aided Engineering or CAE) is the biggest trend driving the market from our perspective. Whether it is crash analysis of cars, optimisation of heavy automotive and aerospace structures, drop-testing cell phones and electric appliances, CAE is the vital component that is helping reduce prototyping costs and development timelines.”

Sector-specific quality standards
Automotive	Intellectual capital 6150, Spice, ISO/TS16949, TUV certificate, APQP, PPAP (Production standard)
Aerospace	AS/EN 9100, iQMS, BS7799, CEMILAC, FAA, approvals by DGCA (Directorate General of Civil Aviation), ISO/IEC 27001, Other customer-specific requirements
High-Tech/Telecom	TL9000, CMMi Level 5, PCMMi Level 5

India on the ESO map

Global spending for engineering services is currently estimated at $750 billion per year, an amount that nearly equals India’s entire gross domestic product.

By 2020, worldwide spending on engineering services is expected to increase to more than $1 trillion. Of the $750 billion spent today, only $10 to 15 billion is currently being offshored—a tiny fraction. India brings home about 12 per cent of today’s offshored market, which it has to share with Canada, China, Mexico, and Eastern Europe.

“India’s share of the global ESO market could take off at the same time as worldwide demand for ESO increases. India has the potential to control 20 to 25 percent of the global market for offshored engineering services by 2010. By 2020, that number could be 25 to 30 percent, or $50 billion of the expected $150 to 225 billion market,” says Mehta of Nasscom.

A key consideration for India in its bid to become the dominant player in offshored engineering services is competition from other low-cost countries such as Nigeria, Philippines and Vietnam.

Mehta adds, “When it comes to high-end, complex tasks, the most likely scenario is that India and China will bring home the most contracts, since there are few (if any) countries that can pose a threat, given their lack of scale relative to these two. Although there are many countries that have positioned themselves in this space including China, Taiwan and Korea, the Indian engineering market has emerged as a dynamic sector in the country.”

“The window of opportunity is short and if all the right cards are played, India will be able to capitalise on the expected increase in global engineering services,” concludes George of Quest Global.