Few companies today would hesitate to outsource routine operations like IT services, call centers, or back office functions, but farming out engineering and product development is difficult or off-limits for most companies, and rightfully so. By their very nature, engineering and R&D are mission critical. What comes out of these units — the hits or misses, the innovation or lack of it — often determines the future of the larger organization. Letting another company, particularly an enterprise thousands of miles away, handle engineering tasks could be an invitation to disaster. Everything from knowledge transfer — dispensing a company’s design and development procedures and preferences to an outsourcing firm — to quality of work may suffer when the supervision of far-flung engineers in offshore locations is left to vendors often woefully ill-equipped to manage complex projects or adequately meet the client company’s needs.
Yet, despite its clear downside, engineering outsourcing has been slowly gaining in popularity over the past decade and is expected to be a business worth US$150 billion a year by 2020, which would make it five times larger than it is today. In most cases, companies are seeking to cut costs for an expensive activity. Engineering R&D can run anywhere from 3 to 10 percent of revenues, depending on the industry.
Western companies are also increasingly interested in tapping local engineers in emerging nations to develop products suited in culture and language to the needs of consumers in areas of the world where sales are growing. When companies fail to outsource these activities to regional operators, wasteful errors occur that would be laughable if they weren’t so expensive to mitigate. For example, a German machine tool company recently attempted to design, entirely in Europe, a product destined for the Brazilian market. As a result, drawings, service manuals, and equipment tags were improperly translated. One instruction was supposed to read, “Advance the ram,” but was translated into Portuguese as “Squeeze the goat.” That mistake and many similar ones ended up costing the German company dearly in reworking tags, text boxes, callouts, and service manuals and hindered sales of the new product in Brazil.
The largest engineering offshoring country is India, with about 25 percent market share, but China is also a big player and its influence in the sector will increase in the coming years; together, India and China graduate more than 800,000 new engineers each year, most of whom are willing to work at pay scales far below those enjoyed by their Western counterparts. The Philippines, Malaysia, Thailand, Brazil, Hungary, Ireland, and the Czech Republic are also notable engineering outsourcing countries. As for client firms, North American companies are the primary engineering outsourcers, accounting for 70 percent of the business, with Europe and Japan responsible for the rest.
Given that more and more companies will likely see the financial virtues in engineering outsourcing, which will overtake their hesitation about entering into such an arrangement, it’s worth considering what it takes to do it right. A successful program is predicated on doing five things well.
1. Choosing the Right Project
The best candidates for offshoring are engineering jobs whose scope, roles and responsibilities, and hardware and software needs are clearly delineated; that require minimal face-to-face interaction between clients and offshore resources; that require no interaction between offshore resources and end customers; that have carefully documented task maps and testing procedures; and that do not involve proprietary or classified activities.
Many companies make the mistake of picking projects to offshore by cost or complexity — the most expensive and tedious are farmed out. Unfortunately, it is only by luck that these criteria can produce successful projects. This was borne out recently when a consumer goods company decided that only the most costly engineering activities should automatically qualify for outsourcing, in part because the company believed their high price indicated that they were arduous and difficult to manage internally. But the project failed, producing no cost savings, precisely because the company was unable to grasp that managing the complexity of the engineering tasks required significant in-person interaction between client and vendor, as well as substantial vendor-supplied on-site resources. Moreover, the offshore vendor was attempting these difficult engineering tasks for the first time, adding a greater dimension of risk to the project.