Maximizing the Potential of Outsourcing Engineering Work

Few companies today would hesitate to outsource routine operations like IT services and call centers, but farming out engineering and product development is another story.  And for good reason.  Many companies have failed to achieve the same results outsourcing core engineering and product work as they have with back office operations.  In other cases, firms are reluctant to lose direct and visible control over mission-critical activities versus non-core operations.

Engineering and product development are expensive activities, making up between 3% and 10% of revenues depending on the sector.  There are compelling reasons to outsource this kind of work to centers like Bangalore, Shanghai and Budapest.  For one thing, potential cost savings are significant considering that offshore engineers earn a fraction of their North American or European counterparts. Secondly, most foreign engineers (particularly in IT) are trained in the latest tools and methodologies as opposed to many North American engineers who have only been exposed to older techniques.  Thirdly, for firms operating under strict time constraints the ability to conduct round-the-clock development over different geographies is very appealing. 

Outsourcing engineering has been difficult for many firms. For one thing, this kind of work is complex, expensive and risky, challenging even under the best of circumstances.  Secondly, these undertakings require a high level of internal collaboration as well as regular interactions with customers and suppliers. This level of engagement is not always feasible when key activities are offshore.   Engineering work also relies on all parties possessing a sophisticated grasp of the English language, something that is not always easy to find outside of English-speaking countries.  Finally, ensuring good project management and governance is always difficult but even more so when your team is 10 time zones away.

Given the potential benefits, it is likely more firms will dip their toe into outsourcing sooner rather than later.  According to Booz & Co., engineering outsourcing is currently a $30B market but it is expected to grow to $150B a year by 2020. To improve a company’s chances of achieving outsourcing success, Booz has come up with five key success drivers:

1. Choose the Right Project

Initially, choose projects with the best risk/reward profile, where lessons can be leveraged into future projects and where a business case can be defined. 

2. Identify the Appropriate Business Model

Unlike a typical vendor-run or captive arrangement, firms should consider other forms of outsourcing business models that ensure sufficient control, IP protection and shared risk & rewards.  Examples include Joint Ventures and Build-Operate-Transfer arrangements.  

3. Team Up with the Right Vendors

Firms must thoroughly identify, analyze and vet only qualified vendors using criteria that go beyond price and reputation.  These other factors could include engineering talent audits, capabilities assessment and employee attrition analysis. 

4. Create Iron-Clad Performance Metrics

Given the important of the work, both parties must jointly choose and track key performance metrics through comprehensive and well articulated Service Level Agreements (SLAs).  Outsourcers must be able to identify SLA variances quickly and enforce corrective actions as needed.

5. Establish a Strong Governance Structure

A strong and aligned governance structure encompassing both parties and based on clear reporting lines & roles is the most important success driver in any outsourcing relationship.  Projects require senior,  head-office accountability and ownership as well as empowered vendor leadership who have the authority to solve problems quickly and effectively.  

For more information on our services and work, please visit the Quanta Consulting Inc. web site.


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