NASSCOM Engineering Summit 2014: Session IV: New Models of Engineering Outsourcing: Steven Hall
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© 2014 Information Services Group, Inc. All Rights Reserved
New Models of Engineering Outsourcing
Global ER&D Growth & Projections
2005 2009 20200
200400600800
10001200140016001800
2014 NASSCOM
Years
Global ER&D Spend
(in Billions $USD)
Can the market’s current service
delivery, contracting and relationship
models sustain this growth?
Top Service Providers ESO Growth
2011 2012 2013 20141000
2000
3000
4000
5000
Growth of Enginnerineerign Service (Revenue by Top 4 Indian Service Providers
The Key ER&D Industry Verticals
ER&D Services % Spend Share
ER&D Primary Verticals
MedicalConsumer
EnergyAeroAuto
OtherSemi
Telecom
0 5 10 15 20 25 30 35
2014 % Share
Cost Reduction
1
Shorter & Faster
Product Lifecycles
2
Access to Global
Talent Pool
3
Product Localization
4
Shrinking R&D
Budgets
5
Higher Usage of
Embedded Systems
6ESO Growth Drivers
Technology Convergence
7
The ESO Driving Trends
Transition to Connected
Technologies
8
Captives Remain the Dominant Delivery Model
400 Captives
85 Service Providers
Captives remain inefficient, costly, and too basic in their value delivery -- Captives must become more operationally efficient and evolve their value delivery.
The market is turning towards service providers for longer term deal flexibility and services up the value chain
ESO Captives & Optimization
Expand Skills & Capabilities Increase Value Delivery
ESO CaptiveDrivers
43 5
1 2Total Cost Reduction Improve Productivity
Improve Quality
.
... with the aim to ...
.
... with the aim to ...
• Improve efficiency and effectiveness • Increase the Value of Engineering Services• Transform the Engineering Services
• Ensure lasting performance improvement
• Improve efficiency and effectiveness • Increase the Value of Engineering Services• Transform the Engineering Services
• Ensure lasting performance improvement
Services & New Product Development Costs
Business Processes and Engineering Application
PortfolioProcess
Maturity
Scope: Engineering Services and/or New Product Development
Service Capabilities
Product Life Cycles & Speed to Market
Analysis Aspects
Drivers for effectiveness
Drivers for efficiency
Captives Approach to Optimization
Mutual Value of Captive Monetization
Increase Skills & Capabilities
Clients
Access to More Resources, Skills & Capabilities Expand Resources
Consolidation into Service Delivery Centers
ESO Service Providers
Long Term ClientRevenue Commitment
Reduce Balance Sheet & Improve Financial Health
Improve Productivity and Value Delivery of Operations
Receive Monetary Value for Assets
Captives Approach to Monetization
► ISG Research Data► ISG SME inputs
► Assess Current State by benchmarking vs peer group
► Due Diligence of select Suppliers
► Detailed Report of the Current State of the Shortlisted Service Providers
► Output of Assess stage
► Undertake Financial Modeling
► Create Negotiation Strategy
► Detailed Report on Financial Health
► Negotiation Strategy with clear positions
Dat
a So
urce
Key
Activ
ities
Out
put
Assess Design
M&A Transaction Support post Target identification
► Output of Assess and Design stage
► Contract Execution► Closure on all required
paperwork
► Signed Contract
Execute
The ESO Deal Allocation Shift Right!
Staff Augmentation
35% to 10%
T&M Projects
20% to 25% 2% to 30%
Fixed Price
Projects
5% to 15%
Co-Risk / Reward
Managed Services
38% to 20%
Traditional Engineering Services Pricing Models The Future of ESO Partnerships
The ESO Deal Allocation Must Shift Right to Sustain the ESO Growth
► Defined Services (SOWs) and SLAs – Statements of Work specify the “What” not the “How”. Defined Service Levels with measured performance goals aligned to the ESO Services
► Defined Pricing - Fixed Price models w/variable components for services that allows ramp-up and ramp-down of costs based on volume and need
► Defined Risk Model - Manage overall sourcing risks via Contract terms, Skill mix, Onsite/onshore/offshore ratios, geographical locations, etc.
ESO ManagedService
Service andServiceLevels
Defined RiskModel
DefinedPricing
ESO Managed Services – for the Larger / Multi-Year Relationships
Engineering Services Outsourcing is
Growing and Evolving to More Mature Sourcing Models
© 2014 Information Services Group, Inc. All Rights Reserved
© 2014 Information Services Group, Inc. All Rights Reserved
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