Engineering services outsourcing industry 2020

If all industries and businesses die or get commoditized in seven years, then how is it that engineering Global Development Centers (captives in low cost countries and engineering outsourcing service providers) managed to escape this fate? This is especially remarkable when one think that most Global Development centers were strategized and conceptualized fifteen years ago post the success of Y2K led boom in IT offshoring.

  1. What are the drivers that are going to shape the industry? How are the Global development centers respond to the changes in the technology, needs of the parent industry verticals and changes in the customer behavior, demands & demographics?
  2. What is the impact of the convergence? (CIO-CTO, integration of technologies, convergence of the way we define industry verticals)
  3. Will the tail ever wag the dog? How critical are GDC going to be to their masters? “Does ESO matter?”
  4. Essentially what is going to be the landscape in 2020? How should the industry react and how will it react? Will it be able to transform and keep up with the pace of the silent revolution that is happening?

Engineering Product Manager

Like any Tier-1, the fate of the ESO is tightly linked to the industries and companies it serves. Hence the GDC’s future cannot be predicted without clearly understanding how the parent’s industry is faring, what challenges and opportunity they are seeing. What are the questions that every product company would be asking in 2020 and what does it mean for their ESO partners?

Am I fashion ready?

Although Francis Bitonti did 3D print a wonderful dress for Dita von Teese, we are not discussing that. Like the fashion industry, engineering products would face the same seasonality, anxiety and pressure to repeat the performance and predict the trends.

  1. Social media and e-commerce has allowed cottage industries to compete head-on with P&G and HULs of the world obliterating their leadership in marketing and distribution channels. As a result companies are seeing a sudden (unplanned) surge in the product demand from a particular category which might not be their primary focus area. These customers demand a continuous upgrade of the services else they migrate equally fast because of low switching cost and limited brand loyalty.

Forget five year of NRE amortization (non-recurring expenses/R&D) and ten year PLM contracts, even conventional industries will be looking to recuperate their investments in one season. They would be spending lesser on each individual product, but spending much more in making sure that the season lasts longer. This means ESO need to revamp their business models to be able to match the responsiveness and business models (e.g.: risk sharing partnership, ability to recover NRE through multiple derivatives) essentially create a supply chain that can keep pace with the industry. Applications are moving to cloud, customizable and reusable components are being used but the industry is yet to pick up the full momentum for it.

  1. Traditional approach of market sizing through pricing, distribution/marketing channels and utility (customer needs, quality, features) will become less reliable. Like fashion industry, product demands would be based on non-core externalities. Eg:
  2. Point of origin: solar/renewable energy, blood diamonds, Made in America
  3. Process & traceability (accuracy of GI logos, eco-friendly initiatives, labor policies of suppliers)
  4. Ethics and political considerations

The sad thing is that like gluten free food and corn base bio-diesel, the premium from customers and sops from government are not permanent. IoT powered automated factories, French vineyards and Dutch dairies have bridged the economic cost of delivery for companies which are trying to address to these niche demands. However by 2020 companies need to come up with processes that are uniform, economical and yet cater to the idiosyncrasies of each region/market they sell to.

  1. Not every company will be fortunate enough to have Steve Jobs or Warren Buffet on their rolls who can consistently predict (through common sense) what people need and where the markets are headed. This will be replaced by grunt work, number crunching, data mining and big data analytics to understand the customers better. Companies will be increasingly spending on gamification platforms (increasing the customer interaction by making them pursue worthless points and trinkets) to improve the ARPU (average revenue per user) of their Fremium products (free products with premium upgrades)

Essentially by 2020 it will be far easier for a company to create a $1bn market but more difficult to maintain its leadership. Companies will always be on their toes and would be dedicating an increasingly larger budget towards engineering services. Also the need to rapidly scale and cut back would lead to larger outsourcing. GDC would be expected to provide white-label goods and services that could be rapidly integrated and deployed along with the client’s core.

Paranoia!!

In the soap opera Frasier, Frasier Crane and Niles Crane used to repeatedly torture their souls by indulging in activities they did not enjoy, buying items they could not afford or attending gatherings for social causes that they did not care about. They underwent all this trouble, just to ensure that the world perceives them as sophisticated, successful professionals. Although not everyone invests in understanding their own Johari window, almost everybody is very careful about what facets of their life they are willing to share to public and what portions of their past they would like to be purged.

As the big data & internet of things matures, people will increasingly get paranoid of programs that can understand an individual much better than their spouses; programs that can deduce one’s identity or predict individual’s future actions/thoughts.

Today most of Europe understands it but is not too much bothered, but Americans are closely watching all developments. Tomorrow there could be serious consumer backlash if “fair use of data” “identity protection” and “limitation of what is gathered” is not defined by the company voluntarily. Tighter regulations would be enforced and breaches would be harshly punished.

Standard Oil and Bell Telephone Company were forced to split because they grew too powerful. It is not unimaginable if the search-engine and data analytic giants were to split into 10 different companies which need to compete rather than collaborate. The share-holders could with-hold funding and pro-actively split the technology powered company and retailers who have diversified too much.

Unlike what paranoia means to the parent company, the GDC flourish under tight regulations and compliance. Client has to invest substantial time, effort and training in setting up the operations, improving the standards and stabilizing the process. This raises the switching costs and allows the GDC to charge a premium for their services. Also inferring more from lesser data, means more processing and more fees.

Are my products relevant?

  1. Firing multi-million dollar cruise missile on a thatched roof of a training center is not economical. Collateral damage is strengthening the will of the enemy more than acting as a deterrent. Countries are finding increasingly difficult to wage war, limit its casualties and achieve quick demonstrable results against an enemy without a centralized command center. Individuals are able to run multi-billion dollar Drug Empire using the free Wi-Fi of a library. Internet has empowered individuals to leak classified information and destabilize governments while enjoying the asylum of a remote safe haven.

Unfortunately the armaments we have today were designed to cater to the threat of the Cold War. They are not tailored to cater to the terrorism threats of today. A 3D printer could be printing an assault rifle anywhere; a cellphone powered propane tank is more powerful than an IED. Archimedes was chief of Defense for his city state. Leonardo da Vinci primary occupation was designing armaments. Armed forces have not only employed most of the sharpest brains, but backed most of the cutting edge technologies. 1940s is considered the golden age of engineering due to number of ground-breaking advancements that were made in response to the challenges of the era.

A lot of money is being poured in network centric warfare, video/audio analytics, drones etc. for these much needed upgrades. India which has not purchased any significant system for the past 10 years is opening its coffers for modernization. The offset requirements mean that a significant portion of these procurements need to be designed and developed locally.

  1. The concept of acquiring asset is being replaced by acquiring experiences. Today, luxury is less to do with craftsmanship or scarcity and more to do with convenience, uniqueness and customization. The shared economy has made leasing cheaper and made people ask critical questions on the cost of ownership rather than the cost of acquisition. Rather than replacing their old models, consumers expect periodic upgrades.

Tesla recently gave a multi-year comprehensive warrantee with its cars. How are companies designed to subsidize the car sale and recoup through expensive service/repairs going to respond to the threat. The consumers perceive, use and evaluate the products very differently. Increased reliance on social media for news and reviews limits the company’s ability to control dissimilation of information and positioning of its brand. Cosmetic changes to the features and price discounts will not solve the threat. Product companies in 2020 will have to rethink their USP, product features and strategy from square one. GDC will its ability to scale and enable the laggards to catch-up will come handy.

  1. There is an emergence of eco-system. Products are not evaluated on its stand-alone features but on the basis of how they interact with the other products and service the customer subscribe to. Big companies are focusing in providing platforms, defining standards and promoting compliance certification/logos. This involves a lot of porting, testing and standardization activities which GDC specializes in. A lot of new entrants are emerging that only understands the customer and services and know very little about product development and project management. All these are creating a ripe market for GDC for their picking.

Summary

These subtle but revolutionary changes would reset all historical definitions of product, company, supplier and service provider. Companies would have to redefine their focus markets and industries. The technological advances would lead to creation of competing eco-systems/platforms rather than competing companies/brands. The only organization that has a view and a capability to cater to the whole gamut of the value chain would be the Global Development Centers. However capitalizing on it requires some serious thoughts on the ESO’s value proposition, business models and modus operandi.

The question one needs to ask is that will the GDC be two hands without a face that executes an SOW or will they be an integral transformational partner? GDC were designed as auxiliaries for the core development teams. Today the product companies rather than driving their industry are becoming Tier-1 to the eco-systems. Status quo would mean that these auxiliaries would watch themselves being demoted from Tier-1 to Tier-2 and becoming commodities.

Advertisements

Leave a Reply.... we want your views

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s