Industry veterans claim there’s no such thing as a “mature” engineering services sourcing deal – and they’re probably right. Let’s be honest; while IT sourcing has evolved, most engineering sourcing deals have not. Indeed, many buy-side enterprises are still following the same old, inefficient ways of sourcing their engineering needs, which is to say they more often engage in short-term project work rather than longer-term, strategic relationships.
But this is changing. Product engineering and other new offerings in engineering services outsourcing (ESO) have improved as service providers have grown increasingly specialized, especially in certain elements of the product lifecycle. Many alternate ways of sourcing, which were once considered taboo, are now becoming a reality, thanks to a tech-inversion trend in the market.
Here’s what that means. Unicorns—start-up companies whose valuations exceed $1 billion—now number more than 70 in the U.S. alone. Meanwhile, most of the large, established tech companies that benefited greatly from venture capital and private equity investment during the dot-com bubble of the late 1990s are now either out of business or experiencing very slow organic growth.
So what’s going on?
The tech-inversion trend is caused by a shift in the connected economy, in which established tech companies have become the potential casualties of emerging cloud-based and as-a-service technologies. In the face of this inversion, companies are attempting to grow by pursuing one of the following approaches:
- Apply start-up-like (read agile) product development and deployment methodology; focus on lean investment and core differentiation. This approach requires a deep integration between internal and external IT and research and development (R&D) service providers. As IT hardware and software are increasingly embedded in products and as the IT organization shifts to a more business-centric role, organizations are forming new kinds of units, such as DevOps and unified data groups. A recent article in Harvard Business Review cites an example in which members of the IT department at Thermo Fisher Scientific now work directly inside R&D.
- Either revamp and evolve legacy products for the connected world and extend their potential for new revenue streams or push them into maintenance mode with a managed services provider and free up your R&D for other areas. Alcatel-Lucent signed a multiyear contract with an India-based engineering service provider. The scope includes all R&D and maintenance services over a three-to-five-year period for legacy second- and third-generation technologies. It also includes management, development and deployment of the product lifecycle.
- Shift to a Product-as-a-Service business model. Leading manufacturers now recognize that offering smart products-as-a-service can generate significant new revenue and business growth. Rolls-Royce, for example, offers engines-as-a-service, for which customers pay by the hour or the mile. Michelin offers pay-per-use systems by invoicing tires per kilometer travelled, per ton carried or per landing. And Xerox has a unique proposition to offer prints-as-a-service rather than as a product.
The graphic below illustrates these three approaches in relation to the product life cycle (click to enlarge):
The changing marketplace and these resulting approaches mean new ESO contracts will need to accomplish four goals:
- Move beyond product engineering. Buy-side enterprises will broaden the definition of engineering sourcing to include new terms, such as product cloud as well as third-party tools integration to securely capture, analyze and store product data.
- Bundle services with products. As long as the enterprise adopts a Product-as-a-Service model, the scope of product engineering will expand to include service delivery and operations over the lifecycle of a product.
- Manage the results, not the service provider. The rise of the Product-as-a-Service model means shorter release cycles and a near-continuous closed-loop process for product design and innovation. This will necessitate more managed ESO contracts, which have been commonplace only in the IT industry to date. As this model becomes more popular, original equipment manufacturers (OEMs) will expect engineering services providers to work in managed services contracts with SLAs based on availability and throughput.
- Demand innovation. Clients today clamor for fresh ideas from their service providers and complain when they don’t get them. The traditional Request for Proposal (RFP) has been an effective tool in enabling competitive pricing and efficient oversight of service delivery. However, if the sourcing objective is innovation, clients may need a less structured, more collaborative approach to the provider marketplace. The Request for Solution (RFS) allows the client to focus on the what of the desired end state, rather than on the how of service delivery, and it gives a provider the flexibility to propose its unique solutions.
ISG helps enterprises navigate the changing ESO landscape. Contact Jim Newman to discuss further.
About the author
Jim Newman is an operations leader with more than 20 years of successful start-up and technology-turnaround experience. His most recent work includes helping enterprises integrate their engineering and IT services, source their applications and infrastructure functions and manage the considerable feat of organizational change. Jim has worked with businesses around the world in a wide range of industries, including software service providers, consumer packaged goods, manufacturing, mining, cable and mobile communications. He helps organizations find technology solutions that achieve strategic business objectives while optimizing enterprise processes to drive revenue growth and profit gains. He works at the convergence of traditional IT services and traditional engineering/operations services most evident in the use of telematics support for manufacturing and operation of mining equipment.