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Engineering Services Outsourcing to Grow Creating Opportunities for Emerging Markets

By Sophia Mayengbam

Emerging markets are the hot targets for outsourcing engineering services, the sector which accounts for 2 percent of the global gross domestic product (GDP). Although the focus of outsourcing was initially to cut cost, it has given way to growth in the emerging markets.

According to a recent survey by Booz Allen Hamilton for National Association of Software and Service Companies (NASSCOM), the trade body and the chamber of commerce of the IT software and services industry in India, decisions about locating engineering capabilities will turn on strategic drivers, such as access to growing markets and an expanded pool of skilled labor.

In the engineering services sector, the high-tech and telecom segment is the dominant and fastest growing sector comprising 30 percent of the market. Current spending for the whole sector accounts about USD 750 billion in 2004 and is projected to increase to USD 1.1 trillion in 2020.

According to the study titled "Globalization of Engineering Services," chief exctuive officers are increasingly viewing offshoring as a way to counter market forces that are exerting pressure on engineering services.

Although cost cutting is the primary objective of outsourcing the services in the emerging market, another chief reason is the availability of a high quality talent pool that can grow engineering capacity and increase productivity.

The study further said that locating engineering services in emerging markets also provides access to a growing market of customers, and can decrease time to market. While today only USD 10-15 billion of engineering services is offshored, the market is expected to grow to USD 150 -225 billion by 2020.

In Asia, India and China are in closed competition to winning the largest marker share in the telecom services outsourcing market.

India current revenue base in the offshored engineering services market is relatively small as compared to its information technology and business process outsourcing (BPO). The market which stand at USD 1.5 billion is well-positioned o increase its market share of engineering offshoring from 12% to 30% by 2020. The potential engineering market in India could exceed billion by 2020.

"The Indian IT and software industry is continuously renewing itself and seeking to grow by addressing newer service lines; the latest one being engineering services. Companies in India have developed capabilities and skill sets, and invested in technology platforms to leverage this opportunity," said Kiran Karnik, President NASSCOM. "The growth in engineering services signifies the need for global corporations to expand their R&D pool beyond their home countries."

"The demand for engineering talent is growing, and emerging market countries such as India will play a vital role in expanding capacity," said Kevin Dehoff, Vice President at Booz Allen. "This isn’t a case of substituting jobs in low cost countries for those in the developed world – these are core capabilities that provide a competitive advantage in the global marketplace."

Other countries led by China gives a fierce competition to the Indian market. A recent survey of the attractiveness of offshoring locations found that 46% of companies identified China as a future resource, compared to 26% for India, 13% for Latin America and 9% for Eastern Europe.

Vikas Sehgal, Principal at Booz Allen said that the offshoring of innovation poses unique challenges not found in IT or BPO. He said the emerging market which will be able to meet the global standard for infrastructure, skilled labor and a positive business environment will capture the largest growth in market share.

He forecast that over the next 15 years the global supply base will be very dynamic with Vietnam and Eastern Europe becoming the low cost providers as operating costs in China and India near those of developed countries during that time.


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