Engineering Design Services: Advantage, IT Players

Outsourcing in engineering is not a new concept. Large companies
in automotive, construction, manufacturing and other industry clusters within
heavy engineering have been outsourcing part of their design and drafting work
to third party vendors for quite some time. So have the consumer product
companies. However, the nature and value of the outsourced business varies
significantly in both cases.

It is generally the specialized engineering firms that these
jobs are outsourced to. The fact that IT services companies are doing a large
chunk of this work is by and large an Indian phenomenon. Almost all the large
Indian IT services firms have a focused approach to engineering services, a
practice growing in size.

TCS, the Maverick

In the late eighties Tata Consultancy Services (TCS), then a division of
Tata Sons, was reselling engineering design software products primarily to
Indian customers. TCS dealt in Unigraphics and some other products from McDonald
Douglas. Providing support services was critical, and for that TCS had to build
considerable expertise around these products. By 1994-95, TCS had developed
significant skill-sets in these and similar areas.

Combining its traditional services strengths and newly acquired
skills, TCS wanted to expand into the engineering design lifecycle space. An
ambitious thought, considering such work had hitherto been done only by
specialized engineering services firms. These being end-to-end engineering
services companies and pure play design firms. For a generalized IT services
firm like TCS, this was certainly a first. TCS tried selling the idea to an
equally innovative and bold customer, GE, which at that time was its customer
for IT services. GE, a pioneer in several areas including offshoring, saw value
in the proposition and evinced keen interest. By 1999, TCS signed on GE for
high-end analysis work on the abstract jet engines. That deal, though presumably
small, was surely a giant leap for engineering offshoring business in general
and the Indian IT industry in particular.

Since then TCS aggressively pursued this line-of-business and
has been able to maintain pole-position till date. Today, with others joining
in, engineering design services has become an integral part of IT services
portfolio in the country.

A Heterogeneous Mix

Unlike services that target enterprise IT functions and areas, engineering
services is not a horizontal by itself. So what exactly constitutes engineering
services? While different companies follow different definitions for engineering
services, in our study we have excluded a few services that are often classified
by some companies as engineering design services. They include software product
engineering, embedded software design, and any other semiconductor related
design work. The primary reason for doing that is that today these services are
far more integrated with other IT application development work, and hence there
is a tendency to club them with application development.

This has resulted in the exclusion of most of the high tech
industriessoftware, IT, semiconductor, telecom systems. High tech products
that have become consumer products in their own rightlike mobile phonesare
the only exceptions. They are included in consumer products.

There are various ways by which the industry can be classified.
The three most common ways being: nature of work, verticals and provider types.
Even this would result in some overlaps. Since engineering life cycles are so
different across verticals, it is almost impossible to have a simple
classification by type of work that will apply well to all industries. In our
research and subsequent analysis, we have tried to study the market based only
on classification by industry and by provider type.

The major outsourcers of engineering services, leaving the
excluded categories mentioned above, are aerospace, automotive, construction,
consumer products, industrial/medical devices, and manufacturing. By and large,
they remain the major industries for engineering services. But the extent of
offshoring is fairly different for each of these sectors.

The India Focus

In India, most of the third party players draw their revenues from three
areasautomotive, aerospace, and industrial/plant automation. Consumer
products are fast emerging as a major segment, though. Many other segments, that
are globally big spenders on these services, are less visible in India.

Take construction, for instance, where globally, the spending on
services is huge. But the revenue break-up of most of our top companies
indicates otherwise. There are a few reasons for this. Firstly, a large chunk of
engineering spend by the construction industry is onsite. But more importantly,
this is an area where the traditional service providers are fairly organized and
consolidated. Many of them are present in India, unlike designers in aerospace
and automotive industries. Having sensed the opportunity well in time, most of
them built large offshore services teams, which now cater to their global
customers. Examples include big names such as Bechtel, Flour Daniel, Butler, and
Lurgi. All these firms have fairly large offshore services teams. Also, many of
them use India as a resource base for manpower, even for their onsite work.

Traditionally, the level of enterprise IT usage in construction
is low. As a result, Indian IT services companies have had limited interactions
with them. On the other hand, industries like automotive and aerospace are smart
users of IT at the enterprise level. Indian IT services companies have leveraged
these relationships to get an entry into their engineering departments.

• Bring in the best global
  delivery practices to engineering services including world class
  metrics

• Better use of technology
  tools

• More efficient processes

• Capability to ramp up
  fast

• Often lack deeper
  understanding of domain

• Too metrics-driven

By far the largest segment

TCS, Infosys, Wipro, Satyam,
HCL, Patni, etc

• Focused and consequently
  have deeper domain experience

• Operate like global IT
  services firms hence get the best practices from there too

• Ability to ramp up is
  usually an issue

• Attracting employees is
  an issue in a highly competitive labor market

The second most dominant
section

Infotech Enterprise, Rolta,
Geometric, Neilsoft, Quest, L&T Infotech

Have a good understanding of
domain

Way behind in terms of
global delivery practices

Limited impact

Hero, Mahindra, Harita,
Ashley

More control and integration
with onshore centers

Larger cost structure

Quite a sizeable chunk

GE, Caterpillar, Delphi,
Ford, Daimler-Chrysler, GM, Siemens, Bosch

Usually focused

Lag in terms of global
delivery practices

Mostly in the construction
segment

Bechtel, Flour, Lurgi,
Butler

That however does not mean that construction has no offshore
players. Many of the smaller, niche players like Neilsoft have consciously
targeted this space. Among the bigger players, TCS now intends to target
construction far more seriously. This is in partnership with group company Tata
Consulting Engineers, a major player in the construction engineering space in
the country.

Whos Who and Where

How major companies look at this opportunity articulates their overall
positioning. Among the big three of Indian IT, TCS happens to be in almost all
the areas. Wipros positioning on other hand needs a bit of explaining. It may
come as a surprise that in our study of engineering services, Wipro ranks
relatively low. That is because Wipro draws most of its engineering services
revenues from telecom and semiconductor, industries that we have excluded. Wipro
is more of an R&D services player than an engineering services player. The
clear tilt towards telecom and semiconductor is because R&D constitutes a
significant part of these outsourced services. However, with the acquisition of
Quantech, it should strengthen its position in automotive, aerospace, and
consumer products as well. Infosystraditionally not known as a product
engineering companyranks fairly high. Almost all of its revenue from
engineering services comes from manufacturing. But the contribution of
engineering services to the overall revenue is on a steady decline.

Tier-2 Looks Serious

The most interesting story in engineering services pertains to the next tier
IT companies. The next three multi-services firms in DQ Top 20 have, without
exception, identified engineering services as the differentiator. Satyam, which
does not boast about its engineering services capability, fares quite
impressively with as much as 6.5% of its revenue coming from this area. Also,
Satyam, like TCS, has a balanced portfolio with automotive, aerospace, consumer
products, and construction all contributing significantly. HCL, the next player,
is the other extreme. It draws more than 85% of its engineering services revenue
from aerospace. But by far, Patnis engineering services is the most mature.
Not only has it a balanced portfolio in terms of industries addressed, its
geographical presence is also most diverse. Japan, which according to the 2006
Nasscom-Booz Allen Hamilton report on engineering services, accounts for 21% of
global engineering services spend, is not penetrated well enough by anyone other
than Patni.

The real surprise comes in the form of the No 2 ranked Tata
Technologies. This specialized engineering services firm started as an in-house
IT and engineering services division of Tata Motors. Tata Technologies grew
impressively by virtue of a single large acquisitionthat of INCAT. The
estimated revenues exclude that from India and other businesses like training
and ERP implementation. INCAT is extremely strong in training.

The next specialized firm, Infotech Enterprise, comes at No 7.
The company that boasts among its clientele, aerospace players such as Boeing
and Airbus, is a fairly low profile so to speak. Like Infotech, most niche
players are focused on one industry or two. For example, Neilsoft is fairly
focused on construction and industrial automation. L&T Infotech is focused
on construction and Geometric Software is focused on automotive and consumer
products.

Captives are a big story by themselves, be it GEs Jack F
Welch Technology Center, GM, Ford or Delphis captive design centers. These
are among the better known. Many of these are engaged in high-end design work.
Though unlike telecom and semiconductor, there is very little of holistic
product design, these captives are slowly moving up the value chain. The
availability of skilled manpower has been a major issue behind slower ramp-ups.

The spin-offs of Indian manufacturing and automotive firms have
so far not been able to make a mark, with the notable exception of L&T.
L&T Infotecha division of L&Tis a mature IT organization by itself
and engineering services is just part of its overall portfolio. The non-Indian
service providers are largely restricted to the construction industry.

Over a Billion, and Counting

The total third party engineering services export market from India is
estimated to be around Rs 4,209 crore. Though Dataquest has not studied
the captive market; its size is pegged by analysts to be between Rs 1,800 to Rs
2,500 crore. Dataquest believes it to be on the higher side of the range,
at around Rs 2,250 crore. Put together, Indias export of engineering design
services is Rs 6,459 crore (about $1.4 bn).

The top five players account for 56.8% of the total market and
all the firms profiled in the table of Top Players account for as high as 84.3%.
The rest of the market is divided among certain specialized firms such as
Plexion, Ashley Design, and Harita, Hero Global Design Services, besides smaller
players. For the purposes of our study, export revenues of firms such as
Bechtel, Flour, and Lurgi have been counted along with the captive players.

In Search of Domain Expertise

According to the Nasscom-Booz Allen Hamilton report on engineering services
offshoring, though the potential for India in engineering services is in the
range of $12 bn to $16 bn by 2010, the most likely scenario would be in the
region of $3-5 bn.

While the report identifies many reasons including lack of
infrastructure, the biggest challenge happens to be manpower. Today, most of the
engineering services companies hire a mix of fresher and experienced workforce.
The composition of workforce is far more inclined towards experienced
professionals than fresh talent. Domain experience is quite critical in this
area.

In the traditional IT services space, learning and unlearning of
skills are fairly rapid. Also, it is possible to rotate large number of
employees across verticals. In engineering services, that is not so. It is
unrealistic to expect an automotive engineer to do construction design. Also,
the number of people in a project team having in-depth domain knowledge is just
about 10%-15% in IT; whereas it could be as high as 45% in engineering services.

Recruitment poses a challenge, especially in fields where Indian
engineering is not that developed. Most companies hire locally, though
acquisitions have helped in getting the right skills, to some extent.

Internal training is something that even the smallest of players
spend heavily on. Unless there is a mechanism to address this challenge,
acquiring and nurturing talent could be a bottleneck.

Shyamanuja Das

shyamanujad@cybermedia.co.in