Solid growth shown in outsourced engineering services

The downturn strengthened outsourced engineering. Now the recovery is further proving the validity - and cost advantage - of using outsiders to engineer new products.

By Rob Spiegel, Contributing editor -- EDN, June 1, 2010

Outsourced engineering has come into its own. During the recession, companies in the electronics industry trimmed their in-house engineering staffs. Then they turned to outside firms to bolster new-product development and product updates. Now that the recovery is gaining steam, companies are loath to add to their overhead with new employees, so they're keeping the outsourced engineering model as they start cranking out products for hungry markets.

The recession increased interest in design services provided by distributors and component suppliers. "Much of the increase in outsourced engineering was initiated during last year's environment where customers needed to continue driving their key products to market with fewer resources," said Andrew Femrite, manager of Arrow Electronics Inc's Engineering Solutions Center in Melville, NY. "Hiring has not yet increased dramatically, so outsourcing continues as not only a short-term tactic, but also as a mainstay."

The downturn also drove work to independent design firms. While the bulk of the electronics industry was contracting, design firms held their own. "Many companies downsized over the last few years, but outsourced engineering companies did well," said Adam Tavin, CEO of Focus Product Design Inc, a design engineering firm in Palo Alto, Calif. "The work still needed to get done even though companies had downsized."

Analysts note that companies in the electronics industry have recently become comfortable with outsourcing. "In the past three years, more work is getting outsourced," said Mukesh Dialani, research manager at IDC in Framingham, Mass. "At some level, confidence has grown in what engineering vendors have to offer. Outsourced engineering has been validated with successful outsourcing engagements."

There are a number of specific areas where outsourced design is particularly attractive. Some companies use outsourcing to keep old products alive while they focus their in-house team on new products. "We saw clients who kept their legacy products going for a small investment in outsourced engineering," said Rafael Cruz, VP of engineering services at Avnet Inc in Phoenix. "The new engineering let them continue to derive revenue from legacy products instead of obsolescing them."

For some companies, particularly large manufacturers in the United States, design firms have become a source of specialized expertise. "One of the key benefits for Fortune 500 companies is the highly qualified engineering labor they get through outsourcing," said IDC's Dialani. "They go to third parties because the can get qualified labor and manage it cost effectively."

Companies are also turning to outside design for expertise they need but don't have sufficient demand to build in-house. "Companies are wrapping new technologies such as lighting or wireless capability around their existing core competence, and they see outsourcing as a mean for quickly adding a new competence from an expert," said Arrow's Femrite. "Our customers are focusing much more on the competency of their design partners than having them in their own yard."

Another prompt for outsourced design is the retiring baby boomers who are taking their experience out the door when they leave. "In some sectors such as aerospace, defense, and medical, companies are dealing with the aging workforce in the United States," said IDC's Dialani. "They don't have the people to take over when the older engineers retire, so they're turning to outsourcing."

 
What's getting outsourced?

As for what's getting outsourced, that can range from the entire product to pieces of design such as boards or software. "We see outsourcing needs for a broad range of items, from proof-of-concept to compliance testing to software development to system-on-module customization to ASIC design," said Arrow's Femrite. "Most of the time, companies pursue third-party deisgn support for a piece of their system outside their core competence. We see fewer full-turnkey design contracts."

Emerging technology is also a candidate for outsourcing. For many companies, it's more cost effective to buy cutting-edge technology rather than hiring it. "We're seeing a lot of growth in green engineering," said John Myung, VP of sales and marketing at Focus Product Design. "In automotive, companies are looking for new battery design. We're also seeing more deisgn work for companies analyzing solar panels."

The type of companies turning to outsourced design ranges from the largest global companies to brand-new start-ups that don't have in-house design. "We have a range of client base from the one-person inventor to the Fortune 500 company," said Myung. "They may not have the design expertise, or they may have overflow work that needs to be met. So we become part of their design strategy."


Who's doing the design engineering?

The type of companies doing outsourced design engineering range from distributors and component supplier that support their customers' product development to specialty design services. "There are specialty design houses specific to different sectors, [such as] medial or industrial," said Eric Miscoll, a principal at Charlie Barnhart and Associates in Hawaii. "What they have in common is their expertise in building products."

A good deal of design is also produced in Asia by large software firms in India or ODMs (original design manufacturers) in China that concentrate of designing and producing high-volume commodity-like products such as cell phones and notebook PCs. "India has been growing in design services, mostly on the software development side," said Miscoll. "Most of the ODMs are doing their design in Taiwan and their manufacturing in China."


Advantages and disadvantages of outsourced design

Charlie Barnhart, principle of Charlie Barnhart and Associates, points to advantages and disadvantages of outsourced design engineering. As for advantages, outsourced work helps companies focus on their most important products. "If it's done with great care, it may allow OEMs to uplift focus on core IP while off-loading less consequential functions," said Barnhart. "It may also increase design velocity via alignment of global capabilities for continuous project activity."

On the down side, it can make it difficult for the company to build its design expertise. "It diminishes apprenticeship within the OEM design team, which too often results in a higher level of turnover," said Barnhart.

Barnhart also noted outsourced engineering can throw a company out of focus. "It may provide a dangerously easy pathway to some perceived - but often fleeting - market opportunity that they company should be ignoring."