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HCL-ESO-Unraveling-Myths

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HCL-ESO-Unraveling-Myths

  1. 1. Engineering Services Outsourcing Unraveling Myths
  2. 2. Abstract Tradi onally, in a product centric world, R&D has always been perceived as intellectual property and hence treated with utmost confiden ality. There was no room for collabora ve or complementary R&D. However, of late, there is a shi away from products alone, to an ecosystem of services around the product focusing on end user experience. There is need for development of the product, associated pla orms, and industry and geo specific variants for companies to go to market. Global compe on and reducing product lifecycles are forcing companies to leverage their value chains to retain market share. Cost and labor arbitrage are no longer the primary drivers and many engineering engagements are being recast as win-win partnerships to leverage collabora ve growth opportuni es. Many OEMs and ISVs are collabora ng with engineering service providers to accelerate me to market, extend product lifecycles, develop pla orms, enter emerging and adjacent markets, and op mize R&D opera ons.
  3. 3. Global R&D Spending and Composition The engineering services spend by industry ver cal has been led by the automo ve sector, which accounts for a quarter (26%) of the global spend. This is due to automo ve OEMs and suppliers being driven by the con nuous need for superior performance, safety, reliability, convergence, and fuel economy. Consumer electronics and telecom- munica ons firms seeking shorter product lifecycles and technology innova on are the next largest spenders on Engineering Research & Development(ER&D). The propor on of spend on ER&D by ver cals is expected to remain stable ll the end of this decade. In terms of geography splits, the US dominates with two-thirds of the global ER&D spend, and with the resurgent economic scenario, it is expected to grow impressively in absolute terms. Japan, with 27% of the share is the second highest spender, though growth has been halted by the slowdown in 2008-09. The third highest spender is Europe, in which Germany remains the largest, and perhaps the only one showing consistent growth. France, United Kingdom, Italy, The Netherlands, and Sweden cons tute the other major spenders in Europe.
  4. 4. The Outsourced R&D Market Size & India’s Share Evolution of the ESO Industry According to NASSCOM, the enterprise outsourced R&D market in 2013-14 is around $75B, with the US, Japan and Germany being the top three markets. India’s share of the Engineering Services Outsourcing (ESO) industry can be es mated to be around 16-17% in 2013-14, and it competes with countries like the US, France, and Germany for onshore delivery and Mexico, China, Eastern Europe, Vietnam, and Philippines for offshore delivery. NASSCOM es mates that India will capture 35-40% share of the global market by 2020. For over three decades, Original Equipment Manufacturers (OEMs) and Independent So ware Vendors (ISVs) have leveraged Engineering Service Providers (ESPs) for tac cal engineering support by using staff augmenta on models for cost and labor arbitrage. Given the plethora of technologies used across hardware and so ware, it was easier for customers to get access to the global talent pool by using ESPs to provide scale whenever and wherever needed. Project execu on was limited to basic ac vi es like scanning and digi zing of engineering drawings to engineering change order management. Product engineering was considered to be a core ac vity and IP-centric and therefore off limits for outsourcing. Post 2003, capacity augmenta on came to the fore and customers required ESPs to help them reduce their me to market and scale only when there were requirements. This helped them accelerate their product development process and manage opera- onal expenditure. A er 2010, access to emerging markets also acquired importance for customers as consumer spending rose in these markets. Today’s businesses, driven by cost reduc on and product lifecycle pressures, are increasingly focused on developing effec ve outsourcing strategies that drive significant improvement in global engineering and R&D opera ons. Of late, the engineering services outsourcing market has witnessed substan al growth, and has evolved to encompass a broad range of new product development, value engineering and product support func ons. Gradually, the future growth of ESPs will lie in how well they are able to drive product innova on for customers and put their skin in the game by sharing investments.
  5. 5. Perceived Barriers and Realities Barrier 1 – Fear of lack of control over product development Most companies are quite cagey when it comes to their R&D work and do not show willingness to disclose details of their next genera on products and solu ons for the fear of plagiarism in this Internet era. This leads to a fear of outsourcing parts of work which are related to product devel- opment. Reality If the onion is peeled, it can be realized that there are mul ple aspects of engineering which can be complementary and hence, not so confiden al. Typical product development cycles are quite elaborate with detailed processes, majority of which are domain neutral. Over 70% of the engi- neering effort is on ac vi es which are domain neutral while only 30% of the effort is on differen - ated domain centric feature func onality. Barrier 2 – Products that are created by third party vendors will not adhere to quality stan- dards It is believed that when outsourcing is performed, there is a loss in complete control over labor and process, which results in lower quality products. When interac on is not done directly with people making your products, they may be less loyal to the company and have a reduced incen ve to produce good work at a reasonable pace. Reality ESPs, as much as the outsourcers themselves, have an incen ve to focus on quality. There is a con nu- ous effort on the part of ESPs to create organiza on management systems which define comprehensive processes to ensure that high quality is delivered at all stages for any engagement. ESPs are also compli- ant to ITIL, ISO, and CMMI and consider these as standard processes which have to be rolled out mandatorily for customers. Barrier 3 – Geo-poli cal reasons The geo-poli cal barriers that are perceived include cultural barriers, physical distance, me difference, and poli cal instability. Some mes, there is a lack of comfort level while dealing with a person who is accustomed to a different cultural environment. For example, when an American is providing require- ments to an Indian, the Indian does not having enough confidence to say that a certain require- ment cannot be implemented due to architectural challenges. There are also instances where resolu- on to a problem gets delayed due to the ESP working in a different me zone. Reality It is true that cultures are different in different countries, but outsourcing has evolved over a period of me and there are defined processes
  6. 6. which ensure that these barriers can be overcome easily. Cross-cultural training programs are under- taken by ESPs to ensure that at an early stage employees are comfortable dealing with customers from different parts of the world. Also, ESPs set up delivery centers at both offshore, nearshore and onshore loca ons which provide support to customers 24*7. When it comes to poli cal insta- bility, ESPs help protect clients by building clauses in the contract to manage it. research and analysis, change management, tool selec on etc. are possible outsourcing candidates, but based on the situa on at hand. Ac vi es like IP management, technology planning, strategic planning, and architecture design can be retained as they are core ac vi es and therefore do not have to be outsourced. Which engineering functions can be outsourced? There is a lot of consul ng around iden fica on of Core vs Context in terms of ac vi es which are undifferen - ated and hence, which can be outsourced. Proper planning in terms of arriving at the scope of work for effec ve outsourcing can help companies drive signifi- cant improvement in global engineering and R&D opera ons and allow them to focus on their key differ- en ators and retain their market share and compe ve advantage. The graph shown here illustrates the possibility of outsourcing a certain engineering func on. It is clear that within a product development lifecycle, ac vi es like so ware development, tes ng,manufacturing support etc. are strong candidates for outsourcing as the complexity of interac on is not high. As one moves higher up the value chain, in the technology develop- ment area, ac vi es like
  7. 7. ESO Levers for Business Impact Companies are increasingly turning to outsourcing as a strategy to improve their global ER&D opera- ons. The key levers and growth drivers include the following: Cost: Over the years, the R&D intensity in terms of R&D spend as a percentage of sales has been constantly reducing. The shrinking R&D budgets have led to companies looking to expand their footprint in Low Cost Countries (LCCs) through partnerships with ESPs or through the establish- ment of cap ve centers to leverage the cost differ- en al in engineering effort. Typical engagement is either through Time & Material or Fixed Bid type of project execu on. Labor: Given the complexi es of the technologies involved in end to end product engineering, it is quite difficult to get a flexible pool of engineers with the relevant capabili es and competencies. Access to a global talent pool can go a long way in providing scale to ER&D opera ons. Time: The free flow of real me informa on across geographies and markets thanks to the Internet has resulted in shortened product lifecycles and release cycles. Companies need to be constantly on their toes to be ahead of the curve, or else they will end up losing market share. In the Online industry, there are some products which have become obsolete even before going to market. Service providers who are able to provide ready-to-use components, frameworks and methodologies to accelerate me to market are much sought a er. Technology: Another key factor is the quantum of technological convergence across varied ver cals thanks to the advent of disrup ve technologies like Mobility and Smart Products which are driving customers to a more connected world. ESPs with a footprint across industry segments are in a be er posi on to adopt best prac ces and technologies from hitherto unrelated industries. Revenue: The shortening product lifecycles ensure that companies do not have the luxury of addressing markets in a phased manner as global compe on might quickly enter white space market segments. Access to global markets with an ability to address emerging and adjacent markets in simultaneous launches will ensure maximiza on of revenue as well as market share reten on. Partnership with global service providers with a large geo spread and foot- print across mul ple markets, currencies and languages can help manage this risk. Ecosystem: The world is becoming more of a connected world with consumers expec ng a seam- less experience more than devices with advanced features and func onali es. OEMs need to ensure that there is a pla orm around the product which integrates the services around the product to provide a phenomenal experience. ISVs on the other hand need to ensure that their services are easily consumed by mul ple devices with different form factors and consumed in different manners (touch, voice, video etc.). All of this has increased the impor- tance of embedded so ware as a means to merge the device with the applica on to provide a seamless experience.
  8. 8. Types of ESO Engagements: Business Models & Relationship Tac cal ESO Engagement – Project Centric Most companies prefer to begin engineering services outsourcing ini a ves with a project-centric engage- ment. Mostly, such projects are specific to a par cu- lar release of a par cular project. A typical project could include some of the following: The business model of the engagement is either on a staff augmenta on model where the ESP provides Verifica on & valida on and release manage- ment of a par cular release New product development of a par cular version of a product/sub assembly Proof of Concept to test out adop on of a new technology/feature set Support and sustenance of a par cular product engineers with the relevant competencies while the outsourcer is responsible for project and program management, or, on a me and material model where the ESP handles project and program man- agement along with the engineering work with associated rate cards for the effort involved (rates differ based on the role and experience level of the engineers). In both these cases, companies prefer to scru nize the engineers involved themselves in terms of their capabili es. In a few cases, companies also outsource projects on a fixed bid model where the ESP is completely responsible for the deliverables of the project with complete ownership on the resource mix of the project team. Typically, engineering services con nue to be delivered primarily through hourly, daily, weekly or monthly rate-based pricing models, staff augmen- ta on rela onships or me and material (T&M) projects of various forms. These less mature resource-based pricing models reflect the conser- va ve nature of the client base; specifically, the lack of sourcing maturity within the engineering services community. However, of late, buyers of engineering services are shi ing towards more mature and advanced sourcing rela onships that provide more predictable, stable, and higher quality of services and deliver the an cipated and contracted value to them. Chances of product success are higher if the service providers also have financial incen ves to achieve business outcomes and hit target service levels and performance metrics. We will now look at the various engineering services outsourcing engagements in detail:
  9. 9. While this is a good model to start with, it gets quite detrimental if the company does not migrate to more mature engagements with their long standing ESPs. This is primarily because of the addi onal overheads of commercial nego a ons and project oversight for every project. Companies need to compute the total cost of outsourcing including the o en neglected travel overheads of their execu ves to arrive at a proper cost benefit analysis. Tac cal ESO Engagement – Procurement Centric Once they have tasted ini al success with their engineering services provider, most companies migrate to a procurement centric Offshore Develop- ment Center model. Over here, procurement aggre- gates the resource requirements across mul ple departments and divisions and arrives at a commer- cial model for engineering effort. ( me & material rate cards basis the tech competency, role and experience of engineers). Given the volumes involved, procurement can work with ESP’s to obtain volume based discounts. As a result, the company now has a dedicated pool of engineers who are competent on the technologies relevant to them. A er execu ng a few projects, the engineers become familiar with the tools and engineering processes of the customer as well. In many cases, an ODC is treated as an extended R&D arm of the company. One big advantage for Engineering and R&D teams in this model is that the decision of choosing the right ESP and nego a ng the rate cards etc. is taken out of the equa on. They just need to define the scope of work with the preferred ESP and get an es mate (with assump ons) on the effort involved for a given project. Once the effort es mate is approved on both sides, the project is quickly executed by the dedi- cated pool of engineers. This process is repeated for different departments and steering commi ees of execu ves on both sides oversee the alloca on of the engineers to different projects. This commi ee meets on a quarterly basis and takes strategic deci- sions like increasing or decreasing the pool of avail- able engineers, inves ng on specific tech trainings, tools, labs etc. Again like the previous model, one needs to audit the total cost of outsourcing by evalua ng hidden costs of execu ve travel (interna onal travel in most cases) vis-à-vis me spent on nego a ons over rate etc. Most successful long term engagements are those where companies treat the ESP as an equal partner with an atmosphere of trust and transparency. Top down, customer-vendor rela onships (a.k.a manufac- turing) tend to be skewed, and hence they do not last long and eventually fail. Companies which prefer staffing centric engage- ments tend to cul vate mul ple ESPs as a hedging tac c. This is to ensure that they get the relevant engineers with the relevant competencies from as many ESPs as possible. This can get detrimental in terms of vendor management when they migrate to more mature models of engineering services outsourcing. Strategic ESO Engagement – PDLC Centric A strategic engineering services outsourcing engage- ment is one that is truly aligned to the business needs of the customer. Rather than focusing on the technology competencies and capabili es alone, one
  10. 10. At the introduc on stage of a product, it is all about “Time to Market”. Services which can “Accelerate” me to market are what ma er the most. Accelera on services from the ESP in this area include competencies at scale, end to end product engineering, test automa on, release management etc. In the growth phase, suddenly the number of customers grows exponen ally from the introduc- on phase. One is no longer able to provide the kind of a en on one used to shower on the early adopters in terms of new feature addi on, defect fixes, customiza on etc. Here, the presence of a pla orm can go a long way in providing uniformity of services to the exponen ally growing user base. Hence projects around pla orm engineering development can act a strong founda on for the growth of the product. In the maturity phase, the product has a large customer base comprising of risk averse and mature customers. CSAT becomes extremely cri cal as any defect or issue can result in a huge backlash. For example, all of us remember airline mishaps despite air s ll being a far safer mode of transport than rail or road. Ideal engineering services outsourcing projects in this stage would be independent verifica on & valida on, product cer fica on & compliance, managed services for product support etc. In the decline phase, one tries to shore up revenues for the product by focusing on emerging markets and adjacent markets. One also tries to squeeze out profits by cu ng cost, and ra onaliz- ing processes. The project candidates at this stage include value engineering, should cos ng for emerging markets, customiza ons for adjacent markets, BOM op miza on etc. In the last (End of Life) stage, the primary objec- ve is to extend the life of the product. One can look at integrated sustenance and support projects to combine teams and resolve high volume defects as part of minor releases to op mize opera onal costs. In addi on to these projects, technology adop on of disrup ve technologies should happen at any stage of the PDLC, as these technologies can make a product obsolete, irrespec ve of the stage of the product. Can we think of a refrigerator which is not frost free? Or a smartphone with no touch feature? also needs to align with the business pain points or hot bu ons of the product manager. This is dependent on the stage of development of the given product (Product Development Life Cycle stage or PDLC stage). Here we elaborate it further in terms of the stages:
  11. 11. ESO propositions by product portfolio Strategic ESO Engagement – End of Lifecycle Support Most OEMs and ISVs, over a period of me, develop or acquire a fairly complex set of products in their por olio. As per the BCG matrix, around 20–30% of these products are ‘Dogs’, and are at the fag-end of their lifecycle and about to be wound up. However, due to historic reasons like powerful customers, strong niche markets and organiza onal dynamics, they end up suppor ng these products with expensive resources including Subject Ma er Experts (SMEs). Technology-centric organiza ons also end up acquir- ing mul ple startups to bootstrap their products with latest technologies. Unfortunately, these acquisi ons come with their own set of products which have to be re red smoothly while ensuring that the key SMEs end up working on the next genera on product por olio. Typically, these products contrib- ute around 15–25% of the product revenues while consuming 25-30% of the R&D spend (most customers have given the feedback that their product audit results are pre y revealing as quite a few products are bleeding). Even organiza ons that are fairly mature in terms of engineering services outsourcing end up having a blanket outsourcing strategy across products and departments. Hence, even end of lifecycle products get outsourced to the tune of say 30-50% only. Based on the product por olio of a customer and the stage at which they lie in the product development lifecycle, ESPs can create specific proposi ons as detailed below.
  12. 12. Ideally, the quantum of outsourcing should be the maximum for Dogs as they are no longer strategic to the organiza on. Such products are ideal candidates for outsourcing of end-to-end product engineering (over 80% of outsourcing). ESPs can easily help bring down the R&D spend on such products by 25-50% with a planned strategy. ESPs can focus on integra ng the sustenance and support teams and manage these ac vi es through a ‘Managed Service’ mode. Focus on high volume ckets in minor releases can ensure op mized opera onal costs while extending the life of the product. If properly mapped, one can easily ensure savings up to the tune of 7-8% of the overall R&D spend of an organiza on resul ng in mul - million dollar savings.Alterna vely, companies can also have a risk reward sharing model with the ESP wherein rewards in terms of savings from the Annual Maintenance Contract (AMC) revenues can be jointly shared. This provides further monetary incen ve for the ESP to manage the integrated sustenance and support in an efficient manner within the AMC revenue of the product and ensure product lifecycle extensions. More importantly, end users typically tend to get quite annoyed with the stoppage of support and invariably switch to compe on resul ng in loss of future revenue streams. Ensuring that the product is kept alive with minor releases ensures that end users can migrate to the next genera on products at a me of their convenience. HCL Case Study HCL created a well-established governance model to manage the program and assumed product manage- ment ownership. We also created specific teams which were focused on driving value and innova on to assist the customer. In the process, HCL was able to reduce the install me by 150% for a par cular ac vity through a parallel install mechanism. We also reduced the requirement of 3rd party tools for traffic genera on, lowered the build crea on me, and reduced the cycle me through test script op miza- on. Strategic ESO Engagement – Industrialized Engineering If one were to analyze the product por olio of any OEM or ISV, the ‘Stars’ and ‘Cash Cows’ typically contribute 60-85% of the overall revenues while consuming 50-70% of the R&D spend. These are the key product lines of the organiza on and garner all the a en on and focus of execu ves. However, while they may be important, there are s ll some horizon- tal aspects of the product and pla orm engineering which can be outsourced without reducing the importance of these product lines. Ideally, these products are apt candidates for opera- onal efficiency and effec veness as they are anyway bulk of the opera onal R&D spend. Simple programs like test automa on, regression tes ng and release management, interoperability tes ng, product cer fica on etc. can easily improve produc vity by 15-20% resul ng in a business impact of up to 7-8% of the R&D spend of the organiza on. In addi on, programs like value engineering and customiza on for emerging and adjacent markets can result in addi onal incremental revenues with a huge business impact.
  13. 13. HCL Case Study For a leading consumer electronics company, HCL was responsible for the ownership of so ware develop- ment and tes ng for a full range of HDTVs consis ng of all TV ranges from 19” to 84”. In the process, we were able to achieve 15% opera onal efficiency through various ac vi es including value engineering for the customer. Being a long term partner (over 17 years) with the customer, we have been able to influence 23% of the customer’s business which is close to $18B. Strategic ESO Engagement – Supplier Sourced Innova on Lastly, coming to the area of New Product Introduc on (NPI), every organiza on would like to spend much more than what is budgeted by senior management. However, nobody wants to risk plagiarism by going the engineering services outsourcing route. By disintegra ng the product engineering ac vi es, companies can iden fy aspects of engineering which are not domain- centric and differen ated. There are mul ple cases of companies collabora ng with their value chain around the overall customer experience and using innova ons from their value chain partners. Supplier sourced innova on is quite common in Hi-tech, Consumer Electronics and other ver cals which are characterized by extreme compe on and IP centricity. Typically, ESPs set up Innova on Groups and focus on Context rather than Core areas for innova on. Innova on happens in the ecosystem around the product, pla orms to extend services of the product, and emerging and adjacent market feature sets. There are even instances of engagements wherein there are contractual obliga ons on the ESP to innovate and come up with IPs. Joint investments on collabora ve innova on have resulted in over 10X ROI for some customers in terms of poten al revenue streams. HCL Case Study For a North American office automa on OEM, HCL envisioned a strategy by launching an innova on campaign and also pu ng together a nego a on approach to stabilize revenues and significantly reduce the cap in service level credits. As a part of the innova on campaign, monthly ID workshops were setup, innova on champions were iden fied, innova on hubs were created, and a review and improvement board for inven ons was established. Through this process, HCL was able to generate over 70 patentable ideas in 12 months for the customer in various areas like color accuracy improvement, inverse half-toning, augmented reality based form processing, image compression algo- rithms, and NFC. These patents ul mately have the poten al to impact over $500M of revenues for the customer. Strategic ESO Engagement – Pla orm & Ecosystem Engineering It is now being observed that products and solu ons also need to be part of an overall ecosystem to succeed. The ecosystem ensures that end users are provided with a seamless experience which encour- ages them to s ck to the product. To achieve this, pla orms have to be built which encompass the products and solu ons. For example, the iPhone wouldn't have been as big a success as it was without the App Store pla orm.
  14. 14. While the primary requirement of a pla orm is to create a marketplace for service mone za on, the way in which pla orms are implemented for different func ons differ as follows: 1. Product management - User group pla orms to assist priori za on of features and func onali es as part of the product roadmap 2. Sales - eCommerce pla orms to facilitate service mone za on 3. Procurement - Partner portal to facilitate easy collabora on across the value chain 4. R&D - Enterprise portals to manage digital assets and facilitate product development 70% of pla orm engineering ac vi es are around basic elements of single sign-on, mul -tenancy, orchestra on, metering & billing, data migra on etc. which are typically domain agnos c. The use of pre-built components can go a long way in the accelera on of pla orm development and deploy- ment. Similarly, most pla orms these days need to support a high amount of concurrent usage and need to be highly secure as vulnerabili es can result in a huge market backlash. Pla orms also need to integrate with best-of-breed enterprise packages to incorporate domain centric business rules and control logic (without reinven ng the wheel) which are essen al for business. Hence, if the product is integrated well with the pla orm and subsequently the ecosystem, it can go a long way in exponen ally improving product experience resul ng in increased service revenues essen al for business impact. Summary There are mul ple engagements which OEMs and ISVs can leverage with ESPs to ensure bo om line and top line impact on their businesses. While the poten al savings and revenue impact are known, o en mes, the challenges are mostly within an organiza on. Even a simple exercise like product por olio analysis can go awry as most of the stake holders would not agree to a nega ve categoriza on of their product due to personal stakes. Programs ini ated in good faith by senior management can be completely botched by high handedness of execu ves in dealing with the ESP as a vendor rather than a partner. Cultural differences between the company and its supplier can also impede collabora ve success. It is impera ve that organiza ons take the help of Engineering Sourcing Advisors to plan the statement of engineering services outsourcing work across products, geographies, func ons etc. in a phased manner. Effort spent in planning and prepara on can never go waste and goes a long way in ensuring success for R&D organiza ons.
  15. 15. For more details contact: Email : ers.info@hcl.com Twi er : www.twi er.com/hclers Website : www.hcltech.com/engineering-rd-services Blog : www.hcltech.com/engineering-and-rd-services HCL Technologies is a global IT services company, working with clients in the areas that impact and redefine the core of their businesses. HCL focuses on ‘transforma onal outsourcing’, underlined by innova on and value crea on, and offers an integrated por olio of services including so ware-led IT solu ons, remote infrastructure management, engineering and R&D services and BPO. HCL leverages its extensive global offshore infrastructure and network of offices in 30+ countries to provide holis c, mul -service delivery to customers. HCL's Engineering and R&D Services (ERS) business unit enables technology led organiza ons to go to market with innova ve products and solu ons. We partner with our customers in building world class products and crea ng associated solu on delivery ecosystems to help bring market leadership. We develop engineering products, solu ons and pla orms across Aerospace and Defense, Automo ve, Consumer Electronics, So ware, Online, Industrial Manufac- turing, Medical Devices, Networking and Telecom, Office Automa on, Semiconductor and Servers & Storage for our customers. Author Information: Vi al Devarajan Vice President, Head of Marke ng, HCL ERS vi aldevarajan@hcl.com Ramesh Natarajan Deputy Manager, Business Marke ng, HCL ERS ramesh.natarajan@hcl.com Akash Jauhari Senior Execu ve, Strategy, HCL ERS akash.jauhari@hcl.com

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