The fast rise in off-shoring key operations such as engineering, design and research and development in India, China, Thailand and Brazil has turned on its head the old notion that companies would not offshore the most important aspects of what they do.
A new study from Booz Allen Hamilton and India's National Association of Software and Service Companies (NASSCOM) reports that companies spend as much as $15 billion on contracting out engineering already, and predict this will increase to at least $150 billion by 2020.
Apart from the desire to find cost savings, companies are also moving in this direction to gain access to markets, maintain resource quality, increase productivity and expand capacity.
The world demand for complex consumer and industrial products and the increased electronic and software content of 'everything from toys to airplanes' is helping to drive the globalisation of innovation. Also, there are not enough engineers in the West relative to the rising numbers available in the emerging markets.
There are as many as six million engineers available there (28% in India; 11% in China). Other countries in Eastern Europe as well as South Africa, the Philippines and Vietnam will also increasingly offer the same services.
Whilst today companies are outsourcing simple processes (documentation, basic simulations etc) this is set to change. By 2010 it will shift to more complex processes such as composite structure design and thermomechanical analysis for aerospace companies. By 2015, companies will routinely outsource whole processes and systems (e.g. climate-control systems for low-end vehicles).
The change is producing completely new global configurations of how a company operates. For example, one auto supplier built its software and design centre in India, its production facilities in Germany and its main engineering centres in the US and Germany to gain access to the most relevant talent pools.
Innovators without borders
By Kevin Dehoff and Vikas Sehgal
strategy + business
Review by Morice Mendoza