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January 18, 2010

Driving home the advantage

Tech players are drawing synergy from the parent platform to win engineering services outsourcing deals..

Once the concept of build to design comes into vogue, another question that needs to be addressed is that of product liability.

Shawn Bracewell, Chief Technology Officer of a California-based company, has the challenging task of selecting suitable manufacturing and engineering vendors for the development of a new cell-phone.

He has zeroed in on China for manufacturing, and India for outsourced design services, instead of taxing the company's in-house engineering department beyond its capabilities.

Bracewell may not have visited India many times but he is surely aware of the engineering prowess of the Tatas, Mahindras, Godrej, Wipro, Larsen & Toubro, etc.

On doing some more legwork, he finds that all these business groups have capabilities within their respective folds to do product engineering, process engineering, plant automation and enterprise asset management by using a combination of an off-shore/onsite model.

(The Tatas can provide engineering services through Tata Consultancy Services and Tata Technologies and also have core engineering companies such as Tata Motors and Tata Advance Systems. L&T has formed a new unit, christened L&T IES or integrated engineering services, for rendering services to third party customers while Godrej group has more than 30 per cent stake in Mumbai-based Geometric, an engineering and product life-cycle specialist. While the Mahindras acquired controlling stake in the erstwhile Satyam Computer Services last year, Wipro has a legacy of engineering because of group company Wipro Infrastructure Engineering.)

On the other hand, there are also pure-play IT companies with engineering outsourcing arms (such as Infosys and MindTree) and engineering companies (Quest and Infotech) that can render similar services on a third party model.

Bracewell's off-shoring experiment is multi-faceted. A few years from now, if all goes well, he will go in for integrated off-shoring by procuring engineering design and manufacturing services from the same vendor. Which Indian company will Bracewell opt for? Will he really look to consolidate his outsourcing programme if things work as planned? eWorld spoke to industry people for more insight.

Indian Engineering Services Outsourcing (ESO) vendors enable computerised design and virtual testing of various automotive and industrial components by using advanced engineering techniques such as computer aided design, computer aided manufacturing and other relevant technologies. India is expected to garner one-fourth of the global ESO business by 2020, generating a whopping $40 billion, as per a joint study by Nasscom and Booz & Co.

Vikas Sehgal, vice-president and director - India business, with management consulting firm Booz & Co, believes that being part of an established engineering conglomerate has a strong ‘umbilical cord' advantage for ESO companies.

“The benefit will be in terms of new deal wins and also from the standpoint of marketing and branding. However, for this to happen, the engineering services company needs to be totally integrated with the parent group,” he says. If it is a well-oiled setup, pure-play engineering companies or ESO vendors can pitch themselves as one-stop shops for their customers.

Explains Dr Keshab Panda, Chief Executive of L&T IES: “In one of our recent interactions with a customer, in addition to providing outsourced services we suggested to source for them the required engineering components by using the supply chains of the parent L&T. The customer was very happy as this enabled him to have costs reduced by 25 per cent.”

Dr Panda claims to have shifted some very senior consultants from the parent company to the IES outfit, a move he believes to be a highly customer-centric one. “In my consulting group I have thought leaders who have been with L&T for, say, the last 20-25 years. So when these people talk to the customer, there is a high degree of cohesion since they would have gone through similar design and manufacturing-related issues umpteen number of times in their careers,” he says. Moreover, customers are keener to engage with well-known outfits especially after the Satyam debacle which shook the confidence of a lot of Chief Technology and Chief Information Officers in the corporate world.

“To work with an organisation that has the lineage of the Godrej group is reassuring for the customer. Thus, the Godrej group not only is a majority shareholder but also a customer and a partner for other engineering projects,” says Ravishankar G, MD & CEO of Geometric.

Elucidating his point, Ravishankar says Geometric is working with multiple divisions within the Godrej group and services its tools design and consumer electronics businesses.

Another school of thought suggests that, going forward, original equipment manufacturers would prefer to outsource the entire process —that ranges from design to engineering — to a single company, rather than outsource each operation to a separate service provider.

Design-to-manufacture

The concept of ‘Design-to-manufacture' is expected to be the way to the future, especially in industries of aerospace, medical devices and consumer electronics, feels Bejoy George – Chief Marketing Officer, QuEST Global. (QuEST has a manufacturing unit that specialises in precision manufacturing, sheet metal fabrication, special processing, design and development of tooling, fixtures and gauges for aerospace, automotive and industrial verticals.)

One of the benefits of this model is that it allows OEMs to interact with only one supplier, thereby ensuring that designers and manufacturers do not blame each other in case of a product failure, he says. Moreover, companies not flush with cash can drive a hard bargain from their vendors by going in for this kind of an integrated model.

So when this model starts gaining traction, will it benefit those companies that already have core engineering capabilities within the group (such as L&T IES, Tata Technologies, Geometric)?

Ravishankar of Geometric replies in the affirmative.

“We have leveraged the Godrej group's manufacturing capabilities in the past where we had to deliver industrial tools to our customers. We are having a lot of conversations to replicate this model from some of the large US-based companies,” he says.

(Geometric has designed assembly tools in North America for over 50 years while Godrej has been in the business of manufacturing tools for more than 70 years.)

Valmeeka Nathan, Vice-President and Global Head-Engineering, Infosys Technologies, feels that the pie is still large for companies like his that specialise in engineering design. His rationale: there are still umpteen customers who prefer dealing with different vendors so that ownership of what is engineered is separate and the ownership of what is designed is separate.

However, he does second the idea that the engineering services arms of IT companies need to work tighter with other external manufacturing companies for servicing a common client base.

“Since we do not have manufacturing capabilities at Infosys, we reach out to our clients' manufacturing vendors and do their work, that is to incorporate engineering on behalf of the customer,” says Nathan.

Infosys' rival Wipro also has a similar strategy for doing high-end work. While the engineering arm of the country's third largest IT provider does harp on its association with Wipro Infrastructure Engineering (which is in the business of delivering precision-engineered hydraulic cylinders, components and solutions), it recognises the need to engage with partners for manufacturing.

“You need to build an ecosystem of manufacturing partners that are dependable…otherwise the theoretical designs may not work,” says Dr TSK Murthy, Wipro's Vice-President.

“For mass manufacturing you can identify a vendor and link it to the OEM. For soft manufacturing you can use the ecosystem of partners,” he adds.

Once the concept of build to design comes into vogue, another question that needs to be addressed is that of product liability.

Several client companies are known to be very stringent with the product liability clauses in their contracts, something that Indian companies are wary of.

“If, for instance, a product fails due to the fault in design, then the users of the product could sue the company from which the product was bought. If that happens, the client company will sue the engineering design provider,” says George of QuEST.

In sectors such as aerospace and medical equipment, product liability damages could be anywhere upwards of approximately $25 million!

In India, however, there are not many insurance companies that provide product liability covers, another deterrent for Indian companies to put their skin in the game.

by Adith Charlie - adith@thehindu.co.in

SOURCE: http://www.thehindubusinessline.com

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