Demand for Engineering Services

Outsourcing is increasing,
particularly for offshore vendors
May 2012

TBR

T E C H N O L O G Y B U S I N E S S R ES E AR C H , I N C .

HCL ESO Whitepaper | May 2012

2012 Technology Business Research Inc.

Contents
Introduction ... 3
ESO Vendors Are Poised To Gain A Larger Share Of The Engineering Services
Market 3
The Indian ESO Industry Is Expected To Experience Strong Growth, Supported
By Its Skilled Work Force ... 4
HCLTs Product-focused History Gives It The Tools To Be Successful In ESO .. 4
HCL Surpasses Its Peers In Terms Of Total ESO Revenue . 5
HCLs Top Indian Outsourcing Provider (IOP) ESO Competitors .. 6
Conclusion .. 7
About HCL Enterprise . 7
About HCL Technologies 7
About TBR ... 8

HCL ESO Whitepaper | May 2012

2012 Technology Business Research Inc.

The Engineering Services Outsourcing industry is

growing as firms seek cost-savings opportunities
Companies are outsourcing engineering services more than ever. The growth trend is
expected to accelerate in the coming years as offshore options increase, particularly in
India, to support cost-cutting efforts.
TBR Position
TBR believes the
Engineering Services
Outsourcing (ESO)
industry is at the
beginning stages of a
growth trajectory. We
believe ESO vendors,
particularly in India, are
positioned to capture a
larger share of the
market due to the
alignment of their
current capabilities and
increased focus on the
ESO market. HCL, for
example, has utilized its
product-focused
background and
specialized knowledge in
IT to become the largest
ESO vendor in India.
TBR believes companies
reliant on manufacturing
and engineering need to
predict needs and
prepare for opportunities
they may not be able to
address on their own. By
partnering with an ESO
vendor committed to
expanding capabilities,
constantly improving its
track record, and pushing
the current limitations to
bring about the next
wave of products,
opportunities become
limitless.

Introduction
To fully understand Engineering Services Outsourcing (ESO) and its current
state in the market, it is necessary to define the functions that are considered
engineering services. Engineering services are tasks that involve the
nonphysical acts of engineering, such as the preparation, design, and consulting
work supporting engineering. One example is the design of a jet engine;
however, the actual building of the engine is considered an engineering
function. Engineering service providers solely focus on the services for
engineering and rarely work on the engineering processes they establish,
consult, and/or manage.

ESO Vendors are Poised to Gain a Larger Share of the Engineering

Services Market
Multiple sources estimate the current size of the global R&D industry at $1.1
trillion per year, or less than 2% of the world economy, and it is expected to
grow to more than $1.4 trillion by 2020. The same sources estimate the current
amount of engineering services being offshored each year is less than 10% of
total market share. TBR believes ESO vendors have the capabilities to more
than double this figure. Studies indicate roughly 30% of international
companies have outsourced aspects of their new product development. All of
these figures are expected to see significant growth within the next few years.
Historically, several factors were cause for concern when companies
considered ESO; the largest concerns include turnaround time, quality and
trust. ESO involves a higher level of functionality within a company and is
strategic to a companys value proposition, as it drives innovation. Due to this,
companies tend to keep engineering services on-site and leverage outsourced
services for lower-level functions, such as finance, accounting and
manufacturing. However, because of the economic climate and cost-saving
potential, many companies can no longer justify keeping their engineering
services in-house.
Another primary concern with ESO is the perceived slow turnaround time. In
todays market there is ever-increasing demand for faster delivery of products
and services. Due to technology advancements significantly decreasing product
lifecycles, clients are increasingly demanding faster delivery of services to

HCL ESO Whitepaper | May 2012

2012 Technology Business Research Inc.

obtain a competitive advantage over rivals. ESO vendors have realized this, and
are now able to deliver their engineering services as fast as, or faster than,
companies would be able to internally.
The final cause for hesitation is quality concerns. In the past, firms would
hesitate to outsource engineering services due to the inferior product that
outsourcing returned; however, ESO vendors invested in increased quality
awareness to produce a quality outcome, and now firms that leverage ESO are
able to obtain high-quality services.
An array of sources
indicate the global
offshored ESO market will
increase from less than
$100 billion currently to
at least double that
amount by 2020, 15% to
20% of which will be from
Indian companies.

While ESOs greatest weaknesses in the past have become strengths, the
potential for additional cost savings remains. Recent growth is partly due to the
economic hardships many companies face. Perhaps the most significant push
for companies to outsource their engineering services remains the costreduction aspect outsourcing provides. Outsourcing engineering services allows
companies to get the most out of tighter budgets and increase concentration
on more pressing matters, such as executive management decisions.

The Indian ESO Industry is Expected to Experience Strong Growth,

Supported by Its Skilled Workforce
Of the $1.1 trillion R&D market, less than $100 billion is currently offshored as
a service. Major offshore locations include Mexico, Eastern Europe, China and
India, with India consisting of approximately $13 billion (includes captive
operations), or 10% to 13% of the offshored market. By 2020, offshored
engineering services is expected to grow to more than $200 billion, while
Indias share is expected to increase to $45 billion to $50 billion.

HCL is experiencing
strong growth due to its
cost saving and timely
delivery capabilities
coupled with its increased
product-quality
reputation.

Indias largest asset in ESO growth potential lies within its people. India has the
largest amount of engineering graduates with the appropriate skillsets
compared to all other emerging, low-cost countries for ESO; however, India
lacks the infrastructure needed to support the increasing demand. Among
Indian ESO vendors, HCL leads the group with the highest revenue and largest
percent of total revenue (at the time of publication).

HCLTs Product-focused History Gives It the Tools to be Successful

in ESO
HCL is a $6.2 billion global enterprise, comprising two separate companies: HCL
Technologies (HCLT) and HCL Infosystems. HCLT is a leading global services
provider of IT services, IT Infrastructure services, Engineering and R&D services
and BPO services. HCLTs Engineering and R&D Services segment came to
fruition in the late 1990s, and has become a vital part of HCLT, consisting of
18.9% of its revenue.
HCL started as a hardware product company in 1976, featuring a strong
engineering team from the beginning. HCL saw an opportunity to take its
expertise and provide engineering outsourcing services to companies across

HCL ESO Whitepaper | May 2012

2012 Technology Business Research Inc.

the globe. HCL took its specialized knowledge and skillset and applied them to
hardware, software, mechanical, and compliance services. To penetrate the
market, HCL placed a strong focus on establishing engineering partnerships
with leading technology companies, such as Microsoft, Boeing and Cisco.
To adapt to the ever-changing market, HCLT established its Engineering out of
the box (EOOTB) strategy in 2009. The EOOTB strategy is based off the shifting
market trend from core product development services to creating ecosystem
advantages around clienteles products. Under the EOOTB strategy, HCLT
identified three key focus areas.

HCL successfully leveraged

strong partnerships with
industry leaders to
penetrate the ESO market.
It has received top
partnership awards from
prestigious companies
such as Symantec, Boeing,
Microsoft, Cisco and
Hamilton Sundstrand.

1. Core Products: Enable customers to develop cutting-edge nextgeneration products.

2. Ecosystem Innovation: Create a platform for ecosystem innovation of
core products.
3. User Experience: Assist in ecosystem product adoption.
The EOOTB strategy has proven successful for HCLT. In the past two years, HCLT
has secured the largest engineering partnership deal with a Fortune 500
company, along with 48 out of the top 100 R&D spenders globally. HCLTs ESO
division also created more than 200 patents for customers around the world. In
4Q11, HCLT surpassed Wipro as the top Indian ESO provider, with revenues of
more than $193 million for the quarter. To support this growth, HCLT invested
$20 million in its labs globally.

HCL Surpasses Its Peers in Terms of Total ESO Revenue

The primary India-centric ESO vendors are HCL, Wipro, Infosys and TCS, with
HCL being the largest. HCL has outpaced Wipro in terms of ESO revenue growth
in recent quarters, passing Wipro as the leading Indian ESO vendor in 3Q11. In
4Q11, HCLs strong growth continued, as it established 34.2% market share
(market share is comprised of HCL, Wipro, TCS and Infosys) in the ESO
landscape. HCL is in a strong position to continue to capture a larger piece of
the growing ESO industry.

HCL ESO Whitepaper | May 2012

2012 Technology Business Research Inc.

ESO MARKET SHARE BY COMPANY*

TBR
45%
40%

Percent Ma rket Share

35%
30%
25%
20%
15%
10%
5%

0%
4Q09

1Q10

2Q10

HCL

SOURCE: TBR

3Q10

4Q10

Infosys

1Q11

2Q11

TCS

3Q11

4Q11

Wipro

*Market share consists of only these four companies

HCLs top Indian Outsourcing Provider (IOP) ESO competitors

HCLs top IOP competitors

in the ESO market space
are Wipro, Infosys and
TCS. The three companies
combined saw more than
$1.4 billion in ESO
revenues in 2011.

x TCS has been in the ESO industry for more than 20 years. Its recent growth is
attributed to increased focus on expanding into LATAM, APAC and EMEA
geographies that are less impacted by macroeconomic headwinds. TCS
experienced a 15.6% year-to-year revenue growth rate, which was below
average compared to competitors. In 4Q11, TCS ESO segment represented
4.6% of its total revenue, compared to 6.3% in 4Q08.

4Q11 vs. 4Q10 ESO PERCENT OF TOTAL REVENUE AND

YEAR-TO-YEAR GROWTH OF PRIMARY IOP VENDORS

TBR
25.0%

4Q10 HCL
$159,859

ESO % of Total Revenue

4Q11 HCL
$193,139
20.0%

15.0%

4Q11 Wipro
$188,923

4Q10 Wipro
$179,044

Avg. ESO % of Total

Revenue: 9.9%
10.0%

4Q10 TCS
$102,912

4Q11 TCS
$118,938
5.0%

0.0%
-10.0%

4Q11 Infosys
4Q10 Infosys $63,210
$41,210

Avg. ESO Revenue

Growth YTY: 23.8%
0.0%

10.0%

20.0%

LEGEND: SIZE OF BUBBLE = ESO REVENUE.

UE.IN THOUSANDS.
ESO
SOURCE: TBR ESTIMATES AND COMPANY DATA.

30.0%

40.0%

50.0%

60.0%

Revenue Growth YTY

x Infosys drives ESO revenue growth through its Innovate, Transform, and
Optimize strategy. Infosys applies innovation to client offerings, transforms
how these offerings are engineered, and optimizes execution to deliver
measurable business value. Infosys has emerged as a serious competitor due to
6

HCL ESO Whitepaper | May 2012

2012 Technology Business Research Inc.

TBR Conclusion and

Outlook
TBR believes vendors such
as HCL will strengthen ESO
capabilities and brand
awareness in concurrence
with increasing demand
stemming from clients
cost-reduction efforts. We
believe advancements in
technology will allow
offshore ESO vendors to
meet clienteles time and
quality demands. We
anticipate IOPs to outpace
other low-cost offshore
options, taking full
advantage of their highly
skilled, technologyexperienced workforce.
We foresee HCL capturing
a stronghold in the Indian
ESO market, as recent
growth and investments
lead us to believe they
have sound strategy and
full commitment in the
industry.

strong growth rates in recent quarters, boasting a 64.4% year-to-year revenue

growth rate in 4Q11 in the ESO market place. Despite recent growth, Infosys
remains the smallest of the four major players, consisting of 11.2% of the
market share*.
x Wipro concentrates its ESO efforts on providing entertainment, information,
and analytics to the user experience. Wipro also focuses on providing mobility
for enterprises, computing and data management, and enhancing its plant
facilities. While HCL has kept its year-to-year growth rates above 20% in six of
the last seven quarters, Wipros year-to-year growth rates have remained
under 10%, as other IOPs steal market share, allowing HCL to surpass it in total
ESO revenues for 2H11.

Conclusion
The Engineering Services Outsourcing market is expected to see significant
growth during the next 10 years. The primary driver for outsourcing
engineering services is cost reduction benefits as macroeconomic headwinds
cause budget austerity. To capture the growing market demand, offshore
competitors have emerged as strong players, particularly in India. With modern
technology, offshore ESO vendors provide services of equal or better quality in
a timely fashion. They do so while offering lower prices than onshore
outsourcing options, stemming from lower wage rates in low-cost countries.
HCL has emerged as the leading IOP ESO provider, committed to capturing the
growing market and embedding ESO into its company strategy.

About HCL Enterprise

HCL is a $6.2 billion leading global technology and IT enterprise comprising two
companies listed in India: HCL Technologies and HCL Infosystems. Founded in
1976, HCL is one of Indias original IT garage start-ups. A pioneer of modern
computing and a transformational enterprise, HCLs diverse range of hardware
and software offerings span a wide array of focused industry verticals. The HCL
team consists of 88,000 professionals of diverse nationalities, who operate
from 31 countries, including more than 500 points of presence in India. For
more on HCL, please visit www.hcl.com.

About HCL Technologies

HCL Technologies is a leading global IT services company, working with clients
in the areas that impact and redefine the core of their businesses. Since its
inception into the global landscape after its IPO in 1999, HCL has focused on
transformational outsourcing, underlined by innovation and value creation,
and offers integrated portfolio of services, including software-led IT solutions,
remote infrastructure management, engineering and R&D services and BPO.
HCL leverages its extensive global offshore infrastructure and network of
7

HCL ESO Whitepaper | May 2012

2012 Technology Business Research Inc.

offices in 26 countries to provide holistic, multiservice delivery in key industry

verticals, including Financial Services, Manufacturing, Consumer Services,
Public Services and Healthcare. HCL takes pride in its philosophy of Employee
First, Customer Second, which empowers 83,076 transformers to create a real
value for the customers. HCL Technologies, along with its subsidiaries, has
reported consolidated revenues of US$3.9 billion (18,334 crores) as of Dec. 31,
2011 (on LTM basis). For more information, please visit www.hcltech.com

About TBR

TBR

Technology Business Research, Inc. is a leading independent technology market

research and consulting firm specializing in the business and financial analyses
of hardware, software, networking equipment, wireless, portal and
professional services vendors. Serving a global clientele, TBR provides timely
and accurate market research and business intelligence in a format that is
uniquely tailored to clients needs. TBR analysts are available to further address
client-specific issues or information needs on an inquiry or proprietary
consulting basis.

For More Information

TBR has been empowering corporate decision makers since 1996. For more
information, visit www.tbri.com.

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HCL ESO Whitepaper | May 2012

2012 Technology Business Research Inc.