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To print: Click Here Best Printed on HP LaserJet's -----------------------------------------------------------This story was printed from Dataquest at http://dqindia.ciol.com Do you want to receive FREE weekly Information Technology updates by email? Sign up for our newsletters at http://dqindia.ciol.com/content/services/register/register.asp?fid=1 -----------------------------------------------------------Article Title: Engineering Design Services: Advantage, IT Players URL: http://dqindia.ciol.commakesections.asp/07080323.asp Section: IT Gaints 07 Author Name: Shyamanuja Das Author Email: shyamanujad@cybermedia.co.in -----------------------------------------------------------Outsourcing in engineering is not a new concept. Large companies in automotive, construction, manufacturing and other industry clusters within heavy engineering have been outsourcing part of their design and drafting work to third party vendors for quite some time. So have the consumer product companies. However, the nature and value of the outsourced business varies significantly in both cases. It is generally the specialized engineering firms that these jobs are outsourced to. The fact that IT services companies are doing a large chunk of this work is by and large an Indian phenomenon. Almost all the large Indian IT services firms have a focused approach to engineering services, a practice growing in size. Engineering serviceswas a $1.4 bn market in FY 07 Multi-services IT firms rule the offshore engineering services in India Aerospace and automotive industries are themost prolific users of offshoring engineering services Availability of trained manpower Combining its traditional services strengths and newly acquired skills, TCS wanted remains a challenge to expand into the engineering design lifecycle space. An ambitious thought, considering such work had hitherto been done only by specialized engineering services firms. These being end-to-end engineering services companies and pure play design firms. For a generalized IT services firm like TCS, this was certainly a first. TCS tried selling the idea to an equally innovative and bold customer, GE, which at that time was its customer for IT services. GE, a pioneer in several areas including offshoring, saw value in the proposition and evinced keen interest. By 1999, TCS signed on GE for high-end analysis work on the abstract jet engines. That deal, though presumably small, was surely a giant leap for engineering offshoring business in general and the Indian IT industry in particular. TCS, the Maverick In the late eighties Tata Consultancy Services (TCS), then a division of Tata Sons, was reselling engineering design software products primarily to Indian customers. TCS dealt in Unigraphics and some other products from McDonald Douglas. Providing support services was critical, and for that TCS had to build considerable expertise around these products. By 1994-95, TCS had developed significant skillsets in these and similar areas. Since then TCS aggressively pursued this line-of-business and has been able to maintain pole-position till date. Today, with others joining in, engineering design services has become an integral part of IT services portfolio in the country. A Heterogeneous Mix Unlike services that target enterprise IT functions and areas, engineering services is not a horizontal by itself. So what exactly constitutes engineering services? While different companies follow different definitions for engineering services, in our study we have excluded a few services that are often classified by some companies as engineering design services. They include software product
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engineering, embedded software design, and any other semiconductor related design work. The primary reason for doing that is that today these services are far more integrated with other IT application development work, and hence there is a tendency to club them with application development. This has resulted in the exclusion of most of the high tech industriessoftware, IT, semiconductor, telecom systems. High tech products that have become consumer products in their own rightlike mobile phonesare the only exceptions. They are included in consumer products. There are various ways by which the industry can be classified. The three most common ways being: nature of work, verticals and provider types. Even this would result in some overlaps. Since engineering life cycles are so different across verticals, it is almost impossible to have a simple classification by type of work that will apply well to all industries. In our research and subsequent analysis, we have tried to study the market based only on classification by industry and by provider type.
W ith one -third of the m ark e t share The major outsourcers of engineering services, leaving the excluded categories mentioned am ong the m se lve s, the two Tata com panie s prove that the group is not above, are aerospace, automotive, construction, consumer products, industrial/medical just a le ade r in old-e conom y and ne w- devices, and manufacturing. By and large, they remain the major industries for engineering e conom y busine sse s, but also in the ir services. But the extent of offshoring is fairly different for each of these sectors. am algam ation

The India Focus In India, most of the third party players draw their revenues from three areasautomotive, aerospace, and industrial/plant automation. Consumer products are fast emerging as a major segment, though. Many other segments, that are globally big spenders on these services, are less visible in India. Take construction, for instance, where globally, the spending on services is huge. But the revenue break-up of most of our top companies indicates otherwise. There are a few reasons for this. Firstly, a large chunk of engineering spend by the construction industry is onsite. But more importantly, this is an area where the traditional service providers are fairly organized and consolidated. Many of them are present in India, unlike designers in aerospace and automotive industries. Having sensed the opportunity well in time, most of them built large offshore services teams, which now cater to their global customers. Examples include big names such as Bechtel, Flour Daniel, Butler, and Lurgi. All these firms have fairly large offshore services teams. Also, many of them use India as a resource base for manpower, even for their onsite work. Traditionally, the level of enterprise IT usage in construction is low. As a result, Indian IT services companies have had limited interactions with them. On the other hand, industries like automotive and aerospace are smart users of IT at the enterprise level. Indian IT services companies have leveraged these relationships to get an entry into their engineering departments. Major CategoriesComparative View
Category Large IT services firms Strengths Bring in the be st global de live ry practice s to e ngine e ring se rvice s including world class m e trics Be tte r use of te chnology tools More e fficie nt proce sse s C apability to ram p up fast Too m e tricsdrive n Weaknesses O fte n lack de e pe r unde rstanding of dom ain Impact/Presence Examples By far the large st se gm e nt TC S, Infosys, W ipro, Satyam , HC L, Patni, e tc

Specialized IT services firms

Focuse d and conse que ntly have de e pe r

Ability to ram p issue

The se cond m ost

Infote ch Ente rprise , R olta,

up is usually an dom inant se ction

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dom ain e x pe rie nce O pe rate lik e global IT se rvice s firm s he nce ge t the be st practice s from the re too Indian engineering company spin-offs Captives More control and inte gration with onshore ce nte rs Large r cost structure Q uite a size able chunk Have a good unde rstanding of dom ain W ay be hind in te rm s of Lim ite d im pact global de live ry practice s He ro, Mahindra, Harita, Ashle y GE, C ate rpillar, De lphi, Ford, Daim le rC hrysle r, GM, Sie m e ns, Bosch Non-Indian engineering firms Usually focuse d Lag in te rm s of global de live ry practice s Mostly in the construction se gm e nt Be chte l, Flour, Lurgi, Butle r Attracting e m ploye e s is an issue in a highly com pe titive labor m ark e t Ge om e tric, Ne ilsoft, Q ue st, L&T Infote ch

It happens only in India: W hile pure play firm s rule in e ngine e ring se rvice s globally, in India it is IT firm s who dom inate

That however does not mean that construction has no offshore players. Many of the smaller, niche players like Neilsoft have consciously targeted this space. Among the bigger players, TCS now intends to target construction far more seriously. This is in partnership with group company Tata Consulting Engineers, a major player in the construction engineering space in the country. Whos Who and Where How major companies look at this opportunity articulates their overall positioning. Among the big three of Indian IT, TCS happens to be in almost all the areas. Wipros positioning on other hand needs a bit of explaining. It may come as a surprise that in our study of engineering services, Wipro ranks relatively low. That is because Wipro draws most of its engineering services revenues from telecom and semiconductor, industries that we have excluded. Wipro is more of an R&D services player than an engineering services player. The clear tilt towards telecom and semiconductor is because R&D constitutes a significant part of these outsourced services. However, with the acquisition of Quantech, it should strengthen its position in automotive, aerospace, and consumer products as well. Infosystraditionally not known as a product engineering companyranks fairly high. Almost all of its revenue from engineering services comes from manufacturing. But the contribution of engineering services to the overall revenue is on a steady decline. Tier-2 Looks Serious The most interesting story in engineering services pertains to the next tier IT companies. The next three multi-services firms in DQ Top 20 have, without exception, identified engineering services as the differentiator. Satyam, which does not boast about its engineering services capability, fares quite impressively with as much as 6.5% of its revenue coming from this area. Also, Satyam, like TCS, has a balanced portfolio with automotive, aerospace, consumer products, and construction all contributing significantly. HCL, the next player, is the other extreme. It draws more than 85% of its engineering services revenue from aerospace. But by far, Patnis engineering services is the most mature. Not only has it a balanced portfolio in terms of industries addressed, its geographical presence is also most diverse. Japan, which according to the 2006 Nasscom-Booz Allen Hamilton report on engineering services, accounts for 21% of global engineering services spend, is not penetrated well enough by anyone other than Patni. The real surprise comes in the form of the No 2 ranked Tata Technologies. This specialized engineering services firm started as an in-house IT and engineering services division of Tata Motors. Tata Technologies grew impressively by virtue of a single large acquisitionthat of INCAT. The estimated revenues exclude that from India and other businesses like training and ERP implementation. INCAT is extremely strong in training. The next specialized firm, Infotech Enterprise, comes at No 7. The company that boasts among its clientele, aerospace players such as Boeing and Airbus, is a fairly low profile so to speak. Like Infotech, most niche players are focused on one industry or two. For example, Neilsoft is fairly focused on construction and industrial automation. L&T Infotech is focused on construction and
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Geometric Software is focused on automotive and consumer products. Captives are a big story by themselves, be it GEs Jack F Welch Technology Center, GM, Ford or Delphis captive design centers. These are among the better known. Many of these are engaged in high-end design work. Though unlike telecom and semiconductor, there is very little of holistic product design, these captives are slowly moving up the value chain. The availability of skilled manpower has been a major issue behind slower ramp-ups. The spin-offs of Indian manufacturing and automotive firms have so far not been able to make a mark, with the notable exception of L&T. L&T Infotecha division of L&Tis a mature IT organization by itself and engineering services is just part of its overall portfolio. The non-Indian service providers are largely restricted to the construction industry. Over a Billion, and Counting The total third party engineering services export market from India is estimated to be around Rs 4,209 crore. Though Dataquest has not studied the captive market; its size is pegged by analysts to be between Rs 1,800 to Rs 2,500 crore. Dataquest believes it to be on the higher side of the range, at around Rs 2,250 crore. Put together, Indias export of engineering design services is Rs 6,459 crore (about $1.4 bn). The top five players account for 56.8% of the total market and all the firms profiled in the table of Top Players account for as high as 84.3%. The rest of the market is divided among certain specialized firms such as Plexion, Ashley Design, and Harita, Hero Global Design Services, besides smaller players. For the purposes of our study, export revenues of firms such as Bechtel, Flour, and Lurgi have been counted along with the captive players. The Bakers Dozen
Company TC S Positioning The top Indian IT se rvice s playe rs tops in e ngine e ring se rvice s too, with a we ll-balance d portfolio in autom otive , ae rospace , and industrial m achine ry. Ge tting se rious about construction too Tata Te chnologie s The Tata Motors subsidiary m ade it big through acquisition of INC AT, a De troit-base d e ngine e ring firm Satyam The unsung he ro of e ngine e ring se rvice s. Satyam follows a TC S-type m ode l and has a fairly we llbalance d ve rtical bre ak -up with autom otive , ae rospace , consum e r products and plant, and industrial autom ation contributing significant parts to its re ve nue HC L Though HC Ls e ngine e ring capability as an e ngine e ring se rvice provide r is m ore we ll-k nown, it draws m ost of its re ve nue from ae rospace , whe re it is an undispute d le ade r Infosys Its e ngine e ring se rvice s is fairly low-profile , ve ry m uch unlik e Infosys. It draws m ost of its re ve nue from the m anufacturing se gm e nt Patni Patni is fairly se rious on e ngine e ring se rvice s as its growth e ngine . In addition to its we ll-balance d industrie s portfolio (with m ost re ve nue com ing from m e dical de vice s), it is the only playe r that has pe ne trate d the Japane se m ark e t, a large e ngine e ring se rvice s m ark e t, fairly we ll Ge om e tric Software Ge om e trics stre ngth lie s in autom otive and consum e r products Infote ch Ente rprise s Focuse d on ae rospace with high-e nd de sign work , with Airbus and Boe ing as m ajor clie nts R olta It is one of the fe w playe rs we ll-e ntre nche d in construction. It also has a thriving ship-de sign se rvice s practice Q ue st A ne w ge ne ration e ngine e ring se rvice s firm , Q ue st is m ode lle d along the large IT se rvice s firm s e x ce pt that it is com ple te ly focuse d on 153.2 195.1 205.9 210.7 216.2 222.5 314.4 450.5 675.8 Revenue (Rs crore)* 725.3

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e ngine e ring se rvice s, with ae rospace be ing a m ajor focus. It also draws its re ve nue from autom otive and industrial products W ipro W ipro, a global le ade r in te le com and se m iconductor de sign se rvice s fe ature s so low in this list, prim arily be cause we have e x clude d the se se gm e nt from this re se arch L&T Infote ch The only succe ssful com pany am ong the spinoffs of e ngine e ring com panie s in India, L&T Infote ch, is strong in construction and m anufacturing se gm e nts Ne ilsoft Ne ilsoft draws m ost of its re ve nue from construction, industrial autom ation and transportation (including autom otive and m arine ) *From engineering services only 1$=Rs 45.05 65.3 128.4 141.9

In Search of Domain Expertise According to the Nasscom-Booz Allen Hamilton report on engineering services offshoring, though the potential for India in engineering services is in the range of $12 bn to $16 bn by 2010, the most likely scenario would be in the region of $3-5 bn. While the report identifies many reasons including lack of infrastructure, the biggest challenge happens to be manpower. Today, most of the engineering services companies hire a mix of fresher and experienced workforce. The composition of workforce is far more inclined towards experienced professionals than fresh talent. Domain experience is quite critical in this area. In the traditional IT services space, learning and unlearning of skills are fairly rapid. Also, it is possible to rotate large number of employees across verticals. In engineering services, that is not so. It is unrealistic to expect an automotive engineer to do construction design. Also, the number of people in a project team having in-depth domain knowledge is just about 10%-15% in IT; whereas it could be as high as 45% in engineering services. Recruitment poses a challenge, especially in fields where Indian engineering is not that developed. Most companies hire locally, though acquisitions have helped in getting the right skills, to some extent. Internal training is something that even the smallest of players spend heavily on. Unless there is a mechanism to address this challenge, acquiring and nurturing talent could be a bottleneck. Shyamanuja Das shyamanujad@cybermedia.co.in -----------------------------------------------------------C opyright (c) 2007 C yberMedia India Online Ltd . All rights reserved. Additional reproduction in whole or in part or in any form or medium without express written permission of C IOL is prohibited. Send your questions to webmasterciol@cybermedia.co.in

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