European engineering companies may be aware of the potential savings of moving production abroad, but not many are considering outsourcing their engineering. Jon Severn spoke with Ajit Prabhu, whose company partners with engineering firms to provide engineering resources based in India and China.
Within the European engineering community there is a general awareness of the growing economies and engineering capability in countries such as India and China. Often engineering companies see this as a threat to their business, as they fear that 'copies' of their own products will be manufactured more cheaply to undercut their own, or genuine alternative designs will be produced at a lower cost by using cheaper labour.
More progressive manufacturers see things differently; they want to sell into the growing markets, set up production facilities to take advantage of lower labour rates, or sub-contract assembly operations to companies in these countries to reduce overall costs.
In many cases European manufactures only think in terms of the manufacturing and assembly side of the business, but the engineering capability of countries such as India and China is now such that there is no reason why elements of design and development should not be moved abroad. The question, in that case, is which route to take? Large companies may simply set up a subsidiary and recruit local engineers, or acquire an existing engineering operation in its entirety. Joint ventures with local engineering companies are also possible. But all of these options carry their own risks and management challenges.
For those companies prepared to take a medium- to long-term strategic view, there is another alternative. Quest is a company incorporated in the USA that has a growing number of offices in Europe, plus others in India, China and Japan. The company works in the fields of aerospace, power generation, oil and gas, automotive and industrial engineering to provide cost-effective, hassle-free engineering resources. Once an agreement is in place, Quest creates a team of engineers and provides them with the necessary facilities, IT (information technology) equipment and software. Furthermore, Quest can also call in additional resources if required to cope with short-term peaks in the customer's workload. The customer simply pays an agreed fee, and Quest manages all aspects of recruitment, training, facilities and IT.
Services provided typically have a bias towards 3D CAD modelling, but the level of expertise also extends as far as FEA (finite element analysis), CFD (computational fluid dynamics), design optimisation and design for Six Sigma. Further downstream in the development process, Quest's engineers can also look after rapid prototyping, the design, fabrication and operation of test rigs, and the creation of technical publications. The aim is to allow the customer to focus on their core engineering activities and let Quest perform the non-core engineering tasks. For some customers this means that the Quest engineers will also be involved in – or take full responsibility for - concept design and development at one end of the process and, at the other extreme, tooling design, and identifying, qualifying and managing relationships with tooling companies and low-cost component suppliers and manufacturing organisations.
Ajit Prabhu, co-founder and CEO of Quest, and a Six Sigma Green Belt certificate holder, says: “Customers usually start working with us on the mainstream design and development activities for new and legacy products, then branch out from there. What is a core activity for an engineering company today will be non-core within five years. Usually we start by providing low-level support to customers with their core activities, and then gradually take on full responsibility as those activities are no longer seen as core to the customer's business. In the eight years since Quest was founded, our main customers have all followed this trend. Other companies have only used us as a tactical resource, but we prefer to work closely with customers in a strategic partnership; that way the customer gains the most from our approach to Global Product Development” .
Quest will typically build a team of around 20 full-time engineers for a customer. However, to maximise the return on investment in infrastructure, the staff work in two shifts. Depending on the geographical location of the customer and the Quest office, this can also enable the customer's engineers to send a request for an engineering task to the Quest office one afternoon and have the result waiting for them when they return to their desks the next morning. Moreover, the two-shift working pattern can also help to reduce development timescales.
But the main reason for using global product development (GPD) is cost reduction. Ajit Prabhu comments: “In a project to develop an inlet plenum for a gas turbine, the USA-based customer undertook the conceptual design phase and we worked alongside the customer on the detailed design. We then took responsibility for performance enhancement, design optimisation and preparation of manufacturing drawings. Quest worked with the customer on vendor qualification in the USA and China, and field support in the USA. As a direct result of our input to the project, design costs were reduced by 50 per cent, Six Sigma saved a further 8 per cent on material costs, and manufacturing costs were 30 per cent lower. These are figures taken from a specific project but, as a guide, customers can expect to reduce product development costs by 30 per cent, and 50 per cent is achievable when maximum use is made of the capability available.”
For companies that might currently be struggling to shave 5 or 10 per cent off their product development costs, the potential for saving 30 per cent or more through GPD partnerships is very attractive.
Ajit Prabhu says: “We currently have around 60 customers, 15 of which are ‘core'’customers that make extensive use of what we can provide. Most of our customers have turnovers ranging from USA$2billion to USA$20billion. Pratt & Whitney, GE, Danaher, Smiths Aerospace, GM, Caterpillar, Toshiba, Honda, Nuovo Pignone, Heico Corporation and Sequa Corporation all use Quest's services.”
In order that Quest can continually deliver the required resources, quarterly reviews are used to predict the numbers of engineers that will be needed in the future and, most importantly, the skills that they will need. Clearly there is a limit to the number of experienced engineers that can be recruited locally, so Quest has worked with six engineering colleges in India to establish Centres for Advanced Design and Manufacturing. During their final year of study, students undertake a six-month project. The nature of the projects and the type of software used for them depends on Quest’s customer's predicted requirements. So, for example, Quest currently has a number of students working on aerospace projects using the Catia solid modelling system. Ajit Prabhu says: “We can hand-pick from the engineers coming out of the courses, having monitored them closely for six months. At any time we have access to around 200 engineers in training.”
As well as the engineers that work in Quest’s offices to meet the base load requirements of customers, engineers can also be located in Quest’s other global offices to assist with tactical support. For instance, there are currently around 35 engineers based in offices in Florence, Italy, and others in Bristol and Nottingham in the UK. Approximately 50 engineers in Quest’s USA offices are currently providing tactical support for military programmes. Additional engineers are occasionally deployed to work on the customer's site for short-term projects, some of which may be local while others could be from Quest’s pool of engineers in India.
Ajit Prabhu comments: “Globalisation is here to stay. Around 60 per cent of our revenues currently come from North America and approximately 30 per cent from Europe. This figure will grow, as we are opening offices in Europe at the rate of one per year. Last year we set up an operation in Italy, and this year we will do the same in Germany. Clearly our continued expansion depends on our investment capability and pipeline customers, but we see major growth potential in Western Europe.”
Resistance to outsourcing
Companies that are new to the idea of GPD often have concerns that have to be overcome before they are comfortable with global outsourcing of product engineering. Quest finds that new customers often have little or no experience of working remotely and therefore have to introduce new management processes. Indeed, some customers have never outsourced any engineering tasks, even locally, which makes GPD a major step to take. Nonetheless, as Ajit Prabhu explains: “The transition is made as simple and painless as possible. We help customers to put the necessary management procedures in place and we encourage them to have a single point of contact - an account manager – through which communications are channelled with the corresponding remote account manager. Pilot projects are then identified, and the remote account manager takes responsibility for ensuring they are delivered to the customer's satisfaction. Process improvements are identified and implemented at the pilot stage, so the outsourced functions can be revised or enlarged, based on the developing partnership. Once the processes and communications channels are proved to be working well, the scope of the outsourcing can be gradually increased and developed.”
Another fear-factor for some customers is the protection of intellectual property (IP). Ajit Prabhu is keen to emphasise the importance his company places on this: “Quest is a USA-incorporated company with 100 per cent owned subsidiaries in India and China. We also have local subsidiaries in the UK, Italy, Germany and Japan, and we have established legal entities in these countries to ensure customers have the comfort of doing business under local jurisdiction. We protect customers' IP first through signing and abiding by documentation requested by them, such as non-disclosure agreements or proprietary information agreements. Further measures are taken as required by particular customers. This might include locating the Quest team in a standalone facility, creating a distinct, separate IT infrastructure that restricts access to the rest of Quest through a customer-approved firewall, and restricting physical access to only those people who are supporting that customer. In addition, non-compete restrictions can be applied to ensure engineers are not rotated to other Quest teams supporting competitor customers with similar projects.”
With rigorous protection of IP, the ability to react fast, and two-shift working that can help to reduce development times, it might seem that GPD could also be appropriate for manufacturers of consumer products. However, Ajit Prabhu feels that Quest's approach to GPD is not a good fit for this sector: “Consumer product development is a very secretive business, and it is not always clear what the levels of investment are. But if you look at the dollar spend on research and development, it is much lower than in high-technology industry. We can therefore make the biggest difference in industries where a larger proportion of turnover is devoted to research and development – hence our focus on the high-tech sectors”.
For companies that have decided that GPD is the way forward, a partnership with an organisation such as Quest may be the only real alternative to establishing a wholly-owned engineering centre in, say, India or China. Ajit Prabhu believes that outsourcing the engineering functions rather than managing a subsidiary offers a number of benefits: “Engineering companies have to ask themselves whether establishing and operating an offshore engineering centre is core to their company's business. Establishing a centre requires significant management attention, substantial upfront capital investment, and it exposes the company to risks associated with managing a multicultural environment. In contrast, a partner company that already has experience of managing GPD can take complete ownership and drive the partnership forward. Furthermore, many customers discover that a supplier is actually more responsive than an internal department. But for companies that believe that they must have a controlling stake, Quest is open to discussions that can lead to a build-operate-transfer model for a global engineering centre.”
Engineering companies in Europe that are looking for ways to reduce product development costs, that see the benefits of moving from a fixed-cost model to a variable-cost model, and that want to improve flexibility and get products to market faster, may feel that establishing a strategic partnership with a GPD service supplier could be the best way forward. While GPD is unlikely to deliver a return on investment in six months, it has the potential to make a substantial difference to profitability in the medium to long term.