Situation: A company wants to reduce their cost of engineering. They are considering outsource options, both domestic and overseas, as well as remote offices in lower cost regions domestically. How can you best reduce costs?
Advice from the CEOs:
An emphasis on cost may be misplaced. Consider instead of where you can offer the best value to your customers or clients. Focus on and compete in best part of your market – the place where you possess the strongest advantage; then worry about cost.
Outsource companies can be dangerous partners. Assume you only profit from the first job that you give them and that they may be your competitor the next time around.
We’ve learned from the last decade of experience in Asia that cost advantages are often temporary. Salaries for top talent in India and China now approach those in the US. This experience is likely to be repeated in Southeast Asia.
Focus on high dollar services and opportunities.
There are limitations to offshore talent – especially in complex, multi-step development projects. Keep high dollar projects in-house because they justify higher prices and margins.
When you outsource, negotiate retainer contracts with additional charges for work above and beyond the scope specified in the retainer.
What do you want to be? Consider your options:
Become a project management company and outsource development.
Be a development company and just look for cost effective sources of labor.
Start your own outsource company – a split-off staffed by your own employees – and feed them work.
Before you invest substantial time or money, do a test.
Situation: A company is rapidly expanding and is considering the pros and cons of domestic versus off-shore expansion. One of the appeals of off-shore expansion is the availability of good talent at lower costs overseas. However there are appealing counterarguments for domestic expansion. What is your experience, and how would you advise this CEO?
Advice from the CEOs:
This is a challenging question. Based on others’ experience, success off-shoring depends on your ability to be disciplined and rigid in your design specs. If this is the case, then off-shoring can work. However, if either you or the partner changes the spec then delays and difficulties result. You have to make sure that the off-shore labor force possesses the skills that you require to successfully complete your projects and that your specs are sufficiently detailed to overcome challenges of language and understanding of usability.
Tightly specify each job that you want to have done off-shore, and develop performance metrics so that shortfalls will become obvious quickly.
Some large technology companies operate off-shore centers not to save costs, but because they actually find better talent overseas. India and China are producing excellent engineers, and given the size of the populations, the top percentile of talent can product a large number of talented people.
Some companies contract through off-shore entities, and tightly integrate the work of off-shore and domestic engineers. This is a perk for the off-shore engineers and helps to produce value.
One large company sends US Indian employees to India for 2-years stints to oversee their Indian operations.
Maintain strict hiring policies for your off-shore operations. Some companies have encountered difficulties when the managers of off-shore entities hired relatives because of family ties as opposed to talent or qualifications.
Over the past five years, the differential in pay for off-shore and domestic talent has shrunk. A large number of companies have found that domestic talent is easier to manage and in many cases is more productive. Further, there are no language challenges and time zone differences make working with domestic talent easier.
Key Words: Expansion, Domestic, Off-shore, Talent, Cost, Design, Spec, Skills, Integration, Hiring, Policy, Language, Time Zone
Interview with Eric Bauswell, President, SurfaceInk
Situation: For a domestic engineering solutions company, one of the challenges is engaging potential customers with the idea that a domestic solution can cost-effectively meet their needs. If you can combine a manufacturing solution to the service solution, this helps. What have you done to effectively communicate your solution to potential clients?
Know your clients. Clients have expertise of their own. However, they may lack expertise in all the disciplines necessary to create a full product. How will you fill the gap?
Know your strengths.
Design is an iterative development process. If you increase process efficiency you can complete more process cycles in a given timeframe, advancing to final product more quickly.
Identify your key differentiators. Target clients for whom your differentiator is a critical need. For example, we do not encourage all of our clients to manufacture overseas, but if they insist and lack experience managing overseas vendors, we can handle this for them.
Consistency of personnel across the life of a project is important, particularly the core team.
“Invention & Innovation” require a plan to mitigate the risk they represent. Develop the design along parallel paths, stage higher risk components or pieces of the design that represent critical path inventions such that they are proven prior to moving forward, or even take that feature out of the current design in order to develop it to a production ready solution for the next product on the client roadmap. Sometimes an invention or innovation is THE reason for the new product. In these cases the key is managing the client’s expectations regarding the significantly elevated risks that come with invention and proceeding with the understanding that the phase gates and even the production dates will slide according to the progress against developing that critical path invention or innovation.
Expertise in material selection and understanding what can be done with materials in the manufacturing process is non-trivial, as is vendor qualification, particularly with new materials.
Know your competitors. How do they handle similar challenges to those that you face?
Know your vendors. “Right-sizing” your contract manufacturer to your client’s product is important. Things will go wrong, and you must assure that the contract manufacturer will give you the priority to get things back on track to meet your launch date.