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Indian IT: Shifting focus

Mar 24, 2009

The Indian information technology (IT) industry has grown from strength to strength during last two decades. The industry has carved a niche for itself globally by providing world class software development and maintenance services and Business Process Outsourcing (BPO) services. However, the recent financial meltdown and economic slowdown in the US and European countries have negatively impacted growth of Indian IT companies. Amidst crisis, Indian IT companies are focusing towards a new opportunity i.e., Engineering Services Outsourcing (ESO). What is ESO?
Engineering services are the services that are related to the core engineering processes. This ranges from providing basic data conversion, to advanced simulation, prototyping, testing, PLM, product design (engineering), process engineering and plant automation. Following are the engineering services which can be outsourced.

In the area of Product Design (Mechanical & Electronic) engineering analysis & design, electronics & embedded software and knowledge based engineering PLM solutions can be outsourced. In the area of Plant Automation Services, control system integration, production optimization and manufacturing execution system can be outsourced. In the area of Plant Design / Process engineering detailed design, construction and commissioning support can be outsourced. In area of Enterprise Asset Management product implementation and OEM solutions can be outsourced.

As per a report by software industry body Nasscom (National Association of Software and Services Companies), global spends on Engineering Services is projected to increase to US$ 1.1 trillion by 2020. The Value of work undertaken by India-based vendors in this space is estimated to reach up to US$ 40 bn by 2020. Engineering companies are witnessing pressures on their margins mainly on account of growing competition and complexity in designs. This is forcing companies to outsource work to low cost and high value destination like India. Furthermore, mindset of these companies is also changing. These days, more and more companies are convinced that R&D or engineering work can be outsourced effectively.

How ESO is different from IT Services?
The following table outlines the differences between IT services and engineering services outsourcing

Parameter Engineering Services IT Services
Business dynamic (vendor perspective) Low annuity , smaller projects and change centric High annuity, large projects & controlled change
Domain and process competencies Industry domain skills , engineering quality IT skills , software quality processes
Knowledge transfer management High degree of knowledge transfer from clients Lower degree of core knowledge transfer from client
Switching costs (client perspective) Very high cost of exit due to up-front investment Relatively lower cost of exit due to compartmentalized tasks
Value proposition Reduction in variable cost & reduction in time to market Reduction in fixed cost and reduction in execution time
Source: Nasscom

Who are the major players?
There are several Indian IT firms which are providing outsourced engineering services. IT majors likes TCS, Infosys and HCL Tech have separate vertical for engineering services. Interestingly, Indian IT companies are focusing on one or two key areas, instead of entire gamut. For instance, HCL Technologies is targeting the hi-tech vertical, which contributed nearly 30.4% to HCL’s revenues in 2QFY09. Infosys is focusing on product engineering, process engineering and plant operations, along with lifecycle management across industry verticals. Software major Wipro is focusing on product engineering, which is one of the five focus areas for the company.

There are few midsized IT firms that are targeting engineering services in a big way. For instance, Infotech Enterprises, which derives over 66% of its revenues from engineering, manufacturing and industrial products. Another midsized player is Rolta, the company provides software and IT enabled services to customers in areas such as geo-engineering, plant and mechanical design automation and enterprise application.

We believe that amidst global financial crisis when major revenue contributing vertical like banking, financial services and manufacturing are witnessing pressure, ESO will provide good opportunity to Indian IT firms. However, Indian IT companies need to leverage its infrastructure and build capabilities to tap untapped potential in this area. We believe Indian firms will be able to tap opportunities in the segment and can take Indian outsourcing industry to a new level going forward.

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Mar 22, 2019 11:29 AM