A recent CRISIL Research study on the Outsourcing industry has concluded that Engineering Services Outsourcing (ESO), an area that encompasses outsourcing of engineering services largely involved with operations linked to the pre-manufacturing stage (designing, prototyping etc.) and analysing data points for process improvement, is poised to be the next big opportunity in the Indian outsourcing services industry.
The Indian IT and ITeS sectors which are currently beset with challenges in the form of global economic uncertainty, rupee volatility, wage inflation, high attrition and commoditisation of services - all resulting in lower margins - need to move towards knowledge driven, value-added services such as ESO and analytics offering better billing rates and protecting margins. Mr. Manoj Mohta, Head, CRISIL Research, explained: "India's strength in the engineering domain, adaptability to new emerging opportunities, and the advantage of India's vast skilled talent pool considered on par with other competing nations such as China, Brazil, Mexico, Russia, Israel and Eastern Europe, augur well for Engineering Services which we estimate will grow at a compounded rate of 26 per cent and post revenues aggregating about USD 7.5 billion by 2012-13.
As a result, India's share of the global offshore engineering spend is expected to increase to 25 per cent from the current 19 per cent." With the IT-ITeS sectors witnessing a focus towards convergence and clients increasingly preferring to outsource multiple processes to a single vendor, Tier-1 Indian IT service players are now offering to be a single stop service provider of services ranging from IT services to ITeS and more recently, engineering services.
Commenting on the profitability of ESO, Mr. Mohta observed, "ESO is an attractive investment proposition as margins are significantly higher than those in traditional IT outsourcing services. This is despite the high cost associated with experienced engineering personnel possessing intricate knowledge of the domain and client's processes. The complexities involved in the ESO business are an entry barrier for new entities ensuring higher client stickiness and ability to extract value pricing."
With cost economics playing a major role in outsourcing of product designs and upgrades, and Indian ESO players favourably placed to take advantage of the same, CRISIL Research has concluded that the Indian ESO industry will be a highly cost effective, compelling reason for multinational companies to outsource their engineering services operations, making India the design services hub of the world.