Question: Is There a Place for ESO in Your Supply Chain?

A recent article over in Global Services on bridging the divide indicated that there is a rising demand for ESO, Engineering Services Outsources, but a shortage of talent. In fact, they claim this is a 60 Billion market. I’m not sure I agree.

While outsourcing has been continuing to move up the value chain, from back-office functions to customer support and service to system implementation and configuration, for your average manufacturing or consumer goods company, engineering services are not only at the top of the value chain, but represent the core of the company’s IP and operations. (And while some would argue marketing is equally as valuable, since there’s no value produced if the product doesn’t sell, that is typically augmented by, or outsourced to, specialist agencies, who don’t have anything without the unique product or service, built by the engineers, to back them up.) As a result, I’m not sure that most companies are ready to even consider Engineering Outsourcing as a possibility.

Furthermore, if your company is built around the manufacture or production of goods, moving to ESO isn’t as easy as simply augmenting or replacing an internal team with an external team. If you’ve been doing engineering internally, then you have a considerable amount of money invested in assets to support engineers — equipment, hardware, software, and specially designed or outfitted locations. What do you do with all that? The software is licensed to you. The hardware and equipment are installed at your location. And the only way you’re going to get what your building is worth (as you would have invested a considerable amount in the power grid, specialized hookups, etc.) is if you can find another company making a similar product who’d be able to take advantage of the infrastructure.

And then there’s the IP issue, especially if you’re outsourcing internationally. Yes, you own the design, but the end customer isn’t going to buy a design. They’re going to buy a product. And if the outsourcing firm borrows from your IP to make a competing product at a lower price point, then your potential customer base could shrink considerably, especially if they get their product out first (possibly licensed through a related, but distinct company). And while you could probably get an injunction pretty quick in your home country (if it has good IP laws), how much are you going to be able to accomplish in the rest of the world in a short time frame?

In other words, while I can see the model starting to take off with new start-ups who can’t afford the infrastructure or who can’t afford to hire a whole team when the immediate plan is to produce a single product and see if it takes off (or with companies trying to quickly expand into new markets with similar challenges), I believe it will be a while before ESO takes off in big established companies who already have large teams in place.

Does anyone have a differing opinion?

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