Documente Academic
Documente Profesional
Documente Cultură
“Marketing of
Outsourced
Engineering
services”: With a
focus on IT
Engineering
services
Prepared by:
Himanshu Shah(51)
Shailendra Khiriya(27)
Guided by:
Prof. Reshmi Menon
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PREFACE
Engineering services outsourcing (parts of which are also referred to as engineering BPO) is the
practice of sourcing some or all of a company's design and engineering requirements from
external service providers.
Over the years, for instance outsourced product engineering (mechanical) services have
graduated from basic drawing conversions and CAD migration assignments, through 2D - 3D
modeling and digital mock-ups. In the field of IT and Electronics outsourcing is majorly done for
chip designing, product development, product testing, embedded systems etc.
Today, increasing levels of digitization have resulted in much of the product development
process being performed virtually using computing technologies. Further the development of
common enterprise management applications and technology platforms have driven information
integration across the value stream to facilitate more efficient planning, deployment and
management of capital assets and production.
Indian companies have successfully leveraged the skill-sets, tools and experience from
outsourcing IT software and services, to gain a strong foothold in outsourced product design and
engineering. Global spend on Engineering Services is projected to increase to $ 1.1 trillion by
2020. Of the $ 750 billion spent today, only a fraction of the total is being offshored ($ 10-15
billion). The Value of work currently undertaken by India-based vendors in this space is
estimated at just 12 % of offshore market, highlighting significant untapped potential.
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ACKNOWLEDGEMENT
In the pursuit of management excellence, every student owes a great deal to the insights and
suggestions of others and we are no exception. We believe learning is a process that entails give
and take, exchange of ideas and value addition through discussion.
We begin by acknowledging our humble thanks to Prof Reshmi Menon for giving us this
opportunity to undertake this important assignment in our academic career and for her constant
guidance, constructive criticism as a project guide, which brought this challenging task to
success. We would also like to express our gratitude to the project managers of the IT companies
who responded to our survey.
Our unfathomable respect to our parents and other family members whose everlasting love, keen
interest and constructive suggestions made us confident.
Last, but certainly not the least, we would like to thank our friends and all who directly or
indirectly contributed in the successful completion of our project work.
Himanshu Shah
Shailendra Khiriya
Table of Contents:
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EXECUTIVE SUMMARY.............................................................................................................7
2.7 Framework of Engineering Services Outsourcing model which includes both on shoring
and off shoring...........................................................................................................................24
....................................................................................................................................................29
....................................................................................................................................................30
....................................................................................................................................................31
3.3 Key pointers in selecting the right partner for providing engineering off shoring services:
....................................................................................................................................................42
Questionnaire-1..........................................................................................................................62
6.1 Critical success factors for Indian Engineering Services Outsourcing Industry..................96
BIBLIOGRAPHY........................................................................................................................101
Internet sources:.......................................................................................................................101
Research papers:......................................................................................................................101
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EXECUTIVE SUMMARY
The major objective of the project is to understand the business model of Engineering Services
Outsourcing and understanding the critical success factors for India as an outsourcing hub and
significant factors which affect the success of ESO vendors. In order to do this study there are
certain pre-requisites which need to be fulfilled and hence are discussed in the report.
The primary objective of the study is to understand the current scenario of IT Engineering
Services Outsourcing industry in India, to analyze the strategic capabilities required for
successfully marketing IT engineering services and finding out the major international markets
for Indian IT engineering Services Companies.
What is the basis for selection for the engineering services to be outsourced?
Which are the international markets which offer maximum growth potential to the IT
engineering services companies in India? What are the strategic strengths of India as an
outsourcing destination?
What are the contractual issues involved in engineering services outsourcing project?
How are the process standards for performing a particular project decided?
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Firstly secondary research was carried out to find out the scope of ESO sector in India,
major players of the sector, and services outsourced in different branches of engineering.
This was followed by primary research which was carried out by carrying out a depth
interview of a project leader in one of the reputed IT & Electronic services outsourcing
company based in Ahmedabad. The interview helped in understanding the business
model of IT Engineering Services Outsourcing.
This was followed by descriptive research which was carried out by interviewing senior
engineers in IT services outsourcing companies based in Ahmedabad.
This study would help one to understand the factors which are to be taken while considering a
particular service to be outsourced. One would be able to understand what capabilities are
required to qualify for being a vendor of IT engineering services. Report would help in
understanding the scope available in various markets.
Apart from this, one would be able to understand the crucial factors that affect the marketing of
these services.
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A structured closed ended questionnaire was used for the descriptive research
For these project senior engineers handling outsourcing project in the companies of Ahmedabad
will be surveyed.
Magazines
Websites
Primary research survey of the companies
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With advances in communications technologies and a flattening world, things are changing.
Today, companies reviewing their internal operations are considering their engineering and
design functions on par with other internal business support functions that may have been or are
in the process of being outsourced. This examination moves past traditional contracting
structures for professional engineering and design work towards a more tightly integrated and
highly leveraged use of strategic relationships to discharge a higher volume of such work on a
more routine basis. Engineering and design services are becoming ripe for outsourcing –
transferring responsibility for the performance of an in-house task or function, usually routine in
nature, to a third party for some period of time. What are the business and legal issues that must
be addressed with respect to the outsourcing of such functions?
Outsourcing began with data centers but now extends to a variety of business functions.
Whatever the function, basic issues remain the same – scope of service, performance standards,
pricing, transition, intellectual property and remedies, among others. Many risks also remain
similar to other types of outsourcing, including poor (or merely mediocre) performance,
excessive costs, security, late delivery, regulatory compliance and others.
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Engineering services are those service functions that deal with or related to core engineering
processes.
Examples are:
The distinction that needs to be drawn here is between engineering functions and engineering
service functions. An engineering function could be auto engine manufacturing. A related
engineering service function would be designing the engine. It is similar to the distinction
between manufacturing and manufacturing support services.
Companies, including engineering and construction contractors, have long been engaging
engineering and design firms and professionals for specialized services, particularly where
unique expertise was required that companies either did not have “in house” or did not want to
bring “in house.” On the other hand, routine functions were handled with internal resources. The
transaction costs of engaging engineering or design firms to perform those routine functions
outweighed the benefits of having that work performed by them. Moreover, the pool of domestic
talent available to perform routine engineering and design tasks was sufficiently affordable to
justify hiring and keeping that talent on staff.
With advances in communications technologies and a flattening world, things are changing.
Today, companies reviewing their internal operations are considering their engineering and
design functions on par with other internal business support functions that may have been or are
in the process of being outsourced. This examination moves past traditional contracting
structures for professional engineering and design work towards a more tightly integrated and
highly leveraged use of strategic relationships to discharge a higher volume of such work on a
more routine basis. Engineering and design services are becoming ripe for outsourcing –
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transferring responsibility for the performance of an in-house task or function, usually routine in
nature, to a third party for some period of time. What are the business and legal issues that must
be addressed with respect to the outsourcing of such functions?
Outsourcing began with data centers but now extends to a variety of business functions.
Whatever the function, basic issues remain the same – scope of service, performance standards,
pricing, transition, intellectual property and remedies, among others. Many risks also remain
similar to other types of outsourcing, including poor (or merely mediocre) performance,
excessive costs, security, late delivery, regulatory compliance.
Presently, ESO forms only 3-4% of the world wide spends on Engineering R&D. If design
peripherals are taken at 20% of the total product, a potential growth of six times the current
growth can be envisaged.
The total expenditure of ESO is currently estimated at USD750bn per year. This is growing at a
steady pace and is expected to reach USD1tn by 2020. India is expected to get 10% share of this
which estimates the revenue to be around Rs 100,000 Cr. The major competitors for India are
China and former Soviet Bloc countries.
While this scenario is expected to change in the years to come, currently companies in the U.S.
are under relentless pressure to save costs and improve efficiency due to global competition.
There are additional factors that make U.S. companies the #1 outsourcers of engineering
activities. Some of these factors are:
Continuous pressure from Wall Street to cut costs and improve efficiency
India is currently the dominant choice for engineering outsourcing and off shoring. Key drivers
for this choice include presence of a large independent vendor base, access to one of the largest
pools of engineers and scientists, English speaking capability, significant labor arbitrage, low
macroeconomic risk and proximity to some of the fastest growing economies (China & India) in
the world. However, it is the success of many of these Indian suppliers in the provision of
business process and information technology outsourcing services that has provided the required
confidence to companies in the western markets to start sourcing engineering services from
Indian suppliers as well. Hence, it is fair to say that many of the vendors, with a few exceptions,
are known in the western markets for their business process and information technology
outsourcing capabilities but have since successfully ventured into developing their engineering
capabilities and delivery of off shore engineering and design services.
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Indian companies have successfully leveraged the skill-sets, tools and experience from
outsourcing IT software and services, to gain a strong foothold in outsourced product design and
engineering. Engineering services is a growth market. Current spending on engineering services,
$750 billion is projected to increase to $1.1 trillion by 2020. Out of this engineering services
outsourced would come to 20% of this which comes to around USD40bn. Taking India’s share to
be 10-20% of this would be around Rs100,000 crore. Engineering services off shoring could help
create 150,000-200,000 additional jobs – up to 1,000,000 with multiplier effect. India needs to
invest now to yield the required number of engineers by 2020.
Indian companies have great expertise in forging long-term partnerships with international
organisations; they adapt quickly to changing global trends and business models to improve the
value proposition to their clients. In order to highlight the 'quality' aspect of services offered in
India, Indian companies are achieving quality certifications such as SEI CMM Level 5, COPC,
PCMM, ISO 9001:2000. These advantages position India ahead of other developing economies
such as China in the list of outsourcing destinations.
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To realize this opportunity, India needs to develop a multi-pronged strategy for success. Some of
the recommended actions are broader in scope, related to those required to sustain our lead in IT-
BPO exports – and are already at various stages of planning and execution. Others are more
specific, targeted at addressing the engineering services market.
The government should take a structured approach to leveraging industry – for e.g. large
imports in Aerospace, Defense, and Utilities should be leveraged through offset programs
Align government policy and incentives
Policies towards facilitation of adequate visas is available for professional services,
conducive bilateral relations, investment in infrastructure and strengthen law to enhance
IP protection.
Incentives for investing in R&D and innovation
Middlers(those who have forayed into the field and are growing
rapidly)
engineering and design functions will likely continue to be a source of cost savings going
forward.
In the context of engineering and design services, there may be other reasons, such as access to
skilled labor pools, access to emerging markets, capacity growth, lowering time to market,
driving innovation, and increasing productivity and quality. Engineering services are different,
though, as compared to other services, like business process outsourcing or information
technology. There are unique constraints on engineering services that make these
services less amenable to outsourcing or off-shoring than other functions.
Understanding these differences is important to not only realizing the expected
efficiencies and savings from outsourcing but also for the long-term health of the
companies engaging in it. The key differences between engineering and other services
can be summarized across the following multiple factors.
programmer probably does not need to acquire as substantial a domain knowledge of the
company’s business or industry as a product development engineer. Back office functions like
payment processing and call center operations may not even require a college degree. In contrast,
specific degree credentials may be required for the performance of outsourced engineering
services and the performance of these services requires extensive and in-depth knowledge of the
customer’s business and industry.
outsourcing of engineering services than other types of outsourcing. For example, intellectual
property related issues tend to be more important for engineering services than for business
process functions that do not give the customer a competitive advantage in the market. Also, the
ability to be able to scale-up resources plays a crucial role in the successful execution of off-
shoring the source of engineering services.
Engineer Foreign
Client Engineer
Initial Engineer
Teleconferences
Preliminary design
3. Test phase:
Engineer
The engineer applies the design to
Regulations a model to test- can be done
domestically or abroad at the
Standards
offshore site. This applies to the
manufactured products
5. Product completion
Product 4. Construction phase:
phase:
The engineer supervises the
Engineer hands over the
manufacturing process
product to the client
domestically or abroad
The above framework relates to the engineering services related to the product development:
Idea Phase:
Here, the client gets an idea about a new product which might be to solve a particular problem or
is a new utility all together.
Design Phase:
Here, the client appoints an engineer to whom the client narrates the idea/problem. Based
on this the engineer prepares a initial design and estimates the requirements for the
project in terms of software, hardware, intellectual capital, number of man-hours your
project process requires etc.
After this the specific components of the project are identified. Decision is to be taken as
to which activities need to be performed on-shore and which activities can be off shored.
An ESO is selected in some other country where a part of the designing or manufacturing
process can be outsourced
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Test phase:
The engineer applies the design to a model to test- which can be done domestically or abroad at
the offshore site. This applies to the manufactured product. It is not applicable for the project
such as software development.
Construction phase:
Client’s engineer supervises the manufacturing process domestically or abroad.
Organizations that outsource are seeking to realize benefits or address the following issues:
Cost savings
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The lowering of the overall cost of the service to the business. This will involve reducing
the scope, defining quality levels, re-pricing, re-negotiation, and cost re-structuring.
Access to lower cost economies through offshoring called "labor arbitrage" generated by
the wage gap between industrialized and developing nations.
Aerospace Engineering
Aerospace Engineering Services Outsourcing:
CAE Services
Tool Design
Construction Drawings
Structural Engineering
CAD Services
o Network Interfaces
o Schematic Tools - Amplifiers, Filters, Semiconductors, Converters
o Processors
Electronic Interfaces and Design
• Content Management
• Artificial Engineering
• Embedded Systems
• Hardware Integration
o Heavy Engineering
o Earthmoving Equipment
o Agriculture Machinery
o Automotives
o Machine Tools
o Special Purpose Machines
o White Goods
o Tooling
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o Turbo machinery
Software can be developed for a variety of purposes, the three most common being to
meet specific needs of a specific client/business (the case with custom software), to meet
a perceived need of some set of potential users (the case with commercial and open
source software), or for personal use (e.g. a scientist may write software to automate a
mundane task).
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Content Management
o Allow for a large number of people to contribute to and share stored data
o Control access to data, based on user roles (defining which information users or
user groups can view, edit, publish, etc.)
o Aid in easy storage and retrieval of data
o Reduce repetitive duplicate input
o Improve the ease of report writing
o Improve communication between users
The term network security and information security are often used interchangeably.
Network security is generally taken as providing protection at the boundaries of an
organization by keeping out intruders (hackers). Information security, however, explicitly
focuses on protecting data resources from malware attack or simple mistakes by people
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within an organization by use of data loss prevention (DLP) techniques. One of these
techniques is to compartmentalize large networks with internal boundaries.
KBE can be defined as engineering on the basis of electronic knowledge models. Such
knowledge models are the result of knowledge modeling that uses knowledge
representation techniques to create the computer interpretable models. The knowledge
models can be imported in and/or stored in specific engineering applications that enable
engineers to specify requirements or create designs on the basis of the knowledge in such
models.
Artificial Engineering
Artificial intelligence (AI) is the intelligence of machines and the branch of computer
science that aims to create it. AI textbooks define the field as "the study and design of
intelligent agents. Where an intelligent agent is a system that perceives its environment
and takes actions that maximize its chances of success.
Embedded Systems
computer, such as a personal computer (PC), is designed to be flexible and to meet a wide
range of end-user needs. Embedded systems control many devices in common use today.
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3.1.1 Transferability:
Before deciding about outsourcing an engineering activity, each and every process must be
analyzed for its transferability to, and the ability to perform the process without need for face-to-
face interactions by, a third party. Processes that need extensive interactions with company, its
engineers or other parts of the company’s organization must be weeded out since these processes
are not good candidates for outsourcing or off-shoring. Such processes run the risk of not
capturing the latest requirements from the customer and/or modifications performed by other
functional groups within the company organization. Additionally, if the process involves very
frequent judgment calls being made by the engineer performing the work, then it is highly
inefficient to outsource such an activity because the service provider’s engineer will be required
to check with the company’s engineer every time a decision has to be made.
Also, it is very difficult to remotely administer engineering processes that require hands-on
assessment and the physical presence of engineers at the company’s facility. Sourcing such
processes to an off-shore location poses logistical problems for administering and managing the
work. Engineering processes must be assessed for their transferability before a decision can be
made to outsource or off-shore them.
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3.1.2 Maturity:
For an engineering process to be successfully outsourced or moved off-shore, it has to be well
defined, process-mapped, documented and standardized. A mature engineering process typically
does not require a combined decision-making from multiple functional organizations within the
company. However, a process with poor documentation typically means that there may be more
than one way of performing the process and the data or information required to complete the task
might be resident with multiple sources within the company. If extracting the required
information is a laborious process if done internally, expecting a provider to extract that
information is dubious.
Also, if no set standards exist for performing a process, the process may be performed with
varying results each time it is done. If the process-mapping is poor, then it is likely the steps and
sequential tasks required to perform the process are stored in some engineer’s memory and not
on paper. Sourcing a third party to perform that function requires extracting the steps and
sequential tasks from the engineer’s memory. Each one of these characteristics makes a process
less communicable to an engineering service provider and reduces the possibility of successful
results from sourcing that function externally. More often than not, outsourcing of an immature
process leads to disappointing results.
3.1.3 Risk:
Engineering processes that are outsourced or off shored should also be evaluated for risk. The
most prominent risk is the risk of losing intellectual capital – both hard intellectual property and
know-how. Given the unique nature of engineering, companies outsourcing their engineering
functions have to be careful to protect their intellectual capital. Additionally, engineering
processes that are very complex raise significant transition risk. For example, an engineering
process that has the potential to take-up a significant portion of an experienced engineer’s time,
for a prolonged period of time, in order to transition that process to a service provider raises
significant transition risk. Other risks include liability for poorly engineered or defective
projects, warranty commitments to third parties and reputational risks associated with poorly
engineered products or processes.
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and vendors because companies have been too eager to chose a vendor and start the outsourcing
process, without having first done a capability analysis.
The following five step process is indicative of the methodology that companies may want to use
to select a service partner.
Step-1: Evaluate the capabilities of the vendor and short-list the potential candidates that have
some experience in the industry / relevant product expertise.
Step-2: Give a pilot test(s), that is/are representative of the problems that would be solved during
the performance of outsourced services, to the short-listed vendors (from step-1) and evaluate
their performance. Further refine the list of capable vendors that met pre-defined success criteria.
Step-3: Visit the operations centers of short-listed (step-2) vendors, i.e., the location where the
proposed activities are to be executed, to diligence the vendors’ capabilities and review their
facilities first-hand.
Step-4: Request an RFQ for the engineering activities that are planned to be outsourced or off-
shored from the short-listed vendors and evaluate them.
Step: 5 pick the right vendor partner based on assessments conducted in steps 1-4.
Allocations of responsibility between service provider and company inevitably vary from one
project to the next. As in other spheres, strategic functions tend to remain inside the company
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organization, along with operations that deal directly with customers.6 Routine transactions are
often good candidates for outsourcing, along with middle-tier operations that use standard
processes. Since companies retain substantial responsibilities, the usual “sweep” (or “general
scope”) language customary to other types of outsourcing may be less sweeping. When, years
ago, companies began to hand off data centers to outside service providers, the scope of service
included not only the statement of work, but everything else done by displaced staff or within the
IT budget. In effect, the service provider agreed to do whatever had been done inside the
company’s data center. When discrete or selected engineering or design projects are outsourced,
but control over the entire engineering or design process remains with the company, such
sweeping language may not be appropriate.
Instead, the scope of work for outsourced engineering services tends to be defined on a project
by project basis. In addition, the scope of work is often described more from the perspective of
the work-flow processes common to a particular type of project than as a matrix allocating
responsibility for a particular set of tasks. The work flow process describes the steps that should
be followed for a particular type of outsourced engineering project. For example, if the project
being sourced is the production of red line drawings or process diagrams for a particular product
or machine, the statement of work might describe or set forth the process steps and expected
deliverables associated with development of production drawings. When allocating responsibility
for completion of a specific production drawing project, the company and the service provider
use the service description as the starting point for estimating the work that will be required to
complete the project. The parties may vary this work allocation as necessary based on the
requirements of a particular project. The precise scope of work for each project is then confirmed
in the documentation for that particular project.
Different types of engineering or design services usually have different work flow processes
associated with them. These processes may reflect the company’s internal policies or procedures
for discharging the work to be outsourced. Or, the process may reflect the service provider’s
process. Usually, the process will be a composite based on the service provider’s best practices
and the company’s specific business requirements related to a particular type of engineering
work being performed. Complex projects may combine multiple work flow processes from
various types of engineering assignments. The key requirement for successful project
management and discharge is the clear demarcation between the work the service provider is
expected to perform and the work that the company retains.
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As engineering outsourcing matures, it may become more common for parties to move away
from these process based statements of work to the task allocation matrixes more common to
traditional forms of outsourcing, like data center management. This is particularly true where
parties are interested in transferring the entire responsibility for an engineering function to a
service provider. An example of such a function might be management and maintenance of
design archives. Rather than allocate responsibility for archiving and maintaining design
drawings on a piecemeal or project-by-project basis, a company may transfer the entire set of
obligations related to archiving and maintaining an inventory of design drawings to the service
provider. In that case, the statement of work would likely detail the tasks associated with that
scope of work (e.g., checking in design drawings, checking out design drawings, backing up the
archive, etc.). In addition, the parties may agree that even if a task is not identified in the
statement of work with respect to that function, if that task was performed by the company’s
personnel that were responsible for archiving and maintaining drawings, then that work is in the
scope of the service provider’s work.
3.4.2 Transition
Transition refers to the process of transferring responsibility for performance of a task from the
company to the service provider at the inception of an outsourcing agreement, and from the
service provider back to the company, or to an alternative supplier at the end of the outsourcing
agreement. In the context of outsourced engineering and design services, work is often
outsourced on a project by project basis. Consequently, outsourced engineering services raise
interesting transition issues. First, how much initial knowledge transfer is required and how
much knowledge transition should be incorporated into any particular project? Second, how do
the company and the service provider ensure that transitioned knowledge is retained by the
service provider and disseminated to available service provider staff? And third, how does the
company protect its interest in retaining access to such knowledge within its organization as the
scope of the outsourced engineering services expands.
The knowledge generally transitioned as part of an engineering outsourcing engagement includes
functional and technical information about the company’s products, services, plant and
equipment. It also includes a detailed understanding of the company’s engineering standards,
procedures and policies. In this respect, engineering and design outsourcing may offer significant
challenges. Where these standards, procedures and policies are not written down or where they
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vary considerably from one facility or department to another, transitioning this information may
be very difficult. Documenting and consolidating such standards, policies and procedures is one
exercise that companies considering outsourcing of their engineering or design function may
want to undertake in advance of the outsourcing in order to make the transition to an outsourced
delivery model more efficient. Requiring service providers to document such standards, policies
and procedures as part of their service delivery obligations may also help ensure that such
knowledge remains accessible to the company even as the scope of the outsourced services
expands.
As discussed above, one transition strategy commonly employed in outsourced engineering
services is to begin the relationship with proof of concept or beta projects that are sufficiently
scope contained to permit the service provider to deliver the service without a transition of all the
engineering standards, policies and procedural information that would be required for a full scale
outsourcing. Typically, companies can prepare a scope of work package for such proof of
concept project with the applicable engineering standards or policies included. Alternatively,
service provider personnel may “job shadow” company personnel in their performance of a
“typical” project in order to identify the standards and policies applicable to a particular type of
work. Such a transition process may be effective where the company does not have documented
engineering standards or policies or where such documented standards are not readily accessible
to potential service providers.
Job shadowing may raise immigration issues where the service provider intends to staff the
project with foreign nationals. For example, how do foreign nationals gain entry into
the U.S.? Under what visa programs are they permitted to work in the U.S.? What restrictions
apply to their visas? With which requirements must the company comply? Some service
providers have available staff already in the U.S. to manage the transition. Others may request
assistance from their clients in obtaining visas and work permits. Where timing is critical, it is
important for clients and service providers to consider whether visa issues will delay transition.
Companies should verify with the service provider that the service provider is responsible for
compliance with all applicable immigration laws.
Another approach to transition that may be useful in the engineering space is the transfer of
engineering staff from the client’s organization to the service provider. In some jurisdictions,
such a transfer may occur by operation of law. In such jurisdictions, if engineering or design
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work is transferred from a company to a service provider (with or without assets related to the
performance of that work), the engineers that were providing that work may have a legal right to
transfer with such work to the service provider.7 Transferring the people that were performing
the work to the service provider is an effective way to ensure that knowledge is transferred to the
service provider. On the other hand, such a transfer of personnel may impact other business goals
of outsourcing. Because employment laws vary by jurisdiction, companies and service providers
should understand the impact that local employment laws may have on the outsourcing
agreement. Where multiple facilities are impacted across multiple jurisdictions, the effect of
local employment laws will likely result in different impacts.
However, service levels alone may not be sufficient in the context of outsourced engineering
services to provide companies with adequate comfort that the outsourced engineering service
provider is bearing sufficient risk to ensure that it has taken appropriate level of care to avoid
mistakes. This can be particularly true where the company is entrusting the service provider to
deliver a result that may have significant impact on the company’s business. For example, if the
company is outsourcing the delivery of a material capital project, mistakes or delays could have
an impact on production that cannot be adequately addressed through service levels. A design
flaw in a production drawing could give rise to liability issues that cannot be adequately
addressed through service levels. Determining how to allocate these potential liabilities between
the company and the service provider raises questions that may not be addressed through the
liability allocation methodologies applicable to other forms of outsourcing.
For these reasons, companies may determine that the complexity of establishing and measuring
service levels outweigh the benefits of including them in project based outsourcing services
contracts. Setting initial service levels poses challenges, since comparatively few companies
have measured their own performance as comprehensively or rigorously as they propose for the
service provider. Without records of past performance, service providers are reluctant to make
specific performance commitments. Consequently, establishing service levels can be
problematic. Measuring performance against service levels once set may also be difficult. Unlike
other forms of outsourcing, there may not be readily available tools to measure performance.
Also, unlike other forms of outsourcing where an entire function is transferred to a single
provider, engineering outsourcing engagements can be structured such that project tasks are
competitively bid to multiple qualified service providers. By structuring multi-source
relationships, companies may use competition to keep pressure on price and performance quality.
If quality starts to diminish, companies can turn to an alternative service provider for the next
project. This competitive pressure may provide a better incentive for performance quality than a
service level regime.
However, companies, in fairness, insist that some things, such as aggregated project performance
against budgets or timelines must be measured and reported. Even if price reductions are not
associated with failure to meet certain minimum standards, such information is useful in
managing the outsourcing relationship. This information is also useful in identifying issues for
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improvement. Often, this information is beneficial to both parties in determining the root cause
for performance failures so that those issues can be resolved.
1
Performance warranties (e.g., performance in a professional and timely manner in
accordance with highest industry standards)
Warranties of specific results (e.g., delivery of a work product that is suitable for a
particular purpose or installation of capital equipment meeting certain specifications by a
certain date)
Staffing warranties (e.g., performance by duly qualified and experienced staff).
Absent express agreement on the nature of the applicable warranties, warranties may be implied
by court. In the context of engineering outsourcing services, a court may imply a performance
warranty which would require the service provider to meet the same standard as other
professionals with respect to its performance of the services. This warranty would not require
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The warranties that the company and its agents make to the outsourcing service provider also
merit special consideration. In some instances, the company makes express warranties to the
service provider. For example, a company may warrant that it has the right to transfer to the
service provider design drawings under the company’s control.
The company may also make implied warranties to the service provider, which are effective
unless disclaimed by the company. For example, a company may make implied warranties that
the design drawings provided to the service provider are suitable for the construction of a
particular piece of equipment. In that case, if the service provider complies with the design
drawing, the company may bear the risk that the equipment under construction will achieve a
particular result. If the company does not intend to provide such warranties, these implied
warranties should be conspicuously disclaimed.
Because the company does not generally control the service provider’s staffing decisions
(controlling such decisions makes the outsourced relationship look suspiciously like co-
employment), companies may seek warranties of minimum staff qualifications from service
providers. These warranties are intended to guarantee quality levels by requiring educational,
training and experience levels for the service provider staff that will be performing outsourced
services. In the context of offshore outsourcing, it is important to consider how such minimum
qualifications may be impacted by differences in educational systems and demographics. It is
also important to consider what licenses, if any, should be required for in-scope staff. These
requirements may vary considerably by the type of function being outsourced, the jurisdiction
involved and even by the particular project being sourced from the service provider.
3.4.6 Pricing
Because people are the primary cost input, engineering and design outsourcing services are often
priced based upon headcount (generally expressed as numbers of “full-time equivalents” or
“FTEs”) or some headcount equivalent (such as hourly rates). Pricing may also be based on time
and materials. Typically, the parties will establish a budget estimate for a particular project based
on the complexity of the project, the personnel requirements and the expected timeline of the
project. Service Providers may include materials costs in their budget estimates, materials may
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be procured by the company, or materials may be pass through expenses to the company. Even in
situations where headcount is expected to comprise a significant portion of the fees, parties
should clearly allocate financial responsibility for materials. Where charges are based on
headcount or hours, the parties should determine up front how to allocate responsibility for
correcting mistakes. Is the time spent fixing an erroneous deliverable chargeable? Or should such
time be non-billable? How is such time segregated from billable time, if it is not chargeable?
What records must the service provider maintain to validate headcount charges? Working
through these issues is particularly important where the company has little visibility into the
service provider’s delivery organization.
In very mature situations where a function is being transferred to a service provider or where
services are closely tied to transaction volumes, services may be priced on a per-transaction basis
– price per design drawing, for example. This pricing model requires well established baselines
and fairly predictable demand requirements, which may not be typical to most engineering
environments. Charges then fluctuate with levels of activity. Ideally, service provider costs,
charges to the company and service volumes are effectively synchronized. Pricing metrics must
be chosen with care, however, to correspond with value delivered. For example, multiple
revisions to correct prior mistakes should not be chargeable to the company.
Likewise, in very mature situations, fixed pricing may be appropriate. Service providers
generally require fairly detailed scope descriptions and change control procedures before
accepting fixed price projects. Where projects tend to be repetitive and quantifiable, fixed pricing
may be attractive to both, companies and service providers. In such situations, though, service
providers should have incentives to continue to drive costs out of their delivery organization.
Maintaining competitive pressure through sourcing models using multiple suppliers is one means
of maintaining such incentives even in a fixed fee model.
somewhat different ways). To sort through this maze, a matrix of legal requirements and
responsibilities is often helpful, so that the parties proceed from a common understanding to
sensible allocations of responsibility for monitoring, compliance and, in the event of difficulty,
liability based upon their particular competencies and ability to monitor legal developments and
manage risks.
Where compliance responsibility rests with the company (as it must in many regulated
industries), the parties can protect themselves by developing detailed written procedures,
approved by the company’s lawyers that the service provider must follow. Service Providers who
(understandably) decline to give legal advice will generally accept that they must comply with
the company’s procedures, and be accountable for failures to do so. Most also recognize
obligations to be familiar with and abide by laws of general application affecting many or most
companies, as well as local laws in the countries where they operate service centers.
Outsourcing engineering and design services to offshore service providers may raise export
control compliance issues, particularly where information or materials within the scope of the
outsourced function are subject to export restrictions. Under U.S. law, providing foreign
nationals with access to such controlled products within the United States is deemed to be an
export. Consequently, offshore service providers may be prohibited from accessing controlled
information without a license even if the information itself never crosses a border. To address
such export control issues, parties may structure delivery solutions to prevent exports or deemed
exports of such information by restricting work on such projects to approved service provider
personnel. Alternatively, parties may obtain the licenses necessary to permit the export of such
information to authorized personnel and comply with the requirements of such licenses with
respect to any export or deemed export of such controlled information or materials.
company’s competitors, at least not immediately, or its data commingled with competitors in a
way that could inadvertently lead to unauthorized disclosures. Neither does a company want to
discover that the solution provided by the outsourced engineering staff may be tainted because
those engineers were working on a competitor’s project. On the other hand, dedicated staff or
separate, secure working areas within the service provider’s facility are likely to add cost.
There are a number of ways of dealing with security and confidentiality issues in engineering
outsourcing service agreements. First, it is essential for the company to perform due diligence on
the service provider’s confidentiality and security practices. Established service providers will
expect such diligence and should be able to provide clear evidence of the commitment to
confidentiality and security. Also, at a minimum, the outsourcing agreement should include clear
and unambiguous covenants from the service provider that confidential customer information
will be treated as confidential and that the service provider will use, at minimum, reasonable
efforts to protect that information from unauthorized disclosure. Where the information is
particularly sensitive, the company may want to attach minimum security and confidentiality
policies which set forth the technical and operational procedures that the service provider and its
agents (including subcontractors) must follow with respect to the performance of the services.
In the context of offshore engineering services, where the service provider staff will have access
to highly confidential information or the risk of misappropriation is high, companies may want to
put non-disclosure agreements in place directly with service provider personnel. Obtaining such
non-disclosure agreements directly from service provider personnel can be administratively
burdensome. Service provider staff may turn over frequently, so maintaining agreements with
current staff can be challenging. On the other hand, maintaining such agreement with service
provider staff can be useful in protecting company’s confidential information in the presence of
such frequent turn-over in staff. Individual non-disclosure agreements may also be useful in
pushing down customer security requirements directly to those persons accessing sensitive
information.
When services are being delivered from offshore facilities, particularly if the offshore delivery
center is a subcontractor to the service provider, the company may want to have a separate non-
disclosure agreement with the subcontractor that directly protects the company’s confidential
information from disclosure. Having such an agreement in place may simplify the company’s
ability to seek injunctive relief directly against the subcontractor in the foreign jurisdiction. Such
enforcement may be facilitated by choosing the local law of the offshore jurisdiction as the
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governing law of such non-disclosure agreement. Of course, prior to selecting local governing
law, local counsel should be consulted to confirm that the non-disclosure agreement is
enforceable and compliant with local requirements.
3.4.9 Non-Compete
In addition to due diligence and contractual restrictions against disclosure of confidential
information, companies may want to preclude service providers from serving direct competitors
or from entering into particular market segments after having access to confidential information.
One rationale for such non-compete obligations is to protect the company’s confidences from
inevitable disclosure. A key disadvantage of such restrictions, however, is the negative effect
such restrictions have on the service provider’s ability to leverage expertise across different
companies and to allocated experts to protected accounts. Where such restrictions are agreed, the
non-compete is typically limited to restrictions against re-assigning in-scope staff to competitor
accounts for some period of time. In other cases, the restriction may apply only to a limited
number of high level personnel.
With respect to offshore delivery centers, local employment laws and practices may make non-
compete agreements with particular individuals unenforceable. In those instances, covenants
from the service provider not to reassign particular resources to competitor accounts may be a
company’s best protection against inevitable disclosure of confidential information. Where
parties agree that experts should or must be permitted to work for competitors, companies may
require that information flows to such experts be limited to avoid, where possible, disclosure of
customer confidences.
which otherwise is ceded to the service provider. In some instances, it is useful to map these
controls against the service provider’s processes. Through this mapping procedure, the company
can establish that its control objectives will be achieved, even if the controls are based on the
service provider’s practices as opposed to those of the company.
As discussed above in the scope of work section, engineering controls may be specified in the
service description and may take the form of mandatory checkpoints (or gating activities),
customer reviews, licensing requirements, permit requirements, service provider reviews and
testing procedures. Companies will often impose clear record keeping obligations on the service
provider to document that such controls are in place and being followed. Companies should use
their due diligence investigation of the service provider to review the service provider’s control
environment and its history of compliance with such controls. Companies may also require
ongoing testing and reporting to document that controls are operating effectively.
In addition to well-defined controls over engineering and design services, companies should
retain the right to audit, either directly or through third parties, service provider’s conformance
with such controls. In some outsourcing contexts where delivery platforms are highly leveraged,
service providers may provide third party audit reports of control compliance to companies as
part of their service offering. With respect to generic controls over security and confidentiality
procedures, obtaining and sharing audits of such procedures at no additional charge is becoming
an increasingly expected component of the service provider’s offering. Requesting access to such
audits as part of the company’s due diligence may be helpful in identifying reputable service
providers.
applicable law, the service provider may retain ownership rights in such intellectual property
absent an express agreement by the parties to the contrary.
In some cases, it may be advantageous to both parties for the service provider to retain
ownership in intellectual property created through the performance of the outsourced engineering
or drawing services, so long as the company obtains broad and unrestricted licenses to use such
work product. The service provider may be better positioned to leverage that intellectual property
in ways that do not negatively impact the company. This may be the case where the engineering
services being outsourced are standardized and do not provide the company with any market
advantages. Of course, in other circumstances it will be critical for the company to retain
ownership over intellectual property rights. For example, where the service provider is designing
a component to a machine that will provide competitive advantages to the company, precluding a
competitor from obtaining license rights in or to that design may be a company
For these reasons, contracts for the provision of engineering and design outsourcing services
must provide clarity around ownership of intellectual property rights. In some instances, this may
require express assignment of intellectual property rights from the service provider to the
company. In other instances, particularly where services are delivered from offshore locations,
such assignments must be made in writing following creation of the intellectual property. To
accommodate such requirements, engineering services outsourcing agreements often include
further assurance clauses pursuant to which the service provider agrees to execute any
assignments necessary to achieve the contractual allocation of intellectual property rights, for no
additional consideration.
Where services are delivered from offshore delivery centers, companies must also be cognizant
of the broader implications of international variations in intellectual property laws. Intellectual
property law is strictly territorial. As a consequence, the law governing ownership of intellectual
property is usually the law of the jurisdiction in which the intellectual property is developed, as
opposed to the law of the jurisdiction where the company resides, or even the governing law
specified in the contract. Some jurisdictions have default provisions as part of their background
intellectual property law regime that differ from principles of U.S. law.12 Understanding the
issues raised by such background legal principles is essential in order to properly structure the
engineering services outsourcing contract to achieve the intellectual property allocation intended
by the parties.
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3.4.12 Subcontractors
Like other forms of outsourcing, subcontractors often play a large role in the delivery of
outsourced engineering services. Where services are delivered offshore, it is not unusual to find
that the service provider subcontracts significant delivery responsibility to a captive subsidiary in
the offshore location. Such a delivery structure is often expected by both parties. In other cases,
the service provider will subcontract delivery to unrelated suppliers in offshore locations. In
either case, the service provider must remain responsible for service delivery, confidentiality and
intellectual property rights. Given the sensitive nature of outsourced engineering services,
companies generally demand visibility and approval rights over subcontracts, at least where such
subcontracts are for material portions of the services being delivered. De minimis administrative
procedures may be subcontracted without approval, unless performance of such services
provides the subcontractor with access to customer confidential information.
3.4.13 Taxes
With engineering and design services, as with other outsourced services, both sides must
consider the impact of possible taxes upon the services, of taxes that may be withheld from
payments and of the risks of creating taxable “permanent establishments” where none may now
exist or be intended. Depending on the jurisdictions in question, tax costs could play a material
role in determining the total cost of outsourcing engineering and design services. Contract
structures, delivery solutions, and invoicing arrangements should be constructed to minimize the
overall effective tax cost of the transaction, but must also be balanced against the company’s and
the service provider’s pre-existing or future tax plans. The administrative burden of different
contract structures must also be taken into account. In some instances, tax planning may require
the transaction to be structured to permit local-to-local invoicing. In other cases, the transaction
should be structured regionally or through a single client or service provider entity. While there
is no single tax advantaged structure for outsourced engineering services, close attention to the
tax impact of the transaction can provide both parties with opportunities to reduce the total cost
of outsourcing.
3.4.14 Assists
One aspect of engineering services outsourcing that is often overlooked is the impact that the
procurement of engineering services from offshore may have on the custom valuation of
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imported goods. Where a party outsources engineering services to an offshore provider, the value
of that offshore work may be considered an “assist” that must be added to the custom valuation
of the product when it is imported into the U.S. While “assists” may not apply where the
offshore engineering services are being used to develop products that are manufactured onshore,
they may become a significant issue where the engineering work for products being
manufactured offshore is also procured from an offshore provider.
ways to get there and access to information. Good plans assure that they have all three.
Engineering and design outsourcing contracts require such plans, regular updates and periodic
testing of such plans.
Questionnaire-1
Product
4. In cases where your company has capability for handling a part of the project and not the
entire thing, do you go for subcontracting or have some other option?
Price
1. How is the pricing of the project done? Which all factors are considered? How is the
entire business plan made?(fixed, part, hourly basis, flexible pricing)
3. What do you do in case of cost overruns (costs increase beyond expectations). When can
this happen?
Place
1. Which are the main countries from which maximum clientele are obtained?
3. Are there major differences between the types of requirements in various countries for
similar services?
Promotion
1. Which are the major tools used for promotion?(Conferences, seminars, trade fairs, trade
journals, direct mailing, etc)
People
1. How are the professional for a particular project decided? Does the client play a role in
this?
Process
1. Are there any constraints in deciding the processes to be used for the project being
imposed by client or otherwise?
2. Is there a process for partial payment on the basis of the completion of the project in
place?
3. How do you handle any errors/bugs that occur or service requirement after completion of
the project?
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Contractual Issues
1. How does the company decide how much information to part with related to the
outsourced service and at what stage? How is the confidentiality and security of this
information maintained?
2. If some professionals need to be transferred to the clients place, are there any legal
problems that are faced in it? (related to visa or otherwise)
3. Are there any conditions for penalty or otherwise in case the solution provided by the
service provider fails in any way? Are there any warranties for performance involved?
4. Are the intellectual property rights of the project retained by the company or shared
between the client and the service provider?’
5. Are there any provisions for termination of contracts in the case when the work is
unsatisfactory?
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1. Direct Sales: This is the process of lead generation where the sales force of the company
gets order from the existing or the new clients by directly approaching them. The
companies generally have sales force in all the countries from which maximum clientele
is obtained.
2. E-mail inquiries: Companies having the need of engineering services send email
explaining their requirements to the company.
3. Tender sales: This source of lead generation is mainly for domestic projects.
4. Partnership with the tool/product vendor company: In this the OEM outsource some
non-core activities to the Engineering Services Outsourcing companies on contract basis
for a definite period of time.
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Contd…
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4.2.4 Subcontracting
In some turnkey projects, it does happen that the vendor does not
have expertise in some particular domain/component of the project.
Direct marketing
There are process specialists who make sure that the necessary
compliances of the processes are met.
Also if the penalties are introduced in the contract they would increase
the price due to the increase in the risk involved.
However in case of the projects involving the partnership with the tool
manufacturer/product vendor company IP is shared between client and
the ESO vendor.
On the basis of the insights collected from the exploratory research, descriptive research
was carried out.
Following are the major motives of carrying out the descriptive research
1. Finding the markets from which Indian IT ESO vendors get maximum clientele
and markets which offer maximum competition to Indian IT ESO vendors.
The survey is done by conducting survey with senior engineers/project leaders of various
IT engineering services outsourcing companies in Ahmedabad.
The structured questionnaire used for the survey is attached in the following pages:
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_______________________________________________________________________
_______________________________________________________________________
__
_______________________________________________________________________
_
_______________________________________________________________________
_
(b) No ____
Direct Marketing ( )
E-mail inquiries ( )
Tender sales/RFB ( )
Direct Marketing ( )
Trade fairs ( )
Conferences /Seminars ( )
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Internet Marketing ( )
7. Which are the main countries from which maximum clientele are obtained?
____________________________________________________________________
1
2 3 4 5
are outsourced.
Intellectual property
vi. Risk involved in case of failure of the service ____ ____ ____
____ ____
Provider
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1
2 3 4 5
3. Listed below are some factors which make India a favorable place for
outsourcing. Mark the factors on a scale of 5, considered in deciding
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1 2 3 4 5
I. Cost saving possible by ____ ____ ____ ____ ____
outsourcing the activities to India
II. Proficiency of English language ____ ____ ____ ____ ____
amongst Indian professionals
4. Which countries are the major competitors of India in Engineering Services Outsourcing?
Response:
The services which are in maximum demand for off shoring are as follows:
FPGA
Embedded system
Product development
Remote infrastructure
Infrastructure Management
Response:
3. Direct Marketing
4. E mail inquiries
5. Tender sales/RFB
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Response:
1. Direct Marketing
2. Conferences/Seminar
3. Internet Marketing
5. Trade fairs
4. Which are the main countries from which maximum clientele are obtained?
Response:
6. Rank the factors which make India a favorable place for outsourcing on a scale of 5.
Russia, China, Korea, Japan, Brazil, Mexico, Netherland, Vietnam, Romania, Spain,
Phillipines, Indonesia, Singapore, Hong Kong
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Part 6: CONCLUSION
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The major factors for the success of Indian Engineering services outsourcing industry are as
follows:
Thus, considering the expected Rs100,000Cr market for Engineering Services Outsourcing there
is a big opportunity for the growth of ESO vendors. Also there is a need for establishing more
number of quality of technical institutes for the industry to thrive.
The services which are in maximum demand in India are Chip design and verification, FPGA,
software development, Embedded system, Remote infrastrucutre management.
The countries which form the major clintele for Indian ESO vendors are U.S, UK, Germany,
France, Canada, and Australia due to the huge amount of R & D taking place in these countries.
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The countries which are the major competitors of India in the Engineering Services Outsourcing
market are Asian countries such as Russia, China due to the huge workforce availabe in these
countries. However the competive advantage of India vis-à-vis these countries is the knowledge
of English language amongst the engineers. Some other south east Asian countries such as
Korea, Japan due to the technological advancement in these countries and Indonesia, Singapore,
Hong Kong due to the cheap labor availability also provide good competition to India in the ESO
market. Some American countries like Mexico & Brazil and Europoean countries like
Netherland, Vietnam, Romania, Spain, Phillipines are also emerging in the ESO market.
This is generally the most important factor for outsourcing as generally companies retain
the critical components of the projects and outsource the peripheral tasks to the ESO
vendors.
This factor also plays a key role in the decisions related to services outsourcing as this
help in reducing the expenses for the entire project.
Retaining the intellectual properties is one of the most critical issues in the outsourcing
projects. Normally engineers are made to sign Non Disclosure Agreements (NDAs) to
counter these problems.
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Amount of interaction and judgment required on the part of the ESO vendor
to handle that service:
The services which require high amount of judgment on the part of the ESO vendors are
generally not outsourced
Generally those services which are easy to evaluate on standards and benchmarks are
considered for outsourcing.
Price quoted for the project although an important factor, but is not as important as the above
factors as if the ESO vendors are successful in providing right quality of work within the time
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frame, the clients tend to continue with the same ESO vendors and thus a loyal customer base
can be formed.
The most effective channels for getting project in the decreasing order are as follows:
1. Partnership with tool/vendor Company: It is the most effective tool as long lasting
relationship is established with the client and it becomes easy for the ESO to function
as per the client’s requirement. If the service provided is high on quality and within
the time frame, the clients generally do not switch.
3. Direct Marketing: ESO vendors generally have their sales team in the countries
which have maximum potentials for getting projects. This helps them in adding new
clients.
4. E mail inquiries: ESO vendors also get inquiries through internet. Web marketing
plays an important role in this industry. It is due to this reason that ESO vendors add a
lot of case studies on their websites which proves their competencies in various
domains. Also technical articles are sent to the potential clients via e-mail.
5. Tender sales/RFB: This is the least effective tool for getting projects.
The most effective channels for promotion/communication in the decreasing order as per the
research are as follows:
1. Direct Marketing
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2. Conferences/Seminar
3. Internet Marketing
5. Trade fairs
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BIBLIOGRAPHY
Internet sources:
www.engineeringservicesoutsourcing.com/
www.nasscom.com/engineeringservicesforum
www.kpoexpertsindia.com
www.hindubusinessline.com/eyeofanopportunity
Research papers:
Indian IT-BPO Industry 2009 analysis