Wednesday, June 27, 2007

Offshore Product Design Services to Grow by 28 Percent Annually


The worldwide market for Offshore Product Design Services (PDS) is expected to grow at a compounded annual growth rate (CAGR) of 28.0% over the next five years. According to a new ARC Advisory Group study, “Offshore Product Design Services Worldwide Outlook”, the market was $1.2 billion in 2006 and is forecasted to be over $4.1 billion in 2011.

According to ARC Advisory Group Service Director Steve Banker, Ph.D., “When you have forecasted growth of over 25% for a market that is already larger than a billion dollars, you are looking at an extraordinary market. One explanation for this is the power of the Global Service Delivery business model.”

Global Service Delivery Model

Global Service Delivery (GSD) is the practice of outsourcing work to low cost regions. Labor for a particular client task is divided between service people located in the client’s office or a nearby office (nearshore), and a low cost offshore facility. A typical ratio in PDS is 80% offshore to 20% onshore.

The GSD model has proven itself across areas such as custom software development, IT infrastructure support, call center services (and other similar business process outsourcing [BPO] services), application implementations, and now PDS. The value proposition is simple; knowledge workers from low cost regions are paid about 25% of the level of their counterparts in the West. The Internet infrastructure and mature business models among leading offshore IT companies support the GSD model.

The Flat World Comes to Engineering Services

The top five suppliers of offshore PDS are large Indian IT companies that provide a broad range of BPO and IT services. Each has revenues of over $100 million in the offshore PDS market, and cumulatively these four suppliers account for more than 60% of the market.

Each of the market leaders has strong market recognition as a company that has perfected the offshore model. Each has developed strong processes and systems to manage offshore projects across their diverse service areas and each has extremely robust processes for hiring new personnel and training them.

All of these companies are challenged by their extremely high growth rates, which for some of them means hiring and training tens of thousands of new employees per year, high attrition (though it is typically much lower in PDS than in other service areas), and growing wage pressures which lead to a gradually decreasing labor arbitrage value proposition.

There is considerable work surrounding 3D to 2D conversions, using Product Data Management systems to create documentation, and design of simpler components. To the extent that service providers can engage in more complex forms of engineering, they improve their ability to help clients speed their products to market.