Inside Outsourcing

Conventional wisdom, at least the kind that operates in many purchasing departments, has it that moving manufacturing operations to cheaper labor markets will invariably lower the total cost of making products. Now, the same brutal economic reasoning has found its way into engineering departments, and you may find yourself worrying about competition from cut-rate foreign engineers.

Maybe you should worry. Engineering wages in India, for example, pale in comparison to ours. "In India, we can hire a beginning mechanical engineer for $12,000 and a Ph.D. for $20,000 a year," says Tom Epply, president of Continental Design, an outsourcing firm with access to about 200 Indian engineers. Compare those wages with those in the U.S., where the average wage for a mechanical engineer came to $67,430 in 2003, according to the U.S. Bureau of Labor Statistics. Even after you factor in costs related to extra training and managing a distant engineering team, that engineer in India will still cost a whole lot less than his American counterpart. "In general, for every engineering resource here, we can get three in India for the same amount of money," says Seshu Seshasai, vice president of technology for Textron Fastening Systems and one of the executives charged with creating an Indian technical center for all of Textron's business units.

When confronted with such compelling cost arguments, some companies will blindly chase the cheap labor. Yet it may pay for them to be less reactionary about outsourcing. Think of it as an elective surgery. If done the wrong way, for the wrong reasons, or at the wrong time, it could turn out very badly and cause lots of pain. But if done right it may just work out for the best. If you work as a design engineer, "best" boils down to two things—making sure the work you do isn't the kind that can be outsourced easily and making sure the products you design don't end up in the wrong manufacturing environment. Here's a look at both issues:

One thing that increasingly looks susceptible to outsourcing is, well, your job. India, in particular, is currently a magnet for companies wanting to draw on low-cost mechanical and electrical engineers. Outsourcing firms already employ thousands of Indian engineers. One such firm, QuEst Inc., has 600 engineers in India, plus 150 more in the U.S., Europe, and China. "The technical talent in India is top-notch and the rates are a huge advantage," says Kurt Noe, QuEst's business development director and a veteran engineer who previously directed Hamilton Sundstrand's research programs at the United Technologies Research Center. Large technology companies—including GE, Honeywell, and Textron—have over the past few years opened their own engineering and research facilities in India, too.

Some of the work done in India does overlap with what the most advanced engineering teams do here. At a press conference in New York last year, GE Advanced Materials Technology VP William Banholzer reported that GE engineers and scientists in Asia engage in advanced research and development activities. And Continental's Epply, who had a 30-year engineering career at General Motors, claims that there's almost no product development work he wouldn't send to India with confidence—with the possible exception of tooling and fixture design. "The only other thing we can't send overseas are certain government contracts," he says.

For the most part, though, companies interested in outsourcing take a more measured approach and keep their core new product development work in house. Epply, whose customers include Delphi and other automotive suppliers, notes that Indian engineers don't typically get to work on new product development, at least not right away. "They have to earn their way by working on all the mundane stuff first," he says.

And that's a good thing, in Noe's view. As someone who once purchased engineering services for United Technologies before joining QuEst, he advocates finding a "globally optimal mix" of engineering resources. The core engineering work, the kind that tends to involve proprietary knowledge or intellectual property, would remain in house while outsourcing firms take on the non-core work. This latter category includes some simple tasks, such as converting drawings or working on legacy products. Increasingly, though, it can also mean more advanced work, such as running finite element analyses, conducting product tests, or handling some project management. The "smart way to do things," according to Noe, is to free up good design engineers to do what they do best—create new products. "If you have an engineer in the U.S. with 20 years experience and deep domain and product knowledge, he is of greater value working on new product development than sustaining legacy products," he argues.

Textron recently followed this global optimization strategy when it opened its technical center in Bangalore, India late last year. A shared resource for all the Textron business units, the center has space for about 300 engineers and will have roughly 225 working there by the end of this year, according to Seshasai, who served as chairman of a technology council that includes the engineering leaders from all of the company's business units. "We decided we needed a presence in India to exploit the engineering resources there," he says.

The company's process for deciding which tasks to perform in India went something like this: Seshasai and other technology managers first identified all the technical skill sets and day-to-day engineering tasks involved in their businesses. They then entered this information in a matrix that helped them get a sense of which competencies and tasks were both important from a technology standpoint and difficult to perform elsewhere (see diagram at left). This core work remains in house. Work that was neither core or hard to do elsewhere has or will soon go to India for substantial cost savings. And work that fell somewhere in the middle is now a candidate for automation and other process improvements to make it more productive.

Textron Fastening Systems' "non-core" work has so far involved tasks such as converting 250,000 paper and CAD fastener drawings into a common format and creating a database of all these fasteners based on 22 dimensional parameters. QuEst's Noe notes that Indian engineers have a threefold advantage in these kind of tasks. For one thing, they cost less than their American counterparts. For another, they may focus almost exclusively on this kind of repetitive work. "They end up being more productive than an American engineer because they do it over and over again." And finally, this kind of work is not the type that U.S. engineers here really want to do as their careers progress.

Textron's roadmap for its Indian engineering center doesn't stop at drawing conversion. Seshasai reveals plans to use the engineering resources there more fully over time. He estimates it will take another six months to fully integrate the Indian engineers into Textron's engineering teams and corporate culture. After that, he plans to let them work extensions to legacy products. By the third or fourth year, he expects that the Indian engineers will "be doing the same kind of work that we do here," including new product development.

Even then, though, a significant number of Textron Fastening's engineering jobs still won't lend themselves to outsourcing. As Seshasai explains, his business and many others that offer custom-engineered products, require hands-on application engineering. "Half of my engineering team has to interface with customers," he says. Those engineers, who also generate many of the new product ideas and have the most in-depth knowledge about fastening, will have to stay near their customer base here and in Western Europe. In addition to application engineers, Seshasai makes a case that other "cross-functional" engineering roles also tend to resist offshoring. He puts project managers, product managers, and sales engineers in this group.

Seshasai and Noe's views hint at some good career advice for any engineer worried about offshoring. Noe says that deep product knowledge and ability to work with or create intellectual property will leave you in better standing than more mundane work. And Seshasai stresses the importance of developing the project management, communication, and customer relation skills that are more difficult to cultivate in the low-wage countries. "Engineers today need to be multidisciplined to get the most out of their career," he advises.