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06/30/2011

Can Outsourcing Boost Profits and Product Differentiation in the Embedded Market?

Although national employment reports have seemed to be inconsistent and unpredictable measurements of the health of the economy, the tech sector has appeared to be quicker to rebound than some of the other parts of the economy. In particular, we wrote earlier today about how the embedded engineering job market appears to be healing with over 55% of surveyed engineers reporting that the job market is better than last year.

Certainly, this improvement should be qualified with a giant asterisk denoting the dire conditions that the economy has struggled through over the last 2+ years, with many embedded system manufacturers still operating with leaner R&D departments than in 2008. Nevertheless, our research has corroborated this progress with strong commercial product growth as well as growth in our measurement of the Total Market for Embedded Software Engineering (TMESE).

As OEMs have been working to revamp their internal assets, however, the recovery of one important sector of the embedded ecosystem has lagged that of the overall market, the market for third-party engineering services. We believe that growth in this segment has begun to accelerate in 2011, however, as customer demands and new project starts have begun to outpace OEMs’ abilities and desires to expand their own internal resources.
Outsourcing

In the past, outsourcing was often looked to as a means to profit from lower cost labor markets. Now, however, we believe that more organizations will look to it as a strategy to hedge operational costs and overhead liabilities during this still precarious economic recovery. Additionally, the underlying value of embedded systems has rapidly been shifting to software, much faster than some organizations can adjust the demographics of their internal workforces to accommodate. As such, we expect that outsourcing will become an increasingly critical tool in the arsenal of OEMs to efficiently staff new projects and, where possible, offload non-critical development tasks, allowing internal development teams to focus on value-adding and differentiating feature sets.

Although we believe that this revitalized industry trend toward third-party engineering services will help promote the continued (profitable) expansion of the embedded system market, it can also raise some additional challenges and concerns within the development process. OEMs looking to take advantage of these services need to take additional precautions in communicating project requirements and evaluating work quality, both through more rigorous internal review/testing as well as generally more robust software/system lifecycle management practices.

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