OEMs Shift Their Use of Professional Services to a Gain Competitive Edge

In 2013, VDC is seeing dynamic shifts in strategy for many OEMs as they respond to market pressures and position their organizations for future opportunities. As the economy improves, the calculus behind the professional services decision may change but most OEMs still prefer to outsource non-core functions. Although the OEM may be losing some product margin to pay for the services consumed, it is a small price to pay compared to the expense and risk of bringing processes back in house. Even so, we see that 10% of OEMs will be considering re-joining the 20% of their peers that do not utilize any professional services (Exhibit 1).

Exhibit 1: 2013 OEM cited current and future use of professional services

In these cases where the reduction in professional service use is being considered by the OEMs, there could be multiple forces and strategies at work. Sometimes it can be as simple as the OEM’s belief that if they want to do something right, they have to do it themselves. It also can be the result that recapturing the lost margins is worth the organizational costs and risks given the improving unit volumes. Although improving margins through insourcing may be part of the strategy, the largest gains are obtained when an OEM can better differentiate their product and therefore charge a premium price for it. Therefore, it is likely that OEMs with proprietary processes and technologies that provide differentiation feel they need to insource to protect their intellectual property.

Despite the advantages that insourcing may have, a growing majority of OEMs see outsourcing as the best way for reducing development costs while still being able to take advantage of new technologies. A prime example might be the new 4^th generation of i7 processors being rolled out by Intel. If an OEM was going to directly embed them, they would need to gain expertise and knowledge of the new Z87 Express chipset. It also might be difficult for an OEM to even obtain those components because they are likely to be in tight supply and the Intel alliance partners would be in a position to have better access. For similar reasons, an OEM would be better off looking to an embedded supplier for an AMD G-Series SoC based hardware product. In that case, the OEM could be focusing their internal resources on activities to develop an HMI application that fully utilized the embedded graphics capability. Doing so could make their product sparkle in ways a competitor might find difficult to duplicate let alone surpass.