An in-depth study offers the state of practice within the engineering community
There is no question that many AEC firms are becoming more global in their perspectives. Facilitated by technological advances, international work has become a source of opportunity for domestic firms, both in terms of profits and exciting projects. While working on projects in other counties has become more commonplace, offshore outsourcing remains a hot topic—and controversial. Firm leaders increasingly are talking about it and its implications for the future of the industry, and most have strong feelings about whether or not they plan on using it at their firm.
This buzz throughout the AEC community led us to wonder just how common it is for firms to offshore outsource engineering services, what services they procure, and why. And if they don’t do it, why not? To answer these questions and many more, ZweigWhite teamed with Satellier, LLC—an offshore computer aided design and building information modeling production partnering firm—to conduct a study on the subject. This article provides a glimpse into what firm leaders think about the issue of offshore outsourcing and its potential role in their firm and in the industry.
As part of this study, we polled more than 250 firm leaders to learn what experience they have in offshore outsourcing. We also asked them about their thoughts regarding the benefits and drawbacks of offshoring, their intention to offshore oursource engineering services in the future, what services are most and least suited for offshore outsourcing, what price they expect to pay for offshore outsourced services, and what working arrangements they would prefer to have with offshore service providers. We polled 221 firm leaders through an online survey and conducted telephone interviews with 32 others.
At the start of the online survey and telephone interviews we defined "offshore outsourcing" for participants as outsourcing any operation to a firm whose principal base of operation is outside the United States. This clarification was important because we wanted to distinguish offshore outsourcing from establishing an offshore office, for example.
In fall 2006, we invited a national sample of firm leaders from consulting engineering, E/A, and A/E firms to participate in our study. Most study participants (73 percent) are firm presidents, vice presidents, and owners/partners. Other participants include CEOs, COOs, principals, and directors. A significant number (43 percent) of study participants represent multi-discipline engineering firms, although single-discipline and full-service engineering firms are substantially represented, with 29 percent and 22 percent of the sample, respectively. Half of all study participants represent small firms with fewer than 25 employees. When considering the total number of respondents from firms with 25 to 49 and 50 to 99 employees, the sample is comprised heavily of small firms—not unlike the industry. Nonetheless, firms of all sizes have been included in the study.
Experience with offshore outsourcing
To get a sense of how common offshore outsourcing is, we started our interviews and online questionnaire by asking participants if their firm has any experience with offshore outsourcing engineering services. The majority (81 percent) of our survey sample has no experience with offshore outsourcing. The remaining 19 percent of those surveyed have offshore outsourcing experience, specifically with engineering services.
Of the respondents whose firms have offshore outsourced, the highest percentage of use occurs in full-service, small- to mid-sized firms. According to our study, full-service engineering firms have more experience offshore outsourcing than multi-discipline or single-discipline engineering firms. Additionally, on a percentage basis, more 50-to-99-person firms have offshore outsourced than any other firm size group, although a significant number (26 percent) of 100-to-249-person firms have also done it.
To understand why so many respondents’ firms have not offshore outsourced, we asked that group the reasons they have not explored it. The reasons most commonly cited were concerns about the quality of the work and a desire to retain internal control over quality; a strong preference to give work to local American firms over foreign firms; and no compelling need for offshore outsourcing based on their firm’s workload, project types, or selection process (see Figure 1).
With such a range of concerns expressed by this group, what is it that drove the 19 percent of study participants to offshore outsource engineering services? The most frequently cited reasons are a desire to reduce labor costs (47 percent), a need for additional capacity/resources (40 percent), and faster turnaround (23 percent).
Most often, they offshore outsourced to reduce production-related costs and to gain access to additional labor. Decreasing capacity constraints were identified as a major driver of offshore outsourcing by this group, who say the limited domestic hiring market for engineers prompted them to gain labor from other markets to complete their current workload or to enable them to take on additional work.
Detailing services were commonly offshore outsourced as well as CAD services, including drafting, base drawings, and document scanning. Based on the experience of this group, the following services were most often procured:
- structural detailing (19 percent);
- structural design and analysis (13 percent);
- plumbing detailing (9 percent);
- mechanical detailing (9 percent);
- electrical design and analysis (6 percent);
- architecture construction documentation (6 percent); and
- 3-D visualization (6 percent)
This group offshore outsourced a relatively small percentage of their production work. Most respondents offshore outsourced less than 10 percent, with a median of 2 percent of total production work. By far, this group favored working with the offshore outsource provider on a project-by-project basis, and hiring them as needed rather than establishing a long-term, formal partnership or having the firm on retainer.
Most of these respondents are satisfied with their experiences. The majority (62 percent) of those who have offshore outsourced describe the experience as positive, 30 percent say their experience was neutral, and 8 percent describe it as negative.
Benefits and challenges
The study data also revealed further information about the benefits associated with offshore outsourcing. Not surprisingly, the overall group identified cost savings as the primary benefit of offshore outsourcing (see Figure 2). Some respondents indicated that offshore outsourcing allows them to increase capacity without investing in equipment, training, and overhead. Along these lines, these respondents—particularly smaller firm leaders—say offshore outsourcing provides a good solution to leveling out periods of high workloads, allowing them to expand their own capacity easily. Other primary benefits include faster turnaround time of work and freeing in-house staff from tasks that are not core competencies.
Despite a number of compelling potential benefits, study participants also shared their perception of the drawbacks and challenges related to offshore outsourcing (see Figure 3). Study participants consider ensuring the quality of documents and the potential for communication problems as the primary drawbacks of offshore outsourcing.
Regarding quality concerns, while most are not questioning the abilities of foreign workers, many say their work requires in-depth knowledge of local codes and conditions that are continually evolving and would be difficult to impart to an offshore team. Communication is perceived as significantly more challenging than with a domestic partner because of language, cultural differences (primarily differences influencing the interpretation of instructions or comments), and the time difference.
A significant number of participants also indicated an issue with offshoring in general. The majority of this group has no offshore outsourcing experience and are not inclined to use it based on its perceived detrimental impact on domestic firms, workers, and the industry, such as taking jobs away from American workers, commoditizing services, and creating downward wage pressure. This group often refers to this as a philosophical or moral issue.
As reflected in Figure 2, cost savings is the benefit most commonly associated with offshore outsourcing. We asked participants approximately what discount they would expect to receive from an offshore outsourcing provider on an hourly rate basis. Recognizing that the actual discount varies from country to country, as well as what services were being procured, Figure 4 gives a general sense of what savings are expected from offshore outsourcing. It is interesting to note that the expected discount varies between those with experience and those without.
After considering the benefits and drawbacks associated with offshore outsourcing, we asked respondents the likelihood that they will offshore outsource services during the next year or the next two years. Survey results indicate that (on average) firms with prior offshore outsourcing experience are nearly three times more likely to offshore outsource services during the next year than firms with no prior offshore outsourcing experience. Survey results also indicate that (on average) full-service engineering firms are slightly more likely to offshore outsource services during the next 12 months than are single-discipline and multi-discipline engineering firms. Furthermore, data indicate that (on average) the smallest firms in the industry and the largest firms in the industry are the least likely to offshore outsource services during the next 12 months.
On average, all kinds of firms are more likely to offshore outsource services during the next 24 months than during the next 12 months. And again, firms with prior experience are far more likely to offshore outsource services during the next 24 months than are firms without prior offshore outsourcing experience. Also, (on average) full-service firms are the most likely type of firm to offshore outsource services. In terms of firm size, the smallest firms in the sample are still the least likely to offshore services in the next 24 months.
Feedback from this study shows this is undoubtedly a controversial topic, with many respondents expressing strong opinions both for and against offshore outsourcing. Some respondents consider offshore outsourcing detrimental to the U.S. industry and workers. Others anticipate it will become the norm as it has with the manufacturing sector based primarily on cost pressures and the limited hiring market.
Other research supports this latter claim, and like our study, suggests offshore outsourcing will become more common and procured from counties such as India, China, South Africa, Phillippines, and Vietnam. A study by consulting firm Booz Allen Hamilton and India’s National Association of Software Services Companies (NASSCOM) says the current global spending on offshored engineering is $15 billion. By 2020, the study projects this will grow to between $150 and $225 billion. Additionally, the Booz Allen/NASSCOM study suggest that while 90 percent of the offshored innovation market is driven by reduced labor costs, that will shift during the next decade, with strategic priorities such as market access, resource quality, increased productivity, and expanded capacity becoming the primary drivers.
Even if it doesn’t reach the projected $225 billion by 2020, offshore outsourcing is a strategy being used increasingly within the AEC industry. With its potential to shape the competitive landscape, it will remain an important factor for firm leaders to consider as they strategically plan for the future.
Susan Dell Orto is a consultant with ZweigWhite’s strategic advisory services group. She can be contacted at email@example.com.
Sidebar: Perceptions of offshore outsourcing
One result of this study that truly stands out is that those with experience offshore outsourcing and those without experience have different perceptions of its benefits and drawbacks. Generally speaking, participants with experience suggest there are more benefits and fewer drawbacks than those without experience.
Firms with offshore outsourcing experience perceived the following benefits (percent of respondents):
- reduced costs (81 percent);
- more timely work (51 percent);
- frees in-house staff from tasks outside of core-competencies (27 percent);
- reduces capacity constraints (24 percent);
- gains access to expertise/software/equipment not found in house (22 percent);
- allows staff to focus on more strategic issues (19 percent); and
- higher quality work (11 percent).
Firms without offshore outsourcing experience perceived the following benefits (percent of respondents):
- reduced costs (66 percent);
- not sure of the benefits (34 percent);
- allows staff to focus on more strategic issues (22 percent);
- frees in-house staff from tasks outside of core-competencies (17 percent);
- more timely work (14 percent);
- reduces capacity constraints (7 percent); and
- higher quality work (2 percent).
Those without experience do not strongly associate time savings and access to additional resources as benefits of offshore outsourcing, although they are considered primary benefits by those who have offshore outsourced.
Firms with offshore outsourcing experience indicated the following challenges (percent of respondents):
- poor communications (38 percent);
- none (27 percent);
- quality control (27 percent);
- cultural differences (24 percent);
- possible delays (11 percent);
- insufficient client attention by vendor (11 percent);
- not guaranteed to save money (8 percent); and
- difficulty exchanging documents (8 percent).
Firms without offshore outsourcing experience perceived the following challenges (percent of respondents):
- quality control (74 percent);
- poor communications (71 percent);
- cultural differences (53 percent);
- not guaranteed to save money (47 percent);
- possible delays (43 percent);
- insufficient client attention by vendor (38 percent);
- difficulty exchanging documents (32 percent); and
- none (1 percent).
All this—coupled with 34 percent of respondents indicating they are unsure of all the benefits of offshore outsourcing—might suggest some misconceptions exist about the issue. Perhaps there is an underestimation of the benefits and an overestimation of the challenges. After all, most respondents with experience say offshore outsourcing was positive. But that’s not to say that offshore outsourcing in practice has only minor challenges; most would agree that communication and quality issues could make or break a project.