Outsourcing is much more than a trend. Companies, in their
zeal for a competitive edge, outsource virtually all non-core activities
including manufacturing, IT, accounting, sales, human resources and other
functions. Engineering and product development are among the last areas affected
by this phenomenon. Can new product development (NPD) outsourcing be effective
Why are companies doing it? Is it worth it? What are the
issues that prevent businesses from maximizing potential? This paper attempts to
define the various aspects of a relationship with a product development
outsourcing entity. It also defines various organizational models and attempts
to match characteristics of each with outsourcing types. Observations are based
on research findings conducted by Syncroness, Inc., a leading provider of
product development services within the US industry.
New Product Development?
Focus on Core Business
All businesses must examine the value of their corporate
activities. For most companies, even those with core technology, engineering
requirements are not the main value provided to customers. Therefore, like other
functions before it, large portions of R&D can be outsourced. Important
reasons to outsource include:
- Difficulty and duration of developing internal expertise
- Complexity of managing the new product development (NPD)
- Resource management
Additional factors might exist, based on the particular
business situation and market.
Based on observation, it is evident that product development departments and divisions are inundated
with projects. Corporate management tends to oversimplify the NPD process;
therefore, NPD groups are typically overloaded with a diverse range of projects
that require varied expertise. This overload is detrimental to business
performance. Most organizations would benefit from fewer projects and a focus on
their execution with dedicated resources. In effect, that is exactly what
outsourcing provides: dedicated resources focused on completion of a single
All new product development activity relies heavily on the
network of vendors, prototype suppliers, etc. These contacts significantly
influence the speed of the development. Augmenting internal resources with an
outside firm can and should also support the network of suppliers that are
involved in the development process. This can help accelerate the project.
Innovation becomes increasingly difficult as organizations
grow. The many reasons include:
- Legacy or history of doing things a certain way
- Risk aversion
- Narrow focus on own industry
- Worry over cannibalization of existing products and
These powerful factors can be overcome or mitigated by use
of an external resource for product development.
As organizations grow, less time is spent on NPD versus
maintenance of existing products. This is true for most companies. For example,
a company might operate well by focusing on the relatively few products within
its original focus. However, as additional products are added, a greater portion
of the engineering resource is required for sustaining engineering. This limits
the time available for NPD. In addition, a larger volume of products leads to a
decline in efficiency. This problem worsens until the organization becomes large
enough to separate NPD from sustaining engineering and other engineering
functions. This is usually only possible in very large organizations.
As previously mentioned, most companies have development
projects that require diverse skill sets and experience. When relying only on
internal resources, it would be virtually impossible to ensure that a necessary
expertise will be available when needed. Availability of external resources
broadens the knowledge and experience base of your
Is All NPD Outsourcing the
In a recent study conducted by Syncroness, over 81 percent
of companies polled said they outsource NPD activities. However, finding a
common definition of â€śNPD outsourcingâ€ť is difficult. We have identified several
types of NPD outsourcing:
Our observations arise from companies where all or part of a
product is manufactured outside the company. This form of outsourcing continues
to grow and often includes some value engineering of components or subsystems.
For example, domestic auto manufacturers assemble components and subsystems that
are often designed and manufactured by external suppliers. In general, many
manufacturers will provide some engineering development in exchange for winning
a production contract. Depending on the industry in question, some larger
contract manufacturers have complete product development capabilities and will
offer turnkey design-and-build services.
Many consumer products begin with a design concept with
little engineering that is forwarded to the contract manufacturer for
engineering and construction. An example is consumer products differentiated by
cosmetic attributes. In these cases, the supplier has past experience building
similar or even identical products.
The use of independent consultants for NPD is a common first
foray into product development outsourcing. Product development consultants
might be former employees or others with specific field experience. This work is
typically task-specific and the contractor provides additional resources rather
than taking responsibility for the entire project.
The use of contract labor is also common. In this form of
outsourcing, individuals are brought on-site to work under the management of the
company. This form of outsourcing is often used by aerospace companies that
require secrecy and control of the development activities.
Most of the independent firms that offer outsourced NPD
capabilities are industrial design firms. These firms focus on product
aesthetics and appeal to the purchaser. Products are differentiated by
controlling the customer experience. While many of these firms employ mechanical
and electrical engineers, the focus is often on the front end of the development
process, and contract manufacturers are relied upon to generate design and
details necessary to begin product production.
Globalization makes it easier to tap low-cost labor pools.
There are numerous firms, typically based in India and China, which offer
relatively inexpensive CAD drafting or design. However, logistics and
communication can be difficult. Significant international travel is often
required to insure that value is received. The added overhead to manage the
project must also be taken into account.
Although there are a smaller number of product development
companies, they are distinguished by the ability to manage and execute the
entire design process up to the manufacturing point. These providers supply not
only the development activity itself but the process structure and quality
systems necessary to bring most products to market.
Over the past nine years Syncroness has engaged a diverse
set of customers ranging in revenue size from virtually zero to billions of
dollars annually. These customers differ in terms of business type, size, etc.
We find that regardless of size, the level of product development maturity is a
critical success factor when outsourcing elements as complex as new product
development. This maturity level is also influenced by industry regulation and
It might seem obvious that the lower the level of maturity,
the more advanced the services one should solicit in order to compensate.
However, the exact opposite is what we observe. Underfunded startups almost
always select the least costly development alternatives rather than the most
experienced. This usually results in unsatisfactory results for both parties in
The maturity level of product development organizations
correlates directly to the level of expectation regarding NPD projects. We have
found that this level of maturity/experience and expectation varies
significantly among companies and individuals.
Financial expectations of development costs vary from
company to company. Issues we believe affect this include levels of NPD
experience as well as the levels of understanding of true internal costs and
volume manufacturing requirements.
Understanding of Internal
Many companies do not value internal and external costs
equally. There is a natural tendency to view existing resources as costing
little or nothing. Therefore, when considering outside resources, costs can
appear higher than expected. Syncroness created analysis tools that help
companies calculate their true internal costs so better decisions about the
costs of outsourcing NPD projects can be made (an example and links to that
content are included in this document). Two costs are most important. One is the
internal cost of hiring and maintaining individual(s). Usually, this hourly cost
is similar to the cost of using outside resources. The more important factor is
opportunity cost, since the cost associated with delays in bringing the product
to market are usually very high.
The process of commercialized product development differs
from that required to conduct experiments or build prototypes. Often,
individuals who have created products on their own have a low understanding of
product design for commercialization, which takes into account mass production,
quality, marketing and other factors. This lack of understanding of the process
leads to unrealistic expectations relating to cost and schedule.
Technical Risk / Intellectual
Virtually anything can be accomplished from an engineering
perspective. However, products are not developed in a vacuum. The design must
exist at a cost that people are willing to spend and it must not infringe upon
existing intellectual property. Again, the experience and understanding
surrounding these issues is critical to insuring realistic expectations for the
Understanding the Transition to
It is relatively simple to obtain quotations on various
components of a new product. However, all pre-design quotations contain limited
information. A wide range of pricing is often observed for individual
components. Suppliers are often unsure what the component will cost. Some
suppliers might provide a low quote and raise the price before the product
Psychology of Outsourcing
Based on a survey conducted by Syncroness, significant
resistance to outsourcing of product development centers around learning curves
and quality of service. Many companies have horror stories to tell about past
outsourcing efforts, due in part to the nature of product development, where
designs almost never go according to plan, and to behavioral, learning or
business issues. In most cases there is an attempt to outsource that is
misaligned with the companyâ€™s level of product development maturity. In its
analysis of past projects encompassing a wide scope of work over the past nine
years, Syncroness has identified several behavioral trends that appear to
interfere with the successful outcome of outsourced projects.
We find that there is a perception or feeling that the high
cost of lessons learned must be repeated. Virtually all manufacturers have paid
a high price to learn what they know about a particular product or market. It is
natural to believe that anyone working from the outside will not be aware of
these lessons and therefore will be doomed to repeat them. An example might be a
design issue that became a significant quality concern after launch, requiring
replacement or recall. This phenomenon leads to the belief that outsourcing such
activity is too difficult, or that without specific expertise in the product
area, it cannot be successful.
Any product development effort generates a huge volume of
knowledge. While some of that knowledge is documented, a large portion is not.
Many engineering organizations rely heavily on the â€śtribal knowledgeâ€ť of the
individuals within the group. It is natural to assume that an outside
organization will not have access to similar information and thus will not be
effective or it will take a lot of time to communicate this knowledge to them.
It is often threatening to work with an outside entity.
There exists a subconscious threat of being perceived as incapable, compounding
the concern that management might seek outsourcing more frequently to reduce
personnel, etc. The result is often subconscious self-sabotage leading to
project failure. This then justifies these individuals to avoid outsourcing in
the future. We have found this to be a potent dynamic within many companies.
Loss of Control
It can be unsettling for established development
organizations to work with an outside entity. Indeed it does require change in
managerial style and therefore the discomfort associated is often perceived as a
loss of control or ownership.
Additionally, management of an engineering organization is
decidedly different from managing an outsourced engineering effort and requires
a different skill set.
Outsourcing of product development can also be hindered by business issues,
such as accounting and adherence to existing procedures. Figure 1 illustrates
the issues that prevent companies from pursuing outsourcing relationships.
Absence of Productivity Measures
Most organizations have no reliable productivity measures that reach senior
management. This creates a tendency to view internal resources as a fixed cost.
Very few companies know how much it really costs them to develop a product,
taking into account all the fixed and variable costs. Items such as benefits,
software/hardware, overhead, and efficiency are often not calculated even though
they are real costs. Figure 2 shows an example of a labor rate calculator for
internal resources. A fullyfunctioning calculator in Excel is available at Syncroness.com
Most companies do not have a good understanding of the
opportunity cost of delay on their product development projects. It is clear
that this cost is high, but without definition, it cannot be factored into the
decision-making process. This can result in a company making decisions on
invalid information. As evident in Figure 3, while the cost of outsourcing may
be high, the payoff is considerably higher based on opportunity
â€śLast Resortâ€ť Outsourcing
Outsourcing opportunities often arise
when a company is in some sort of crisis. They are being pushed to develop a
product or products without the required resources or expertise. Therefore, the
outsourcing effort is usually unbudgeted. Thus, entering into an outsourcing
partnership while under pressure is not ideal.
Loss of Control
Undoubtedly, managers feel that they are
losing some control over any project that is outsourced. This natural reaction
is usually without merit, as one often has more control of an outsourced
resource than an internal one.
Many companies are not accustomed to
purchasing a service where the deliverables often arrive by email or other
electronic means instead of showing up at the loading dock. This factor can
cause delays and additional work to validate with the purchasing department that
the deliverables have been achieved. Additionally, product development is a
fluid process where the costs are variable. Changes to the contract amounts are
common and the process to modify purchase orders is slow, difficult, and impacts
the project pace. For this reason, fixed cost pricing is usually preferred over
time and materials pricing.
The Learning Curve
â€śBy the time I tell them what to doâ€¦.â€ť The largest obstacle
to effective outsourcing is that it initially requires effort to change existing
behavior. However, the benefits over time are significant as we learn to operate
in a more efficient manner. There are learning curves on both sides of the
outsourcing transaction: those required by the customer and those required by
the outsourcing entity or firm to come up to speed on a particular project.
It is difficult to document a return on investment for
outsourced services. Learning to look at opportunity costs as well as overhead
costs, etc., is difficult for most organizations that are driven by profit and
Lack of Project
Reliance on tribal knowledge and time pressures often result
in a lack of clear project and product definitions. This effects internal and
external developments. However, it is critical to communicate the product
definition in as much written detail as possible. As with any development, not
all requirements can be defined up front, but the better the definition, the
better the project will progress and the less it will cost.
Lack of Perceived
All solutions to product design problems are compromises to
some degree, and when faced with an outcome, it is natural to question the
approach since the compromise design likely will not meet all of the ideal
requirements. The trade-off is that a detailed understanding of the compromise
would require your participation in all design reviews. The designing entity
must be trusted to have done all homework and should show some of the major
alternatives and compromises in the design.
Sense of Progress
It is common in all development environments for the
stakeholders to want to see immediate progress in some tangible form, such as a
3D model or prototype. However, most larger developments require a significant
amount of up-front planning and concept generation that the stakeholders have
difficulty perceiving as progress. Further, the cost at startup is usually
higher due to the inclusion of a variety of team members in the concept
generation process, which is a factor that generates additional uncertainty
among the stakeholders.
What are the Benefits?
Despite the obvious complexities, outsourcing of new product
development has more benefits than drawbacks.
Outside companies are almost always faster at accomplishing
a new productâ€™s development. This is due to their increased focus and dedicated
resources that are applied to the project. In opportunity cost alone, this makes
a meaningful cost savings.
â€śBetter controlâ€ť is counterintuitive. One might believe that
having daily contact with your engineering staff provides better control, yet
the opposite is true. Product development firms are usually bound by cost and
budget which highly motivates them to accomplish the work. Internal resources
typically are not as dependable nor as motivated.
A relationship with a quality product development firm
provides a wealth of knowledge that can be tapped at any time. Product
development can encompass a vast body of information about process, materials,
analysis, prototype methods, etc. It is impossible for any organization to have
all the knowledge in all of these fields.
Often, the cost of product development is not a main issue,
but rather itâ€™s the uncertainty of the cost that is the root of the problem. Use
of outside resources assists in improved definition of development costs and
reduces uncertainty over time. Most top engineering firms are willing to work on
a fixed-cost basis, provided that the project has sufficient
Can Outsourcing of New Product
What is necessary in order to make outsourcing of product
development activities a net positive for our business? The answer depends in
part on the current level of product development maturity. If your company
possesses experienced product developers with good processes and systems, you
are in a position to take advantage of all engineering outsourcing methods.
However, should you lack experience, you should be more careful about the
methods you choose. If you are inexperienced and decide to add more resources
through contract engineering or by hiring outside consultants, you will likely
have difficulty. The less experience you have, the more you should look to
hiring product development firms that have the depth of experience and
management expertise that you lack. While the cost will be higher in the short
run, you will save in the long run. There are other day-to-day activities that
can also assist the process: