Building Successful Digital Product Engineering Businesses
As you are aware, recent advances in technology have led to a massive digital wave in the engineering world, with smart, connected, autonomous, and intelligent physical and hardware products taking center stage.
To meet the needs of the current generation of consumers and provide a rich user experience, tech and engineering leaders, such as yourself, are finding that investments in next-generation technologies and talent have become crucial in successfully building digital product engineering businesses.
Join us as our experts deliver a deep understanding of the digital product engineering market, the trends impacting this space, and potential avenues and opportunities that leaders should examine.
Our experts will explore:
The size and expected growth of digital product engineering and how it compares to traditional engineering
Digital product engineering spend across industries
Relevant use-cases from an enterprise adoption standpoint and what will gain the most traction
Approaches to gauging digital product engineering vendor performance
The most relevant skillsets for digital product engineering initiatives
Challenges enterprises may face when considering a play in this market
Who should attend?
Chief digital officer
Product engineering leaders
Leads of engineering for product-centric verticals
In today’s digital world, a car isn’t just a car, a home isn’t just a home, and a factory isn’t just a factory. They’re all connected and intelligent and rely on both hardware and embedded software to deliver value to end-customers.
But to make sure these connected and intelligent products operate safely and as intended, enterprises need to completely rethink the way they verify and validate them before they release them to market.
Here are the key things enterprises need to keep top of mind when reimagining Verification and Validation (V&V) for their digital products.
Product security: With increasing volumes of data and products operating in an “always connected” state, enterprises need to emphasize security compliance and testing for digital vulnerabilities. Examples such as Microsoft’s AI bot Tay going haywire and hackers being able to remotely control Tesla car functionalities make it clear that these vulnerabilities expose their users to multiple risks.
Ecosystem integration: Here, enterprises need to think beyond the component and system level to verify and validate how the product functions within its connected ecosystem. For example, how does your connected medical device interact with other hospital equipment, patient records, doctors’ offices, and patients’ smart phones?
Response predictability: Making products connected and intelligent also means that interactions with them will yield different responses based on context and the period they have been in service. This lower predictability in responses – as compared with legacy products – makes it complex to manage quality and mandates a degree of automation in the V&V process.
Compliance: As regulatory bodies are imposing increasingly stringent compliance and certification requirements on digital products, especially in industries such as medical devices, BFSI, and automotive, enterprises need to quickly and adeptly revise their quality assurance practices.
Speed: With an ever-increasing competitive requirement on time-to-market and the many frequent changes that characterize digital products, enterprises must appropriately tune their V&V programs to deliver with speed and scale. At the same time, they need to manage the complexity of embedded and hardware development lifecycles running at different cadences.
Learning curve: Given the new technologies and capabilities required for developing digital products, enterprises also need to determine how to manage hard-to-find skilled talent, collective organizational knowledge, and the typically steep learning curve around quality engineering.
Developments in processes and technologies: Finally, enterprises need to leverage new developments such as Design For Quality (DFQ) to rectify design flaws earlier in the product lifecycle, cognitive testing techniques enabled by AI/ML, analytics, and robotics to make the V&V process productive and repeatable, and “digital twins” to increase predictability of product performance in the real world. They also need to keep pace with the innovation in tools and procedures in areas such as EMC, environment, acoustic, and mechanical testing to ensure better coverage and conformance.
Third-party service providers can help
Because these capabilities require significant infrastructural and talent investments many enterprises find it challenging to leverage them. As a result, V&V for digital products is emerging as a highly relevant category for global sourcing with the presence of specialist partners that provide “as-a-service” capabilities. Their offerings, including Quality-as-a-Service (QaaS) Testing-as-a-Service (TaaS,) and Testing-as-a-Utility (TaaU,) are cost effective, and can provide multiple benefits to enterprises, including:
Access to consulting expertise: Ideation and planning for quality requirements, and associated strategies for leveraging technology and maximizing test coverage
Scalability: Easy accommodation of demand fluctuations
Access to the latest techniques: Because service providers are consistently investing in upgrading their labs
Compliance and certification support: Prescribing the necessary procedures for compliance and certification and readying all documents for submission to certification authorities.
Over the last few years, service providers have invested heavily in making this model a success. Examples include Wipro’s Tarang Labs, which provides product qualification and compliance services in diverse areas such as EMI/EMC, mechanical, environmental, reliability, safety, and acoustic testing, and domain-specific labs, such as LTTS’ Autonomous Validation Studio, which offers digital validation of autonomous practices, annotation correction, and image processing in ADAS scenarios.
With digitalization on a rise across industries and product segments, we expect demand for third party V&V services to grow. We also expect the technological complexity involved to drive specialization, in turn making these “as-a-service” models emerge as an industry norm over the next few years.
Back in December 2017, Altran’s acquisition of Aricent for US$2 billion was one of the biggest inorganic growth initiatives in the engineering services space. The acquisition helped Altran draw synergies across key verticals and strengthen its leadership position in the global engineering services space.
Fast forward just a short year and a half later to a much larger deal: Capgemini on June 24, 2019, announced its plan to acquire Altran for a cash consideration of ~US$4.1 billion and also assume Altran’s financial debt of ~US$1.6 billion, which is primarily attributable to its Aricent acquisition. The transaction is expected to close by the end of 2019.
Based on our calendar year 2018 estimates, the combined entity will hold over 10 percent of the global engineering services outsourcing market and will have nearly US$1.4 billion higher revenue than its nearest competitor.
1 Includes Everest Group estimates
The acquisition reinforces the fact that the global services industry views engineering services as an avenue to offset the low headroom for growth in the IT and business process services. While players such as HCL Technologies and Tata Consultancy Services have primarily followed the organic route to drive growth in this space (both the companies have a spot in the list of global top 10 engineering services companies,) Capgemini has become the largest engineering services company with this mammoth acquisition.
The acquisition also highlights how service providers are increasingly reckoning with the need to develop capabilities to cater to the Information Technology – Operational Technology (IT-OT) integration needs of today’s connected world. An IT-OT play helps service providers demonstrate capabilities across multiple value elements and capture a larger share of enterprise spend.
What this acquisition means for Capgemini
Altran reported year-on-year growth of 27.1 percent for calendar year 2018, and its organic growth stood at 8 percent. Capgemini will certainly benefit from Altran’s robust portfolio growth. But it stands to gain more benefits:
Top spot in the engineering services industry: The combined entity will be the undisputed leader in engineering services, with over US$4 billion in engineering services revenue, and ~54,000 professionals
Enhanced capabilities across key verticals: With Altran’s stronghold in the automotive, aerospace, electronics & semiconductors, medical devices, and software products spaces, and Capgemini’s strength in sectors including manufacturing and energy and utilities, the combined entity will have a leadership position across the majority of engineering verticals
Asset and infrastructure dividend: Altran has developed numerous labs, solutions, innovation centers, etc., that will add rich depth and breadth to Capgemini’s capabilities
Enhanced value proposition: Capgemini will not only be able to cross-sell its enhanced IT-OT value proposition to Altran’s existing, top R&D-spend clients – including six of the top 10 Independent Software Vendors (ISVs) and all of the top five automotive Original Equipment Manufacturers (OEMs) –– but also to its own engineering-heavy verticals
Enhanced nearshore delivery capabilities: Altran has a sizeable delivery presence in Eastern Europe, which is a hub for high-quality engineering talent, and a significant delivery presence is viewed as a differentiator in the engineering services space
Access to Altran’s hand-picked portfolio of companies: Capgemini will be able to enhance its capabilities in niche areas including design and cyber security through Altran’s previous acquisitions of companies like Frog Design and Information Risk Management (IRM.)
Compound Annual Growth Rate (CAGR) of 6.5-7 percent (organic) during 2017-2022
25,000 engineers in near/offshore locations, including India, up from 16,000 in 2018
Momentum in high-growth segments such as ISVs, electronics, automotive, and medical devices
Leadership in North America, while pursuing selective growth in the APAC region
Complete integration of Aricent by 2020
With Capgemini coming into the picture, the growth plan for Altran will likely be redefined. Nonetheless, assessing how Capgemini impacts the objectives Altran’s leadership laid down is still worthwhile.
While Altran has been managing steady growth on its own (8 percent year-over-year organic growth in calendar year 2018,) integration with Capgemini will help generate greater exposure to clients and accelerated market growth in North America. It will also accelerate Altran’s delivery expansion in offshore locations.
As a downside, Altran will be integrating with Capgemini – which could come into play as soon as early 2020 – while it continues to attain full synergy with Aricent. This multi-faceted integration will require meticulous planning and execution to ensure success. It may result in increased attrition among the talent Altran acquired from Aricent.
Cues for the broader engineering services outsourcing industry
This acquisition further enhances the dominance of Europe-headquartered firms on the leaderboard of the global engineering services industry. Further, once the acquisition is complete, Capgemini – as the largest engineering services provider – will have developed a sizeable offshore delivery presence and will be capable of going to market with an optimum combination of four key factors: capabilities, scale, client proximity, and cost-effectiveness. Offshore-heritage service providers will need to step up their game to continuously invest in building and enhancing capabilities for new and emerging areas.
We expect the inorganic growth wave to continue in this space. While it is unlikely that we will soon see another acquisition of this scale, we expect both large and mid-sized players to explore smaller acquisitions that address their unique objectives. While large service providers will flex their financial muscle to gain market share and niche capabilities, mid-sized service providers will look to build adjacent capabilities. And when this happens, both the providers and their clients will win.
In 2015, Denver-based Chipotle Mexican Grill suffered a major crisis with an E. coli outbreak that left 55 customers ill. Sales plummeted, news stories and investigations shattered its reputation, and the restaurant chain’s share price dropped 42 percent, to a three-year low, where it has languished ever since. Why couldn’t Chipotle prevent or contain it? What triggered it?
The answer lies in an ever-present scenario companies face – dependence across multiple vendors and lack of transparency and accountability across complex supply chains. A radical solution, using blockchain technology, is rapidly emerging, and is being explored by a slew of startups and corporations.
Blockchain allows supply chain managers to attach digital tokens – a unique, negotiable form of digital asset – to intermediate goods as they progress along the production, shipping, and delivery phases among different supply chain players. This gives businesses far greater flexibility to find markets and price risks, by capturing the value invested in the process at any point along the chain.
Blockchain in Action
One example of blockchain in action is Walmart working with IBM and Beijing’s Tsinghua University to follow the movement of pork in China. Another is BHP Billiton, a mining giant, using the technology to track mineral analysis conducted by outside vendors. Everledger, a dynamic startup, has already uploaded unique data on more than a million individual diamonds to a blockchain ledger system, thus developing quality assurances and helping jewelry market associations comply with regulations barring “blood diamond” products.
“Smart contracts,” an application based on blockchain technology – buoyed by advances in chip and sensor technology – is an especially powerful option providing traceability and automation benefits. These contracts can grant different vendors special, cryptographic, and encrypted permissions, can be automatically executed by an autonomous system, and provide visibility on each other’s activity to all members of a supply chain community.
This kind of provable, transparent credentialing will be especially important for additive manufacturing, which is central to the dynamic, on-demand production model of the burning Industry 4.0 movement. For instance, operations and maintenance crew in an aircraft carrier need to have absolute confidence that the software file they downloaded to 3D print a new part is safe and not hacked. One of the most compelling arguments for blockchain is that it can help eradicate the trust problem in supply chains, without which the sophisticated, decentralized, IoT–driven economy many are projecting might be impossible.
Obstacles to Overcome
While the need for efficiency improvement and information aggregation suggest blockchain technology could deliver vast supply chain savings for companies everywhere, there are formidable obstacles to overcome first, such as:
Development and governance of the technology is a big concern, with two imperatives – global supply chains anchoring to a public blockchain (that no entity controls) to encourage free access and open innovation, and private or closed ledgers to protect companies’ market share and profits. This conflict leads to a couple of challenges:
Achieving global economic capacity for the most significant public blockchains, digital currency and smart contract platforms becomes constrained by divisions in open-source communities, making it difficult to agree on protocol upgrades
There needs to be interoperability across private and public blockchains, and this will require standards and agreements
There exists a complex array of regulations, maritime law, and commercial codes that govern rights of ownership and possession along the world’s shipping routes and their multiple jurisdictions. It will be extremely difficult to marry this old-world body of law, and the human-led institutions that manage it, with the digitally defined, dematerialized, automated, and denationalized nature of blockchains and smart contracts.
Despite these challenges, positive steps are being taken. For example, Hong Kong recently formed a Belt and Road blockchain consortium that seeks to bring a structure and order along with ICANN (Internet Corporation for Assigned Names and Numbers), an international, private sector–led global administrator and adjudicator.
While it might be too early to say that blockchain entirely solves the global supply chains issues, we believe any system that promises to enhance transparency and control for businesses and their customers, while also countering inter-commercial trading frictions, is worth exploring.
An increasing number of investors, businesses, academics, and even governments are starting to view blockchain technology as a much-needed platform…are you with them?
My most recent blog focused on why quality management (QM) is a critical contributor to enterprises’ ability to take great products to market. Now, let’s turn our attention to who can – indeed, perhaps should – perform product QM work for organizations.
Viewing QM activities as a core competency, enterprises have traditionally conducted them in-house. In some cases, they’ve engaged their global in-house centers (GICs) to handle some aspects of QM in order to reap the benefits of factors such as talent access and cost arbitrage, while still retaining control over issues such as IP protection and close integration with the parent entity, which is key for product design and development.
However, the advent of innovative engagement models (e.g., outcome-based pricing, collaborative IP, etc.), the pervasiveness of digital technologies, and advancements in data and IP security measures are instilling confidence among enterprises to partner with third-party service providers for their product QM activities. Recent investments by service providers in building IP and enhancing their capabilities in this space – spurred in part by slowing growth in more traditional ITO and BPO areas – is strengthening their case with enterprises. Indeed, Everest Group research shows that global sourcing in the QM space will grow at an impressive 16 to 18 percent through 2020 – higher than the growth expected in the global sourcing space for overall engineering services.
Following are some of the ways in which third-party service providers can deliver product QM value to clients.
Of course, outsourcing product QM does come with risks and challenges. Factors that enterprises should consider when weighing a product QM outsourcing decision include:
When evaluating a particular outsourcing service provider for product QM work, enterprises should evaluate factors including talent availability, infrastructure availability, delivery capabilities, ability to scale up/down, innovation-focus, expertise in digital themes, inclination towards outcome-based business models, and client satisfaction.
Everest Group has conducted deep-dive research on the global sourcing landscape in the product engineering space, covering all the activities involved in the validation, verification, and testing of both hardware and software across the product lifecycle. We have studied twenty-three of the leading engineering service providers in the QM services space, and have analyzed them on parameters including capabilities, scale and scope of services, and IP/investments. Following is a sneak peek into our relative analysis of these players based on their engineering services play, revenue and revenue growth, and coverage of QM services.
Please click here to read a preview of our report, “Identifying the Right Partners for Quality Management in the Engineering Services Industry – Service Provider Landscape.”
What do products like the Samsung Galaxy Note 7, the Toyota Corolla/Yaris (in 2016), and the Fitbit Force (in 2016) have in common? All were potentially great products that cost their companies dearly – in both image and money – due to faulty performance resulting from poor quality management.
Enterprises have come to realize the significance of quality as an indispensable ingredient for creating impactful products. They not only view product quality management as a cost-saving measure (preventing the costs of rework, wastage, regulatory breaches, warranties, product recalls, etc.) but also as a way of accelerating product launches and creating a differentiating value proposition in increasingly commoditizing markets. Given the vast intermediation of product supply chains among vendors, technology partners, assembly partners, and logistic partners in today’s operating environment, the need for quality management activities is even more pronounced as products flow from one stakeholder to another.
Yet, despite acknowledging the positive impact of product quality management, many enterprises grapple with fully integrating, and regularly upgrading, their quality management initiatives across business activities. Some reasons for this are:
To counter these issues, enterprise stakeholders need to commit to quality management as seriously as their other business mandates (innovation, margins, etc.) They should also be open to the idea of partnering with external entities and service providers in areas where their internal capabilities fall short on yielding the desired levels of quality standards.
Product Quality Management in the Digital World
Digital themes like mobility, IoT, and data analytics are enabling enterprises to build new capabilities in their products and enhance the customer experience. The advent of IoT and automation has also led to a transformation of production processes, wherein enterprises can build their products more smartly and with shorter turnaround times.
However, many enterprises face initial failures in bringing robust digital products to market because they tend to focus only on developing digital products, completely ignoring the need to adapt the underlying processes to ensure the reliability and quality of these products. This is the same as having a Euro Standard VII vehicle engine ready for market, but not having focused one bit on developing compatible fuels. We all can guess how successful (at least in the near term) these engines will be.
Digitization has thus ushered in a new era of product quality management, where capabilities need to be enhanced for testing more sophisticated products while factoring in for data management and security. Further, advancement and automation of production processes is creating the need for redefining metrics and KPIs for quality management.
So, what immediate steps should enterprises take to develop digital-ready and digitally-enabled quality management activities? They include:
Everest Group has conducted deep-dive research on quality management services in the product engineering space, covering all activities that are involved in the validation, verification, and testing of products (hardware or software) across the product lifecycle. The research covers the market landscape of quality management services, and delves into the role of digital technology themes in reshaping the way enterprises look at their product quality management efforts. Read a preview of our report, “In Pursuit of Product Excellence: Quality Management in the Engineering Services Industry.”