© 2014 Information Services Group, Inc. All Rights Reserved

New Models of Engineering Outsourcing

Global ER&D Growth & Projections

2005 2009 20200

200400600800

10001200140016001800

2014 NASSCOM

Years

Global ER&D Spend

(in Billions $USD)

Can the market’s current service

delivery, contracting and relationship

models sustain this growth?

Top Service Providers ESO Growth

2011 2012 2013 20141000

2000

3000

4000

5000

Growth of Enginnerineerign Service (Revenue by Top 4 Indian Service Providers

The Key ER&D Industry Verticals

ER&D Services % Spend Share

ER&D Primary Verticals

MedicalConsumer

EnergyAeroAuto

OtherSemi

Telecom

0 5 10 15 20 25 30 35

2014 % Share

Cost Reduction

1

Shorter & Faster

Product Lifecycles

2

Access to Global

Talent Pool

3

Product Localization

4

Shrinking R&D

Budgets

5

Higher Usage of

Embedded Systems

6ESO Growth Drivers

Technology Convergence

7

The ESO Driving Trends

Transition to Connected

Technologies

8

Captives Remain the Dominant Delivery Model

400 Captives

85 Service Providers

Captives remain inefficient, costly, and too basic in their value delivery -- Captives must become more operationally efficient and evolve their value delivery.

The market is turning towards service providers for longer term deal flexibility and services up the value chain

ESO Captives & Optimization

Expand Skills & Capabilities Increase Value Delivery

ESO CaptiveDrivers

43 5

1 2Total Cost Reduction Improve Productivity

Improve Quality

.

... with the aim to ...

.

... with the aim to ...

• Improve efficiency and effectiveness • Increase the Value of Engineering Services• Transform the Engineering Services

• Ensure lasting performance improvement

• Improve efficiency and effectiveness • Increase the Value of Engineering Services• Transform the Engineering Services

• Ensure lasting performance improvement

Services & New Product Development Costs

Business Processes and Engineering Application

PortfolioProcess

Maturity

Scope: Engineering Services and/or New Product Development

Service Capabilities

Product Life Cycles & Speed to Market

Analysis Aspects

Drivers for effectiveness

Drivers for efficiency

Captives Approach to Optimization

Mutual Value of Captive Monetization

Increase Skills & Capabilities

Clients

Access to More Resources, Skills & Capabilities Expand Resources

Consolidation into Service Delivery Centers

ESO Service Providers

Long Term ClientRevenue Commitment

Reduce Balance Sheet & Improve Financial Health

Improve Productivity and Value Delivery of Operations

Receive Monetary Value for Assets

Captives Approach to Monetization

► ISG Research Data► ISG SME inputs

► Assess Current State by benchmarking vs peer group

► Due Diligence of select Suppliers

► Detailed Report of the Current State of the Shortlisted Service Providers

► Output of Assess stage

► Undertake Financial Modeling

► Create Negotiation Strategy

► Detailed Report on Financial Health

► Negotiation Strategy with clear positions

Dat

a So

urce

Key

Activ

ities

Out

put

Assess Design

M&A Transaction Support post Target identification

► Output of Assess and Design stage

► Contract Execution► Closure on all required

paperwork

► Signed Contract

Execute

The ESO Deal Allocation Shift Right!

Staff Augmentation

35% to 10%

T&M Projects

20% to 25% 2% to 30%

Fixed Price

Projects

5% to 15%

Co-Risk / Reward

Managed Services

38% to 20%

Traditional Engineering Services Pricing Models The Future of ESO Partnerships

The ESO Deal Allocation Must Shift Right to Sustain the ESO Growth

► Defined Services (SOWs) and SLAs – Statements of Work specify the “What” not the “How”. Defined Service Levels with measured performance goals aligned to the ESO Services

► Defined Pricing - Fixed Price models w/variable components for services that allows ramp-up and ramp-down of costs based on volume and need

► Defined Risk Model - Manage overall sourcing risks via Contract terms, Skill mix, Onsite/onshore/offshore ratios, geographical locations, etc.

ESO ManagedService

Service andServiceLevels

Defined RiskModel

DefinedPricing

ESO Managed Services – for the Larger / Multi-Year Relationships

Engineering Services Outsourcing is

Growing and Evolving to More Mature Sourcing Models

© 2014 Information Services Group, Inc. All Rights Reserved

© 2014 Information Services Group, Inc. All Rights Reserved