Part 1:
Why companies struggle to go beyond incremental improvement and deliver big change

Our recent Engineering Trends report – which surveyed 300 engineering leaders – found that optimizing core engineering was considered key to the future of their business (see Chart 1). Reducing costs may be the obvious benefit (highlighted by 38%), but nearly as many respondents said it was essential to profitability, speeding time to market, and as a sustainable competitive advantage.

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This must go beyond incremental optimization. Ever greater efficiency serves you well, until it doesn’t. For example, a recent Economist article on the challenges facing the German economy noted that, “German industry, especially its Mittelstand firms, has focused on incremental innovation, leaving it unprepared for technological shocks like the advent of electric vehicles.” In the face of unprecedented competition, engineering companies need the sort of dramatic efficiency improvements delivered by the internet and offshoring booms of the 1990s and early 2000s.

But established companies struggle with big transformation. They generally see two routes for improving cost and efficiency without harming output: technology and outsourcing. Both have limits.

Technology and its limits

New technology offers endless small improvements – all worth doing (see Chart 2). Many believe it will offer wholesale transformation – observe how Tesla delivered unheard of efficiencies by building factories from the ground up, using the latest digital, automation and collaboration technologies.

But the reality is that this is hard for companies with legacy systems and cultural resistance to the change these technologies bring. Our survey showed nearly three quarters saw skills, and cultural resistance as barriers to optimizing the core, amongst other internal blockers (see Chart 3).

Outsourcing and its limits

Outsourcing has had more success delivering big cost savings for established companies – especially in the US where leading companies are known to outsource 60%+ of their activities (Europe is significantly lower at 30-40%). Various sources suggest outsourcing saves companies 20-30% or more in costs, by reducing expenses, accessing hard-to-find expertise, and even improving efficiencies by moving work to purpose-built facilities.

But outsourcing has traditionally been about shifting a defined work package from one place to another. This delivers a big initial cost-saving amongst other benefits, but its value diminishes over time.

This is because a team built for a single outsourced task will focus on doing one thing efficiently, and will not be able to see the bigger picture, spot new ideas, or identify new technologies from other sectors that could bring improvements.

Gradually, they will fall behind companies with more innovative approaches.

Over time, costs rise as specialist teams expect higher pay. Under this highly formalized approach, it can be hard to maintain the desired pyramid structure of a few managers at the top and lots of people delivering at the bottom (unless you constantly fire people whenever they deserve a promotion, which is not a good look these days).

Finally, narrowly focused teams, each with their own siloed approaches to quality control, can make outsourcing complex and safety-critical components more trouble than they are worth, limiting outsourcing’s potential.