The manufacturing industry witnessed a sharp rebound in 2021, led by critical segments such as pharma, high-tech, chemicals, and electrical equipment and machinery. As such, more than 70% of Global 2000 manufacturing clients in our H2 2021 Pulse study expect to increase the adoption of third-party services across the manufacturing value chain. Third-party engineering service providers are also recovering from the early pandemic shock and clocking solid double-digit growth in 2021 (Exhibit 1).
Note: Analysis based on engineering service providers that disclose engineering revenues in their quarterly financial results.
Revenue calculation: Alten, Bertrandt, Cyient, EPAM, KPIT, LTTS, Persistent, Semcon, SII Group, Sogeclair, TATA Elxsi – Entire revenue; HCL – Engineering and R&D Services; Capgemini – Operations & Engineering;
Source: HFS Research, 2022
Source: World Manufacturing Report Q3 2021, United Nations Industrial Development Organization (UNIDO)
Savvy manufacturing leaders will closely watch how these services evolve to align with the HFS Innovation Framework for Manufacturing (Exhibit 2). The three distinct horizons don’t represent a linear progression; they occur concurrently and overlap:
Source: HFS Research, 2022
Enabling digital technologies like cloud computing, artificial intelligence (AI), and the internet of things (IoT) ushered in the fourth industry revolution, Industry 4.0, driving the IT/OT convergence. The pandemic accelerated many of these trends, making Horizon 1 digital engineering critical to survival. Horizon 1 includes enabling technologies such as cloudification for greater flexibility and agility, automation for touchless maintenance, AI-driven autonomous manufacturing, and smart analytics across industrial systems. Newer interactive AR (augmented reality) and VR (virtual reality) technologies are transforming user experiences across the manufacturing . For example, AR/VR applications are used for product design/prototyping, training, aftermarket services, and customer experience management (virtual showroom) among others. Manufacturers are building digital twins of almost everything—from single components and assets (rotors, turbines, pipelines) to complex processes and environments (production lines, manufacturing plants, wind farms).
Industry 4.0 technologies have led many “smart” advances such as smart manufacturing, where sensors and equipment with embedded software can talk to the ERP, CRM, and supply chain systems, resulting in significant improvements in production efficiencies. We have also become reliant on intelligent and connected “smart” consumer products, such as speakers, cars, homes, and cities.
Most manufacturing organizations operate in silos, resulting reduced visibility, decision making delays, and value chain inefficiency. With increasing product complexity, changing customer preferences, and complex supply chains, manufacturers need more internal collaboration to smoothly run the business and cater to customer demands. To get to the Horizon 2 OneOffice, enabling growth and success, manufacturing enterprises must bring their IT and OT together with another critical element: business transformation.
More than 85% of Global 2000 manufacturing organizations consider the OneOffice mindset (connecting the end-to-end organization to create a frictionless experience for both customers and employees) very important. More than 75% say that the importance of OneOffice increased post the pandemic shock (see Exhibit 3). COVID-19 made companies realize they needed to recalibrate archaic processes and that no transformation would solve the talent equation. Global 2000 manufacturing organizations, when asked for our H2 2021 Pulse Study about the significant changes in ways of working over the next 12-18 months, ranked increasing the workforce’s digital fluency as #1. The OneOffice restores equilibrium between people, processes, and technology.
Sample: 800 respondents from Global 2000 enterprises
Source: HFS Research Pulse, April 2021
Leading service providers support this manufacturing OneOffice by bringing together IT, business, consulting, and engineering capabilities. In the last two years, IT services firms have completed more than 25 acquisitions of engineering services firms to add integrated capabilities across diversified industry segments (Exhibit 4). Partnerships will also be crucial. Leading engineering and manufacturing companies are partnering with hyperscalers to drive innovation and create new go-to-markets. For example, In December 2021, Siemens expanded collaboration with AWS to enable cloud-based digital transformation across industries, and Microsoft is building industry-oriented partnerships with ABB, GE, Schneider Electric, Rockwell, and Siemens.
Source: HFS Research, 2022
COVID-19 shined a light on our supply chains and illuminated the cracks that have always existed. Just like we need a digital twin of the turbine for preventive maintenance, COVID-19 made us realize that we also need a digital twin of our supply chain to make it resilient.
For too long, supply chains have been shackled by the idea that they must be linear—a “chain”—but manufacturing leaders finally recognize the need for supply networks. Supply chains need an ecosystem approach—both internally and externally. Organizations will need to collaborate across industries to pinpoint sources of disruption, were to disrupt, and how to keep reinventing themselves in an unforgiving world where we no longer have time to rest on our laurels. Horizon 3 will be all about enabling these ecosystems to make the supply chain increasingly resilient, intelligent, and collaborative.
Source: HFS Research, 2022
While engineering services have traditionally operated in a market of their own, these services will become closely linked with technology and business services as Industry 4.0 expands beyond the shop floor to the supply chain and manufacturing innovation initiatives are tightly connected across IT, operations, and business strategy. Engineering is also approaching slowly from OneEnterprise view to OneEcosystem view as manufacturing enterprises and the technology world are coming together (For example, The Open Manufacturing Platform (OMP)) to enable innovation across the manufacturing value chain. Thus, engineering enterprises should build an open innovation culture to learn, unlearn, and unlearn in the context of within and beyond the organization boundary. HFS provides unique three-dimensional coverage of engineering services (see Exhibit 6) allowing manufacturing clients to make intelligent decisions based on the engineering domain, industry context, and maturity across the HFS enterprise innovation framework about the rapidly evolving engineering services market.
Source: HFS Research, 2022
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