Services and Pricing are Top Priorities for Aerospace Engineering Services Customers

This report outlines client buying behavior and preferences in the aerospace engineering services market projects (see Exhibit 1 and Exhibit 2). We spoke with more than 20 clients to understand their experiences working with service providers to deploy and support aerospace engineering projects (see Exhibit 3). Refer to the HfS Blueprint Report: Aerospace Engineering Services 2017 for a detailed analysis on the capabilities and vision of the aerospace engineering service providers. We outline some of the key trends that emerged from this study and provide recommendations for enterprises embarking on aerospace engineering service engagements.

Exhibit 1: Scope of Aerospace Engineering Services Market Across Value Chain

Source: HfS Research, 2018

Exhibit 2: Scope of Aerospace Engineering Services Market Across Aerospace Segments

Source: HfS Research, 2018

Exhibit 3: Study Demographics

Sample set: 20 client interviews | Source: HfS Research, 2018

The key findings of this study are:

• Aerospace engineering services need a long-term strategy and planning for capability development. Some aerospace projects are stretched due to stringent regulations, development guidelines, and testing procedures. Service providers need long-term planning commitment followed by delivery alignment, research labs, investment funds, and other entities. As Digital and IoT are becoming mainstream, service providers need to leverage all their digital learnings in aerospace engineering.
• At present, the United States and Europe dominate the aerospace engineering services outsourcing client mix. We believe that in the next few years, Asia-Pacific will be the major growth driver. In the civil aerospace, Chinese player COMAC is a new entrant for both short-medium and long range. Defense expansion programs in India, Saudi Arabia, and other APAC countries will create volume orders for defense manufacturers. In addition, low-cost APAC countries will be a hotbed for MRO hubs for civil aerospace companies.
• Aerospace engineering services projects demand industry-specific business process knowledge and regulatory compliance awareness. Buyers expect threshold industry knowledge from service providers. Service providers need to increase their domain knowledge to improve their customer experience. A few service providers we spoke to are making investments in this area at this time by developing internal training modules on specific topics such as in-flight entertainment and UAVs.
• Defense suppliers are rethinking their global offset strategy to fulfill local government regulations and compliances. They are increasingly entering into partnerships with local certified players for contribution in non-core areas. For example, Tata Advanced Systems and Lockheed Martin have signed an agreement to manufacture F-16 fighter jets in India. Saab has entered into a partnership with the Adani Group to grab a pie of India’s search for single-engine fighter jets.
• As most of the aircraft development programs are entering production, the next focus will be the maintenance of the fleet. With the advent of IoT, different aircraft data is captured over flight hours and it is analyzed for predictive maintenance, enabling better maintenance and improved design over time. Boeing has established a dedicated Global Services business that will focus on MRO services.

Aerospace Engineering Service Opportunities across the Value Chain

In terms of services, aerospace engineering service providers have developed new product development, product sustenance, manufacturing support, testing, MRO, and software implementation services to assist clients in their deployment journeys. These align with the HfS Aerospace Engineering services Value Chain of services (see Exhibit 4).

Exhibit 4: What Percentage of Current Aerospace Engineering Services Business Is from These Services?

Sample set: 11 Aerospace Engineering service providers | Source: HfS Research, 2018

The majority of current aerospace engineering service engagements consist of new product development, product sustenance, and manufacturing support services, accounting for about 60 percent of the revenue, followed by testing, and certification services. There is continued opportunity for growth across the HfS Aerospace Engineering Services Value Chain, particularly in the areas of MRO/aftermarket services, manufacturing support, and testing services.

Aerospace Engineering Service Opportunities across Segments

In terms of services, the aerospace engineering service providers have provided services to assist clients in their deployment journeys across aerospace segments aerostructures, aeroengines, aerosystems, avionics, and interiors. These align with the HfS Aerospace Engineering Services Aerospace Segments (see Exhibit 5).

Exhibit 5: What Percentage of Current Aerospace Engineering Services Business Is from These Segments?

Sample set: 11 Aerospace Engineering service providers | Source: HfS Research, 2018

The majority of current aerospace engineering service engagements consist of aerostructures, aeroengines, and aerosystems segments, accounting for about 70 percent of the revenue, followed by avionics and interiors segments. There is continued opportunity for growth across the HfS Aerospace Engineering services Aerospace Segments, particularly in the areas of avionics, interiors, and aeroengines segments.

End-to-End Services Portfolio and Pricing are the Main Reasons for Service Provider Selection

The aerospace engineering service provider ecosystem is vast and complex due to safety requirements, regulations, and certifications, among others. It includes global, regional, and specialist service providers with varying degrees of technical skills and delivery capabilities. Exhibit 6 outlines the main reasons the referenced clients selected their aerospace engineering service provider.

Exhibit 6: How Did You Select Your Aerospace Engineering Service Provider?

Sample set: 20 client interviews | Source: HfS Research, 2018

Deeper conversations with the referenced clients highlighted that these were the criteria used for identifying the service providers to be considered in the RFP phase. The ultimate selection of the service provider was often based on strong service offerings across the aerospace value chain and in different aerosegments, including global and local country certifications. Clients appreciated the outcome-based pricing models for both cost reduction and risk-sharing perspectives. They were also interested in the application of digital technologies to improve their existing portfolio and the opportunity of new business models in the future.

Clients rated aerospace engineering service providers highest for their end-to-end services portfolio, delivery capability, quality of account management, and geographic presence. They rated the service providers lowest for their ability to provide services based on outcome-based pricing model and project innovation capability, including emerging technologies adaption (see Exhibit 7).

Exhibit 7: Client Satisfaction with Aerospace Engineering Services

Sample set: 20 client interviews | Source: HfS Research, 2018

Capability and Execution are the Keys

We also asked the referenced clients to identify the main strengths and challenges of their aerospace engineering service providers. Exhibit 8 presents the top 10 strengths and service provider opportunities mentioned by the referenced clients. These are listed in order of client mentions.

Exhibit 8: Aerospace Engineering Services Market–Strengths and Development Opportunities

Sample set: 20 client interviews | Source: HfS Research, 2018

The top three strengths noted were an end-to-end solutions portfolio, delivery capability, and digital engineering expertise. A client who highlighted customer focus as a strength said, “We are satisfied with their delivery capability and digital engineering expertise to fulfill our transformation goal,” which demonstrates the service provider’s execution as well as innovation capabilities.

Several clients referred to the issue of pricing flexibility for engagements. Most of the engagements are run on a work package pricing model assuming end-to-end delivery capability, but clients prefer more nonlinear pricing models from both cost reduction and risk-sharing perspectives. 

Clients also highlighted that aerospace engineering demands core industry knowledge and niche skills. Very few academic institutions have regular courses in aerospace engineering, so resource capability augmentation is very important. Though service providers are prioritizing resource training, clients expect more focus in this area. A lack of efficient resources limits the scope of innovation, unnecessary rework, and project delays, among others.

Several clients mentioned that very few service providers have capability in advanced aerospace engineering. One client complained, “The key challenge is to find the right service provider that can support our advanced and futuristic aerospace programs.” Clients pointed out that service providers need to develop expertise in certain areas, including electric aircrafts, UAVs, and autonomous flight technology.

According to clients, inability of resource onboarding in certain geographies and the lack of client proximity (heavy offshoring for cost advantage) sometimes limits project execution, leading to delays. Clients are satisfied with the resources in nearshore countries also for favorable time differences and easy travel, if required.

In terms of overall satisfaction, it often came down to the specific team on the engagement. In a few cases, referenced clients from the same service provider provided inconsistent feedback in areas such as the level of technical expertise, innovation capability, and flexibility of the service provider team.

Aerospace Engineering Services Customers Must Take These Measures to Achieve Their Desired Outcomes

• Select service providers based on the skills you need: Participants for this Blueprint were selected because they are the leading or emerging service providers in their field of expertise. Every aerospace engineering service provider covered is capable of meeting buyers’ broad needs, although capabilities differ significantly across the value chain and different aero segments. Therefore, buyers are advised to match carefully the service providers’ skills with their need and take analysis to an appropriate level before shortlisting a service provider for an RFP.
• Leverage pricing models and contracts: Many service providers prefer to opt for a work package pricing model assuming end-to-end delivery capability. With the advent of digital technologies, buyers are more interested in nonlinear pricing models, such as transaction-based or risk-reward pricing, like some of their peers, to get the maximum out of service providers. Fixed price and time and material (T&M) are already the most popular, and outcome-based models have started showing up more frequently in the service providers’ pricing mix as well. We recommend buyers engage with service providers for outcome-based pricing models for both cost reduction and risk- sharing perspectives. In this way, buyers can get the best out of their service providers.
• Trust service providers with more strategic work: Buyers need to think about long-term strategic engagements beyond cost and efficiency to engage with service providers. After discussions with buyers, we also confirmed that they want to outsource strategic, higher-value services, including design and testing projects. This is often easily expressed, but not as easily adopted by various stakeholders within client organizations. More trust and close working relationships are needed to convert traditional relationships to strategic partnerships.
   

• Prepare for radical change: Aerospace engineering is going through a massive transformation with more development programs in niche and emerging areas. The focus is on flying urban transportation and electric aircrafts. These programs demand a new set of capabilities and we are observing a number of small companies coming up in this space. Choose service providers that can support you to understand and embrace these radical changes besides coworking with internal R&D teams, finding a new balance, and interplaying between internal and external capabilities.
• Push the digital envelope: Digital transformation is an important aspect to improve quality and efficiency in many existing standardized processes. The adoption of digital technologies is unevenly distributed in the industry, and most players have started to experiment. Make digital transformation a central anchor in aerospace engineering operations. Select service providers that can be long-term partners in the digital transformation journey to achieve overall business objectives in terms of cost savings, quality, and accuracy, among others.
• Check the service provider’s ability to support required locations: Most service providers claim to have the ability to support clients across the globe. However, very few service providers are truly capable of having a balanced presence in North America, Europe, and the APAC regions. As local government regulations and compliances are big challenges for aerospace engineering, access to local resources is of paramount importance. Also, in many cases, some of the outsourcing engineering works demand close proximity to the client location for close collaboration.

Bottom Line: Service Providers Need to Invest in Emerging Areas

The major civil aircraft development programs are coming to an end and the focus is shifting on avionics, in-flight entertainment, manufacturing, and MRO segments. The defense sector is picking up fast with major demand coming from developing countries such as India, the Middle East, and so on. New technology areas such as AR/VR, IoT, AI, and 3D printing are influencing different areas of aerospace engineering, including avionics, aftermarket services for better monitoring, efficiency, and safety. So service providers need to leverage cross-domain knowledge and invest significantly in IP and product innovation to deliver differentiated value to customers.