The need for end-to-end solution partners in Engineering services

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

Exhibit 1: Scope of Embedded and Semiconductor Engineering Services Market

Embedded Software: BIOS, Firmware, Microprocessors, Drivers, RTOS, Protocols, Boot, OS Porting, Middleware, Applications, HMI, etc. 

Embedded Hardware: Board, PCB, Sensors, RF, Mechatronics, etc.

Semiconductor: VLSI, Chip, SoC, ASIC, FPGA, Pre and Post Silicon Validation, etc.

Source: HfS Research, 2017

Exhibit 2: Study Demographics

Source: HfS Research, 2017, sample set: 20 client interviews

The key findings of this study are:

• Clients are increasingly looking for a single-product engineering service provider for an end-to-end solutions portfolio. The scope includes silicon and system design, and software development (including communication stack and middleware, testing, sustenance, and optimization). Therefore, service providers are expanding their capability from innovation to transformation.
• With the advent of the Internet of Things (IoT), service providers are managing complexity in system on chip (SoC) and at the software level, focusing on gateways, edge analytics, cloud-based platforms, analytics and insights, user interfaces, application integration, and other factors. This is enabling more digital technology integration with embedded engineering.
• Chip designing is now becoming very complex and is confined to lower geometry including other factors, such as clock/timing, power optimization, and yield and coverage improvement. Discussions with service providers confirmed that ASICs larger than 40 nm are increasingly being tapered, with more focus being placed on 16 nm/10 nm or lower design.
• In embedded and semiconductor services, business models are ripe for disruption. Accelerated go-to-market timeline, lower capex investment, and frequent design changes are a few demands from the clients. Thus, a groundswell of change and potential disruptions in the current embedded and semiconductor services business models are occurring. Clients are increasingly looking for outcome-based pricing models in this space.
• In embedded hardware and semiconductor services, in-house manufacturing facilities are increasingly becoming a differentiating factor. These manufacturing facilities are used for prototype designing, low-volume manufacturing, and testing purposes, enabling value engineering for clients and leading to substantial savings for clients.

Embedded and Semiconductor Engineering Service Opportunities across the Value Chain

In terms of services, the embedded and semiconductor engineering service providers have developed design, development, testing, and support services to assist clients in their deployment journeys. These align with the HfS Embedded and Semiconductor Engineering services Value Chain of services (see Exhibit 3).

Exhibit 3: What Percentage of Current Embedded and Semiconductor Engineering Services Business Is from These Services?

Source: HfS Research, 2017, sample set: 17 embedded and semiconductor engineering service providers

The majority of current embedded and semiconductor engineering service engagements consist of the development and testing services, accounting for about 70% of the revenue, followed by design and support services.  There is continued opportunity for growth across the HfS Embedded and Semiconductor Engineering services Value Chain (design, development, and testing services), especially with the advent of the IoT, smart products, and connected devices. Key growth industry verticals are automotive, aerospace, and telecom industries, which are traditionally embedded- and semiconductor-heavy industries.

Full Services Portfolio is the Main Reason for Service Provider Selection

The embedded and semiconductor engineering service provider ecosystem is vast. It includes global, regional, and specialist service providers with varying degrees of technical skills and delivery capabilities. Exhibit 4 outlines the main reasons the referenced clients selected their embedded and semiconductor engineering service provider.

Exhibit 4: How Did You Select Your Embedded and Semiconductor Engineering Service Provider?

Source: HfS Research, 2017, sample set: 20 client interviews

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 embedded and semiconductor value chain and in different industry verticals, including consulting capabilities. Clients appreciated the willingness of service providers to go the extra mile with very thorough and detailed bids, which included team structure and collaborative methodology.

Clients rated embedded and semiconductor engineering service providers highest for their end-to-end services portfolio, delivery capability, and quality of account management. They rated the service providers lowest for their ability to provide services across the globe and project innovation capability, including emerging technologies adoption (see Exhibit 5).

Exhibit 5: Client Satisfaction with Embedded and Semiconductor Engineering Services

1 being the most satisfied and 8 the least.

1. End-to-end services portfolio

2. Flexible and on-time delivery capability

3. Quality of account management

4. Strength and availability of resources

5. Experience delivering industry-specific services

6. Flexible and competitive pricing model

7. Geographic footprint and scale

8. Innovation and new technology adoption

Source: HfS Research, 2017, sample set: 20 client interviews

Capability and Execution are the Keys

We also asked the referenced clients to identify the main strengths and challenges of their embedded and semiconductor engineering service providers. Table 1 presents the top 10 strengths and service provider opportunities mentioned by the referenced clients. These are listed in order of client mentions.

Table 1: Embedded and Semiconductor Engineering Services Market – Strengths and Development Opportunities

Source: HfS Research, 2017, sample set: 20 client interviews

The top three strengths noted were an end-to-end solutions portfolio, delivery capability, and semiconductor engineering expertise. A client who highlighted customer focus as a strength said, “I can rely on their delivery capability with minimum supervision,” which demonstrates the service provider’s integrity and commitment to the project.

Several clients referred to the issue of having too many junior members on the team. This was not a huge problem if the service provider clearly communicated this intention, and importantly, priced the skill accordingly. A client mentioned, “I’m happy to have a talented youngster with the right structure and guidance.”

Clients also highlighted that the lack of client proximity was a major challenge for them. Due to the cost pressure, the delivery team is often located offshore and visits the client site during the project requirement phase. So, insufficient communication leads to a lack of understanding, necessitating a lot of rework and causing project delays. High resource attrition was also a major concern for clients. In an engineering service engagement, clients understood resource mobility in projects, but client satisfaction depended on the retention of key team members of the projects. If, however, the service provider does not communicate this well, clients are often unhappy about having a team that does not consist majorly of senior talent. One client complained, “Often, we found that junior individuals are learning the technology on the project.” Clients pointed out that too many junior resources limit the scope of innovation and value-added activities of the project.

Several clients admitted that service providers seriously lacked industry knowledge for embedded and semiconductor engineering services. Vertical knowledge enables the implementation of business process with minimum revision and project delays. Also, some providers are traditionally strong in some verticals, so they need to work to expand their expertise in other verticals as well.

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.

Embedded and Semiconductor 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 among the leading and emerging service providers in their field of expertise. Every embedded and semiconductor engineering service provider covered was capable of meeting the broad needs of buyers, although capabilities differed significantly across customer segments and regions and even within. Therefore, buyers are advised to match the skills of the service providers carefully with their need and undertake appropriate analysis before shortlisting a service provider for an RFP.
• Leverage pricing models and contracts: Buyers should try nonlinear pricing models, such as transaction-based pricing, gainsharing, or risk-reward pricing, as some of their peers are doing to get the maximum out of service providers. Fixed price and time and material (T&M) are already the most popular pricing models, and outcome-based models have started showing up more frequently in the pricing mix of service providers as well. We recommend that buyers engage with service providers for end-to-end business processes, i.e. from the design phase to the product sustenance phase, enabling service providers to plan and invest according to buyers’ needs. In this way, buyers can get the best out of their service providers.
• Demand innovation and proactive recommendations from the service provider: Buyers should leverage the innovation capabilities of service providers, including their opinions of market developments, innovation investments, and suggested roadmaps for clients, throughout the engagement. These can also be seen as value-added activities within the project scope. As many embedded and semiconductor engineering services projects follow the T&M pricing model, the scope of innovation may be limited. In this case, proactive recommendations can be effective to ensure that current plans remain relevant in a changing market.
• Look to service providers for a strategic partnership: Buyers need to think beyond cost and efficiency to engage with service providers. After discussions with buyers, we also confirmed that they are interested in strategic, higher-value services from their providers. This is often expressed easily but is not readily adopted by various stakeholders within client organizations. More trust and close working relationships are needed to transform traditional relationships to strategic partnerships.
• Keep an eye out for project management: Buyers should regularly monitor a project’s progress and provide feedback to service providers to ensure continued alignment of objectives. Some of the referenced clients have pointed out that requirement misunderstanding, delivery issues, late resource onboarding, and other factors impact a project’s timeline and output. Clients may need to be more proactive to keep the service provider focused on the right areas, ensuring timely delivery of a project’s essential components.
• Leverage the service provider’s tools and in-house facility for faster deployment: The service providers included for this Blueprint have a good understanding of process maturity, including regulatory certification. This can be one of the selection criteria while evaluating them in the RFP process and the benefit can be leveraged in project engagements. Some referenced clients pointed out that the in-house testing and development facilities of service providers were very useful and critical for the success of their projects.

Bottom line

We expect the embedded and semiconductor engineering services market to undergo high-trajectory growth over the next few years. Emerging technologies, particularly machine learning, artificial intelligence, and the IoT, are major influential factors for embedded and semiconductor engineering services. As the adoption of the IoT accelerates, the importance of IoT-derived data, device, and connectivity software, sensors, and embedded hardware becomes of paramount importance.