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Analyst: Outsourcing to grow in fresh field

Next wave will be in the higher-level area of product engineering, says an AMR analyst, noting that some work is already going to Asia.

The next wave of outsourcing will be in product engineering, according to an AMR Research analyst.

Citing an AMR survey of business processing outsourcing in 2004, analyst Lance Travis said on Tuesday that outsourcing engineering services is "a small but growing offering from outsourcing service providers."

The study found that last year, 15 percent of manufacturing companies hired outside companies to handle parts of their research and engineering activities. Another 10 percent of manufacturing companies had plans to do the same by the end of 2005.

AMR also reported that 13 percent of the outsourced engineering work is being done in India, and 19 percent is being done in other Asian countries, including China.

"The market for outsourced engineering services is expanding globally," Travis wrote in a research note.

The report comes amid growing concern that the United States may be losing its edge when it comes to technological leadership, as countries including China and ramp up their abilities.

Outsourcing refers to farming out tasks to a separate company, whose operations might be in a lower-wage nation. Product engineering arguably represents a higher level of work than has traditionally been outsourced, as earlier contracts focused on tasks such as running human resources departments or information technology operations.

"Companies considering outsourcing product engineering are looking for benefits similar to companies outsourcing IT functions and other business processes: reduced costs, improved capabilities and added flexibility to their internal workforce," Travis wrote. "To date, outsourcing engineering services is more effective at delivering staffing flexibility."

In AMR's 2004 survey, the companies naming staff flexibility as a benefit outnumbered those reporting cost savings or skills benefits two-to-one.

As evidence that the market for outsourced engineering services will continue to grow at a healthy rate, AMR cited a recent agreement between IBM and Nortel Networks to set up a joint development center.

"This represents one of the first major contracts for IBM's 1,200-person engineering services group," Travis wrote.

He argued that over five years, the deal could save Nortel $2 billion.