The engineering services sector is made up of Engineering Services Outsourcing (ESO) firms or Engineering Service Providers (ESPs) that specialize in planning, design, and technical work at each stage of a product lifecycle. ESO is commonly used by industries such as construction, automotive, telecom, energy, transportation, pharmaceuticals, and manufacturing. Among the services offered by ESO that are consistently in high demand are structural, architectural, civil, and electrical engineering.
Industry Growth Drivers
Growth in the engineering services industry is stimulated by circumstances that include:
- Increasing technical complexities regarding product development and manufacturing
- A need to reduce costs
- Shorter product lifecycles
- Demand for innovation
- Increasing tie-ups between ESPs and Original Equipment Manufacturers (OEMs)
The Demand for ESO
As clients demand more complex solutions and shorter product lifecycles, there is a growing need for the use of subcontractors through ESO. Shorter duration solutions result in renewed managed service contracts, helping ESO businesses to do well. Additionally, some engineering companies opt to use ESO as an extension of their own capabilities.
Other reasons that companies choose to use ESO include:
- Access to more cutting-edge technologies and more complex engineering services
- The ability to focus time and resources on other critical tasks such as marketing
- Need for less office space and lower office equipment costs
- Faster project turnaround that can result in improved client satisfaction
- Access to services on an as-needed basis
- Around the clock support services
ESO demand is also affected by the specific needs of individual industry sectors.
- ESO in consumer electronics is driven by consumer demand for enhanced mobility and entertainment, and the better exchange of information between devices for data and media.
- Both onshore and offshore ESO is used in the automotive segment in developing countries due to their high demand for passenger vehicles and economical cars. Demands in developed countries include car connectivity, advanced driver assistance, Vehicle-to-Vehicle (V2V) and Vehicle-to-Infrastructure (V2I) communication.
- Tech companies, OEMs and semiconductor companies look to ESO for assistance in developing next-generation smart devices. These businesses also employ ESO to stay competitive by focusing on product localization needs, new features, and industry best practices.
- The telecom industry accounts for a major share of ESO revenue as global telecom companies continue to expand their market presence around the world.
Adapting to the Tech Era
In today’s digital world, engineering services companies must adapt their business models to focus on emerging technologies and their integration with manufacturing and engineering services. This adaptation is crucial to realize the full potential of these growth opportunities. These technologies include data, sensors, the Internet of Things, embedded electronics, Machine-to-Machine adoption, and other digital transformative solutions.
The Need for M&A
As delivery methods for engineering services continue to change, engineering firms must either look to acquire new technologies, or diversify into higher value advisory services and focus on forming strong client relationships. Mergers and acquisitions are a resourceful path to establishing these services in a highly competitive market.
M&A strategies are also vital to creating growth and uncovering new strategic pathways. Larger companies look to acquire smaller companies in order to remain relevant, close talent gaps, expand to new regions, and strengthen their portfolio of offerings. This increased consolidation results in the prevalence of more one-stop service providers.
Because larger engineering services firms have more developed infrastructure and economies of scale, they are able to easily outbid smaller firms. This makes it problematic for the smaller firms that are trying to keep up and stay profitable. As a result of such challenges, many small engineering services companies are forced to rethink their options and consider partnership with larger firms through acquisitions.
M&A as a Succession Solution
Additionally, private engineering services companies may face succession issues because they typically have one or two founders who eventually plan to retire. When these particular business owners choose to exit the company, in many cases the next generation either cannot afford to buy out its departing leaders or is unwilling to do so. In these situations, M&A transactions are an ideal way for middle-market leadership to solve succession-planning issues, form a strong exit strategy, and set up the future trajectory for the company.
Please reach out to our cross-border M&A specialists at Benchmark International to start the conversation about selling your business or devising your exit strategy. We can offer unique perspectives, services and tools that work in concert to arrange a deal that delivers on your every aspiration. We think you will like what we bring to the table.READ MORE >>