Enterprises can improve EBITDA with the help of Engineering Service Providers

Which enterprise doesn’t want to improve its EBITDA? The EBITDA improvement depends upon two things:

• Increase in revenue more than the cost
• Decrease in cost more than revenue

Engineering service providers can help in both of the above.

Strategies for increasing revenue with engineering service providers

Four kinds of strategies:

• Increase product velocity:  There are many product features or ideas that are not pursued or prioritized because of cost and time. These could be products/ variants for different geographies, customer segments, price points, energy-saving products, accessibility-led versions, and other long-tail ideas for products and variants. With globalization, engineering service providers can be leveraged at a competitive cost to increase capacity and velocity. The KPI to measure and improve is Product Output/ Cost.
• New business models and service lines: Enterprises can engage their customers with new business models such as product as a service servitization, subscription services, etc. They can also offer new service lines such as selling predictive maintenance, aftermarket parts, data-based services such as usage-based insurance, and location-based services such as local advertising, among others. Enterprises can also engage customers directly thru digital and immersive websites bypassing traditional dealers and middlemen. These can be both for existing products and new DTC (Direct to Consumer) brands also. Enterprises will need an engineering underbelly to enable and deliver these new business models, which engineering service providers can enable. The KPIs to measure and improve are Revenue Increase and CLTV (Customer Lifetime Value) due to these programs.
• Obsolescence Management: Enterprises can increase the operational life of their products with some modifications. This is sometimes (not always) good for sustainability, customers, and enterprise. Similarly, obsolescence management can be proactively planned and executed. These initiatives can bring additional revenue and can be executed with the help of engineering service providers. KPI to measure and improve is Additional Revenue from these initiatives
• Enterprise internal solution monetization: Every successful enterprise is unique in its own way. In their journey to success, enterprises face many business and technical issues, and sometimes they solve their problems in unique ways by internally leveraging technology. Some of these solutions or assets are core competence or trade secret, but a majority of these solutions and assets are not in that category. These solutions and assets can be packaged and offered to other enterprises in similar or other industries, which can bring new revenue for the enterprise. Engineering service providers and ISVs can help enterprises in the packaging and monetization of these solutions and assets. KPI to measure and improve is New Revenue Stream. (Read more about enterprise internal solution monetization here).

Strategies for decreasing cost with engineering service providers

Four kinds of strategies:

• Reduce R&D spend with globalization: Enterprises can transfer more R&D work to offshore locations and reduce their overall R&D spend while keeping the output the same. It can be done both with GICs and engineering service providers. The KPI to monitor and improve is the reduction of R&D Cost/ hour.
• Reduce R&D cost with virtualization: Technology can improve the process and reduce cost across the design life cycle. Extensive use of simulation can reduce design time and cost. Virtual prototypes can reduce the need and cost of physical prototypes. Usage of cloud, digital thread, and other collaboration and productivity tools can reduce the cost of design further. Engineering service providers, having worked with many enterprises, will know the virtualization and technology possibilities along with best practices. The KPI to measure and improve is Design Cost/ Product.
• Decrease COGS using VAVE, Industry 4.0: COGS (Cost of Goods Sold) is one of the most important metrics for manufacturing enterprises, and it can be reduced by design, optimization, and manufacturing levers. Design changes for reducing COGS can be done with Value Analysis and Value Engineering (VAVE), including reducing material consumption and using alternate materials. Optimization can be done at the product portfolio level to increase the usage of common parts and platforms. Manufacturing costs can be improved with Industry 4.0 by improving quality, productivity, and efficiency flexibility. Material and energy savings are enabled by Industry 4.0. The KPI to measure and improve is COGS / Product at the product level.
• Decrease warranty and service costs: Manufacturing enterprises make provisions for warranty in the range of 2%. Any savings in warranty-related actual costs will directly lead to an impact on the bottom line. Warranty cost and the process can be improved with Industry 4.0 technologies such as IoT, digital twin, and analytics. Engineering service providers can enable this. The KPI to measure and improve is Warranty Cost/ Product

And these strategies for revenue increase and cost decrease are even more relevant in the recession!

What is changed in the recession?
The time frame reduces. The ambitious long terms plans are deprioritized, and strategies that can give a quick return in 1-2 years are prioritized. If you look at the above strategies, identify and prioritize ones that are easy to implement and can give quick returns depending upon client situations.

Bottom Line: Engineering services is not a demand-constrained market, but a supply-constrained market as only 1% of the R&D spend is offshored to ESPs. Engineering service providers can help enterprises in improving EBITDA in ways that enterprises wouldn’t have thought of. It is the job of engineering service providers to not just tell but show enterprises what they can do to improve EBITDA. In extraordinary times all ideas are on the table. Engineering service providers should make this time count. Engineering service providers should focus on two things in the downturn. First, prepare capabilities (Read here), and other is show business value of their offerings in increasing EBITDA.