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If you still think outsourcing is about sending large chunks of your operations to low-cost-labor countries, it’s time to get your head out of the 1990s. That still happens, of course, but companies have learned that cheap labor isn’t the complete solution to their problems. They also need to optimize operations, and they need skilled engineers and technicians to do that, engineers and technicians that are retiring in droves over the next ten years.
“It’s a perfect storm,” says Larry O’Brien, research director for process automation at ARC Advisory Group. “Labor is part of it, but the focus, particularly in North America and Europe, is on getting maximum return on assets. Manufacturers need to get the most from what they have. They need to improve plant performance and productivity, and they don’t have the resources in-house to do that.”
Ironically, this second wave of outsourcing demand is in part a result of the first wave. In the last two decades, companies have downsized, right-sized and reengineered their work forces, all with an eye to cutting labor costs, but apparently ignoring the looming retirement avalanche. In its May 2007 report, “Services Market Boom for Automation Suppliers,” ARC tells of a “major refining company” losing 2,500 years of experience last year when 100 operators, with an average of 25 years’ experience each, retired at one of its sites and of an unnamed “major chemical company” that did a demographic analysis and found that one of its largest plants would lose 75% of its operating staff to retirement by the end of the decade.
At the same time, it’s getting harder and harder to find qualified replacement engineers. “It’s not a very sexy profession any more,” says O’Brien.
In another irony, many of the engineers shed by manufacturers over the past decades have found homes with the automation vendors. They have “ended up hiring the engineers who don’t see the opportunities in the industry anymore,” says O’Brien. “Some of the best people in oil and gas, refining and pharma are being hired by suppliers. We also see a large pool of older people getting hired. The vendors are hiring the gray-haired gurus. These guys are popping up again on the other side of the fence.”
The result is more and more process manufacturers are looking to others to provide expertise they one time had in-house, and the first place many of them are looking is to their automation providers, who are more than happy to help. Vendors are building some of the scarce skill sets into their products, providing a kind of “stealth” outsourcing that lets manufacturers replace lost process knowledge with software. Then they are packaging this new capability along with integration and training services. (See sidebar, “An Alarming Situation.”)
For example, Siemens’ Si-BASIC set of engineering tools and services gives customers the choice of picking all or some of five key process control project engineering tasks—I/O hardware configuration, development of the control module, interlocks, process graphics and simulation—to offload on to Siemens or one of its partners, who then use a packaged methodology and toolset to install them. Other major automation players may have entire engineering teams (some of which are located offshore) to handle such jobs. Some are specializing in certain functions ripe for outsourcing. ABB offers a comprehensive maintenance package, and Invensys Process Systems has just announced a whole package of services around equipping plants with wireless technology.
“What we’re trying to do—because our customers are asking for it—is leverage our industry and automation expertise to complement the plant,” says Tim Olsen, a process consultant with Emerson Process Management. “We’re not taking over their jobs so much as providing tools and services to complement their plants to run them better. The biggest driver is the retirement of the baby boomers. What’s a plant supposed to do? The experience isn’t necessarily on the street.”
Kevin McDevitt, program management officer in the Process Automation Systems group at Siemens, says, “’Outsourcing’ is a bad term here. We see it as value-add. The reality is that the marketplace is putting pressure on everyone, and we’re trying to respond.”
It’s not just the labor shortage that’s driving the push to outsourcing. The variable nature of the demand for many engineering tasks makes them attractive targets. “The biggest reason manufacturers are outsourcing parts of their operations is that they like to have variable costs,” says Bill Pollock, president of systems integrator, Optimation. “Capital projects come in cycles and waves. Even with things like maintenance, you may only need your maintenance people some of the time, and you don’t want to keep them on staff all the time. Companies are looking at costing a different way. They want to hire and buy just what they need at the moment.”
This was the rationale behind Kodak’s turning over its entire engineering operation, including the staff, to Optimation. “When we took things over from Kodak, it was just seasonal. There were blocks of the year when they needed everybody and had to hire more, and then there were times when it was slow, and they would have to pay to keep good people. Now we can charge Kodak fewer dollars per hour for each hour the engineers work, and Kodak has to pay only for the hours worked. It increases resources utilization and decreases costs. If you have outsourcing, you’re better off.”