ISG Provider Lens™ Digital Engineering Services - Design & Development (Product, Services, Experience) - Europe 2023

Digital engineering drives interventions across industries to increase efficiencies and effectiveness

The digital world offers enormous opportunities and challenges to the current generation to cope with changes. The adoption of evolving digital technologies offers better ease of life, access to information, fact-based decision making and switching between real and digital spaces. Digital technology is revolutionizing the world of work, value chains, innovation and market and business structures. Modernday digital customers expect faster, more personalized experiences when reaching out to a business’ contact center. Digital adoption created a great convergence among countries in Europe over the last year – the trend was very positive during the post-pandemic period and has stabilized while still showing upward trends.

The technology-savvy end-customer has pushed the need for accelerated digital technologies adoption across industries. CX is taking the central position for any product or service being built, and each element is bringing a touch of digital perspective into play. The whole business ecosystem is becoming digital and thus requires providers to be capable of addressing the changing customer needs through the latest technology and tools. Enterprises are investing in digital technologies, such as artificial intelligence, cloud computing and big data, to increase efficiency, reduce costs and improve CX. With data, solutions and tools, the products companies make and how they make them can be reimagined digitally. Digital firms are inherently more scalable, have greater efficiency and productivity, are more innovative, grow faster and create more digital opportunities.

Business context and technology changes are the key factors driving engineering services. Digital is the mantra for the products and services being envisaged for the digitally capable end customer. Business imperatives dictate metrics such as faster product life cycles and rapid releases of new products and variants. They promote the virtual prototyping adoption to reduce the risks involved in design cycles and to optimize iterations, time and cost during the engineering stages.

• Greater need for digital transformation: The COVID-19 pandemic has accelerated digital technologies adoption across industries, and this trend is continuing in Europe. AI, cloud computing and big data are among the key digital technologies that enterprises are investing in to improve CX, increase operational efficiencies and reduce costs across the value chain.

• Focus on sustainability: Environmental and social sustainability are becoming increasingly important for businesses across Europe. As part of their ESG focus, enterprises are adopting sustainable practices, reducing their carbon footprints and implementing circular economy principles to achieve sustainable growth.

• Mandatory growth of e-commerce: E-commerce has significantly evolved in the recent past. With the pandemic accelerating the online shopping trend, many consumers are likely to prefer e-retail in the times ahead. Retailers are investing in digital channels to meet changing consumer behavior.

• Increasing digital interventions in healthtech: Considering its high importance, enterprises are heavily investing in digital health technologies in the European market. In healthcare, the main focus is on technologies around telemedicine and remote patient monitoring to improve access to care and patient outcomes.

• Automation and robotics: Enterprises are acknowledging the significance of automation and robotics and hence making higher investments in the technologies to increase productivity, reduce costs and improve operational efficiency. Robotics is also finding applications in healthcare, logistics and manufacturing to automate repetitive and dangerous tasks.

• Impact of the ecosystem on business and digital scenarios: The UK recession and war in Ukraine have affected the European ecosystem in several ways. The stress on supply chains, uncertainty on foreign exchange rates, reduction in overall demand, the readiness of customers and industries to make long-term/short-term investments have all caused the scope of digital interventions to be based on the assessment of the risks associated and the resources available. Interestingly, consumers currently don’t expect the war in Ukraine to have much of an effect on their digital usage. But some businesses might be required to move their operations across to other locations.

Over the years, the digital element has grown significantly to bring digital twins into existence which connects the physical and digital worlds closely. Industry 4.0 and other digital trends, which are augmented by IIoT and artificial intelligence of things (AIoT), take engineering to a newer orbit to be an automated, smart, intelligent and controllable ecosystem.

We also see the following industry segment highlights in the DES space in Europe.

Automotive Industry

Growth in the European automotive industry has been slow in recent years due to factors such as the economic slowdown changing consumer preferences, and increased competition. However, some areas of the industry have seen growth, such as electric and autonomous vehicles and automotive software. Automotive products are becoming intelligent and self-contained, which is increasing the challenges on the systems and solutions used to take them from inception to reality.

Aerospace Industry

The aerospace industry in Europe has been growing steadily in recent years due to factors such as increasing demand for air travel, rising defense budgets and technological advancements. The industry, which was slowed due to the COVID-19 pandemic, is expected to recover in the long term.

Healthcare Industry

Europe’s healthcare industry has been expanding steadily, resulting from an aging population, rising healthcare costs and technological advancements. The pandemic increased demand for some healthcare services and accelerated the adoption of digital health technologies.

The developments highlighted above represent only a sample of what is happening in industry verticals. Digital has not spared any of the following sectors and has its own customer impact, leading to customer-centric powerful use cases for each of the following:

Airlines, amusement and recreation, arts and culture, banking, business services, chemical industry, construction, consumer services, consumer staples, e-commerce, education, energy, engineering, entertainment, environment, fashion, forestry, government, healthcare, heavy industry, hotels, infrastructure, insurance, law, life sciences, logistics, manufacturing, media, mining, non-profits, professional services, publishing, real estate, restaurants, retail, science and technology, space, telecom, tourism, transportation, utilities, wholesale. Opportunities in these industries for digital interventions have to be clearly identified in powerful customer scenarios and use cases for the digital providers to address them to crossmultiply benefits across these industries.

The market has moved in a synchronized manner toward digital engineering transformation services to provide an overarching strategy for digital products, services and solutions. It is delivering new capabilities for real-time and concurrent digital product design, along with data-driven product lifecycle management (PLM), flexible, intelligent manufacturing operations and digital CX delivery services.

With the focus we have on the four quadrants in the current study on Digital Engineering Services, the following trends are evident across the providers to disrupt the market in the Digital Engineering Space.

• Engineering R&D (ER&D) becoming a strength: Customers are looking for stronger players with abilities to understand, relate to, completely own and execute larger digital transformations with a deeper understanding of ER&D as a specialized discipline. Digital engineering service providers need an extraordinarily strong background in engineering research and development. The deep experience and knowledge from the large transformational engagements in ER&D with multiple customers serves as a differentiator from the competition.

• Focus on software to be central for digital offerings: Providers need to become more intelligent, connected-capable, reliable and hence predictable to their customers by leveraging software tools across the value chain so they and their customers can deliver efficiencies, comfort, and advanced features to the end customer.

• CX is a key driver for success in the long term: The conventional start of any product development is a comprehensive analysis of the market requirement and applying the learnings from the earlier products in the market. This approach is conventionally known as the voice of the customer (VoC), and now powerful end-to-end use cases cover a plethora of digital information sources to drive feedback to the design upstream to make the process self-learning and self-driving. CX, in the form of customer inputs, expectations and comforts, takes the front seat to the drive product development process.

• Global preparedness with the right competencies: The advent of digital has drastically impacted the expectations of various roles in enterprises. As there is a ready market for customers across globe, the digital engineering industry is spreading across geographies and its growth is indicated by the number of locations of operations and the sizes of global teams collaborating digitally. The industry always needs very specific competencies for building international digital operations. The industry has started expecting to get the employment-ready students from academia.

• Supply chains becoming visible and intelligent: The digital impact extends further than the enterprise to the extended supply chain in both upstream and downstream directions. The digital technologies enable supply chain visibility and performance to make supply chains more intelligent, strongly connected and predictable.

Technologies such as mobility, big data, AI, ML, IIoT and predictive analytics can impact the entire value chain to make it increasingly visible, trackable, reliable, consistent, controllable and, hence, predictable. This has resulted in the digitization of the entire value chain – right from product inception to manufacturing and across the industry spectrum. This digitalization includes foundational engineering services, such as product innovation, ideation, strategy and design, R&D, operations, PLM and aftermarket services. Track-and-trace ability has gained importance for building the genealogy of a product and its history during the value-add. Testing and validation processes have also become evident as the product moves digitally toward the consumer. All four quadrants analyzed in this report are digitally enabled to become more intelligent and capable both in the product and process perspectives.

From the four focused subject areas, the following observations are prominently evolving across the providers:

• Design & Development

• Strong use cases of digital twins and threads across the value chain
• Streamlined working of the CAD/ CAM/CAE/CAM digital tools with integrations with ERP and CRM is evident

• Intelligent Operations

• Supporting clients from the manufacturing and other verticals for the digital interventions for their operations. The digital manufacturing transformation use cases could be leveraged across the industries with appropriate contextualization.
• In addition to the conventional global metrics for the operations, issues such as sustainability and carbon footprint should also be considered.

• Customer Experience

• Setting up design studios and keeping CX at the center of the product design and development value chain
• Continuous feedback for the product experience across the value chain and improvement loops – to avoid surprises at the product release

• Platforms & Applications

• Supporting the customers’ products and variants, and platforms for the same
•  Extending digital support to both digital and physical products to the customer’s customer

As an indicative comparison, the EU falls short of the U.S. in terms of technology adoption. On average, European firms are less often fully digital, and digitally transformed companies are particularly lacking in the manufacturing, construction, communication and other industries. Furthermore, U.S. firms invest more in business process improvements compared to their EU counterparts.

Based on the market availability and hence the services rendered, a typical digital engineering provider generates 15-30 percent of its revenue from the European market, which most of the providers are indicating could be increased further. Some of the providers are seen to be cross-leveraging their global customers from the U.S. to be geographically present in the EU to extend their presence and increase the market share, while the others have a dedicated EU focus strategy for growth.

Following are some of the concrete and direct recommendations for service providers to demonstrate and improve their scores on ISG’s Portfolio Attractiveness and Competitive Strength evaluations in each of the quadrants studied.

• Design & Development (Products, Services and Experiences)

• Impact on the design and development of the end customer’s product is the key to success
• Build a stronger foothold in the ER&D space
• Get entrenched in the customer’s product development by providing value-add by driving innovation

• Integrated Customer/User Engagement

• Aim at providing CX at the core and extend it to the end-customer across the value chain
• Convergence of the real and virtual worlds is critical

• Platforms & Applications Services

• Build a comprehensive story for how the digital platforms are supporting the providers’ product processes and hence helping the end customers and their products, ensuring better business outcomes
• Make the definition of the platform and application layer more abstract to cover products, processes and resources for the customers and make it industry-agnostic so it can address a larger market with maximum reuse

• Intelligent Operations

• Build support for end-to-end customer operations and aim at growing across the walls to the extended enterprise
• Support for shop floor to top floor, virtual gemba, AR/VR in real-life use cases is the key
• Adopt concepts such as plant-in-a-box and plant-in-a-mobile
• The advent of Industry 5.0 must be converted into an overarching storyline as a matured, long-term, and sustainable approach

This study was designed to give a perspective of four key elements in the customers’ value chain and assess how the market is bringing digital interventions into this space. About a decade back, digital was a lever for growth for the industry. It has now become a mandatory element for existence and a differentiating factor to drive the market. The early move to cope with the trends like dark factories, neural plant floors, and digital twins of industry workers are going to challenge the market and create opportunities for thought leadership.

Taking an approach that will drive positive impact and hence alignment to the customer’s business imperatives and KPIs, eventually to be delivered through the digital transformation, is the way for the provider to move up the value chain, gain mindshare with the customer and make greater impact on the ecosystem. Stronger consideration to digital reimagination of the customer’s value chain will result in providers winning mindshare and confidence from customers. Technologies like 3D printing, AI, ML, robotics and self-learning business processes will keep disrupting. They will bring more automation and intelligence to build the industry, which is will be increasingly digital in the years to come. A stronger recommendation for gaining more business and attention from customer management is to embed domain experts in the customer’s business and enable the digital drivers by building the business transformation roadmap with customers. The aim is to eventually drive digital IT initiatives to achieve the desired business outcomes.

Providers are mostly technology-driven companies, so it’s obvious they bring and promote a tech-centric view of solutions and their benefits. Now it is critical to bring the customer’s business-centric view to outline compelling and strong use cases to ensure the business outcome through the digital technology enablers that the providers are bringing to the fore. Providers should work with this focus to keep capturing these views from customers and using success stories to articulate the benefits across industries.

Next year’s Digital Engineering Services study will be based on the next year’s digital drivers for business and technology dimensions. It would be an interesting perspective to evaluate the value added by providers from the customers’ point-of-view.

With the expectation of demonstrating stronger business use cases and scenarios, ISG will make the next year’s study more focused on bringing the next-generation elements into the framework.

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