Prevent Disasters in Design Outsourcing

Firms that pursue product platform strategies—by leveraging a common set of development, production, and support resources—have been able to outmaneuver competitors by cost-effectively delivering a greater variety of distinctive products. Having succeeded in outsourcing manufacturing, these firms are now also working to outsource the design of new platform-based products. Unfortunately, design outsourcing often fails to generate desired cost savings and can even tear profitable platforms apart. Of the nearly 100 outsourced design projects we have studied at Fortune 1,000 companies, approximately one-third worked seamlessly, owing to modular designs, effective management, or both. The other two-thirds struggled or failed, for three main reasons: Misaligned objectives. The goals of a company and its design service providers—even the aims of teams within that organization—often don’t match. For example, we worked with two teams at a company that was planning a new line of computing hardware products. The “platform team,” which was developing a new product platform, focused on delivering advanced functionality and growing long-term revenue. At the same time, a separate “derivative team” planned to reuse part of the new platform to create a derivative product that would generate short-term revenue. The problem was that each team relied on a different external service provider for the detailed design and manufacturing of their respective products, and each provider focused on maximizing its own profitability. Because of inconsistent objectives, the two internal and two external teams had trouble working together, and the design schedule for both products slipped. Ultimately, the plan to achieve efficiency through a shared platform was abandoned. Before development begins, executives from internal and external teams involved in platform-based design projects must carefully align the teams’ incentives. Still, disagreements often arise, so it’s wise to use contingent contracts that anticipate uncertainty and provide a framework for renegotiation. Unanticipated rivalry. Executing platform projects with multiple partners often forces fierce rivals to collaborate. One company we worked with planned to adapt more than 20 subassemblies from an existing platform for the design of a new product. However, the company’s design and manufacturing partner pushed to revamp those subassemblies because, it argued, they would not work in the new design. Although the argument had some merit, the provider was motivated primarily by a desire not to collaborate with, or purchase from, the subassemblies’ supplier—a major competitor. The platform owner eventually conceded and never realized its anticipated cost savings. Firms outsourcing platform-product designs must anticipate that rivals will be reluctant to source from one another. To head off problems, the lead firm must not only create incentives for short-term collaboration, but also award future business based on demonstrated cooperation. Poor version control. Firms always face the challenge of managing product-specification changes, but those that outsource design confront a particularly difficult problem. Consider the company that had a partner design a casing to use in a family of consumer computing products. The company wanted a consistent look on the retail shelf, plus the ability to rebalance inventory and share tooling across products. Although detailed schematics were shared in that way, two different suppliers manufactured the casings. Unfortunately, the designs got out of sync once they left the hands of the original design partner. One manufacturing partner made several, supposedly minor changes to satisfy electromagnetic emissions regulations, and another used an outdated version. The problems did not surface until much time and money had been invested in precision tooling. In addition to the marketing blemish of having mismatched designs, the company lost sales when unexpectedly strong demand for one of the products outstripped the available casing capacity. The two manufacturing partners simply could not share their inventory or their production capabilities. To outsource design and then just assume that the specifics will take care of themselves is a recipe for disaster. Brand owners must retain enough program management capability to enforce processes, communicate with all parties, and keep track of critical details.

Prevent Disasters in Design Outsourcing

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