Several years ago, the promise of saving a lot of money and “reducing risk” allured many organizations and shipyards to go all in on outsourcing. This was especially the case with engineering and design. In some cases, I saw shipyards outsource almost all their production engineering work.
This strategy did not seem to work for many, or at least it did not work as well as hoped. There were some successes, but most failed to gain the cost-benefit they sought. These shipyards were using outsourcing simply as a cost-cutting initiative and laid off many of their highly skilled staff, and chose their new subcontractors mainly based on who could offer the lowest price. Since it was a cost-cutting initiative, they also failed to adapt their business to successfully leverage these new external partners. However, the trend of outsourcing knowledge workers, including engineers and designers, in shipbuilding is pivoting.
Outsourcing Driven by Cost-Cutting
Why was outsourcing so popular? At the time, outsourcing seemed like a great idea. It seemed perfectly aligned with the cyclical nature of building a ship and made “financial sense” if we only considered the numbers on paper.
For example, when you’re just starting to build a ship, you may require 100 Hull & Structure designers and 50 Outfitting designers. But later in the project, you will only need 50 Hull & Structure designers and 100 Outfitting designers. What to do with the other designers? Ideally, you would have another project that would be starting its design phase while the previous one was just finishing, making for a constant manning requirement.
However, this type of constant manning is very difficult for many shipyards to achieve. Projects do not always align perfectly because different ships/projects require different manning at different phases, various different types of delays are hard to schedule, the client’s needs change which alters the schedule and resource requirements, and countless other reasons all contribute to the difficulty. The reality was that shipyards ended up with several of their people not doing billable work, which was considered inefficient and financially irresponsible.
Because of this, it was determined that outsourcing as much variable work as possible would be more cost effective, even if outsourcing was 1.5x-2x more expensive per hour.
Result of Outsourcing
The shipyards which turned to outsourcing had mixed results, but the majority of shipyards that outsourced a significant part of their engineering team did so without a good plan and faced many challenges. To list a few:
- Communicating with an off-site entity required a different strategy which was not clearly defined
- Outsourced companies were not researched enough and only selected based on the lowest bid
- Both companies’ goals did not always align
- Had a culture of us vs. them
- An external company created more political issues than a purely internal team
- Partner did not have the experience of knowing or extracting exactly what the customer wanted
- In many cases, the shipyard and their production did not get the deliverables they needed
- Required more time “managing” the external team than initially thought
- Changes were time consuming and costly
I want to be clear that there were successful shipyards that had a successful partnership with an outsourced design partner; it was just not very common. The majority of shipyards that turned to outsourcing failed to get the benefits that they thought they would.
In today’s world, most shipyards are trying to find a balance between the potential cost efficiencies of outsourcing while keeping some key competencies within the company. It was not that outsourcing was bad, it was just the way that many shipyards went about it as a silver bullet solution was wrong.
The approach which appears to be striking a balance is leaving a strong core set of design and engineering teams, enough to handle the valleys in workload. When there is a need for more horsepower, they will engage the outsourcing companies, not by just looking at the lowest bidder, but instead by selecting someone that they can partner with. There are going to be obstacles and disagreements, and having someone they can trust to resolve them fairly and quickly has a lot of value. This hybrid approach allows for more control and knowledge of what the yard needs and provides a good communication channel to the outsourcing team. In addition, I am also noticing that many of the larger and longer projects will require some members of the outsourcing team to work onsite, which also helps minimize any obstacles.
What will the Future Hold?
This is a good question that I have been pondering for a while. With the current pandemic, it was made clear that the industry could function remotely. The jury is still out if today’s remote distributed environment is more or less effective. Just because we are doing it does not mean it is better. Many organizations have still not completely adapted to the new way of working and “managing” their team.
However, the remote working of their employees is forcing shipyards to change the way the leadership team is thinking about how they need to (and can) run their businesses. As with most major events in life and business, it can cause a significant mindset change.
The pandemic required many shipyards to support a remote workforce via VPN, Cloud or some other strategy. This allowed the team members to complete their work off-site. This can potentially change the way off-site contractors work in the future. Before, they were usually sent disconnected “files” to complete their work as well as their deliverable to the shipyard was some type of files. Having the subcontractor be able to access the live project data can make them more effective and closely resemble other team members. This can potentially change the dynamic of leveraging subcontractors.
Another potential improvement is that we, as an industry, are getting better at refining the way we communicate and collaborate with remote workers. This can have significant benefits for how shipyards work with subcontractors as it will help subcontractors be more in sync with the needs and wants of the shipyard.
It is hard to predict the future, but it is possible that subcontractors will eventually be integrated so tightly into the shipyard team that it might be hard to distinguish them from other team members. This future will therefore increase the importance of selecting the right subcontractor partner.
Even though outsourcing seemed to be perfect for the shipbuilding industry, as a whole, it was not successful. It was not that outsourcing is a bad thing. I think if done right, it is the ideal solution for the shipbuilding Industry. However, it was primarily done as a cost-cutting initiative for shipyards, which started them on the wrong path.
With several years of experience and scares, now outsourcing is about selecting a partner based on more than price, while also keeping a strong core team within the shipyard.
The current pandemic really accelerated and altered the trajectory of how we can leverage outsourced subcontractors. We have proven that we have the technology as well as the ability to change the way we communicate and collaborate with a remote workforce. If these tools and skills transition to how we think of subcontractors we might see a future where they may be so integrated into the business it will be hard to differentiate them from any other department.
I am interested in your thoughts and insights and seeing how it pans in the future.