A trend toward outsourcing emerged at this year's Embedded Systems Conference, writes Curt Schacker, CEO of embedded outsourcing specialist Embedded Solution Partners (ESP), in this guest retrospective. Schacker formerly served as VP of marketing at Wind River, and founded ESP together with Jim Ritchie, former Wind River business development director.

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A retrospective: Outsourcing comes out at ESC

by Curt Schacker

Last week, I attended the Embedded Systems Conference (back in San Jose after a several year hiatus in San Francisco). Invariably, the question after one of these shows is, “What's new in the industry?” Just visiting exhibits probably wouldn't yield a very insightful answer, but if you listened closely to the conversations, there was one very clear theme that could be picked up on: the wholesale embracing of the outsourcing model for developing embedded devices.

Anyone who's been in this business for a while can tell you that OEMs (original equipment manufacturers) have traditionally taken a very provincial view as to what is core (and therefore should be developed internally) vs. what is not (and is therefore eligible to be outsourced). But in discussion after discussion, I heard the same thing: OEMs are welcoming anyone who can contribute expertise and resources to their task of getting a complex device to market on time, with the right functionality and cost structure. So, why such a dramatic change in a relatively short period of time? Well, I have a few ideas:

• Open source — The open source model got a whole bunch of companies used to the idea of looking outside their own walls for valuable intellectual property that could help them get their job done. The popularity of Linux, in particular, has had a profound effect on the industry's collective mind set; by all accounts, Linux is now the industry's leading embedded operating system.
• Technology commoditization — Not surprisingly, technology has historically been an opportunity for differentiation, but that is getting harder to do. For good reasons, embedded devices are becoming more and more subject to a variety of standards intended to make them easy to use and interoperate with other devices, which of course enhances their value. It's quite a paradox, then, to try and differentiate (literally make different) your product while at the same time making it compatible with a raft of industry standards. The net result seems to be that OEMs are looking at other ways to differentiate vs. their competition — low cost manufacturing and assembly, brand equity, efficient channels — often collectively referred to as the “Dell Model.”
• Declining margins — As products commoditize, prices come down and so do gross margins (sale price less cost of goods). This naturally leads OEMs to consider the most cost effective approach to developing products, which is often an outside company which specializes in an area of technology and may have access to lower cost development resources.
• Engineers — Speaking of human resources, I don't have any numbers to back this up, but I have a feeling that the Internet bubble drove some people out of embedded engineering. (I know several people personally for whom this was the case — one sells motorcycles, another commercial real estate; the list goes on.) It is a fact that our universities are seeing fewer students enter engineering and science disciplines in favor of other majors.
• Globalization — In many respects, the embedded industry is merely following the macro trend of globalization and the notion of “virtualization,” where companies restrict the activities of their direct employees to a very specific and small set of disciplines and outsource the remaining business functions to third parties, often in lower cost centers such as India, China, and Eastern Europe.

While all of this is going on, product complexity continues to increase with growing emphasis on advanced functionality like security, reliability, and communications. To me, it adds up to the veritable case of the irresistible force colliding with the immovable object: something's got to give. That loud grinding noise you hear is our industry giving way to a new model that offers intriguing opportunity to those who understand it well.

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About the author — Curt Schacker has spent his entire career in the embedded industry. He started out in 1985 developing flight software for NASA's Hubble Space Telescope before moving to embedded software pioneer Ready Systems. In 1990, he joined Wind River Systems, where he served in the roles of Field Applications Engineer, Northwest Regional Manager, and Vice President of Marketing. In 2002, Schacker co-founded Embedded Solution Partners, an embedded software and services firm based in San Mateo, Calif., where he currently serves as CEO. He holds a BS in Computer Science from Wright State University in Dayton, Ohio.

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