They are viewed as mercenaries. They infiltrate to do the arduous work that people don't have the time, personnel, or possibly the skills to accomplish. There's a cornucopia of choices from which to select the correct mercenaries, and for whom it's the toughest job they'll ever love. They are third-party design services and they are fighting a common enemy - time-to-market. These engineers are electronic design's high-tech version of the A-Team

"If you have a problem, if no one else can help, and if you can find them, maybe you can hire the A-Team."

Although outsourcing design has been around since the explosion in the electronics industry began, it has been in the past ten years that this niche industry became hip. In the past, design services were typically small organizations, filling in the gaps in the design process and offering expertise to customers.

"The market's been around since the 1960s, maybe earlier," said Gary Smith, chief EDA analyst at Dataquest. "It was made up of mom and pop operations, but in the last five years you've seen major EDA companies move into the market." Outsourcing continues to be the trend today pushing the electronics industry. The impetus for this need has been the advances to system-on-a-chip, compact design cycles, and the seemingly omnipresent lack of qualified engineers. Indeed, outsourcing is a juggernaut of a trend, which of course benefits companies offering design services as well as the companies receiving them.

Jim Tully, a chief analyst at Dataquest, reported that there are over 900 companies offering services, with at least 600 of them in Europe. Although many different definitions of the design services market exist, Tully said that the market Ð which he outlines as outfits mostly doing outsourced hardware design Ð stands at about $1 billion.

A wave of hype

In the mid-1990s, some thought that design services would leave companies in the field skin-diving in an ocean of profits. Once the bubble popped in the late 1990s, however, reality began to surface. The extent of the cyclical nature inherent in this market became apparent. In 1998, Cadence laid off one-third of its 1,800 consulting personnel."Initially, there was a lot of hype and expectations from services," said Ron Collett, president of Collett International Research. "The reality has set in that services don't offer a lot of leverage. It's difficult to grow because it's difficult to replicate human beings. It's a difficult business model to sustain."

According to Dataquest, the market is growing at a rate of five percent per year. For any market to expand rapidly, a high amount of leverage, high scalability, and high-gross margin need to exist, noted Collett. Design centers may be getting the message. Service outfits are realizing that it's necessary to move beyond a pure bodies-for-hire, mercenary business model. In order to succeed in this competitive market, design services have learned to diversify their offerings.

"People are looking for a much tighter link between the client and the outsourced design team," said Tony Farinaro, vice president of Actel's (Sunnyvale, CA) Protocol Design Services Group. "You need to bring the engineers and the technology. When you look at what we do, we form a partnership with the client, an extension of their internal resources. They want it to be transparent and to work long term."

Another way to differentiate in the competitive market is with intellectual property. TSMC in Taiwan, although not trying to compete with design centers, has initiated a design service alliance program to facilitate the first-silicon success of its customers. Through the program, TSMC is concentrating on four areas: libraries, IP, EDA software, and design center alliances.

"For our alliance partners, IP is a key differentiation," said Andley Chang, design services manger of marketing. "The real hook each service company has is with its IP. Each company is learning that pure design services is not enough."

Founded over three years ago, Indesign (Indianapolis, IN) is employee-owned, offering hardware, embedded firmware, MCAD, ECAD, and test services. Founded by 35 former Bell Labs employees, the company now employs a staff of 55. Dennis Abshire, vice president of marketing and business development, said he believes that IP will continue to drive the industry toward the future and limit the impact of economic downturns.

"Having your own intellectual property to sell can even out the revenue peaks and valleys that are inherent in contract engineering," Abshire said. "At Indesign, we have developed firmware platforms for things like USB audio and acoustic echo cancilers."

Giant steps

With 900 companies offering services, a sampling of which you can see in the Focus Table included here, the diversity runs the gamut. From solo consultants to the 1000 engineers of Tality Corp. (the spin-off of Cadence Design Services), from semiconductor companies to EDA vendors, many possibilities exist within the market. Critics of EDA's plunge into the services say that it's not only a poor business model for EDA companies, but it muddies the playing field as well. They believe the EDA vendors are tethered to their tools and cannot be independent.

Mentor Graphics' Consulting Division, which attempts to help customers improve productivity through better methodologies, maintains that it can remain tool independent.

"While we do not push Mentor tools, we do introduce customers to new procedures and technologies which in the end make them a potential customer for our tools," said Jeff Jussel, director. "We maintain tool independence in our flows so that we can provide the methodology and the design process that is right for the specific customer."

The announcement declaring the spin-off of the design services arm of Cadence into Tality Corp. received similar criticism because the EDA vendor intends to retain an 80 percent ownership of Tality. Smith said he would have liked to see Cadence relinquish 40 to 60 percent of Tality.

"EDA and design services don't complement each other," said Smith. "Design services offers a 15 percent profit margin while tools offer 40 percent. Therefore, the more successful design services are within an EDA company, the lower the margins of its overall business, which affects its standing on Wall Street."

If a company is selling tools, according to Smith, it wants the client to have a strong engineering department. However, if a company is seeking to do outsourced work, it benefits from a client with a weak engineering group. Tality is in a Ôquiet' period preceding its scheduled October initial public offering and declined to be interviewed for this report.

Although the large EDA vendors and other large service companies may offer a wider spectrum of services, small to mid-sized independent companies believe they are situated best to benefit in meeting the demand for design services. ADI Engineering (Charlottesville, VA) maintains an eight-person crew, specializing in hardware development, broadband, networking, and multimedia. Steve Yates, president, believes there has been a shift in the mindset of potential customers.

"There has been a real loosening at major firms who were reluctant to outsource development work," Yates said "It's impossible for clients to keep up with the most advanced technology. Start-ups lack the technology or engineering skills to realize a product. As a third-party, we become a melting pot for design and technology."

Analysts said they believe the semiconductor and ASIC companies will have the edge in the market because design services are viewed as a natural extension of their existing business, thus providing the technology and the services.

"Semi companies need a full range of engagement programs," Collett said. "Semiconductor companies can have leverage. ASIC vendors recognize that it is imperative for their survival. They are no longer doing back-end layout but are doing front-end work. It's important to cast the widest net possible."

Consolidate and acquire

Since it's impossible to replicate engineers, as one would with a product, and the supply of engineers isn't mushrooming at a phenomenal rate, companies wishing to expand are acquiring smaller shops. A wave of consolidations and mergers has gripped the market.

Independents such as Intrinsix (Westboro, MA) and ASIC Alliance (Woburn, MA) continue to grow rapidly by such means and thrive. In January, ASIC Alliance acquired Cadworx (Milpitas, CA) and Intrinsix Corp. purchased the existing Telexis (Kanata, Ontario) design consulting engineering business, and acquired Seva Technologies in 1999. In March, ASIC Alliance acquired Dvlogix (Ottawa, Canada). ASIC Alliance has expanded to 200 employees.

"The industry is ready for consolidation," said Rich McAndrew, chairman of the board at ASIC Alliance. "Customers are really looking for reusability, which will leave a lot of the smaller players behind. Customers don't want just good engineers. They need expertise in key domains. In a larger company like ours, we can get that."

Tully sees consolidation as a prominent trend but said it's too early to determine the repercussions, if any, that may affect the industry. In Europe, however, Tully said that the market is more stable because the job-hopping phenomenon isn't as prevalent.

"In Europe, you don't see the start-up culture that exists in North America, where engineers are poached," Tully said. "This provides stability. In North America, there are a lot of start-ups, but they don't last as long as they in Europe."

Despite the wave of consolidation, however, smaller independents still revel in their status, saying they offer the intangibles that large corporations can't. "In a typical corporate environment, an engineer's time isn't always devoted to engineering," said Yates, whose company was recently approached with an acquisition offer, which was declined. "As an independent, a greater percentage of our designers are involved in esoteric technology. Our employees also better balance their personal and technical life. This allows the employee to be more innovative and creative."

Village vanguard

The Internet will also have a substantial impact on design work. The Internet is already playing a prominent role in the design service sector by allowing a diaspora of engineers to work on the same project by coordinating and communicating through the web.

"New servers and application software for use on the Internet will make outsourcing product development, and even manufacturing, much easier," Abshire said. "Development and manufacturing partners can literally be scattered around the globe, but collaborate easily over the Internet. This will be a major stimulus to the outsourcing of engineering services."

The Internet will also facilitate improved communication between people of different languages, cultures, and geographic locations.

TSMC recently launched its Internet Layout Viewer, which will allow disparate parties to have a graphical view through a browser of the layout of a design.

"English in Japan, Taiwan, and the United States is very different," Chang said. "They have different ways of describing things. Having a visual, virtual view of the layout will help different teams communicate."

Although the image of design services isn't as glossy as it was just five years ago, the need for the skills and expertise offered by such organizations will continue to be in demand as long as technology advances at the current, formidable speed, there is a lack of skilled engineers, and design cycles continue to compress. The hype may be gone but the substance remains critical to the continued growth of the electronics community.

Click here for this month's Focus Tables.