ODMs and EMS providers have been getting most outsourced design contracts lately, but there's a third option: The independent design house. Who are the top players and why do they matter?

An OEM's debut product launch is often make or break. When that product also happens to be a cost-sensitive consumer device that will be manufactured by a contractor outside the United States, choosing a design partner can quickly turn into a bet-the-company decision.

That scenario is very real for DualCor Technologies Inc., a San Francisco startup prepping its first device, a handheld appliance described as a cross among a cellular phone, a PDA and a Windows XP computer. Due to the high-performance technologies involved and the tiny form factor, it's imperative that the design team be well-versed in solving tricky problems like electromagnetic discharge, heat dissipation and voltage tolerances. And since the device will ultimately be built offshore, close ties to the manufacturing community are essential.

"The [design] decision is so critical because we have everything riding on it," said Bryan Cupps, co-founder and chief technology officer of DualCor. "It's all about who you work with."

Small and midtier OEMs looking to build products in Asia in smaller production quantities than would be attractive to EMS providers or Taiwanese original design manufacturers are increasingly turning to independent design houses. More than just engineers for hire, these design firms are in effect becoming virtual ODMs-using relationships they've established with manufacturers to create best-in-class services that give customers both full support and flexibility.

For a segment largely populated by mom-and-pop shops with limited resources and narrow capabilities, responding to the full-service push is no easy feat. Competitive pressure from EMS providers and offshore R&D houses could spur consolidation or attrition, sources said.

Despite the challenges, independent design houses are a growing part of the OEM supply chain, and vendors said they are seeing a significant rise in design wins.

In DualCor's case, GDA Technologies Inc. (San Jose, Calif.) proved the right fit. Its work force of approximately 200 designers in the United States and India has broad and deep expertise in communications, computing and consumer applications. Since last December, GDA has taken DualCor from product concept through board prototypes and case design, and is in the process of helping the OEM select an EMS partner for volume production outside the United States.

Had GDA been unable to handle all of DualCor's hardware and firmware design, Cupps would himself be managing as many as 16 contractors. What's more, by outsourcing the project, he estimates DualCor will save 3.5x to 4x the cost of doing the entire job in-house.

In a ranking by Electronics Supply & Manufacturing of the top electronics design services vendors, a vast majority are, like GDA, based in the United States, but are spreading into Asia and Europe to take advantage of the proximity to low-cost manufacturing. Competition is brewing, however, as China's many R&D houses have started extending their design services to Western OEMs.

Increasingly, these companies are the primary link between an OEM and the manufacturing site.

"We are, in essence, a general contractor with a global network of design resources, and relationships with factories in China and Taiwan," said Wei Kong, design manager at Titoma Inc., a small Hong Kong-based design firm that primarily caters to U.S. and European customers. "A lot of [clients] do not have the resources or the expertise to go by themselves into China. So we are the people on the ground to take care of everything from the very start of the design work to actual delivery of the product."

Why outsource design

Contract design services have been around for many years, but the market really came into its own in the mid-1990s, when the digital revolution created a mass consumer market for a new set of electronic products. The resulting pressures on product development cycles and costs pushed vertically integrated companies to farm out noncore functions.

The design services market suffered a brief setback in 2001, when design activity froze and engineering departments witnessed massive layoffs as companies struggled to bring costs under control. "Whoever got laid off became a design services company," said A.G. Karunakaran, president of GDA Technologies. "Much of that competition has subsided now, because either they've found a job or they realized this is not an easy thing to do." As the business climate has returned to normal and design activity increases, OEMs are again looking to outside help to extend their design budgets, he said. "In the last 18 months, people have been looking to stretch their R&D dollars," said Karunakaran. "It's our challenge as a design services company to provide them a low-cost alternative-perhaps reference designs or overseas resources." Not everyone is looking to contract out an entire design project and have it shipped to China for production. More common among the business opportunities SET Engineering Inc. sees-particularly from large OEMs-is specialized pieces of larger projects that are being handled in-house, said Michael DiMartino, vice president of business development at SET (Morgan Hill, Calif.). A tier-one server OEM that in prior years would have outsourced 100 percent of the work of new projects today might contract out only a portion of each design, he said. Yet, design companies that don't offer complete services have been unable to sustain business. "If you can't do a project start to finish, then when the smaller projects come along that only require a piece, you may not be able to respond," DiMartino said. Specialists in a given area, such as layout, are finding their opportunities limited in today's business climate. As a result, the many consultants who entered design services due to layoffs have contracted on the order of 50 percent to 75 percent, because "they didn't have the versatility to handle a wide range of work," he said. "For the companies that aren't in a growing niche, the amount of work that might have been available in the past is simply not available now," DiMartino said. "You've heard the saying 'a rising tide lifts all boats.' Well, low tide grounds a few."

The EMS challenge

Despite the benefits to establishing larger and more global operations, the market today remains highly fragmented and niche-oriented, and few design shops ever grow beyond 100 employees, leaving this segment vulnerable to consolidation as EMS vendors look to acquire design capability. When wireless specialist Cellon International was formed several years back, outsourcing design was a new phenomenon in the segment. OEMs were just starting to look to design services firms to augment in-house operations or compensate for engineering downsizing they had done to relieve market pressures, said Billy Crotty, chief operating officer of Cellon, a Santa Clara, Calif., designer of handsets and modules. "Now you see ODMs moving over from the PC space, or EMS players like Flextronics trying to enter the arena by acquiring the independent design houses, and you also see traditional Chinese manufacturers like TCL acquiring R&D houses," Crotty said. "So, there's still a lot of consolidation going on in the industry." Those design shops that are selling out to EMS companies are doing so because they see the handwriting on the wall, vendors said. To date, however, EMS providers have not made the inroads people expected, according to SET's DiMartino. "Essentially the manufacturing side was subsidizing the design side," he said. "That only works when the volume shooting out the other end of the factory is significant. Today the numbers are substantially smaller." Emerging offshore design competition has also increased pressure on small U.S. vendors either to develop global resources or focus on higher-value applications that are less likely to be sent offshore. Large and globally aligned design firms can offer customers the benefit of "blended pricing," said GDA's Karunakaran. GDA, for one, has its front-end design centers close to customers in Boston, San Jose and Rocklin, Calif. Board layout and prototype manufacturing are done in lower-cost centers in Bangalore and Chinnea, India. GDA has established relationships with global EMS players, and helps customers with the EMS selection process and the handoff to ensure a smooth transition into production. It's not critical that design be co-located with manufacturing, but it is important that both the OEM and design partner know where the product will ultimately be built in order to match the design with the manufacturing capability. Otherwise, the results can be disappointing and costly. What customers tend to forget, vendors said, is that manufacturing in the West is more automated and mostly manual in Asia.

"You could design a keyboard that [in Western methodology] never sees the touch of a hand . . . and then you go to China and there's going to be 1,000 people who are experts at screwing in little screws," said Titoma's Kong. "There's sometimes a bitter pill for clients to swallow in the beginning, but it's important they understand the success of the project really depends on the setup."