By Dan Berthiaume
Traditionally a provider of cost arbitrage in its outsourcing services, during the last five years China has begun shifting its focus beyond simply offering lower labor and operational expenses. “China is looking to become a value-add player,” said John Peng, EVP of Chinese information technology outsourcing (ITO) provider iSoftStone, during a session, “Sourcing IT Services Globally: What China Has To Offer,” at the recent MIT CIO Symposium in Cambridge, MA.
BPO on Path to Higher-End Services
According to Peng, BPO business taken on by China will develop into higher-end areas such as HR, direct material procurement, financial and accounting planning, risk management, and customer/sales management. “China is transitioning its (BPO) market to services,” he stated. “All major global companies now have a center or third party delivery center in China.”
In addition, Peng said the Chinese ITO market is evolving to move beyond software development to include higher-end areas such as system integration, database management, IS management, content management and IT advisory. Peng added that ITO and BPO development often occur hand-in-hand.
“Outsourcing projects often enter China as ITO, and then we get good leads to BPO,” he said.
China’s Outsourcing Advantages
Both Peng and Karl Pessinis, SVP of iSoftStone, stressed that China offers many advantages as a destination for outsourcing either business processes and/or IT. “A large amount of college graduates are underutilized,” said Peng. “Six million graduate a year, and more than half of them are engineering graduates.”
Pessinis said companies in many industries are looking to expand their outsourcing operations from the mature Indian market and diversify their risk by outsourcing some functions to emerging markets, including China as well Brazil, Russia and the Philippines. In addition, he said Chinese outsourcing is in a position for “pretty significant” growth as its rapidly expanding middle class increasingly seeks access to retail, automotive, manufacturing, and financial products and services, and global companies seek to establish a local presence.
Furthermore, Pessinis said with its 12-hour time zone difference from the US (China operates on a single time zone), China is an ideal part of a “follow the sun strategy,” and commonly spoken languages include German, Russian and Japanese as well as various dialects of Chinese.
Pessinis stressed that companies outsourcing business processes and/or IT to China need to fully develop a strategy and conduct due diligence before launching any kind of program. “Know why you want to use China,” he advised.
Pessinis presented a comparison of China, India and the Philippines as outsourcing destinations based on data collected by TPI. China has a cost structure roughly equivalent to the Philippines and 10-20% higher than India, but comes out ahead of the other two leading global outsourcing destinations in areas including regulatory risk, political stability, and inflation. TPI data shows the area where China poses the biggest comparative risk is in data security.
To help minimize data security issues, Pessinis urged companies outsourcing to China to “pick the right partner,” emphasizing global companies with stock exchanges as the safest choices. Of course, Chinese outsourcing providers also have their own priorities when it comes to selecting foreign business partners.
“Initially, Chinese companies worked with leaders,” said Pessinis. “Now they pick based on long-term vs. short-term relationships coming from the project.”