Outsourcing in China

Computerworld - About two years ago, Kevin Miller needed a little help supporting legacy applications and developing new software for large automotive manufacturers. He decided to conduct a Cobol pilot project with Information Technology United Corp., a Beijing-based outsourcer with U.S. offices in Redwood City, Calif.

“We’d seen their marketing and qualifications; we just wanted to do a proof of concept to make sure that everything worked,” says Miller, who is systems consulting manager for the automotive solutions group at Dallas-based Affiliated Computer Services Inc. (ACS).

Miller’s team had worked previously with vendors in India and Russia. China was new territory, but the Chinese company had the right skills at the right price. It offered Web development skills, .Net experience and CMMI Level 3 certification, indicating mature processes. “And their cost structure was very competitive,” he says.

Since that first pilot project, the relationship has expanded. Today, 15 IT United people are working on ACS projects, and ACS is in the process of bringing on 15 more, Miller says.

But IT United is the exception, not the norm. Unlike India’s large and thriving outsourcing industry, China’s is still immature and fragmented, with few companies attaining high-level international certifications. Moreover, most of the IT outsourcing that happens in China today serves that country’s domestic market, such as the financial services sector.

Still, U.S. companies are finding a few providers, like IT United, Freeborders Inc. and Achievo Corp., that combine U.S.-based management, marketing and support teams with China-based developers.

Looking Inward

In today’s Chinese software outsourcing business, foreign clients account for just 10% of total revenue, compared with around 70% for India, says Giuseppe De Filippo, an associate principal at global consultancy McKinsey & Co.’s IT practice in Shanghai.

Even the work that is done for multi¿national companies is often focused on Asia. For example, outsourcers may translate Web sites and applications into Chinese or other Asian languages. They may also rewrite business applications for local currencies or to allow input in Asian double-byte characters.

But the huge Asian market is attracting outside investment. Bangalore, India-based Infosys Technologies Ltd., a major global IT outsourcing vendor, has committed to spending $65 million over the next five years to build the first of many consultant campuses in Shanghai, says James Lin, CEO of Shanghai operations at Infosys.

After that, it will begin to look at second-tier cities such as Dalian, Chonquing, Wuhan, Nanjing and Chengdu, where the Chinese government offers tax exemptions for businesses.

Infosys isn’t alone. Major Western companies such as Accenture Ltd., IBM and Hewlett-Packard Co. and Indian vendors Wipro Ltd. and Tata Consultancy Services Ltd. are also ramping up in China. There are no clear market leaders yet, so the companies are establishing an early presence. They hope that will position them to respond to growing domestic demand, serve global supply chain networks and attract nearby Japanese and Korean clients.