Outsourcing in China

Most providers target the burgeoning domestic market, but a few offer a hybrid approach that appeals to the West.

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.

HP, for example, has more than 5,000 employees in China now, says William Poon, who heads HP’s managed services for China and Hong Kong. Analysys International, a Beijing-based market research firm, estimates that HP’s share of the Chinese market is 4.4%, second only to IBM’s 5.2%.

HP has put its faith largely in the domestic market, Poon says, supplementing that with clients from Japan and Korea.

Looking Outward

Japanese clients accounted for about 60% of the nondomestic outsourcing work in China in the first quarter of this year, while customers in Hong Kong accounted for 10%, and clients in the U.S. and Europe combined accounted for just over 22%, according to Analysys International.

Chinese companies that seek external clients face a variety of challenges. A major one is communication, so having a U.S. office and Western managers can be a big selling point. That was part of IT United’s appeal, says Miller. “IT United has a good mixture of Western managers and Chinese managers, and English is how they do their business within their office,” he says.

Still, of the IT United team currently working for Miller’s group, only the project manager has good conversational English skills. “The other team members can write, but their speaking abilities are limited,” Miller says.

Cultural differences represent another challenge — one that can complicate communication. “The Chinese workers are going to agree with you most of the time, rather than tell you, ‘No, that’s not a good idea,’” Miller says.

The solution is training, he says. “Part of our process is getting them to understand that when we, as a group, review work and make corrections to it, that’s not a criticism; it’s to better the project,” Miller says. “It took them a while to get a bit more open about it and start putting comments on each other’s work.”

Another problem is retention of skilled Chinese employees. Turnover rates for IT professionals average 15% to 20% in China, compared with 10% elsewhere, says Lin. “It will take a while to stabilize people,” he says. “There are a lot of jobs in Shanghai. People move fast.”

But these challenges didn’t stop Ellie Mae Inc. from testing the waters. The Dublin, Calif.-based company provides software and services for the mortgage industry. Many of its managers are originally from India and China, so those two countries were prime candidates when the 240-employee company needed to outsource some development and quality assurance work.

Limin Hu, CTO, Ellie Mae inc.

Limin Hu, CTO, Ellie Mae inc.Chief Technology Officer Limin Hu polled employees about which country they preferred to target, and China won. “Working with the offshore team, you get to go to China, so everybody was thrilled about the opportunity,” Hu says.

Having Chinese-speaking employees on staff was an advantage for Hu, but not everyone at Ellie Mae speaks Chinese, so picking a vendor with the right language skills was important.

Ellie Mae chose to work with Achievo, and communication played a role in that decision. Achievo has a policy of doing all its business in English, and many of its employees in China used to work overseas, Hu says.

“They’ve done a good job of bringing the American style into a Chinese company,” Hu says. “So the communication has been successful, even between the English-speaking employees and the offshore team.”

It doesn’t hurt that Achievo’s global headquarters is San Ramon, Calif., not far from Ellie Mae’s offices, Hu says.

Small Scale

Achievo is one of the largest U.S.-focused outsourcing vendors in China, with about 1,000 employees worldwide and quite a few Fortune 1,000 customers, including DaimlerChrysler, Fujitsu, Mercedes-Benz, Siemens, Hitachi, NEC, Pioneer, NTT Data and Toshiba.

It’s still tiny compared with the Indian and U.S. outsourcing giants, but small-scale outsourcing contracts are typical in China. Large-scale outsourcing operations serving U.S. customers have yet to take root in this nascent market. IDC analyst Eugene Wee says that the Chinese outsourcing market is growing at about 30% annually but was still worth only $586 million at the end of 2005. “China’s IT outsourcing market is still embryonic,” he says.

Another small outsourcing provider operating in China is San Francisco-based Freeborders, which has more than 500 employees in the southern city of Shenzhen.

Wichita, Kan.-based Invista BV (formerly DuPont Textiles), one of the world’s largest fiber manufacturers, began using Freeborders in 2001 to create an online fabric library. “They worked closely with us around the clock and were able to deliver not just on time but ahead of schedule,” says Norman Beveridge, Invista’s global e-business apparel manager. “Over the next couple of years, our relationship with Freeborders strengthened.”

Freeborders CEO John Cestar knows that communication is the key to the future for outward-facing Chinese outsourcing.

To improve the English skills of his employees, Cestar says, he has four full-time English teachers on staff. “Our business is delivering services to the larger world, and the key is language expertise,” he explains. “In our industry, a number of companies have blown up over this issue; the importance of integrating culturally can’t be overstated.”

The language training and the skills they acquire working for Western companies keep employees happy, Cestar says. Annual turnover is just 3%, and last year the company received 20,000 r¿sum¿s from job applicants.

Trombly and Marcus are freelance business and technology writers based in Shanghai. Contact them at maria@trombly.com and BillinChina2004@yahoo.com.

Copyright © 2006 IDG Communications, Inc.

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