The ins of outsourcing

Western edge

Western companies still have an upper hand when it comes to high-end outsourcing services despite the impressive strides made by Chinese companies, says Tang Tongmei, an analyst with US-based consulting company Gartner.

Zhong Mingbo, executive president and CEO of the outsourcing business group at Insigma, a Chinese IT services company, says the aggressive expansion of foreign players will lead to a healthy development of the market.

"Though we still lag foreign players in high-end outsourcing services, we are confident that the gap will narrow soon. More competition means more progress. China will lead the next round of development for the outsourcing industry with its innovation and skills, and also reshape the stereotypical image of the industry as a low value-added business," Zhong says.

Analysts say Chinese service providers are maturing in scale and fast reducing the gap with global players in terms of service offerings and performance.

"Large domestic service providers such as Neusoft are expanding from ITO, and low-end BPO to high-end BPO. Foreign companies are now facing stiff competition from the domestic players," Wright says.

ITO & BPO power

The term ITO refers to the outsourcing of computer or Internet-related work, such as programming, to other companies. But from an outsourcing perspective, it represents one of the fastest-growing sectors within the industry in China.

According to the China Service Outsourcing Development Report 2012, the combined value of the ITO market in China was about $19.78 billion in 2011, a year-on-year growth of 53 percent.

"Outsourcing doesn't mean letting others do some low-end and repetitive work. China is rich in science and engineering talents, an integral asset for the ITO market. The expansion of China's outsourcing market is not just about cost, but more of innovation strengths," says Sam Zhong, group program manager of the strategic partnership group in the Microsoft Asia-Pacific Research and Development Group.

According to the KPMG report, more than 1,200 R&D centers were set up by multinational firms in China in the last 10 years. As services providers mature and move up the value chain, some ITO sectors such as integrated circuit design, IT software testing and training are also expected to show huge growth potential.

Business process outsourcing or BPO means the process by which an organization delegates part of or all of its support processes to an outside vendor, covering all centers, data entry of bills, prescriptions and traffic tickets at its lower spectrum to a higher end of managing human resources operations.

Common BPO services areas include finances and accounting, human resources and customer management.

According to the China Service Outsourcing Development Report 2012, the BPO market in China during 2011 was estimated at about $4.87 billion, up 22.1 percent year-on-year.

The BPO market is just less than one-third of China's outsourcing market, but it is growing at a fast pace and has the potential to outgrow ITO as businesses gain confidence in the operational excellence that China can deliver, says the KPMG report.

Problem areas

The immature commercial law environment is one of the major obstacles that may hamper the growth of the ITO sector, experts say.

"Unlike other major outsourcing service destinations, China still lags in the maturity of commercial laws and regulations, especially in areas like data privacy and intellectual property protection," Yu of HCL says.

But analysts say that China is catching up fast with other outsourcing service markets in this aspect.

"This shortage is an unavoidable growth process for every market to experience. Some achievements have already been made as the government has taken up many measures to improve the situation, including amending laws and regulations," says Wang from CCID Consulting.

"There is, however, a serious dearth of talent capable in outsourcing skills like operations, sales and marketing," says Wang Yue, president of Dalian Hi-Think Computer Technology Corp.

But the shortage of talent is also a journey toward better development of the industry, Wang says.

"Every year nearly 600,000 engineering graduates enter the Chinese job market. Add to this also a growing number of Chinese students returning home after studying abroad. Talent shortage will soon be a thing of the past," he says.

"We will focus on developing talents through various training programs, including job-related training, soft skills training and six sigma programs."

Mindset is another major obstacle that often comes in the way of the development of the BPO sector.

"Because China's BPO market history is not long and it is popular for domestic companies to be tight-lipped, it usually takes a long time for clients to decide on whether to outsource the business to China," Poon from Capgemini says.

He says the local outsourcing service vendors have concerns, not only from the point view of service quality, but also from data security.

"Even though our company is a famous service provider, and we have stringent codes to ensure data protection, some local outsourcing vendors still have some concerns," Poon says.

Despite these concerns, Poon believes the outsourcing market will develop quickly in China.

"If other countries take 10 years for example, I am very confident that it will take only five years in China. That's our general feeling about the Chinese market, and that's happening to other industries, like finance, banking, and insurance. The outsourcing winds will blow strongly here," Poon says.

huhaiyan@chinadaily.com.cn

(China Daily 07/27/2012 page1)