Outsourcing the future

Chinese service providers must enhance their skills further to make a mark in the global markets

Though the service outsourcing industry in China had a late start compared with India, it has developed in an orderly fashion and more or less adhered to the basic rules of development.

Despite the orderly evolution, high-end service capabilities like consulting services, business re-engineering and system solutions are often in short supply and not adequate for the offshore market requirements.

Lack of experience is often the most visible drawback for Chinese service outsourcing companies. Though Chinese companies have been making considerable progress, they are still far behind their Indian counterparts in terms of the services they can provide.

The fragmented nature of the service capabilities provided by Chinese service providers is another major issue. They often do not have solutions for systems integration, design development, testing, deliveries, operation, maintenance and system upgrade. Many of the Chinese companies are also not abreast with the latest technologies like cloud computing.

The service outsourcing industry in China also faces an acute shortage of high-end talent. Most of the employees in China's service outsourcing companies have work experience of less than five years. The number of professionals with work experience of more than 10 years in Chinese service outsourcing companies is just about 1 percent.

Shortcomings in these areas are bound to be a drag on the industry as the success of the service outsourcing business depends largely on proprietary technology, service process maturity and industry experience.

Accumulated technologies and the experiences learned by the core personnel will certainly help Chinese outsourcing companies become much more competitive in the global market. Indian information technology company Infosys Technologies Ltd has often acknowledged that its core competitiveness is its more than 2,700 senior employees (aged between 45 and 60). This is something that Chinese companies must build up in the long run.

Information security is often cited as a major drawback for service outsourcing to China. The inefficiency of the information security laws and the weak enforcement of intellectual property rights in China are the two main factors that often hamper the transfer of the critical data and service businesses.

To some extent, it is also the reason why domestic clients like the government and State-owned enterprises often shy away from indicating their exact outsourcing requirements.

Language and cultural differences have also been constraints for the industry's development. In recent years, the ability of Chinese students to understand English has improved considerably. But most of this education is oriented to train engineers to read and write English papers. As a result many of them still have difficulty in communicating in English, something that is essential in the outsourcing service industry.

In addition, the West's historical and cultural influence in India has made India closer to offshore buyers than China.

Insufficient market research and industry development principles are other gray areas for Chinese companies. The National Association of Software and Service Companies, India's largest and most important IT industry group, annually cooperates with top global consulting companies, and issues research reports on global service outsourcing market trends, service technologies, new services, model innovation, changing demands from buyers, and service bottlenecks. They also publish dozens of guidance reports every year. Compared with India, China's research work still leaves a lot to be desired.

Indian outsourcing services cover more than 52 countries and regions worldwide, with more than 500 global delivery centers located outside India. By the end of 2010, the number of foreign employees in Indian services companies surpassed 6 million. Indian companies have also carried out more than 200 cases of overseas mergers and acquisitions.

The number of sharing centers set up in India by multinational companies has reached 750. India's outsourcing industry revenue in 2010 was $88.1 billion (72.7 billion euros) with the business scope covering IT services, software products, engineering services and R&D.

Revenue from BPO services in India was about $76 billion, while $12.1 billion came from hardware services. Of this, onshore hardware revenues were $11.5 billion, accounting for 40 percent of the total onshore revenue. Out of India's $88.1 billion service outsourcing revenue, $28.8 billion came from the onshore market, a year-on-year increase of 21 percent, while the offshore market income of $59.4 billion was an 18.7 percent increase over the previous year.

In comparison, China's service outsourcing industry is still young.

In the next 20 years, China's economic structure will have a qualitative change in exports, investment and consumption. The scale of trade will continue to grow, but its percentage in total economy will decline. With the completion of the large-scale infrastructure nationwide, infrastructure investment will be reduced. The contribution rate of exports and investment to GDP growth will drop from today's 70 percent to less than 50 percent. Household consumption in GDP will increase from less than 30 percent to more than 50 percent.

Twenty years later, the ratio of China's manufacturing and service industries will reverse from today's 6:4 to 4:6. The total scale of China's service sector is estimated to reach $14 trillion, a net increase of $12.5 trillion compared with that of 2010.

Pension, health insurance, healthcare, education, housing, employment and other issues will create potential for the vast emerging markets of China's service economy, which will provide a huge market for the service outsourcing industry.

Based on these judgments, I believe that the service outsourcing industry in China and India has a completely different market environment. Contained by the Indian economy and onshore market size, India will continue to major in offshore business, keeping the ratio between the offshore and the onshore market at 7:3.

The nascent Chinese service outsourcing sector is looking to compete in the international offshore market, after learning from experienced international service buyers and improving the process management maturity, consulting and solution capabilities, staff training, and collective delivery experiences through offshore services. China's service outsourcing will maintain rapid growth in the offshore market, but the focus will shift to the domestic market.

India had encountered bottlenecks constraining the outsourcing service industry, and it was not until 2000 that a sound industrial environment was formed. Despite the many problems, China's speed to improve the industrial environment is much faster than India. I believe service outsourcing will become the main force of China's service industry in the future.

The author is chairman of the Beijing Association of Sourcing Service and a senior consultant of China Council for International Investment Promotion.