China is catching up rapidly on India in terms of IT outsourcing.

But the surprising fact is that Chinese outsourcing companies are not very visible in the USA and Western Europe, two geographies where Indian companies have already established a strong foothold.

I can think of 3 reasons:

1. While Indian companies have to come to the US to find their customers, American companies are flocking to China to find their suppliers! I assume it has to do with China being overall a much more attractive destination than India. Key advantages include:

   • The fiscal incentives offered by the central and local governments
   • The possibility to wholly own their offshore operations
   • The pool of talents available
   • A disciplined workforce, with lower attrition rates and lower salaries
   • An excellent country infrastructure.

2. Most large US corporations already have established a presence in China, either for their manufacturing or for their business. Their Chinese branch often deals directly with local outsourcing vendors.

3. The Chinese outsourcing industry is still to consolidate, which means that most companies have relatively limited investment capabilities. Before establishing a presence in the USA, they tend to focus their energy on two markets:

   • Their domestic market, which is growing at a stellar speed, thanks to a healthy economy and to the many US companies already established in China

   • The Japanese market. China is a favorite outsourcing destination for Japanese companies. China is close from Japan, and it is relatively easy to find Japanese speaking talents, especially in cities like Dalian or Shanghai.

I am just wondering what will happen when Chinese outsourcing vendors will start moving aggressively into the US market.

Remi
www.outsourcing-vsc.com

Business, China | 4 Comments »

Technology Partners International Inc. (ATPI), a TX-based consulting firm, estimated that close to $100 billion worth of large outsourcing contracts are due for renewal by 2008.

According to ATPI, US companies are about to spread mega-deals from large single contracts over multiple, smaller providers, a blow to all large outsourcing firms.

While the IT outsourcing / BPO market will continue to grow at an average 8% in 2008, according to the Gartner Group, the year might mark the end of the current “one-size-fits-all” outsourcing model.

Far too often, leading providers have applied the brute force approach to outsourcing: “throwing people at a problem”, especially by tapping into their cheaper pool of talents (India, China, etc.). This model has reached its limits and has finally started to fade away.

New customer/relationship models are emerging, centered on flexibility. Says Julie Giera from Forrester Research, “customers want an outsourcing offering for IT and Business Process Outsourcing that evolves, or “flexes”, as their needs change over time.”

Market leaders might be slow to embrace this new model; an opportunity of a lifetime for smaller size providers to make it to the next step.

Remi
www.outsourcing-vsc.com

Business | No Comments »

Some analysts are predicting a dark future to IT outsourcing.

The reasons commonly advanced are:

• A depreciating dollar versus an appreciating Indian Rupee with no sign of recovery for the US dollar
• India, the current industry leader is suffering from skyrocketing attrition rates and salary increases. Tier-1 companies which already have established a significant presence in countries with cheaper labor rates like China or Eastern Europe can mitigate these risks; however the bulk of Indian providers cannot afford to go global and are left with little options; a situation that negatively impact the quality of their deliveries.

And these same analysts to conclude that with overall cost savings under the 20%, and a mediocre quality level, the goods days of outsourcing are over.

This reasoning might apply to India as a destination, but definitely not to the industry. The demand keeps growing in the USA, but ot new destinations, most to the advantage of China.

Outsourcing is not to fade away in the USA any soon:

• The tier-1 Indian companies are becoming global players; their cash situation (Infosys generates over $ 1B in profit each quarter!) associated to the favorable exchange rate between the rupee and the dollar give them a significant purchasing power, which they are eager to use. By becoming truly global players, they have the capability to adjust their offerings to every single market’s conditions
• The tier-2 and tier-3 Indian companies have lost their competitive edge, and do not have the breadth to go global. The future I can envision for them is to become either very specialized or privileged subcontractors of tier-1 Indian companies. I am sure that Indian leaders would prefer to tap into a domestic pool of talents, even if no longer at the best quality/price ratio
• The client base of the tier-2 Indian companies has started to move to other destinations, and China is leading the pack by far. Other booming destinations include Eastern Europe, Latin America, and Vietnam. These countries offer overall savings that are still over the 50%
• That said, prices in China and the others countries are also increasing rapidly. These newcomers must create a sustainable model, or they will likely face a situation similar to India’s.

  China for instance can certainly take advantage of the vast discrepancies that exist between its provinces to balance the prices in Beijing or Shanghai with the more affordable ones available in cities like Chengdu or Hangzhou, a luxury that many other destinations cannot afford, either per the small size of the country or per the poor country’s overall infrastructure.

• Unfortunately, there is another factor, and that is the decline of the education level in the USA. The country does not only produce enough engineers, but more tragically the overall education level is decreasing rapidly to say the least.

Each party involved is faced with a major challenge:

• India is faced with a profound reorganization of its IT outsourcing industry, both a flagship industry and a major source of revenue for India
• China is yet to create its own unique outsourcing model to accommodate the growth of its tier-2 providers. Since the Chinese industry is still very fragmented, China has no heavy-weight leader, and therefore this new model should be aimed primarily at tier-2 and tier-3 companies
• The USA must rethink their educational system entirely, a long haul and very complex task.

IT outsourcing will remain a growing industry in the coming years, and certainly for as long as the country does not produce enough engineers to cover its own needs.

• US large companies are likely to continue using the services of tier-1 leaders, that include the Indian ones
• US smaller size companies are likely to continue to massively redirect their sourcing to China and to a minor extent Vietnam or other emerging destinations.

Business, China | 7 Comments »