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IT Leadership // IT Strategy
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4/8/2005
10:23 AM
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Look East

Low costs and high skills tempt businesses to outsource to China

Most U.S. companies think India when considering a low-cost destination for offshore IT work. Not Sebastian Risse. The director of product development at business-software vendor CommerceQuest Inc. opted for China, which some believe eventually could become the world's biggest provider of high-tech services. The reason behind Risse's decision? "China is about half the cost of India," he says.

That, combined with a flood of highly skilled programmers graduating annually from Chinese colleges, is moving China to the center of the outsourcing debate. China's income from outsourcing is growing quickly, fed in large part by contracts with Japanese companies, which make up 60% of the country's outsourcing business. But big American companies, including Coach, Motorola, and Target, also have begun sending IT or IT-driven business-process work to China, accounting for about 15% of the country's outsourcing contracts, say officials at Beijing's Municipal Science and Technology Commission. Revenue in China from software and IT services has risen a whopping 42% per year since 1997, reaching $6.8 billion in 2004, according to a recent report by consultants McKinsey & Co.

China must take piracy seriously to succeed, says Eric Rongley, the American CEO of China-based outsourcer Bleum Co.

China must take piracy seriously to succeed, says Eric Rongley, the American CEO of China-based outsourcer Bleum Co.
Yet China poses some challenges and risks for business-technology executives that India doesn't, with the most frequently cited concerns being language and, perhaps more important, intellectual-property risks. "To India, software is the most important thing in the country," says Eric Rongley, the American CEO of China-based outsourcer Bleum Co., who worked in the IT-services industry in India for five years starting in the mid-'90s. Rampant piracy was brought under control quickly there because it threatened the growth of the nascent export industry, he says. It's a different story in China, where pirated software still turns up frequently in markets and on street corners. That's partly because the country's dominance as a manufacturing center means it doesn't need to pin its future solely on IT. China, "in order to really go big in this industry, is going to need to take piracy seriously, take intellectual property seriously," Rongley says.

The cost benefits China offers don't necessarily outweigh business-technology executives' concerns, but the savings are compelling enough that companies are game to try to plan around the obstacles. The monthly salary for programmers in high-tech hot spots like Beijing, Shanghai, and Shenzhen is between $600 and $960, according to a survey conducted by InformationWeek China. That's about half the salary paid for a similar position in India and less than a quarter of what prevails in the United States. Rates are even lower in secondary locations. For instance, the average salary for a programmer in Dalian, a coastal city in northern China, is $450 per month.

As interest in China increases, major U.S. computer-services firms, including Affiliated Computer Services, BearingPoint, EDS, and IBM, are setting up shop in the People's Republic. Most big Indian outsourcing companies, including Infosys Technologies, Satyam Computer Services, Tata Consultancy Services, and Wipro Technologies, also are establishing satellite operations in China to serve Asian customers and reduce pressure on their facilities in India. Cognizant Technology Solutions, a New Jersey provider of application-development services that operates primarily from India, last year opened a development center in Shanghai to serve customers throughout Asia and the West. Having operations in China to do basic software coding for clients gives American and Indian IT-services firms a hedge against rising costs in their India-based operations and lets them satisfy IT executives' desire to add geographic diversity to their offshoring plans. "Risk mitigation is becoming increasingly important," Gartner analyst Frances Karamouzis says.

They're also hoping to capitalize on the fact that China's burgeoning economy has led to more U.S. businesses opening offices there, creating a need for on-the-ground support with IT and business-process operations. Satyam, which opened its first Chinese office in Shanghai three years ago, won an IT support-and-implementation contract with supply-chain software vendor Marc Global's newly opened China office because of Satyam's strong roster of local talent. "The Chinese like dealing with the Chinese," says Mark Skipper, president of Marc Global's Asia-Pacific operations.

Motorola has outsourced human-resources management for its China employees to Affiliated Computer Services' Beijing center. "We need to support customers who have activities in China," says Tom Blodgett, Affiliated's managing director for BPO solutions. In January, the service provider revealed plans to open a second operations facility in China to offer finance and accounting BPO services and IT outsourcing. Blodgett ultimately sees China as "a major global production center to serve the West. We're always looking for talented, educated people that are willing to work at the correct wages," he says. EDS hopes to follow suit, through its ExcellerateHRO unit, a joint venture with Towers Perrin.

The Chinese government is following the Indian model to ensure a steady supply of IT talent for both foreign and homegrown IT-services firms: investing in education and quality control. In partnership with U.S. tech firms such as Cisco Systems, IBM, Microsoft, and Sun Microsystems, the government has established 35 national schools to provide software training, especially in technologies such as .Net, Linux, Java, and Web services. The goal is to have 800,000 trained software pros by the end of 2005, versus 600,000 in India. The government also is promoting the use of widely recognized quality-control standards. To date, 11 outsourcing companies with operations in China have attained Capability Maturity Model Level 5, the highest ranking from Carnegie Mellon University's Software Engineering Institute. Among those, seven are indigenous Chinese companies.

IT officials at organizations that have tapped outsourcing talent in China say the educational efforts are paying off. "I'm very impressed with their skill level," says Jean-Benoit Gauthier, technology director for the International Olympic Committee. Gauthier is using Chinese IT workers through his outsourcing vendor, Atos Origin, under a contract that covers summer and winter games in cities including Beijing in 2008.

Contracting with a service provider that has both the scale required to handle a megaproject like the Olympics and native IT staff in China is essential for Gauthier. Atos Origin is creating a number of key applications for use at the Beijing Olympics. Gauthier acknowledges the possibility of communications and cultural divides that could jeopardize projects outsourced to Chinese IT workers. While India's colonial history seeded English firmly into its culture, most Chinese speak Mandarin or Cantonese. But the International Olympic Committee hasn't had any project delays or misunderstandings. "They're bridging any gaps created by culture," he says.


It's cheaper to develop software in China than in India, says Sebastian Risse, the director of product development at business-software vendor CommerceQuest Inc.

It's cheaper to develop software in China than in India, says Sebastian Risse, the director of product development at business-software vendor CommerceQuest Inc.


Photo by Jeffery Salter/Redux Pictures
Those gaps exist, though. "The Chinese may nod their heads, but it doesn't mean they understand what you're saying," says Marc Global's Skipper. Language "will continue to be a huge issue for the next five to 10 years," Gartner's Karamouzis says. Children are now required to take English from the third grade on, so the problem should ease as the next generation enters the workforce. And some companies are getting a jump by pushing an aggressive English-speaking agenda. At Bleum, which provides IT development and support to banks and credit-card and software companies in the States, all staff must speak English two days a week, and soon it's going to be every day of the week, Rongley says.

To compensate for the language barrier, CommerceQuest needed to establish very formal communication processes with workers in China, Risse says. "Early on, there were times when it appeared they hadn't done a lot of work. It turned out they were doing the work but just not communicating it effectively," he says. Documenting requirements actually turned into an advantage, Risse says. "It helps everyone stay on the same page."

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