Chinese Offshore Outsourcing Suppliers to Challenge India?

China Consulting to Analyse the IT & BP Offshore Outsourcing Supplier Market in China

·        The Chinese Offshore Outsourcing market is young but fast growing

·        Key differentiators between Chinese Offshore Outsourcing suppliers are international experience, language skills and expertise

·        Besides the US and Japan, Chinese Offshore Outsourcing suppliers focus on the UK and Germany in the future.

The offshore outsourcing market in China is rather young but fast growing. The future development can be forecasted as positive due to growing international experiences, strong governmental support and Reverse Brain Drain effects. Application Development/Custom Software Development, Application Maintenance of proprietary systems and Localization Services are currently dominating the IT Offshore Outsourcing services. Business Process Outsourcing services are offered only partially. At the average, price levels are lower than in India while they differ significantly among Chinese suppliers.

For the last 10-15 years, India has been the most attractive offshore country. Even today, the vast majority of global outsourcing revenues are generated there. But there are reasons for companies to consider alternatives to India as their (single) offshore outsourcing country:

•      Over the last 12 months there has been a rise in prices of about 7% caused by the increasing global demand for Indian offshore outsourcing services.

•      India has been a quasi-monopolist for many years. Potential customers may cut the prices and/or improve the service levels in soliciting bids from different countries and confronting Indian suppliers with their competitors.

•      Companies seek to mitigate their risks through diversification. In terms of offshore outsourcing, this can be achieved by sourcing services from different countries, which minimizes geopolitical risks on the one hand, and supplier specific risks on the other hand.

•      The so-called global sourcing allows companies to pick out the needed services where they are best produced.

•      Sourcing services from developing economies such as China may be a first step to enter this emerging market. The Chinese economy is expected to continue growing by at least 7 percent per year for the next 10 years so that China might replace Germany as the third biggest economic power in the world in 2014.

The software sector in China is young and its size is still small. Its share accounts for 2-4% of the global sales in software products and services. However, the software market has been growing rapidly for the last few years. Since 1996, the average growth rate has been 25-28% per year.

The Chinese offshore outsourcing market, originated from the software market, has been experiencing a similar development. The survey results carried out in course of META Group’s study “IT & BP Offshore Outsourcing to China” underline the dynamic growth of this sector.

Only about 10% of the surveyed companies have been established more than 12 years ago. However, the number of foundations has been increasing dynamically.

The positive developments result of the opening of the markets as from the late 1990ies and the rising support of this sector by the government. For the last five years the government has been increasingly launching programs and putting funds into projects in order to promote further set ups in the software sector and to improve international competitiveness of Chinese software and offshore outsourcing companies. In the current Five-Year-Plan the development of the IT sector is highly prioritized and in 2000 there have been introduced extensive directives which grant software companies exceptional advantages over companies of other industries. Overall academic education has been strongly supported for the last years which has result in an increase of students and graduates of all fields of studies by 51% resp. 76% from 2000 to 2003. Special incentives are being given for returning Chinese software professionals studying abroad to enforce the Reverse Brain Drain.

Currently the main services offered by Chinese Offshore Outsourcing suppliers are Application Development/Custom Software Development, Application Maintenance of proprietary systems and Localization Services. About 75-90% of the surveyed companies have these services in their product portfolios. Not surprisingly, the provisioning of services pertaining to business processes (BP) is lower than that of IT-related services. Often, BPs are strongly related to core competencies. In China, concerns about the compliance with intellectual property rights are still an issue, and consequently, the overall demand is limited. In this category of services, R&D services (research and development of products as well as product management) are offered most often, followed by IT help desk services.

Most of the Chinese offshore outsourcing suppliers have customers in the USA and Japan at the moment as statistics on their reference projects show. As for the European market their future country focus is on the United Kingdom and Germany.

The objective of the study “IT & BP Offshore Outsourcing to China - Overview of the Chinese Supplier Market in 2004/2005” is to explore the status of the offshore outsourcing market in China, by having a glance at the past and current market environment and by presenting and interpreting the results of a survey among Chinese suppliers. Detailed profiles of Chinese suppliers will help to identify suitable partners. Additionally, addresses of software parks and associations, chambers, ministries and authorities are included.

The survey covers six major topics divided in 37 sub categories:

•      Company details: structure and maturity of Chinese suppliers

•      Staff: capabilities and skills of Chinese offshore outsourcing employees

•      Services / products: services and products most often offered

•      Reference projects: experience of Chinese suppliers

•      Offshore business strategy: target industries and target customers

•      Pricing: prices for consultants, project managers, technicians and developers