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“+” and “-” outsourcing to China

An article by Jacquline Zhang summarizes pretty well: by adding up the dangers and benefits of outsourcing to China, you get a fairly mixed report card.

(+) We score service provider availability a positive. There are some true diamonds with potential to grow, given the projects. The challenge is finding the company that’s appropriate for you to work with.

(~) We score personnel talent and experience neither a negative nor a positive. The right managers — strong in staff development and retention skills — can work wonders.

(-) Intellectual property rights gain a negative mark across the board. If your business is IP-sensitive, you’d better be IP savvy too, to protect what’s yours.

(-) Regarding English language skills, we give a negative rating because the results of all that educational effort are uneven. Until students have an on-going opportunity to converse with native English speakers, they’ll never achieve the proficiency in the language that most non-China companies need.

(-) Cultural issues gain a negative too, at least until US and European managers have more experience in working within the bounds of the Chinese culture.

(+) The Chinese government’s support in taxation and other areas is a positive. We give this a plus — though with the caveat that governmental support in China can be fickle. One day they’re wooing your business; the next day, they’re turning a blind eye to vigilante justice, as the Japanese recently experienced in multiple Chinese cities.

Zhang also points out a bonus “+” is use outsourcing relationship as entry to market: a 20 billion $ market and fast growing: In another word, the economic environment is more a plus factor than a negative factor.

“another reason to consider China for IT service is the 1.3 billion people marketplace that China constitutes,” said Stefan Klotz in his study titled The future of China’s software outsourcing industry. “Some examples of sectors that need a remake of their IT-infrastructure are banking and insurance. This opens up further opportunities for foreign software vendors.” Domestic software sales in China is $17.3 billion in 2005 (compared to India’s $3 billion).

A foreign company with established relationships in China has a better chance of getting lucrative Chinese contracts. There is no outright prejudice for foreign companies already in the Chinese market but it is not known to hurt. Also, a company that already has experience outsourcing to China might have a better understanding of the machinations of the Middle Kingdom. The reverse is true too. Those companies already outsourcing to China in the manufacturing sector will probably have greater success in sending IT work there too.

Also, as companies expand into China, outsourcing to a local vendor becomes desirable as ground support for operations there.

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SMBs lead in IT spend in 2008, relying more on services

Recent IDC study indicated almost half of small to mid-sized businesses (SMBs) have increased their IT budgets for 2008, ahead of larger enterprises. Study shows their lack of expertise in buying and deploying technology means their spending will be concentrated on playing catch-up with their larger counterparts. It also found security is still the top priority followed by infrastructure, and then application, modernisation. Meanwhile, new software investment decreased as a focus for investment. But services emerged as key, given the fact that SMBs were looking “to align their IT infrastructure better with the business and want to improve IT service levels to the business,” said the survey.

Because SMEs have less experience of how to do that, they therefore plan to buy more consultancy services to understand how best to realise their strategic goals. This would be good news for the consulting industry, but also warned economic uncertainty is likely to dampen consulting spending.

The survey also found two-thirds of SMBs already used outsourcing to some extent and a third are ready to invest in more or invest for the first time. Cost reduction is a more important driver of outsourcing spend for these organisations than it is for larger enterprises, where the latter see outsourcing as a tool for business innovation leading to better alignment of IT with business.

Study advises SMBs to buy more standardised, cheaper and easier-to-consume services, while vendors should offer clearer and fewer choices in order to make the buying process less painful, more according to individual industry needs than generic requirements according to size.

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US April Job Loss Breakdown

Here is a breakdown of where the job losses were as well as which sectors were adding jobs. Worst hit continue to be construction and manufacturing. Education, Health Care and Professional Services added the most jobs.

Total change in non-farm payroll = - 20,000

* Private Sector = -29,000
o Natural Resources & Mining = -3,000
o Construction = -61,000
o Manufacturing = -46,000
o Services = +81,000
+ Wholesale Trade = -10,600
+ Retail Trade = -26,800
+ Transportation = +1,200
+ Utilities = Unch
+ Information & Media = -2,000
+ Financial Svcs & Real Estate = +3,000
+ Professional & Business Svcs = +39,000
+ Education & Health Svcs = +52,000
+ Leisure = +18,000
* Government = +9,000

For reference, in the 2001 recession, monthly losses hit a high of 325,000. The 1990-91 recession peaked at 306,000 losses. Job loss numbers peak toward the end of a recession and are therefore a lagging indicator.

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Economic Slowdown in the US to Accelerate Offshoring of IT Services

The current U.S. economic slowdown will lead buyers of IT services to consider increasing the percentage of their labor in offshore, lower-cost locations such India and China, according to Gartner.

With concerns that the US economic slowdown could extend to other geographies, organizations are refocusing on IT cost reduction and taking steps to accelerate the use of offshore labour. Buyers of IT services will shift from cost containment goals to a greater focus on cost reduction and productivity increases in their sourcing decisions. This will lead to a steady increase in the adoption and expansion of offshore services - primarily from India, but increasingly from other countries as well.

Gartner sees two possible scenarios that will have an impact on offshore services adoption in the coming months: temporary economic downturn (best case scenario) or a more sustained recession (worst case scenario).

In the best case scenario, buyers will aggressively seek cost-saving measures by accelerating offshore delivery or, for first time users, moving IT services to offshore locations. For buyers that haven’t used offshore before, this will be a critical step to changing their paradigm for services sourcing towards a global delivery model (GDM) approach in the future. First -time buyers of offshore services will seek providers that can prove effective in transition and project management, skills that can demonstrate added value from previous clients, and that are candid on the real costs of offshoring. Buyers will be more aggressive with external service providers (ESPs) to have greater clarity on costs, and they will seek immediate savings.

If a more sustained economic slowdown leads to a prolonged recession in the US and possibly other global economies, buyers will aggressively move toward offshore destinations and service providers that can offer a global delivery model to access lower-cost IT labor for routine IT work that must continue for the business to operate. However, noncritical projects may be delayed indefinitely, and for most organizations, any discretionary IT spending will be canceled.

Some variation by vertical market will occur, but most will experience the overall economic recession in some form, and IT will typically be impacted by budget cuts of some form. The mix of offshore work will emphasize routine maintenance and development work vs. higher-value service contracts, and providers will need to work closely with clients to deliver cost savings.

Organizations are likely to conclude that increasing the proportion of work to offshore locations is the best way to reduce labor costs, among other benefits. In most sectors, the watchword is “caution” - IT budgets have not yet been cut, and offshore services options are being considered or accelerated as a prudent step to contain labor costs.

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Chinese Firm Selected among 2008 100 Best Outsourcing Providers

On this year’s Global Outsourcing 100, Accenture was ranked the number one outsourcing service provider for the first time, coming out ahead of IBM, who had garnered the leading position since the list’s inception three years ago.

Half of the top 10 companies are from India, reflecting the country’s strong outsourcing growth. Infosys Technologies was number three on the Leaders List, representing firms with annual sales of $60 million or more. The other top-ranked India-based firms were Tata Consultancy Services, Wipro Technologies, Genpact and Tech Mahindra.

More than 60 percent of the winners on the Rising Stars list are based outside the U.S., indicating that the companies to watch in the future will be from emerging countries. First-time honorees include Beyondsoft of China, LawScribe of the U.S., and MERA NN from Russia.

The data also provides a unique industry snapshot and reveals its continued fast growth. Revenue among Leaders grew 24 percent in 2007, compared to 16 percent growth the previous year. These companies averaged $1.7 billion in annual sales and engaged 27,000 employees globally.

IAOP established the list as a resource to help companies compare providers using an objective methodology. It includes both Leaders and Rising Stars, as well as 25 sublists based on geographies, services and industry.

Similar to the request for proposal process, companies are ranked on quality following a rigorously judged application process that examines 18 criteria. Final rankings are based on a weighted average on demonstrated competencies, size and growth, management capabilities and customer references.

To download the 2007 Best Outsourcing Provider List, please click here.

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Why does EDS scale up its ITO operation in China?

China has been promoting its outsourcing sector in recent years to tap the booming market. The nation’s software outsourcing companies raked in $1.4 billion in revenue in 2006, up more than 40 percent compared with a year earlier. ITO providers in China are projected to earn $18 billion by 2010 & $56 billion by 2015.

According to a White Paper “Building a World-Class IT Services Outsourcing Industry in China” released by EDS, China has some distinctive advantages such as an abundant supply of raw talent, world-class infrastructure and low costs.

EDS, which has about 20,000 staff members in India now, has been trying to scale up its operation in China. In 2007, the US-based company decided to establish a global delivery center in Wuhan, capital of Central China’s Hubei Province. The company is looking to increase the center’s headcount to 5,000 in a few years.

There is more that attracts EDS to expand their operations in China: China’s large and fast-growing domestic IT services market is a great strength for its outsourcing industry.

Unlike their Indian counterparts, outsourcing companies in China work closely with local clients from industries such as banking, securities and manufacturing. These experiences allow them to develop their own domain expertise and enhance their innovative capacity.

For example, Shenyang-based Neusoft, now China’s largest outsourcing company, started to develop software programs for Japanese car audio manufacturer Alpine Electronics in 1991. The two companies set up a joint research center in 2001. Nuesoft is now one of the leading providers of auto electronic software in China.

This is impossible for Indian outsourcing companies due to their small local market. They have to buy expertise and knowledge due to the small domestic market.

Chinese government also strongly supports such deal. According to the cooperation agreement with Ministry of Commerce, EDS and the ministry will work together on policy and regulatory issues, as well as cultivate market growth opportunities. The two parties will jointly hold high-profile summits and conferences to promote China’s image abroad.

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Is my job at risk for offshoring?

Researchers at the Wharton School and careerbuilder.com released new study titled, “Jobs Beyond Borders,” based on a survey of more than 3,000 hiring managers and HR professionals and more than 6,700 workers across the U.S.

Among employers who offshore, 50% said they believe offshoring is necessary to compete in a global economy and 15 percent project more than 20 percent of their jobs will eventually be sent overseas. This does not mean the U.S. will see a reduction in employment levels, however. One-in-four employers who offshore said it has enabled them to create a greater number of better jobs here in the U.S.

What Jobs Are Being Offshored?

Thirteen percent of employers said their companies outsourced work to third party vendors outside the country in 2007. The same amount said they would do so in 2008. 7% percent of employers offshored job functions to foreign countries affiliates in China, India in 2007; 9% plan to do so in 2008. Plans to offshore to third party vendors in 2008 are more prevalent in the Northeast and West at 15 percent compared to 12 percent in the South and 10 percent in the Midwest.

The study indicates that services that can be delivered electronically and don’t require much face-to-face interaction are now at higher risk of being displaced.

Even High-Skill Jobs Also at Risk

According to respondents who offshore, more firms are offshoring high-wage, high-skill jobs that were once thought to be immune to global competition. Twenty-eight percent of these employers reported more high-skill services positions are being sent overseas to third parties or foreign affiliates in need of management, technology and sales and marketing know-how. The majority of employers who offshore (69 percent) believe high-skill services positions are at equal or more risk of being offshored than low-skill jobs.

Examples of jobs companies plan to offshore:

-- Computer programmers - 32 percent
-- Software developers - 32 percent
-- Customer service - 25 percent
-- Systems analysts - 16 percent
-- Sales managers - 8 percent
-- Graphic designers - 8 percent
-- HR personnel - 7 percent
-- General managers - 6 percent
-- Marketing personnel - 5 percent

Among industries, technology services, telecommunications, insurance, manufacturing, engineering, banking & finance, oil, travel, utilities and communications all reported higher rates for offshoring.

Impact on the U.S. Job Market and Workers

The study indicates, of all the respondents, older workers were more susceptible to being displaced than younger workers.

Of all workers who reported being displaced by offshoring, one-in-five (21 percent) said they were reassigned within the company. Seventy-one percent were let go. Of those who were reassigned, 76 percent reported it was a lateral move while 7 percent reported they benefited from either a promotion, higher compensation or both. Of those who left the company, 81 percent went to another employer that was not aggressively offshoring.

While U.S. workers have lost jobs as a result of offshoring, companies are making the argument that offshoring is ultimately benefiting the American workforce. Twenty-eight percent of employers who offshored jobs said offshoring has already enabled them to create new, better jobs of different types in the U.S.

Cost-Savings and Other Reasons for Offshoring

Cost-savings is the primary motivator for offshoring, according to 64 percent of respondents. Looking at information technology specifically, nearly half (49 percent) say they save over $20,000 per head on average by offshoring. Fifteen percent of employers say they are saving more than $50,000 per head.

Twenty-seven percent of respondents cited availability of skills and 19 percent pointed to plans for expansion in a particular market as their main reasons for offshoring.

Popular Spots for Offshoring

Offshoring companies are predominantly drawn to South Asia with 44 percent of employers who offshore stating they sent jobs to India. Others key locations include China (24 percent), Mexico (12 percent), Canada (9 percent), Germany (8 percent), the Philippines (7 percent) and the U.K. (7 percent).

Reasons for Not Offshoring

When respondents who don’t offshore were asked why their companies chose not to, one-in-five (21 percent) said they felt it is important to keep jobs in the U.S. Fourteen percent reported their customers would not respond favorably and 10 percent said they work with sensitive data. Difficulty to build trust across borders, the cost associated with monitoring workers and shipping/materials, and the availability of a skilled labor pool abroad were also cited.

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Strong growth for offshoring predicted for 2008

The outsourcing and offshoring landscape has changed considerably in the last few years. Despite the fact that the opportunity for cost savings has been reduced, major gains in both capabilities and processes mean that outsourcing continues to be an attractive option for many companies. Offshore spending is predicted by some analysts to grow by 40% in 2008, even as overall spending and investment slows down.

According to Gartner, India remains the “undisputed leader” in offshore services, but China, Russia and Brazil are providing credible alternatives.

Top 30 offshore locations

Gartner Inc.’s top 30 locations for offshore services, by region, are:

Americas: Argentina, Brazil, Canada, Chile, Costa Rica, Mexico and Uruguay.
Asia/Pacific: Australia, China, India, Malaysia, New Zealand, Pakistan, the Philippines, Singapore, Sri Lanka and Vietnam.
Europe, the Middle East and Africa: The Czech Republic, Hungary, Ireland, Israel, Northern Ireland, Poland, Romania, Russia, Slovakia, South Africa, Spain, Turkey and Ukraine.

Gartner’s criteria:

1. Language
2. Government support
3. Labor pool
4. Infrastructure
5. Educational system
6. Cost
7. Political and economic environment
8. Cultural compatibility
9. Global and legal maturity
10. Data and IP security

While there is a growing consensus among the analyst firms, including Gartner, that IT investment and spending will be lower than anticipated in 2008, offshoring is not an area where companies (and vendors) are pinching pennies. Indeed, Gartner predicts that offshore spending in the U.S. will grow 40% in 2008. In Europe, where companies have been slower to use overseas labor as part of their IT strategies, Gartner pegs the growth even higher, at 60%.

During a Forrester Research conference call last week warning of lower-than-anticipated IT growth rates for 2008, analyst Andrew Bartels pointed to the offshore market as an exception.“If you look at the IT outsourcing market, the offshore portion certainly has seen the strongest growth. Vendors like Wipro, Tata and Infosys have been growing at far stronger growth rates than a lot of North American vendors,” said Bartels, vice president of research at Cambridge, Mass.-based Forrester.

The rising interest may not immediately correlate with higher spending, however, as it usually takes nine to 12 months for offshore contracts to be sourced and deals to materialize. That is about the time Forrester expects the IT overall growth rates to rebound from a 2008 slowdown.

Takeaways

The aim of the Gartner study was not to rank each country but to help sourcing managers determine which locations are right for their particular needs, Huntley said. “There are risks and rewards to any part of the world you go to, and everything from service delivery to concerns about security and language to consider.”

Here are some main findings in the report, listed by regions:

The seven countries from the Americas are becoming or already are attractive destinations for U.S. companies, but a lack of government support is restricting offshore development. Only Mexico rated “very good” in this area, followed by Canada and Uruguay. Canada and Mexico rated higher than Brazil in the quality of the labor pool. In terms of infrastructure, think twice about Argentina, the only country to rate lower than “good.” Canada earned excellent marks in most categories, except in the big rate limiter: cost.

The Asia Pacific region boasts the most countries in the top 30 list—10. India rules, with China at its heels. Language skills have come a long way. Only China, Sri Lanka and Vietnam rated less than “good.” You can expect strong government support in China, India and Singapore.

The rest of the countries are a “mixed bag” of pluses and minuses. Australia, New Zealand and Singapore, and an increasingly proactive China, rate high on infrastructure and educational systems. Vietnam leads the pack on cost, earning an “excellent,” while China, India, Pakistan, the Philippines and Sri Lanka rated “very good.”

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Wipro Q4 results and outlook

Wipro, India’s third-largest software services exporter, reported a slightly smaller-than-expected 1.7 percent rise in quarterly net profit, and forecast muted growth amid fears a weak U.S. economy will hit outsourcing demand. Here is what is happening according to CFO of Wipro.

ON THE U.S. SLOWDOWN:

“we have seen some form softened in the last few weeks. We are saying we are a little cautiously optimistic.

“We think, by talking to various customers, that offshoring will continue to be the main driver for them, particularly to deal with the lower or flattish budgets that they have.”

ON CLIENTS’ IT BUDGETS:

“In the dipstick we have done, customers are talking about flattish, to maybe slightly lower budgets, but they are all wanting to do more offshoring. And we are expecting that more and more offshoring will happen soon after this so-called uncertain situation disappears.”

ON MARGIN OUTLOOK FOR FY2008/09:

“What we are saying is that we will be able to hold, to expand margins.”

ON PRICING:

“The blended (average) price declined by 0.9 percent in Q4, quarter on quarter. However, so far, as far as we continue to get 4-5 percent higher rates from new customers. Overall, pricing looks to be stable, with a positive bias.”

ON GROWTH:

“We would expect more of the growth back-ended, and the deal pipeline looks good. But since the decision-making could get delayed, given the uncertain situation, we think most of the fructification would happen after 3-6 months, and therefore the growth will be more back-ended.”

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Changing roles of center of excellence (CoE) in global outsourcing

According to a recent report in TMCnet, more and more outsourcing companies are aligning their delivery operations along centers of excellence (CoE) - building and leveraging specialized skills within their organizations. Firms use CoE to facilitate knowledge sharing and capability building in niche areas such as pharmaceuticals, automobile, telecom or for specific functions like innovation, technology, R&D, testing, etc. The adoption of CoEs by outsourcing companies has been a recent phenomenon, but is rapidly gaining traction. The model is offering service providers much-needed flexibility, productivity, cost and resource efficiency in managing their increasingly global businesses. It is also finding better acceptance among buyers.

For the moment, the large-scale acceptance suggests that the concept is likely to witness rapid growth over the next few years. A large number of buyers and suppliers will organize their activities around CoEs to gain from economies of scale and to leverage other strategic advantages.

The CoE served to centralize resources, standardize processes, share strategic knowledge and more importantly, put in place a roadmap to sustain and develop operational excellence. The choice of locations was strategic - e.g., India allowed rapid scalability from an abundant manpower pool.

Changing Roles In Global Sourcing

The service provider is being increasingly seen in the role of a strategic partner , aligned with the buyer s business objectives such as cost reduction, efficiency improvement, process re-engineering, innovation and business continuity. Contract sizes have been reducing and the large mega-deals of the past are getting restructured into smaller contracts to multiple vendors, often to specialized service providers who are best-in-breed. Vendors are expected to be able to provide services from multiple locations around the world and at times, expected to partner with competitors, acting as active participants in the clients business, rather than mere executors of contracts.

Going Forward, it sounds like a win-win situation for the client and the vendor, there are several challenges in operating a successful center of excellence, mostly related to implementation and sustainability. Setting up a CoE can be highly cost-intensive and necessitates a comprehensive business plan for the longer term, to transform the CoE from a cost center to a profitable unit. Consequently, skeptics question the capability of an excellence center to succeed in the absence of broader organizational maturity.

More details can be read in this report.

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