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CHOOSING CHINA Three Reasons to Re-think Your IT Outsourcing Strategy

Cyrill Eltschinger, Strategic Advisor, and Author Source Code China: The New Global Hub of IT Outsourcing Mike Keating, Senior Executive, Freeborders

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CHOOSING CHINA

Three Reasons to Re-think Your IT Outsourcing Strategy

Cyrill Eltschinger, Strategic Advisor, and Author Source Code China: The New Global Hub of IT Outsourcing Mike Keating, Senior Executive, Freeborders

Executive Summary
Information technology (IT) provides critical competitive differentiation for companies operating in todays global wired marketplace. The effective use of IT is essential for winning customers, capturing marketshare, managing supply chains, optimizing profitability, making informed decisions, and maintaining regulatory compliance. While there are countless ways companies can potentially use IT to their advantage, the harsh reality is that they only have finite resources to devote to it. So a key factor in the bottom-line performance of any company is how intelligently it leverages those limited resources to get the maximum business value bang for its IT buck. One popular way to leverage limited resources is outsourcingin particular, offshore outsourcing. IT outsourcing enables companies to flexibly access human and technical resources as required to achieve their business objectives, at less cost and without driving up internal headcount. Thats why the global IT outsourcing market is projected to grow to US$1.2 trillion by 2012.1 Its also why many companies that have never previously considered outsourcing are doing so now. In fact, given current pressures to reduce costs while still using IT to achieve competitive advantages, outsourcing is probably a more compelling business strategy than ever. Simply deciding to engage in outsourcing, however, is not enough. Corporate decisionmakers also have to determine where to outsource. In todays global economy, there are many such choices. In fact, because the different regions of the world each have their own specific characteristics, such a decision can have a significant impact on the success of any outsourcing initiativeand therefore, by extension, on the business as a whole.

This paper presents three compelling reasons to choose China for offshore IT outsourcing:

Its superior resources

Its unique cultural fit with the requirements of U.S. businesses

Its proven record of exceptional success

These three reasons are driving the ascendancy of China as the country-of-choice for all types of IT outsourcing, from legacy application maintenance to the development of aggressively innovative web-based services. Combined, these reasons also make China highly attractive to decision-makers who are thinking in terms of long-term strategic advantagesrather than just how to get the next project out the door as quickly and cheaply as possible. IT will become more and more central to business performance in the coming years. And it is unlikely that budgets for IT will suddenly grow by an order of magnitude during this time. It is therefore prudent for corporate decision-makers to start cultivating access to Chinas high-value IT outsourcing capabilities right away.

Gartner: Forecast: IT services, Worldwide, 2008-2012

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WHITEPAPER: Choosing China: Three Reasons to Re-think Your IT Outsourcing Strategy

Reason 1: Chinas superior resources

China is booming. The collective pent-up energies of the worlds most populous nation are
now being channeled into what is probably the most intensive period of economic development in the history of humankind. And all expert observers agree that this is not just some short-term, unsustainable boom cycle. It is instead an epochal shift in the global balance of power. Three factors in particular characterize Chinas dramatic growth from a relatively undeveloped nation to one whose resources are rapidly dwarfing its erstwhile competitors:

People
With a population of more than 1.3 billion, China boasts greater human resources than any other country in the world. And, increasingly, this population is highly educated. The number of people in China with a college education quadrupled from 2001 to 2005 and continues to rise sharply. China currently boasts 600,000 engineering graduatesmore than India (400,000) and the United States (70,000) combined.2 China also produced 3,000 computer science PhDs in 2007.3 As that number continues to climb upwards, China will have the worlds greatest supply of trained IT professionals. This will allow Chinas outsourcing industry to scale up to meet demand and develop necessary expertise in key vertical marketswhile at the same time maintaining the downward pressure on pricing that accompanies an abundance of supply. There is also rich anecdotal evidence of the ascendancy of Chinas IT talent. At this years NSA-sponsored TopCoder Open challenge, for example, China dominatedracking up twice as many finalists (20) as any other country. The first place winner was also Chinese.4 The number of English speakers in China is also growing rapidly, as the country focuses on education as a competitive requirement. There are now more people learning English in China than there are native English speakers in the United States. And Gordon Brown has estimated that by the year 2025 there may be more English learners in China than there are native English speakers in the rest of the world.

Boom in education
Tertiary education in China

millions 6 5 4 3 2 1

1985

1989

1993

1997

2001

2005

Chinas National Academy of Sciences, 2005 National Bureau of Statistics of China, 2007 Network World, June 2009

Graduates
Basis: Tertiary education below masters degree

Enrollments
Source: China Statistical Yearbook, 2007

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Infrastructure
Chinas investment in infrastructure is unprecedented. The Chinese government is currently embarked on what may be the largest infrastructure initiative in the history of the world. These infrastructure efforts include US$590 billion allocated for build-outs of telecommunications, energy, roadways, and ports.5 It has been estimated that Shanghai alone has been home to more than a quarter of the worlds construction cranes. And a consortium of U.S. and Chinese companies have embarked on the construction of a one-gigawatt solar power plant in northwest Chinathe largest of its kind in history. These efforts place China significantly ahead of potential outsourcing destinations where transportation, communications, and power resources are not being developed with sufficient diligence to mitigate the risks associated with infrastructure-related service interruptions. They also bode well for Chinas ability to continue scaling up its capacity to support growing global outsourcing demand.

Government
The intensive growth of Chinas infrastructure and the aggressive education of its workforce are being championed by a government that is fully committed to ensuring the ascendancy of China as an economic power. This is being done through the creation of special economic development zones and programs such as the 1,000-100-10 Project, which was launched in 2006 to pursue three key goals:

Daqing Haerbin

Establishing 10 internationally competitive cities for service outsourcing (since expanded to 20) Inducing 100 well-known global corporations to bring their outsourcing businesses to China Developing 1,000 large and medium-sized service outsourcing enterprises with international qualifications

Beijing Tianjin Xian Chengdu Chongqing Changsha Jinan

Dalian

Nanjing Wuhan Hefei

Wuxi Suzhou Shanghai

Nanchang

Hangzhou

Dalian is a prime example of a Chinese city that has become an important outsourcing center. The former mayor of Dalian, Bo Xilai, actively recruited leading outsourcing service providers to the city during the 1990s. As a result, Dalian now has a technology university that graduates 14,000 students per yearin addition to a highly active and well-equipped outsourcing center. The Chinese government is also encouraging its outsourcing industry by taxing outsourcers at a 15% rate, rather than the standard 25%, and by subsidizing every new college graduate they hire to the tune of 4,500 Yuan (US$658).6 These measures and others make it clear that outsourcing service providers in China are receiving the government support they need to continue growing and evolving their technical capabilities.

Guangzhou Shenzhen Hainan

Taiwan

KPMG, A New Dawn: Chinas Emerging Role in Global Outsourcing, 2009 Gartner, Analysis of China as an Offshore Services Location. 2009

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Reason 2: Chinas unique cultural fit with the requirements of U.S. businesses
Every country has its own social, cultural, and political idiosyncrasies. So, to
obtain the considerable benefits that offshore IT outsourcing offers, company managers have to invest time and effort into learning a countrys social conventions, business culture, regulatory constraints, and banking system. They even need to learn a bit about the local cuisine so that they can eat sustaining meals when theyre in-country. The question, of course, is whether that learning curve is going to wind up being worthwhile. It doesnt make much sense to spend months or years learning about a cultureonly to discover that the culture doesnt place a strong value on timeliness, innovation, quality, hard work, or any of the other attributes that IT organizations look for in an outsourcing partner. This is another area where China shines. In fact, at this stage in their cultural development, the Chinese people may have a work ethic that is even greater than that of the U.S. Unlike the West, where economic pessimism has become increasingly pervasive, the younger generation of educated Chinese has a strong and realistic sense that hard work on their part will result in positive financial outcomes. This sense of opportunity is underscored by the words of the renowned former leader of the Chinese Communist Party, Deng Xiaoping, which still resonate throughout the country today: To get rich is glorious! This strong business culture is validated by many contemporary market observers. KPMG, for example, wrote in a recent report that Chinas demographic strength includes a strong culture of entrepreneurship and inventiveness. 7 An ongoing upsurge in English proficiency further enhances the cultural fit China offers:

English proficiency in China is exploding. The Chinese school system has been placing increasing emphasis on learning English, and the 2008 Olympics held in Beijing further fueled this trend. Since the 1990s, English is mandatory starting in the third year of primary school, but many children start earlier By contrast, as late as 2005 the government of the Indian state Karnataka still held on to its 15-year-old ban on English in primary schools despite huge popular pressure. It would seem that a state whose capital is Bangalorethe symbol of Indias success in the global economyand which derives its competitive advantage from its mastery of the English language should be more progressive in embracing English as a way of enhancing its competitiveness. 8
7

KPMG, A New Dawn: Chinas Emerging Role in Global Outsourcing, 2009 Source Code China, Cyrill Eltschinger

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Problems with corporate governance in China are now evoking swift and decisive responses.

The high value that China puts on corporate integrity is another important consideration when it comes to choosing an outsourcing destination. Problems with corporate governance in China are now evoking swift and decisive responses. This is in stark contrast with other outsourcing geographies where substandard management practices seem to be institutionalized It is also worthwhile noting that even issues such as poor IP protection that have historically been problematic in China are now yielding to its intensive development as a global business powerhouse. Software piracy is decreasing significantly as Chinas economy develops and as its government aggressively attacks this potential obstacle to its ascendancy with measures such as financial incentives that promote the installation of licensed software at enterprises.9 Chinas entry into the World Trade Organization also bodes well on this front. The Chinese business community clearly recognizes how much it has at stake in the protection of IP, and economic development is making it easier for Chinese computer users to pay for the software they need. All of these factors combined make China a strong cultural fit for global companies looking for reliable outsourcing partners who understand the importance of reliability, fair value, and the use of IT to achieve competitive advantage.

Deutsche Bank Research, Offshoring to China, 2009

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Reason 3: Chinas proven record of success

Chinas unique combination of vast human resources, extensive infrastructure, and strong business culture are already resulting in highly positive
outcomes for companies seeking to gain competitive advantage through IT. In fact, unlike other countries known for outsourcing, Chinas IT industry is not entirely driven by the exporting of services. Chinas meteoric internal growth is being directly supported by its native IT capacity. This is itself a testimony of its ability to effectively deliver IT solutions and services.

GE Capital, for example, is now sending approximately 20% of its offshore IT outsourcing to Chinaup from 5% just a few years ago as they shift work fromother outsourcing locations.
Chinas IT outsourcing capacity is also being tapped extensively by other countries in Asia, such as Japan and Koreafurther underscoring its growing desirability as an outsourcing location. Western countries have started to embrace Chinese outsourcing partners. GE Capital, for example, is now sending approximately 20% of its offshore IT outsourcing to Chinaup from 5% just a few years ago as they shift work from other outsourcing locations. And China maintains its rank as the worlds second most desirable outsourcing locations, while gaining ground on first-place India in several key considerations.10 The growing appeal of Chinese outsourcers is further highlighted by the annual growth of 30 percent projected for its offshore contractsa growth rate that outpaces the 19 percent projected for the rest of the world.11 But perhaps the best proof of Chinas ability to fulfill the requirements of corporate customers on a timely and cost-effective basis can be found in the specific examples of project successes. One global financial institution, for example, started off dealing with a Shenzhen-based Chinese outsourcer through its IT facility in Hong Kong, which was facing some specific challenges regarding the development of a cash management system. That engagement was so successful that the company the outsourcing-augmented capacity of the Hong Kong facility as a primary center of excellence for other strategic IT deliverablesincluding systems for country risk management and the administration of access rights.
10

2009 A.T. Kearney Global Services Location Index KPMG, A New Dawn: Chinas Emerging Role in Global Outsourcing, 2009

11

While delivering these enterprise solutions, the Hong Kong facility and its Chinese outsourcing partner are operating at costs 15%-30% lower than the companys other IT locations. The hybrid Hong Kong/Shenzhen operation was also assessed by the Software Engineering Institute and earned its highest rating: Level 5 CMMI certification.

One global financial institution, for example...

...the Hong Kong facility and its Chinese outsourcing partner are operating at costs 15%-30% lower than the companys other IT locations.

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...expansion is the ultimate proof-point that Chinese outsourcers are able to deliver differentiated value to their customers

Another global financial services company engaged its Chinese outsourcing partner to build a unified global system for managing its outstanding HR compensation liabilities. In this case, strong PeopleSoft implementation skills were of particularly critical importanceas was the ability to manage a complex project lifecycle that would convert multiple desktop solutions dispersed across the organization into a single corporate-wide reporting environment. The result of this successful project was vastly improved visibility into compensation liabilities across the enterprise and a 15% reduction in total application support costs. In still another case, a Chinese outsourcer helped another global financial institution leverage incident tracking software that it had already purchasedcombined with voice communications and supplementary reporting toolsto create an enterprise one call IT service-and-support environment that reduced costs, accelerated problem resolution, and provided high-value feedback to the IT organization so that it could discover and address issues that were undermining the user-experience. These are just a few examples that highlight the ability of todays Chinese outsourcing organizations to deliver enterprise-class IT solutions and manage sophisticated business requirements, while offering both lower development costs and lower long-term costs of application ownership. In all cases, companies that initially engaged with an outsourcer for a specific assignment were so completely satisfied with the results from both a quality and cost perspective that they expanded the scope of their outsourcing engagement. That expansion is the ultimate proof-point that Chinese outsourcers are able to deliver differentiated value to their customers.

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Should you choose China?

The choice of China has simply become too lucrative to ignore.

For companies that have yet to take full advantage of the benefits offered by outsourcing, these three reasons should provide sufficient incentive to explore the possibility of engaging with the right China-based services provider. For companies that are already actively engaged in outsourcing, these reasons should give cause to evaluate China as a possible alternative to any current or planned engagements. Freeborders can help you take the first concrete steps towards realization of the tremendous business value that an outsourcing relationship with a Chinese partner can offer through our proprietary ProfIT Workshop methodology. The ProfIT Workshop brings together business managers and IT decision-makers to identify and quantify genuine opportunities to gain substantial business value from technologyand, if appropriate, to prepare a game plan for achieving that value. The methodology thus takes IT outsourcing beyond mere labor arbitrage to a truly strategic partnership that has optimal positive impact on bottom-line performance. Globalization is presenting companies with new opportunities to capture markets and optimize their supply chains. IT supply chains are particularly important as the ability to effectively use information technology becomes an increasingly critical success factor. In this context, no company can afford to neglect the compelling value proposition offered by Chinas burgeoning IT outsourcing industry. The choice of China has simply become too lucrative to ignore.

The ProfIT Workshop brings together business managers and IT decision-makers to identify and quantify genuine opportunities to gain substantial business value from technology.

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About Freeborders
Founded in 1999, Freeborders helps financial services and Internet based businesses solve the most complex business challenges. The company provides global consulting, technology and outsourcing services through an integrated China to US delivery model. Freeborders enables clients to cost-effectively adapt their business infrastructure to market opportunities and changes, offering deep domain expertise, innovative thinking and strategic execution. Headquartered in San Francisco, the company has offices in London, Hong Kong, Shenzhen and Wuxi. To learn more, visit www.freeborders.com.

About the Authors

Mike Keating, Senior Executive, Freeborders
Mike Keating is a senior executive at Freeborders, a leading provider of management consulting, technology, and outsourcing. Keating joined Freeborders in 2000 with unique IT, technical, projects and executive management talent spanning over 20 years. Since then, his leadership and passion have become hallmarks of his tenure at the company and he is currently leading global business development. Keating is a highly experienced executive, top echelon consultant, seasoned technology, and business professional who founded the Freeborders Value Engineering Institute (VEI) and ProfIT methodology that delivers value innovation for clients. ProfIT targets with C-level executives to emphasize the return-on-investment aspect of decisionmaking in terms of lifecycle costs to maintain or improve on desired levels of capability and performance. Under Keatings leadership, Freeborders won the Forbes and Everest Group Global Outsourcing Excellence award for innovation in global delivery from China. Additionally, Keating led the team to close the largest software development services contract ever awarded to a Chinese delivery firm from a Fortune 500 company.

Cyrill Eltschinger, Strategic Advisor, and Author Source Code China: The New Global Hub of IT Outsourcing
A multi-cultural entrepreneur educated in Switzerland and the United States, Cyrill Eltschinger has over 15 years of experience working in the China market. He currently acts as strategic advisor to both commercial and government sectors on China market and various industry focused projects. Before that he was leading Softtek China (formerly I.T. UNITED) for over 10 years. He spent eight years with Electronic Data Systems (EDS) on various assignments in Europe, the United States, and Asia-Pacific. He was later posted to China as Head of Technical Infrastructure to establish and lead the nationwide information and communications systems and automation of General Motors. Anticipating the trend towards global IT outsourcing, he identified early China as an emerging major player. In 1998, he and a group of former EDS colleagues started I.T. UNITED, which became Softtek China in August 2007. The company today is one of the most trusted China-based outsourcing services providers with a reputation for delivering costeffective IT solutions that make technology smarter, easier, and more productive. With his unique expertise in the IT field and experience in China, Cyrill acts as a strategy advisor for the TORCH Center, the technology-focused agency of Chinas Ministry of Science & Technology (MOST); IT strategy advisor for the Tianjin Economic-Technological Development Area (TEDA); Senior Consultant for Service Outsourcing Industry of Zhenjiang New Area; and is a subject matter expert at the Gerson Lehrman Group (GLG) Technology Council, briefing executives both on the technology industry and the China market. He holds a Bachelor of Arts in Finance from Texas A&M University and a certificate in Systems Engineering Development from EDS. In March 2008, he was presented by the honorable Mayor of Beijing Mr. Guo Jinlong with the Great Wall Friendship Award, the Peoples Government of Beijing Municipalitys highest honor for foreign experts, for his outstanding contributions to Beijings economic development. He was further recognized to run with the Olympian flame in China during the 2008 Beijing Olympics Torch Relay. Away from the office, Cyrill is the author of Source Code China: The New Global Hub of IT Outsourcing ( 2007 by John Wiley & Sons), the first book to address Chinas growing technology boom for software development and high-tech services. Cyrill serves on the Board of Governors at the Capital Club, Beijings premier private business club; he is also the Founding President of SwissCham Beijing (the Swiss Chamber of Commerce in China) and the Founding President of the Texas A&M University China Club. Before entering the private sector, Cyrill was an Officer in an elite unit of the Swiss Special Forces. He is also an enthusiastic aviator and holds the first private pilots license issued to a foreigner in China since 1949.

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