Author: Thomas Kaminsky, Managing Director and Founder
Crescendo Consulting Solutions, LLC
For many companies around the world, India has been the crown jewel of IT and business process outsourcing for the better part of the last decade. However, India as an off-shore haven is now facing greater competition from a rapidly advancing China.
In 1998, realizing they were missing out on the opportunities of outsourcing and it’s economic impact, China drastically shifted focus announcing plans to expand infrastructure, education and business ties with foreign investors. This migration from a state-run economy to a more market-driven economy was a historic shift in business, economic and cultural values. Coupled with an increasingly expensive India and uncertainty in the global economy, China is now meeting the needs of foreign companies seeking lower cost, higher quality outsourcing alternatives.
So what are the advantages and risks of outsourcing IT and software development to China?
Wage Arbitrage
India initially boasted a wage ratio that was roughly 1:6 versus the US. Now, after years of success and growth, talent and processes have matured in India. Global competition for resources, especially talent, is greater driving wages higher. The wage ratio is now closer to 1:3 and in some cases 1:1.5. In contrast, China’s wage ratio is closer to 1:7. From a cost perspective, China provides a greater competitive advantage than India.
Access to a Growing Educated Workforce
Previously, China’s lack of participation in the global marketplace hindered their national development. As part of the host of sea change development projects initiated in 1998, the Chinese government placed a strong focus on funding education. That investment is now reaping large returns. In 2008, China boasted college enrollments reaching 20 million students. Last year, a reported 6.1 million students graduated from undergraduate studies to enter the workforce. More important, several universities have formed alliances with Chinese as well as foreign companies creating extensive technology and application development tracks of study. The result is an established pipeline of talent enabling China to market its IT outsourcing capability.
One example of this education investment and leveraging the China market for outsourcing is a company called Insigma Hengtian Software Ltd. Its genus is from a relationship that was formed by State Street Corporation and Zhejiang University in Hangzhou, China. Where its senior management is part of the university faculty, Insigma Hengtian has access to the “best of the best” graduate and post graduate candidates from one of the top three universities in China. This teacher student bond also prevents the typical turnover in company human capital. Given the types of projects the students work on while at University, they leave and enter into Insigma Hengtian having been exposed to “real life” financial services-based process workflow and applications. Access to University-affiliated advanced research and development expertise separates this company from many purely commercial entities. Because of its partnership with the university and central government, Insigma Hengtian can leverage these relationships and assist its clients who want to introduce their products and services into the China market.
While there is a growing abundance of skilled IT workers, there are fewer interdisciplinary workers skilled in technical issues, business process, management and interpersonal communication. China is beginning to address these interdisciplinary areas of study in order to compete with India’s mature business environment.
Enforcing Intellectual Property Protection
China has a longstanding history of being lax on intellectual property violations and letting multiple sources cheaply produce and copy applications, repeatedly demonstrating little regard for international law.
This trend, however, is changing. Due to its shift towards a knowledge-based production economy in place of its legacy manufacturing-based economy and greater pressure from foreign investors to align with global practices, China is bringing their intellectual property (IP) laws and standards more in line with other global standards. Precedent has been set recently. In many intellectual property lawsuits, the Chinese courts have favored the plaintiff.
One study showed that between 2002 and 2008, the US presented 26% of 179 cases. Of those cases, only 8% involved software IP infringement. The study also suggested damages awarded are growing. In 2002 the highest sum awarded in an IP case was $50,000. In 2008, that number grew to $2,780,000. The Chinese government has established that, in order to provide an environment conducive to foreign investment and outsourcing, it needs to maintain a rigorous intellectual property enforcement policy.
Riding the Infrastructure Boom
China is in the middle of an infrastructure boom. Initiated as part of its responsibilities for hosting the 2008 Beijing Olympics, the country continues to invest in public works, technology networks and support industries. Local and foreign investors are helping China identify quality locations to establish service centers with close proximity to local universities, sound infrastructure and quality labor pools. Working together, foreign investors and the Chinese government are fostering a collaborative environment aimed at establishing China as a key player in the outsourcing industry.
With the advantages of wage arbitrage, a growing, highly skilled workforce, enforcement of intellectual property policy and continued infrastructure investment, global companies are now considering China as the alternative outsourcing partner to India.
