Flips and flops in outsourcing to China

December 10, 2011: China has witnessed a phenomenal growth in the Information Technology and BPO sector over the past few years. Analysts in the field observe that China fits into the category of matured market in the IT and the BPO sector. China now enjoys a third place in the outsourcing industry after India and Philippines. However China offers a whole different value proposition when compared to the leaders in the industry.

Everest group, which offers consulting and analytic services to the outsourcing industry, has reported that China exported services worth USD 1.2 billion in 2007 and the value soared to USD 3.5 billion in 2010. It is observed that 65 per cent of the service export was dominated by IT services alone. The study conducted by Everest projects that the Chinese outsourcing market will reach USD 10 billion by 2015. It is estimated that the Chinese outsourcing industry will remain as a favorite outsourcing location for another 13 years.

Most of the organizations in the west outsource business functions and IT services to India and Philippines for obvious cost reduction reasons. But in the case of outsourcing to China, there are other objectives than just cost reduction. The companies consider China as offshore location for minor risk diversification. Most organizations that outsource to China find it as a means to serve their nearshore businesses in Japan, Hong Kong, and Korea. In the case of other organizations, outsourcing is a way into the Chinese market.

The decision to outsource to China is made on the background of the global strategy and is never an isolated move.

In spite of the advantages, there are few dangers associated with outsourcing to China. Outsourcing to China is about 40 per cent more expensive than India and Philippines. More over professionals lack in English language skills, which is a great disadvantage as good English language skill is essential in the outsourcing industry. In 2010, out of 5.8 million graduates who graduated from China, more than 50 per cent were with engineering and management background. Another area where the Chinese outsourcing industry lacks is the capacity of the delivery center. The capacity of most of the Chinese service delivery centers fall between 300 and 400 employees.

Companies before outsourcing to China should consider both advantages and disadvantages of the outsourcing industry in China. The advantages in the Chinese market should be exploited to serve the local market, as geographic proximity will offer advantage in terms of local language and culture.

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