Outsourcing the future

Chinese service providers must enhance their skills further to make a mark in the global markets

Though the service outsourcing industry in China had a late start compared with India, it has developed in an orderly fashion and more or less adhered to the basic rules of development.

Despite the orderly evolution, high-end service capabilities like consulting services, business reengineering and system solutions are often in short supply and not adequate for the offshore market requirements.

Lack of experience is often the most visible drawback for Chinese service outsourcing companies. Though Chinese companies have been making considerable progress, they are still far behind their Indian counterparts in terms of the services they can provide.

The fragmented nature of the service capabilities provided by Chinese service providers is another major issue. They often do not have solutions for systems integration, design development, testing, deliveries, operation, maintenance and system upgrade.

The service outsourcing industry in China also faces an acute shortage of high-end talent. Most of the employees in China's service outsourcing companies have work experience of less than five years. The number of professionals with work experience of more than 10 years in Chinese service outsourcing companies is just about 1 percent.

Information security is often cited as a major drawback for service outsourcing to China. The inefficiency of the information security laws and the weak enforcement of intellectual property rights in China are the two main factors that often hamper the transfer of the critical data and service businesses.

To some extent, it is also the reason why domestic clients like the government and State-owned enterprises often shy away from indicating their exact outsourcing requirements.

Language and cultural differences have also been constraints for the industry development. In recent years, the ability of Chinese students to understand English has improved considerably. But most of this education is oriented to train engineers to read and write English papers. As a result many of them still have difficulty in communicating in English, something that is essential in the outsourcing service industry.

In addition, the West's historical and cultural influence in India has made India closer to offshore buyers than China.

Insufficient market research and industry development principles are other gray areas for Chinese companies. The National Association of Software and Service Companies, India's largest and most important IT industry group, annually cooperates with top global consulting companies, and issues research reports on global service outsourcing market trends, service technologies, new services, model innovation, changing demands from buyers, and service bottlenecks. They also publish dozens of guidance reports every year. Compared with India, China's research work still leaves a lot to be desired.

Compare with the Indian outsourcing service industry, with revenue of $88.1 billion (72.7 billion euros) in 2010, China's service outsourcing industry is still young.

In the next 20 years, China's economic structure will have a qualitative change in exports, investment and consumption.

The scale of trade will continue to grow, but its percentage in total economy will decline. With the completion of the large-scale infrastructure nationwide, infrastructure investment will be reduced. The contribution rate of exports and investment to GDP growth will drop from today's 70 percent to less than 50 percent. Household consumption in GDP will increase from less than 30 percent to more than 50 percent.

Twenty years later, the ratio of China's manufacturing and service industries will reverse from today's 6:4 to 4:6. The total scale of China's service sector is estimated to reach $14 trillion, a net increase of $12.5 trillion compared with that of 2010, equivalent to the size of today's US service market.

Pension, health insurance, healthcare, education, housing, employment and other issues will create potential for the vast emerging markets of China's service economy, which in turn will provide a huge new market for China's service outsourcing industry.

Based on these judgments, I believe that China's service outsourcing will maintain rapid growth in the offshore market, but the focus will shift to the domestic market.

India had encountered bottlenecks constraining the outsourcing service industry, and it was not until 2000 that a sound industrial environment was formed. Despite the many problems, China's speed to improve the industrial environment is much faster than India. I believe service outsourcing will become the main force of China's service industry in the future.

The author is chairman of the Beijing Association of Sourcing Service and a senior consultant of China Council for International Investment Promotion.

(China Daily 07/27/2012 page7)