Though it still lags far behind IT giant India, China's outsourcing market has potential for serious growth

----By Vibhash Ranjan

Business process outsourcing, or BPO, has been a buzzword in China for quite some time, but so far little has come from China's outsourcers. While China does figure as an emerging destination for off-shore outsourcing in various reports and news items, it is nowhere close to its neighbouring outsourcing behemoth, India - India's BPO industry is worth US$5.5 billion, compared to China's at US$500 million, an eleventh of the value.

The upbeat mood surrounding outsourcing in China that was prevalent two years ago turns out to have been mostly hype and wishful thinking. To date, there have mainly been paltry lacklustre outsourcing deals. No single Chinese provider has emerged as a genuine force to reckon with, and multinational and Indian players that entered the Chinese market with much enthusiasm are also floundering.

However, the market indicates that outsourcing activity is booming and opportunities do exist for China. The key question for the Chinese providers is whether they will be able to overcome the barriers and seize the opportunities presented to them.

Time to step it up

The need of the hour is innovation. Given the current status of outsourcing in China, there are a few possible outcomes: (1) Chinese providers adopt innovative approaches to compete with much established players and eventually gain substantial market share to emerge as serious contenders; (2) Indian providers continue to dominate the outsourcing market circumventing growth of Chinese outsourcing industry - Chinese market would continue to be fragmented and would take another few years to grow; or (3) Chinese providers miss the opportunity altogether and some new country - Vietnam, for example - emerges as a new "hot" destination for BPO. The outcome will depend on approaches adopted by the Chinese providers.

While Chinese outsourcing has gained viability, the idea of Chinese vendors as viable partners has not gained much customer "buy-in". So what is holding these firms back? There are a few possible explanations.

The first is that Chinese firms have not successfully adopted standard global management practices and outlook. Overall, they are still very locally focused.

Secondly, a prevailing short-term mentality has held these companies back from implementing growth strategies.

Finally, Chinese companies have so far been unwilling to foray into India, instead preferring to play a secondary role through various alliances and partnerships.

At numerous events around the world, far beyond just those related to India, showcasing potential outsourcing opportunities in China. There are plenty of delegations visiting China for exploring them, but ultimately nothing substantial comes out of them. Chinese providers are still considered "amateurs" next to their Indian counterparts. Chinese firms have to understand that global management practices does not mean participation in outsourcing related events but rather embedding global thinking across the organization. The organizational management structure and culture should foster global outlook. A strong relation with analysts and advisory firms is essential not only for raising awareness but for attracting venture capital investments.

A short-term focus on revenue generation is driven by two factors - lack of capital and lack of focus on innovation. Scarce capital means most firms are forced to look for quick successes. These providers believe that they can build on these successes, an attitude that prevents them from adopting a longer-term strategy.

In order to acquire customers in the short term, these providers are simply emulating models developed hitherto by Indian outsourcing providers. The service offering, value proposition and benefits offered are not differentiated.

Some providers harp about cost savings by outsourcing to China, which relatively few customers believe. On the contrary, outsourcing to China appears to be more expensive than outsourcing to India. As long as the Chinese providers bank on cost savings as their value proposition they will not be able to catch customers' attention. The bottom line is that Chinese providers will have to offer a compelling reason for attracting customers rather than pointing at inadequacies in India. If providers believe that customers would start looking at China because there are inadequacies in India then they are deluding themselves.

Chinese providers have explored Far Eastern markets such as Japan and Korea. However none of the Chinese providers have ventured into the Indian market for setting up operations. Chinese providers are reluctant as the Indian providers are well entrenched in India and have acquired extensive experience. But these are only a few firms such as TCS, Infosys, Wipro, Satyam, HCL, Cognizant etc. There are also other second-tier companies such as Mphasis and Zensar. However, tier-three providers are still small and very much like Chinese providers.

Go southwest, young man

By foraying into the Indian market, Chinese providers would be able achieve three objectives - demonstrating that their outlook is global, gaining access to highly skilled Indian workforce and competing with Indian providers on a more even footing. Currently, Chinese providers are fraught with the two daunting tasks of convincing customers about the potential value of outsourcing to China and selling their services. Setting up operations in India avoids the part about selling China and would allow providers to focus on their services proposition.

Most Chinese outsourcers currently play second fiddle to Indian and other global providers. As such, they are looking for alliances or partnerships with more established players.

This outlook is preventing them from being aggressive and innovative. Look, for example, at a small Chinese firm like TomorrowNow, which came up with such a compelling value proposition that it was eventually acquired by SAP. TomorrowNow provider focused on innovation rather than alliances and partnerships.

Hoping to gain market expansion through alliances or partnership can be a big gamble. There have been very few success stories based on strategic alliances. However, strategic alliances driven by Chinese providers or smaller acquisitions would allow Chinese providers to grow aggressively. Also, consolidation in the domestic market should be considered earnestly to build scale and capabilities. The recent merger of HiSoft, Ensemble and Teksen is a good start.

Media is an essential tool for promotion, if used effectively. There have been many reports and ranking on China outsourcing. Most of these rankings are based on interviews at international events rather than in-depth study of business landscape in China. As such, these reports and articles paint a different picture and send an ambiguous message to the global outsourcing community. It is essential for Chinese providers to develop, and maintain, healthy relations with media and analysts globally. This will allow them to give a holistic picture while promoting overall industry.

What's next

Unless the Chinese providers translate the opportunities presented to them into viable business they risk losing momentum. The global outsourcing community is getting interested in China. This is an opportunity to create the China brand at macro level while enabling release of innovations at micro level. By combining these two initiatives China may eventually make it big.

The Chinese providers have a daunting task ahead of them. There are a few key areas they should focus on.

First, they must develop delivery models to combine on-shore and off-shore elements. Currently they are solely focused on off-shore delivery. Also the off-shore element should include India and other emerging markets like Vietnam.

Second, customer proximity is critical and requires time to develop. Providers have to be in constant touch with their potential customers and understand their requirements. Conferences and events are not the right, nor the only, platform on which to build close customer proximity. A proactive approach should be adopted to nurture long term relationship.

Finally, operational excellence would enable providers to release efficiencies while offering optimal solutions. By focusing on internal processes and developing middle management such operational excellence could be attained.

In the immediate future the most important is to focus on innovation. The innovation has to encompass the whole spectrum including business, services, promotion, partnerships and marketing. As with other new upcoming providers, Chinese providers have a fair understanding of outsourcing business and how projects can be implemented from off-shore locations. What is missing is what could be offered that is different. This is where they have to evaluate internally and develop a long-term vision.

Vibhash Ranjan is Partner at Strata-Nova Consulting in Shanghai. Strata-Nova Consulting is an innovative strategy consulting firm with a strong focus on outsourcing engagements in emerging countries. He has closely followed and analysed the key trends in this industry. He can be contacted at vibhash.ranjan@strata-nova.com