Opinion split on whether to offshore IT to China

analysis

Opinion split on whether to offshore IT to China

Karl Flinders

Relatively low costs and high levels of software skills give China immense potential when it comes to providing large businesses with IT services, but opinion is split on whether it is an option.

Computer Weekly outsourcing blog Inside Outsourcing recently polled readers on whether or not they would consider offshoring IT jobs to China. The result was very balanced – of the of 104 people who responded, 46.15% said they would not offshore to China, 41.3% said they would, and 12.5% said they had never considered it.

Chinese service providers such as Bleum and VanceInfo are currently targeting the UK market for growth. China has 350,000 computer science graduates every year, and they cost less than their equivalents in India. 

Now that India is well established as a destination for IT services for multinationals, the move to China will not be as big a step.

China plans outsourcing growth

China’s government plans to increase its outsourcing sector by 30% annually to the end of 2015. The goal for China is to match India, which has become an IT services superpower in the past 15 years.

Businesses offshored work to India in the late 1990s in preparation for Y2K. The low-cost labour was considered vital as businesses took on high numbers of software engineers.

But China does not need a Y2K moment to prove that it can provide software services, because India has already done the proof of concept.

Indian IT services heavyweight Vineet Nayar, who is the outgoing CEO of India's fourth largest outsourcing company HCL Technologies, has previously said the fact that Chinese workers cost less removes a traditional advantage of India.

In 2010 he said: "The reason business moved to India in the first place was because of economics. It's a fool's paradise to think that it will not grow in China [for the same reasons] – people work 18 hours at half the cost."

China's growing skilled workforce

China has more than 350,000 computer science graduates every year and the government has chosen software development as an industry to develop.

Bleum, which is based in China but managed from the US, has the pick of graduates. It gets thousands of applicants a month and only takes on the very best.

Candidates are put through a rigorous recruitment process. They must have an IQ of 140, speak a good level of English and undergo a behavioural test. There is also a skills test, and people are chosen depending on the demand for particular skills at the time.

In 2008, IDC forecast that offshoring to China would grow 23% every year until 2013, when it would be worth $6.8bn.

Barriers to acceptance

But there are challenges. Although Bleum has set a policy that means all staff speak English, the language is not common in China. 

There are major security fears for Western firms, such as organisations in the US. And intellectual property laws are not sufficient for many businesses.

China could be next IT services hotspot

Mark Lewis, head of outsourcing at law firm Berwin Leighton Paisner, said China may not compare to India now, but this will not hold it back. “China can see what India’s IT services industry is going through at the moment and can learn from the mistakes. It can then accelerate to the next phase,” he said. 

Lewis believes that in a year's time China will have “overturned India as the number one offshore IT services destination”.

He said India’s IT services industry is currently in a difficult place because companies don’t have their own products and intellectual property (IP), as they simply work on the products of other suppliers. They rely on linear growth and need to sell more and more services to make more money.

“China has a chance to accelerate through to owning IP. It already manufacturers more hardware than India, and can grow some more,” said Lewis.

A changing services landscape

Douglas Hayward, outsourcing analyst at IDC, said he is not seeing much from China in terms of providing IT services to Western companies, and many of the firms providing IT services from China are doing it through intermediaries. 

“We have not yet got a company like India’s TCS to champion China," he added, "but at some point the IT services companies that supply within China will turn their attentions externally, which will be very interesting.”


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