Is China ready for frontline offshore services?

China's rapid growth as an economic power has brought new businesses and created an outsourcing industry to support them.

China's rapid growth as an economic power has brought new businesses and created an outsourcing industry to support them. This industry also has the capacity to support firms outside China by offering IT services.

China is one of a group of emerging economies which also includes Brazil, Russia and India. These countries, known as the BRIC countries, have been touted as potential new regions to offshore services.

India dominates the group. China has the capacity to become India's nearest rival, but it has major cultural and legal hurdles to overcome, which will take time.

The Chinese government is supporting the development of its offshore Business Process Outsourcing (BPO) industry through legislative changes and incentives.

These include a tax policy that favours offshore services, training funds and interest-free loans.

Matthew Cule, managing director at offshore service provider M&Y which works out of China, says the Chinese offshore service providers often support other service providers with low-cost business processing. But he says it is now ready to take a more prominent front line role. The company has 2,100 staff in China.

Chinese providers have grown up in a short space of time and are now in a position to deal with Western companies direct. This, he says, is a result of the growth in China's economy

"Three and a half years ago we did not know there was a market in China but now it represents 70% of what we do." M&Y already has 15 customers in the UK and 58 customers of offshore services in total. In about half of these M&Y deals directly with the customer. It has about the same number of customers in China but "these are much bigger companies," says Cule.

"I think Western companies are ready for China. For years they have been talking about it but they have stuck with India. We have now reached a stage where there is capacity in the market to look at other areas."

If Chinese company's want to follow the example set by their Indian peers they will have to ensure they are ready before they commit to providing extensive services, according to Andy Gallagher, consultant at Compass managing Consultants. "One piece of bad press will set them back years," he says.

He says if the Satyam fraud scandal, where the Indian IT service provider's former chairman admitted to cooking the books, had happened a few years ago, India would have struggled to get where it is today.

To become a frontline service provider, Chinese companies must develop their brand and be more than just an offshore service for a more established offshore service provider.

Gallagher says China has the potential to be the next India but it will take a long time.

"There is no doubt China has the capacity, however it does not have the brand. If you look at what happened in India it took the service providers a long time to reach the point where the brand was valuable and they were more than just low-cost services."

"China will also have a harder task getting into the UK and US because of the fact that, unlike in India, English is not the business language in China."

Cule at M&Y says the company has operations in all the countries it is targeting customers, which will overcome language barriers. It is currently expanding its international sales force.

Gallagher at Compass Consulting says this approach can help overcome cultural obstacle. "They have to establish a credible national presence in these countries, which are run by locals."

Peter Brudenall, outsourcing Lawyer at Hunton & Williams, said China does not have the language skills and major project management skills that India has. But he says there are also major legal issues to overcome before China will be seen as a trusted destination for offshore IT services. "Over the last three to four years interest in China as a destination for services has increased but from a legal point of view there are still questions to be answered about how secure intellectual property and data is."

He says China could become the next India but it will take a long time.

Robert Morgan, director at Hamilton Bailey, says China is a long way off being able to provide frontline services. "China is not anywhere near ready because of the physical environment and the cultural differences."

He says that there are isolated pockets where companies provide specific outsourcing services, which have often been set up by the customers. But he says China will struggle to match India because there are no Chinese entrepreneurs investing in this industry, only the government.

He adds that the communications infrastructure and language barrier pose major problems for China's development as an offshore services destination.

Brudenall at Hunton & Williams, says China needs an industry body to support outsourced service providers in the mould of Nasscom in India if it is to overcome this problem.

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