Archive for August, 2005

A bad rap for outsourcing?

August 25th, 2005

I’d have thought that by now outsourcing would be about as controversial as sending your suit to the dry cleaners, but this hasn’t prevented a rash of articles with headlines like “the folly” or “the perils” of outsourcing.

Take Steven Downes, business editor of the Times: “Outsourcing has become something of a dirty word…especially among…anyone who has tried to use the services of an outsourced call centre. Choruses of “I told you so” were also heard…when news agency Reuters moved one of its departments to India, and someone there pressed the wrong button at the wrong time.”

Comments like this make me suspect that there’s a lot of racism fuelling this debate. British people clearly react against certain accents on the phone–I doubt they even consider that the nice Scottish and Irish people at their favorite bank may themselves be outsourced. And, frankly, what do you expect when you entrust someone with dark skin with a complex technical operation like button-pushing?

Take this unpleasant undertone away and you’re left with the fear of the new. If you’re mugged in the street, well, it’s a tough world. If your online bank account is “phished”, it’s the Internet’s fault. We should never have changed the existing order of things; we have brought destruction on our own heads by meddling.

According to the Guardian’s Polly Toynbee, for example, the Gourmet Gate story should become “a business-school exemplar on how the subcontracting culture can bring down a company.” BA is doomed apparently, because it has “trash[ed] its good name…by contracting out a service that is vital to its marketing success” (In-flight catering? Really? I’d rather bring sandwiches…).

The blame, of course is with the consultants who advise clients to toy with the madness that is subcontracting. The normally quite sensible Simon Caulkin recently wrote in the Observer that “with management everything conventionally regarded as good is actually toxic.” Who was telling us otherwise: “a whole ecology of improvers – consultants, IT vendors, outsourcers and peddlers of tools of all descriptions.”

With no apparent sense of irony, Caulkin referred to recent study by “improvers” Deloitte Consulting, which suggested that outsourcing often disappointed. Since this survey has become embedded in the mythology that Outsourcing Doesn’t Work, it’s worth revisiting its headline conclusions: 70 per cent of respondents have had “significant negative experiences” (rather than utter disaster) with some of their outsourcing deals, and a mere one in four were bringing services back in-house. Not the end of outsourcing then, which must have come as some relief to Deloitte, named top outsourcer by Information Week last year.

All this is rather odd because The Gourmet Gate affair—I suppose we should call it GateGate—isn’t really about outsourcing. It is an object lesson in not bankrupting your suppliers, whoever they are. BA used its power as the sole purchaser of Gourmet Gate’s services to drive costs down beyond Gourmet Gate’s ability to respond—principally because of the TUPE undertakings covering the staff it took on from BA. It’s hard to see how keeping catering in-house could have squared that circle.

If commentators want to know what’s really going on with outsourcing, they should look at the lifecycle of any fashion, business or otherwise.

“Early adopters”, whether of outsourcing or the mini skirt, get significant benefits either in profits or popularity. As others follow suit, the competitive advantage erodes and people who frankly shouldn’t have been seen dead in that style start appearing on the street. And then the world moves on.

Similarly with outsourcing—a lot of the low-hanging fruit has gone, and companies have to work harder to gain significant advantage. Worse, because a lot of those early success stories were “no-brainers”, outsourcing gained appeal for those managers who are more comfortable when not using their brains. A badly thought-through decision is a badly thought-through decision, whether it’s outsourcing your call centre or buying a safari suit.

As outsourcing becomes more widespread and mature, and the competitive landscape changes, we should expect some bad or disappointing experiences. We should also expect services to occasionally come back in-house, and the best outsourcing contracts now explicitly recognize this fact. We should expect more sophisticated models—shared services is making a major comeback, as companies try to get the best of both worlds. And we should hope that the armchair pundits would move on to something else.

posted by Preet Chandhoke at 11:03 AM | 0 comments

Indian outsourcing too expensive

August 24th, 2005

NUMBER CRUNCHERS at Gartner are predicting doom and gloom for the Indian outsourcing biz.

The Big G says that India’s wage bill for developers is sky rocketing and its share of the outsourcing market could fall by as much as 45 percent by 2007.

Gartner says that the ancient land is having to face stiff competition from cheaper, or closer countries such as the Philippines, Malaysia, Vietnam and Eastern Europe and they will not cut the mustard.

The main reason is that India’s wage bill is getting too high, with call centre staff now demanding between $159-$204 a month when before they only wanted $114-$136.

At the same time the country’s infrastructure is not keeping pace with the rapid growth of the industry.

posted by Preet Chandhoke at 3:18 PM | 0 comments

Outsourcing does work but must be done correctly, say experts

The trouble caused to British Airways by the Gate Gourmet dispute has shown that one of the few things that no company can outsource is the risk of a serious breakdown in its supply chain. The lesson is not that outsourcing does not work, management experts say, but that it needs to be done correctly.

Outsourcing is one of the most powerful trends in modern business life. Accurate figures for the total value of services outsourced in the UK are hard to come by, but £2.5bn was spent on consultants advising on and managing outsourcing projects alone, according to the Management Consultancies Association.

posted by Preet Chandhoke at 2:37 PM | 0 comments

Is India’s outsourcing honeymoon over?

Surprise! India’s reign as the world’s “Outsourcing King” may be slipping, even with its rock-bottom call center costs.

A new report from market research firm Gartner, Inc. warns that a labor crunch and rising wages could erode as much as 45 percent of India’s market share by 2007.

Indian industry watchers acknowledge that the country’s outsourcing industry — its golden goose of the moment — is indeed facing a “serious” problem.

In an interview with CNN/Money from New Delhi, Kiran Karnick, president of the National Association of Software and Service companies (NASSCOM), said he’s concerned that these challenges could stymie India’s strong double-digit growth in outsourcing services.

NASSCOM is the trade body representing India’s information technology (IT) software and services industry.

More importantly, the Gartner report cautions that a host of emerging countries such as the Philippines, Malaysia, Vietnam and Eastern European nations including Hungary and Poland, are also starting to challenge India’s leadership in offshore business process outsourcing (BPO.)

Many U.S. and international companies maintain that outsourcing business processes such as customer service call centers, administrative and accounting processes to low-cost and low-wage countries like India helps to keep down their own cost of doing business.

Analysts say India’s “go to” status as a premier outsourcing destination is a function of the country’s vast pool of about 2.5 million mostly English-speaking graduates that are ready to enter the workforce annually.

But India can’t afford to rest on its laurels, said Sujay Chohan, one of the authors of the Gartner report and vice president and research director of offshore business process outsourcing with Gartner in New Delhi.

Unless India devises a long-term roadmap to improve infrastructure and consistently grow its skilled labor force, he said India will see some of its offshore BPO clients shift business elsewhere.

“Although India’s infrastructure is improving, it is not keeping pace with the rapid growth of the industry,” the report said.

The Gartner report pointed out that while no single nation yet poses a direct threat to India as a high-quality/low-cost location, over the past two years, more than 50 other countries have emerged that together could pose a viable challenge to India in the months ahead.

Gartner estimates that India’s current 85 percent ownership of the BPO market share could dwindle to about 45 percent by 2007.

In dollar terms, that would be a significant blow to India, Chohan said. In 2004 India raked in more than $2 billion of an estimated $3 billion global offshore BPO market with more than 250,000 workers.

He estimates that the worldwide offshore BPO market will grow to about $24 billion by 2007 of which India will earn about $13.8 billion.
Rising labor costs

Given that India’s been doubling its outsourcing operations every year for the past four years, Chohan said he’s not too surprised by the current imbalance in the labor demand-supply equation as well as the onset of wage inflation and high levels of attrition.

“Four years ago, a typical call center employee would have earned between 5,000 to 6,000 rupees ($114- $136) a month. Now it may be up to between 7,000 to 9,000 rupees ($159 – $204) a month,” he said. “The rise in labor costs isn’t significant yet. What’s more important is that these increases so far have not been passed on to clients in the U.S.”

But if these costs continue to escalate, he predicts that Indian outsourcing firms will take a hit to their bottom line and eventually start to pass along the increases to their international clients.

Chohan said India could learn from Ireland’s mistakes more than a decade earlier.

“This is exactly what happened in Ireland in the 1990s,” said Chohan. “As a result, companies that were outsourcing to Ireland began to look elsewhere and discovered India for the lower-level work,” adding that Ireland today still attracts what’s considered to be “high-value” outsourcing such as R&D and software development.

Chohan isn’t worried about India losing it lead in IT outsourcing. “India dominates now and will continue to do so in the future because of the sheer scale of skills in the country at low costs. The only exception is China which has become very visible in this space within the last six months.”
Moving beyond call centers

Ashank Desai, chairman of Mumbai-based Mastek, said one way for Indian companies to maintain their competitive advantage and ensure their international clientele is to upgrade their services by offering more sophisticated back office functions in addition to the basic call center services.

Mastek is a provider of offshore IT and BPO outsourcing services. The company logged annual sales of $130 million in 2004.

“At Mastek we’re already looking into merging BPO and IT services so that our clients get double the advantage,’ Desai said.

He gave an example, “We can reconfigure IT used for processing insurance claims to make it more efficient and then process these claims more efficiently for our customers.”

In order to emerge as truly global players and undercut the competition, Chohan said Indian outsourcing companies should also think about expanding their brand globally by setting up delivery centers outside of India.

Indian vendors depend too much on the U.S. market. India has to make inroads into non-English speaking markets as well, “similar to what Ireland has done to successfully service the European market,” he said.

posted by Preet Chandhoke at 11:57 AM | 0 comments

Outsourcing does prov’l gov’t good

Outsourcing of heavy equipment for the repair and maintenance of provincial roads allows the provincial government to save resources. What used to be a six-month work of the then provincial engineering task force can now be accomplished in less than two weeks.

Governor Gwendolyn Garcia yesterday announced that they are already about to complete the Phase I of the Capitol asphalting project. She said that aside from the short period in the completion of the project, the performance level is also far beyond what the task force before had executed.

She also mentioned that the province was able to save money using this scheme because it has done away with paying the overtime of the personnel and the maintenance of the equipment. She finds outsourcing of equipment advantageous to the province because the equipment is rented on a per-hour basis.

The governor said that in less than two weeks the asphalting of the 6.7-kilometer Kayaan-Dakit and the 12.3-kilometer Libertad-Udlot roads in Bogo will be completed. A 6.10-kilometer Lunas-Sta Lucia road in Asturias has already been completed including the Lamacan-Mangyan-Candaguit road in Sibonga and Ylaya-Kantangkas road in Dumanjug.

The rented equipment is now in Lamac, Pinamungajan, and Daanlungsod in Tuburan.

posted by Preet Chandhoke at 9:19 AM | 0 comments

Pressure on to protect privacy in outsourcing

August 23rd, 2005

Privacy-law experts expect provincial and federal governments to be pressured for more laws to protect confidential information that is now ending up in the hands of foreign-based private businesses because of government outsourcing.

No laws exist in Canada to restrict the flow of information in the private sector, says Theodore Ling. But, while Canadians fear the U.S. government may be able to gain access to this material under anti-terrorism laws, they also realize that Canadian businesses are net beneficiaries of the trend toward outsourcing,

At the federal level, the controversy over government information outsourcing came to a head last year, when New Democrat MPs revealed the government had awarded a contract for the 2006 census to a Canadian subsidiary of Lockheed Martin.

At the provincial level, in 2004, the British Columbia government was pressured by its public-sector unions to stop its plan to outsource the management services of its health insurance and pharma-care systems. Rather than back down on the proposal, the government passed stringent rules regarding the protection of the data.

Outsourcing of data management is a huge business. The government of the United Kingdom outsources $140 billion worth of services, an amount nearly equivalent to Canada’s entire federal spending. Canadian and U.S. governments are catching up, and, because of Canada’s English-speaking workforce and relatively low labour costs, it is a preferred location for U.S. firms.

(U.S. politicians, however, have tried to block foreign outsourcing of data management. The U.S. Senate passed a bill to prevent the practice, but it was not enacted.)

And, while Canadian unions claim outsourcing of government services will cost as many as 75,000 jobs, proponents of outsourcing say Canada could see a net gain of 165,000 jobs.

Theodore C. Ling of Baker and McKenzie LLP in Toronto said firms are watching to see whether the policy of the British Columbia government becomes the norm across the country.

“The situation in B.C. has been of high interest to any company that might be engaged in outsourcing because it’s the first time we’ve seen a government change a law to restrict that type of outsourcing activity,” Ling said.

“It has evolved from a specific situation where Canadian public sector workers were going to lose jobs. But (the B.C. policy) affects only the public sector. No laws exist to restrict the flow of information in the private sector,” he said.

The B.C. statute is similar to laws in many European countries. It prevents disclosure of information based on foreign court orders. Critics of foreign outsourcing say the law does not go far enough, since there are now about 350 laws in the U.S. that allow police and prosecutors to demand information without a court review.

The penalties under the B.C. law are a $2,000 fine for individuals and $500,000 fines for corporations. However, U.S. courts have ruled that criminal sanctions in a foreign country do not prevent U.S. courts from compelling production of information.

Ling said businesses are concerned that the federal government is going to use its regulatory powers over sectors of the economy such as banking and transportation to toughen privacy rules in Canada, and for Canadian information held abroad.

“Service providers are mobilized to say to government ‘Hey, don’t be too quick to expand these laws. That will affect our ability to get this kind of work or outsource this kind of work. This would be very bad for the Canadian economy,’” Ling said.

“The question before us is: Will the federal or provincial governments want to restrain the flow of information?

“There are people who will care about their privacy rights because the concern is so much greater in the public sector. It was information about the public. In the private sector, companies handle information about their business partners and their employees.

“So you may see the federal government try to change laws or put in place guidelines about how the federal government outsources government activities. You may see industrial guidelines. I don’t think we will see new laws in Canada that restrict that flow of information from Canada,” he said.

But Lydia Wakulowsky, chairwoman of the health law group at McMillan Binch Mendelsohn LLP, said there’s such a gap between privacy laws in Canada and the U.S. that many privacy advocates are worried about the flow of information over the border.

“The U.S. federal government enacted the U.S.A. Patriot Act as an anti-terrorism measure shortly after Sept. 11, 2001. The U.S.A Patriot Act makes it easier for the FBI to gain access to records containing personal information in the U.S.,” she said.

In fact, the law allows U.S. authorities to compel the disclosure of information held in the U.S. by foreign and U.S. companies. The Patriot Act and related statutes give U.S. police and grand juries wide subpoena power, and allow investigators to slap gag orders on companies that have been ordered to hand over data.

“This is relevant to Canadians when Canadian companies outsource information management functions to U.S. firms. B.C. has responded by amending its Freedom of Information and Protection of Privacy Act. The amendments prevent public-sector institutions from storing personal information outside of Canada; prohibit public bodies and their service providers and suppliers from disclosing personal information outside of Canada and make it mandatory for them to report any foreign demand for such information that is not authorized by the B.C. Act.,” she said.

Both Ling and Wakulowsky expect the Ontario government to be confronted with the issue.

“Ontario has not yet introduced similar provisions, but Ontario companies have started to re-evaluate their own information-handling processes,” said Wakulowsky. “They are asking prospective vendors whether any information would be processed in the U.S. and they are taking steps to ensure information is processed only in Canada.”

The issue will be discussed at the federal level next year. Ottawa’s federal Personal Information Protection and Electronic Documents Act is due to be reviewed in 2006. Wakulowsky said the review gives the federal government has an opportunity to address the issues arising from the U.S. Patriot Act.

The federal Personal Information and Electronic Documents Act (PIPEDA) took effect in 2001. All businesses must now comply with the law.

posted by Preet Chandhoke at 2:23 PM | 0 comments

Crouched for the kill

Early this month, Infosys Technologies board member Srinath Batni flew to China to kick off one of the company’s most significant new initiatives this year.

His mission: to sign letters of intent with Shanghai Zhangjiang Co. Ltd and the administrative commission of the Hangzhou Hi-Tech Development Industry Zone to set up two development centres.

The sprawling new facilities — expected to cost $65 million over the next five years — will ramp up the number of software engineers employed by Infy’s Chinese subsidiary from the current 250 to 6,000.

“China will be the second largest software hub for us, after India. Our aim is to recreate the same global delivery model in China that we have perfected in India,” says Batni.

Bangalore-based Infosys is not the only Indian infotech tiger crouched for the kill. Having stalked the elusive — and often frustrating — Chinese outsourcing dragon for the past four years, an entire pride of Indian software services and solutions providers is now hoping to gnaw a large chunk off China’s mouthwatering market.

From a mere $2 billion in offshore revenues this year (compared to India’s $17 billion), China is expected to pull in $27 billion from IT services (including call centres and back-office work) by 2007, according to Gartner, which predicts Indian companies will carve out 40 per cent of that figure.

Dual Strategy

China is being seen not just as an offshoring hub. Its domestic market is growing, too. Chinese companies will spend over $25 billion on information technology this year, and the market is growing at a rapid 30 per cent annually.

According to research house IDC, $9.4 billion will be spent on technology services alone in 2006, up from $3.74 billion in 2002. Little wonder Indian companies are hoping to use their Chinese operations to gain a domestic foothold.

Take Mumbai-based Tata Consultancy Services (TCS). The ink has barely dried on the agreement signed last month between TCS, Redmond (Wa.)-based Microsoft and a clutch of state-owned Chinese partners to set up a joint venture services company by early next year.

To be located in Beijing’s Zhongguancun Software Park, the new facility – in which TCS has a majority stake – will employ 1,000 engineers. That’s four times the existing strength at the infotech major’s three-year-old Global Delivery Centre at Hangzhou and Shanghai.

Girija Pande “Our aim is to create a role model for the Chinese IT industry and it will serve both the global as well as the Chinese market,” says Girija Pande, head of Asia-Pacific at TCS, which was awarded the prestigious project in the face of stiff competition by the Chinese government on the advice of IT consulting firm Gartner.

Hyderabad-based Satyam Computer Services has plans that are just as ambitious. Satyam has around 300 engineers, mostly Chinese, at its facilities in Shanghai and Dalian. With plans to set up a third development centre – probably at a university town in western China – the company hopes to multiply its workforce to 3,000 by 2007 and 5,000 by 2010.

Sailesh Shah Says Sailesh Shah, senior vice-president and director at Satyam : “The Chinese market is three to four times bigger than India. You have to be an early bird. Also, it is part of our company’s policy to globalise in non-English-speaking markets”.

Software education major NIIT, which has had a presence in China for almost a decade now, is using a different model to scale up: it is tying up with local universities and setting up education centres on their campuses.

Rajendra Pawar The Delhi-based company has already set up 25 such centres across China. Says NIIT chairman Rajendra Pawar: “Today, 50% of our business is from centres in universities and another 50% from centres which we run directly.”

Elusive Quarry

Others are more cautious. Bangalore-based Wipro Technologies, for instance, is sticking to the needs of its global customers who have a presence in China. It has only a small development centre consisting of 25 engineers, which could go up to 150.

Sudip Banerjee Says Sudip Banerjee, president of Wipro’s enterprise solutions division: “China is a big market. We have a skeletal presence and will see how it develops before we make more investments.”

Such caution is not unwarranted. Indian software companies have battled against language, culture and local regulations ever since they established a token presence in mainland China four years ago largely to service multinational clients or specific offshore requirements. Together, they employ less than 1,000 people and the contribution of Chinese subsidiaries to overall revenues is still minuscule.

That is now set to change very dramatically. One of the biggest advantages that Indian companies have is, of course, scale. China’s IT services market is highly fragmented, with half the 6,000 domestic firms employing less than 50 people. Indian subsidiaries and joint ventures, such as the one signed by TCS, hope to showcase the cost advantages of large-scale operations by creating additional hubs outside India.

“We partner with Chinese companies and bring in global solution expertise to modernise their business so that they become global players,” says Pande.

There’s another lure. Universities in the people’s republic now churn out 350,000 software engineers every year, significantly higher than the 250,000 from Indian campuses. That’s a large pool of talent which no IT services company hoping for a global presence can ignore.

According to Batni, it is now Infosys strategy to become a global company by setting up hubs in countries where the relevant skill sets are available.

Leveraging that burgeoning skill base, companies like Infosys are hoping to use their Chinese operations to service Japanese and Korean clients who have a cultural affinity with that country.

“Japanese companies are offshoring low level work in China. We provide high level IT services work by convincing them that we will offer them the same quality as in India,” says Batni.

Costly Campaign

But that quality doesn’t come cheap. Pande says that while entry-level Chinese programmers ($145 a month, inclusive of social security) are paid around the same as in India ($135 a month), project managers and senior staff are at least 10-12 per cent more expensive.

Wipro’s experience is similar: while programmers with three years experience can be hired at salaries which are 10 per cent lower than their Indian counterparts, supervisory staff is at least 25 per cent costlier. “You don’t go to China because it’s cheaper. That is a myth,” says Batni.

Cost is not the only problem. While entry-level programmers may be increasingly more abundant in China, engineers with project management skills, domain knowledge expertise, and professionals with more than five years experience are not easily available.

Associates with bilingual skills — Chinese and English — also command a premium. Attrition rates are much higher than in India as well. Says Banerjee: “Most Chinese IT professionals work for two or three years and then decide to set up shop by taking away clients.”

Finding out about local entrepreneurial instincts the hard way is not the only lesson that Indian companies have had to learn. For instance, software services used to come bundled with hardware in China. So, most IT services were delivered by hardware vendors or resellers.

Pande says that Chinese companies are not used to paying for IT services separately. It is a difference which they had to understand before approaching domestic clients.

The communist giant also has a complicated legal structure, problems of repatriation, wide variations in policy and law in the provinces, and opaque infrastructure pricing (two units in the same software park might be charged two completely different rents for the same space).

Infy, for instance, had to wait over two years to enter China — its initial plan to set up a branch office was rejected. Finally, it decided to set up a fully-owned venture. With its newfound experience, Infosys now believes it is best to go it alone in China, even though it has been offered a joint venture with the government.

“We think a collaboration will not work as they are contradictory interests: one partner will want to reduce costs while we would like to maximise profits,” says Batni.

China’s record on protecting intellectual property rights (IPRs) can also be a major stumbling block for companies looking to set up offshore hubs there.

Says Wipro’s Banerjee: “Many of our customers who have offshored work to us in India would be hesitant to take it to China because of IPR protection. It is an impediment as the laws are still not well developed.”

Not everyone agrees. Batni argues that the Chinese government is making an extra effort to ensure that IPRs are protected.

As a result of these drawbacks and higher expenses – some of which, though, are offset by lower infrastructural costs such as telecommunications – several major Indian software companies are adopting a wait-and-watch attitude regarding China for the moment. One of them is Mumbai-based Patni Computer Systems.

“Virtually none of the Indian companies have been able to scale up in China. That’s because IT professionals are not available there and it makes no sense to move them from India,” says Patni vice-president Deepak Khosla.

He may have a point. But companies like Infosys, Satyam, TCS and NIIT are obviously banking on the prospect of rapid growth — both in offshore work and in China’s domestic needs— and are making large investments in developing that country as a new hub. Clearly, these tigers don’t expect their long-awaited quarry to be hidden much longer.

Europe’s outsourcing growth will benefit India

August 22nd, 2005

According to the European Information Technology Observatory (EITO), outsourcing continues to be the fastest growing segment within the IT services in Europe. German companies outsourced services worth around euro 10 billion worldwide in 2003, a figure that is set to rise to euro 17 bn by 2008.

EITO vice-chairman Jorg Schomburg says this is good for countries like India which have a leadership position in outsourcing. However, he warns that although India continues to enjoy a significant competitive advantage over countries like China, Malaysia and the Czech Republic among others, these countries are beginning to take initiatives to close the gap.

Mr Schomburg was speaking at a curtain raiser on CeBIT 2006, the world’s largest trade fair for information and communications technology, to be held in Hannover, Germany from March 9-15, 2006. Nasscom figures show that the ITES-BPO industry in India grew at a CAGR of 56.4% during the 2000-05 period.

posted by Preet Chandhoke at 4:58 PM | 0 comments

Outsourcing boosts economy: British official

Sydney: A top British industry official Sunday said developed countries should not worry over job losses to low-wage countries like India and China as off-shoring forces an economy upmarket to where the big rewards are.

Sir Digby Jones, director general of the Chamber of British Industry, said Britain had injected more than $27 billion into its economy since 2000 by sending unskilled jobs offshore to places like India and China.

Jones told Australian TV network Channel Nine that the British workforce had retrained and was now better skilled. This transformation had resulted in a more flexible labour market and lower unemployment.

“You’ve got somebody doing the work that is a commodity, send it away … have the courage, don’t protect the market, let it go,” Jones said.

“Skill the person into value-added work, they earn more money so they stimulate the economy, they spend in the high street or they pay down their credit card debt.”

He added that profitable companies paid more tax and that money could be spent on hospitals and schools.

China Seeks a Piece of the IT Pie Through Outsourcing

August 21st, 2005

China Seeks a Piece of the IT Pie Through Outsourcing

China has many of the same attributes that have lured U.S. businesses to India: low wages and a large pool of talented, eager workers. A report released last month by global consultant McKinsey & Co. concluded that China was the second-best place for U.S. companies to send their IT work, after India.

China’s IT industry is here, growing and eager for American business.

That was the message from Chinese government officials and information technology businessmen last Thursday at the 2005 China IT Service Summit, a two-day event organized by the International Executive Association.

Taking a cue from their country’s ascent as manufacturer to the world, Chinese officials said their IT industry could provide opportunities for American businessmen and investors.
Cut Costs, Boost Profits

Chinese companies can provide healthy returns for investors and quality services for businessmen looking to cut IT costs by sending work abroad, Chinese officials said.

“U.S. outsourcing Latest News about Outsourcing to China will become big business,” said Wuqiang Li, science and technology counselor for the Chinese Consulate in New York City. “The coming years will be the best period for U.S. investment.”

About 100 people attended the two-day conference in lower Manhattan, many of them U.S. businessmen and investors looking to evaluate the risks and opportunities of entering the Chinese market.

Included were representatives of Deloitte & Touche, Merrill Lynch (NYSE: MER) Latest News about Merrill Lynch, Lehman Bros. and Morgan Stanley, as well as smaller investment companies.
‘The Place to Be’

“Clearly there are opportunities,” said Bernard Hutman, a portfolio manager for Platinum Partners, a New York-based hedge fund, who attended the conference to better understand the Chinese investment environment.

“For our generation, this is the place to be,” he said.

China lags well behind India in the global market for IT work done overseas. Analysts say India holds about 90 percent of the world’s outsourcing business, worth around US$20 billion. Chinese officials said their IT outsourcing industry earned $600 million in 2004, according to Walter Fang, an executive with Chinese outsourcer Neusoft Group.

Still, China has many of the same attributes that have lured U.S. businesses to India: low wages and a large pool of talented, eager workers. A report released last month by global consultant McKinsey & Co. concluded that China was the second-best place for U.S. companies to send their IT work, after India.
Establishing a Presence

The list of U.S. companies that already do IT work in China includes IBM (NYSE: IBM) Latest News about IBM and Motorola (NYSE: MOT) Latest News about Motorola, Chinese officials said. Teaneck, N.J.-based outsourcer Cognizant Technology Solutions, which has 70 percent of its employees in India, last year opened an office in Shanghai.

Jamie Popkin, an analyst for Gartner Latest News about Gartner Research, said China clearly has grand designs for its computer industry: it wants to make its mark in a variety of areas, including computer software Get your FREE Oracle Database Software Kit today!, hardware, semiconductors Latest News about semiconductors and programming services.

“It’s a very ambitious goal,” he said, noting only the United States could claim strength in all of those areas.

“That is a statement that should create competitive concerns among others in the industry.”

Indeed, Chinese officials offered a wealth of statistics to support their contention that the industry in China is on the rise. It is growing 30 percent a year, they said, with about 700,000 IT workers and another prospective 200,000 in college.
Industry on the Move

The industry has 10,000 software companies and adds 1,000 to 2,000 each year, Chinese officials said. Popkin, however, noted that most of those companies have fewer than five employees.

Among the larger ones seeking to drum up business from U.S. companies at the conference was UFIDA Software Engineering, a Beijing-based firm.

“Definitely, we have a large talented pool of software experts in China,” said Long Fang, an executive for UFIDA. With 5,000 employees, UFIDA has a client list that includes HP and Microsoft (Nasdaq: MSFT) Latest News about Microsoft, he said.

China offers companies a cheap alternative to India, he said. UFIDA can cut American IT costs by two-thirds and even undercut Indian companies by 20 percent to 30 percent, he said.

That’s in part because a typical Chinese IT worker earns $700 to $800 a month, less than one-fifth what a U.S. worker would earn.

In addition, China allows American companies to diversify their services, he said.

“They don’t want to put all their eggs in one basket,” he said.

posted by preet chandhoke at 10:34 am | 0 comments

Outsourcing remodels the supply chain

August 20th, 2005

The global electronics supply chain is undergoing a fundamental transformation due to OEMs’ continued outsourcing to electronics manufacturing services (EMS) providers and original design manufacturers (ODMs), according to Jeffrey Wu at analyst firm iSuppli.

Wu, formerly with Taiwanese manufacturers BenQ, said: “Taiwanese manufacturers now…play a pivotal role and often stimulate changes in the electronics-manufacturing industry. Many OEMs now are taking back control of the purchasing of certain components from the EMS/ODM providers.”

“This trend is likely to continue, because OEMs increasingly believe this is the best way to resolve procurement problems arising between them and their contract manufacturers,” he said.

The EMS/ODM purchasing policy has been blamed both for driving down semiconductor prices because of their sheer purchasing power – around a third of all semiconductors purchased – and for obscuring the amount of inventory in the supply chain.

This has resulted in sudden, unexpected adjustments in the supply/demand balance, with severe consequences for manufacturers.

The lack of transparency on global supply chain inventory levels has recurrently plagued the semiconductor industry since 2001, and has been widely attributed to the unknown inventory levels of contract manufacturers.

“The rules of the EMS/ODM industry are being rewritten,” said Wu. “Contract manufacturers are devising ways to climb up the value chain to combat drastically-eroding margins, breaking down the conventional boundaries between EMS providers and ODMs. Contract manufacturers are expanding their global footprints to serve the OEMs in fast-growing emerging markets, a practice that increases operational complexity.”

posted by Preet Chandhoke at 11:33 AM | 0 comments

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