Outsourcing Market Research

China and the World 2008

Table of contents

Part I. Overview
Foreword About the research Executive summary
Helping China achieve high performance 

4
5 7 9
10

Part II. Chinas domestic market 14

Scope and key definitions in outsourcing market
Scope of outsourcing

Case Study #2 WuXi PharmaTechA pioneer and leader in the contract research outsourcing (CRO) sector 32 Case Study #3 China Data Group (CDG)Innovation in professional services 36

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Key players in the market

Overview Service providers
Service providers in the China outsourcing market The Chinese service provider landscape Analysis of service provider landscape by product offering Analysis of service provider landscape by industry

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17 18
18 20 25 34

Clients
Clients in China outsourcing markets

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38

Analyzing the scope and scale of Chinas outsourcing activities 10 Key research findings Chinas potential as an outsourcing leader Critical next steps for China 10 11 13

Case Study #4 China Development BankA domestic client that makes good use of outsourcing services 40

Fact sheet on outsourcing in China 12

Chinas outsourcing providers client base 42 Chinas outsourcing market: Notable phenomena
Multinational corporations shared service centers

Case Study #1 Neusoft GroupInformation technology outsourcing (ITO) specialist is breaking through with creative models 26

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45

Case Study #5 VanceInfoForerunner in the offshore development center sector 48

The use of subcontracting in outsourcing

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Designated industry parks and cities

53

Snapshot of outsourcing activity in key cities 53 In-depth analysis and suggestions for improvement 54
Case Study #6 Accenture Delivery Centers in China: helping clients achieve high performance in three designated outsourcing cities 56 Case Study #7 A tale of Beijings two industry parksA comparison of Zhongguancun Software Park and Wangjing Technology Park 58

Part III. China and global outsourcing

Analysis of the global outsourcing market for ITO

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66

Part IV. Recommendations References

81 83

Analysis of the global outsourcing market for business process outsourcing (BPO)  70
Services trend watch: bundled outsourcing 72

Services trend watch: knowledge process outsourcing (KPO) 73

Overview of global outsourcing hot spots 74 Chinas outsourcing opportunities and challenges in a multi-polar world 77
Outsourcing trend watch: India companies in China 79

City evaluation model

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The war for talent

Current situation and analysis Introduction of current talent policies Introduction of current pilot training pattern

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61 62 63

Part I. Overview

Foreword
By Charles Hunting, Managing Director Outsourcing, Greater China, Accenture

Working in and around China for many years, I have become very familiar with the country and its economic dynamism. Yet, like many businesspeople, I have tended to associate the nations economic growth with its manufacturing might. However, it is quickly becoming apparent that a powerful service sector is forming beneath Chinas industrial surface. The rapid emergence of this sector has been guided by well-orchestrated government plans and fueled by the free markets, and it is evident in the successes of fast-growing contenders. Those outsourcing leaders, and many others like them in China, are emblems of a new multi-polar worlda reminder that the collective economic dominance of the United States, Europe and Japan is quickly giving way to a broader dispersion of global economic power. Of course, China is not alone in defining the new global economic power structure. Some other players already enjoy a cast-iron reputation for excellence in outsourcing. For the most part, Chinas outsourcing providers have some distance to go before they can match the expectations, offerings and operations of their target clients. However, China brings three powerful advantages that will help its outsourcing leaders close the gap over the next decade. First, the government is wholly committed to developing a world-class service sector, with outsourcing services at its core. Second, China boasts an education system that reaches deep into Chinese society at every level, enabling a future talent pool

of unprecedented impact. And third, despite rising labor costs, Chinas outsourcing firms still have, and will continue to have for some time, a low-cost advantage. The representative Chinese outsourcing firms described in this report are making astonishing progress, rapidly acquiring technical competency along with management and marketing skills. In the information technology outsourcing (ITO) sector, some companies are poised to grow not only on the strength of infrastructure expansion programs within China but also by leveraging cultural similarities to offer compelling services to Korea and Japan. In contract research outsourcing (CRO), several firms are already playing a global game. And in business process outsourcing (BPO), China has enormous potential to be a power player, particularly in the Asia Pacific region. My team and I are excited to see how Chinas outsourcing story unfolds. More than that, we are committed to using our outsourcing experience to help our Chinese and our global clients to become high-performance businesses.

Charles Hunting, Managing DirectorOutsourcing, Greater China, Acccenture

Foreword
By Madam Zhou Ming, Executive Vice President and Secretary-General, China Council of International Investment Promotion (CCIIP)

After 30 years of opening up to the world, China has made unprecedented strides in its industrialization. And now, with the definite allocation of capital and resources to the service sector, China is developing its outsourcing industry. Building on fastdeveloping IT technology and on the rise of business process outsourcing in particular, the new industry sector will make major contributions to Chinas long-term economic growth. In recent years, Chinas outsourcing industry has received strong support and significant attention from the government and from key stateowned enterprises. The Ministry of Commerce, in cooperation with other ministries, has launched the 1000100-10 Project in order to attract the attention of international corporations and international service providers to Chinas nascent outsourcing sector. The initiatives goals are to foster 1,000 internationally accredited outsourcing providers nationwide, to encourage 100 multinational corporations to transfer their outsourcing needs to China and to support 10 outsourcing metro centers that are competitive with the worlds best outsourcing hubs. CCIIP and Accenture recently conducted a national research project to assess the status and the potential of Chinas outsourcing sector. This resulting report, titled Outsourcing Market ResearchChina and the World, will meet the growing demand for such information among international corporations with experience in outsourcing elsewhere. It will help readers to appraise the scope and scale of Chinas emergent
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outsourcing industry, understand its market characteristics and evaluate the capabilities of Chinas fastgrowing service providers. At the same time, this report, with its objective analyses and empirical data, will provide useful insights to Chinas service providers, national research institutions and economic policy-makers. It also will help business leaders and government officials to examine current global outsourcing trends: Combining data from leading research firms with findings from Accentures and CCIIPs own survey, the report provides in-depth analysis of the international offshore outsourcing market as well as clear definitions of the categories and concepts of outsourcing. And Chinas unique market characteristics appear in the reports descriptions of the nations new outsourcing parks and in rich case studies on several of Chinas top outsourcing success stories. Many experts, entrepreneurs and government officials have contributed to Outsourcing Market Research China and the World. The project team and I would like to take this opportunity to express our thanks to everyone who helped bring the report to life. First, our gratitude goes to Vice Minister Ma Xiuhong and other Ministry of Commerce officials. They have already provided significant support and invaluable advice. We are very grateful for the active cooperation and commitment of the outsourcing enterprises that participated in our research. Our special thanks go to the experts of CCIIPs China Sourcing Working Committee who regularly reviewed

the text and argued the viewpoints, enhancing the academic value of the report at every step. And I would like to extend our appreciation to our partner Accenture for its investment and for the strength of its research. Through the half-year of our close teamwork, CCIIP and Accenture have developed a truly cooperative spirit. For the first time, we now have a report that gives a complete picture of the development of Chinas outsourcing industry and its market characteristics. It is my sincere wish that the impact of this study will grow with each years new report, and that it will become a sought-after reference for global organizations as well as for Chinas outsourcing providers. On behalf of CCIIP, I would like to extend my congratulations to all who helped make this report a reality.

Madam Zhou Ming, Executive Vice President and Secretary-General, CCIIP

About the research

In 2006, the China Ministry of Commerce launched its 1000-100-10 Project to promote the development of a robust outsourcing service sector in the country. The Ministry of Commerce expects the emerging sector to play a large part in the development of Chinas own commercial infrastructure and to help the nation take its place in the ranks of the worlds leading outsourcing centers. In tandem with the 1000-100 10 Project, the China Council of International Investment Promotion (CCIIP) formed a partnership with leading global management consulting, technology services and outsourcing company Accenture to sponsor a wide-ranging research program. This research program was designed to provide a deeper understanding of the scope and scale of Chinas embryonic outsourcing industry and to spotlight the opportunities and competition the industry faces. The program was launched with three key audiences in mind: potential customers that may outsource

more to China; service providers, both Chinese-owned and foreign; and China government officials. The research program had these key objectives: To provide a strategic review of Chinas outsourcing market, with data on market size and growth opportunities over the next five years To assess and compare the roles of both China-owned and multinational outsourcing providers in Chinas domestic market To assess and compare the roles of China-owned outsourcing providers in global markets To showcase some of Chinas leading outsourcing providers using in-depth case studies The research was designed and led by an Accenture team of industry researchers and outsourcing experts. It involved two multiple-choice surveys. The first survey, asking 43 questions of outsourcing clients, queried

senior managers at local Chinese companies, multinational corporations (MNC's) China operations and the global headquarters offices of MNCs. MNCs were defined as companies in which foreign investment comprises more than 50 percent of the companies capital structure. A separate 37-question survey was sent to senior managers at locally owned and multinational outsourcing service providers across China. Altogether, participating companies received 140 questionnaires, and 37 (26.4 percent) responded. Two hundred questionnaires went out to service providers, and 53 (26.5 percent) responded. The questionnaires were sent by direct mail or e-mail and were followed up by phone calls. All survey responses were confirmed in follow-up phone calls. To supplement the survey findings, Accenture researchers also conducted 15 in-depth interviews with executives across Chinas outsourcing industry.

Executive summary

Over the last two decades, Chinas performance as an industrial power has been remarkable. The country has had phenomenal success developing an export economy that takes advantage of its supply of cheap and abundant labor. Made in China labels appear on retail shelves from Argentina to Australia and from Brazil to the United Kingdom, on everything from pencils and shoes to televisions and mobile phones. Its industrial companies have made striking inroads in markets as demanding as machine tools and highquality steel. In mineral and fossil fuel extraction, Chinese companies have become global heavyweights. And with strong capital resources behind them, companies such as Nanjing Automobile, Huawei and computer maker Lenovo have been assertively acquiring foreign corporations and operating units.1

Yet there is a notable weakness in the countrys economic system: China lacks a mature services sector. It is an imbalance that must be addressed before the nation can develop longterm economic stability. Chinas success in the global services arena will not be so clearly linked to low cost and large scale as it has been in the nations manufacturing sector. Nor will the country have the head start it enjoyed over its rivals when entering the manufacturing sector. From Eastern Europe across the Middle East to Southeast Asia, many developing countries have young service sectors of their own. Spurring on these nations is rising international demand in the global services marketplace. Analysts estimate that spending on global offshore outsourcing in 2011 will be triple 2005 levels. Growth rates in the Asia Pacific region already are impressive: The compound annual growth rate of outsourcing spending between 2005 and 2011 is about 30 percent in this

region compared with 21 percent in the United States.2 Contributing to other developing nations viability as outsourcing centers are their competitively priced niche skills and their cultural alignment with clients in neighboring countries. Developed countries have also taken note. Widely circulated studies show that every new global service position results in the creation of 12 additional jobs in supporting industries.3 Consequently, governments in developed nations have added emphasis and resources to policies and programs that support domestic service providers and their efforts to be more competitive on the global stage.

Helping China achieve high performance

Chinas government leaders are well aware of the nations economic imbalance. That is why the Ministry of Commerce, in cooperation with other government agencies, launched the 1000-100-10 Project in 2006. The project seeks to establish 1,000 internationally accredited outsourcing providers nationwide, attract 100 MNCs and persuade them to transfer their outsourcing needs to China, and support 10 outsourcing centers in metro areas that rival the worlds best outsourcing hubs. The initiative, a focused effort to balance Chinas economic development with more skills-based service industries, is intended to help the nation to generate $10 billion per year in outsourcing industry revenue by 2010. The 1000-100-10 Project involves provincial, municipal, and civic level governments as well. Some cities with strong outsourcing economies have begun to tailor promotion policies to their locations and outsourcing landscape. Such policies encourage competitive taxation supplements and investment via loans that favor certain industries, among other elements. At the same time, local and regional authorities are offering targeted measures such as increased protection of intellectual property and infrastructure construction. The governments initiative is adding to the growing momentum. Indeed, China is rapidly becoming a key player in some corners of the outsourcing sector and appears to be on track to meet its 2010 target. The countrys ITO industry is steadily expanding and is poised to take advantage of the need for significant improvements in IT infrastructure and systems across the country. Chinese BPO companies have begun to prove their value to some of the worlds foremost financial services firms, signing large-scale contracts with global clients such as banking leader HSBC and insurer Allianz among many others. And for most of the last decade, Chinas contract
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research organizations have been essential to the success of the worlds largest pharmaceutical companies. WuXi PharmaTech, for example, has core relationships with companies such as Eli Lilly and Merck.

Analyzing the scope and scale of Chinas outsourcing activities

To help shed new light on these dynamic economic activities, Accenture recently partnered with CCIP on a large-scale research study that analyzed the scope and scale of Chinas outsourcing activities. Blending detailed multiple-choice surveys with executive interviews across China, the study gathered input from locally owned and multinational outsourcing service providers as well as from outsourcing clients, including local Chinese companies, the Chinese operations of MNCs and the headquarter offices of MNCs. (See About the Research.) Our unique partnership has culminated in this initial analysis. We envision three groups of readers for this report: current and prospective clients of outsourcing services in China; Chinas outsourcing service providers; and government officials who are tasked with developing industrial policy and promoting Chinas outsourcing sector. The report is presented in two segments. The first part focuses on the domestic outsourcing market, featuring in-depth analysis of both service providers and clients in China. We highlight some industry trends of note, such as subcontracting within outsourcing, services centers shared among MNCs and R&D centers in China. We shed light on the industry parks that are emerging as hubs of outsourcing expertise, and we also examine the ideal talent mix needed to sustain a viable outsourcing economy in China.

The report also features detailed case studies on a selection of Chinas most prestigious outsourcing providersthe first time, we believe, that such insights have become available to business leaders worldwide. A later part of the report looks critically at Chinas outsourcing strengths compared with the services available from other global outsourcing hotspots. This section examines outsourcing activity in India in particular, reviewing several of that countrys top outsourcing service providers.

Key research findings

Our research shows that China must address several significant barriers before it can be considered an outsourcing leader. Yet encouraging signs are appearing already. Among the clients that now use China-based providers, outsourcing is helping them to become high-performance businesses by enabling them to cut costs, downsize their operations and improve their business processes. Many survey respondents reported high degrees of satisfaction with their service providers. At the same time, Chinese providers are rapidly learning which factors are most critical to the success of outsourcing engagements. Through our research, it became apparent that Chinas BPO and ITO sectors face the following significant challenges: The outsourcing sectors in China are still in the early in the stages of development. Respondents are concerned about issues of trustworthiness and confidentiality, the expertise of Chinas service providers and the value they think they may gain from outsourcing.

 Only a third of survey respondents are currently outsourcing services in China or are planning to do so. Among those who are now outsourcing, the key drivers of high performance are cost, service quality, intellectual property rights protection, workforce skills and industry expertise along with a high degree of comfort and familiarity with the use of outsourcing as an effective business practice. Half of the Chinese respondents to the survey admit to having limited or no understanding of outsourcingmeaning that there is a big opportunity for education. The clear implication is that Chinas goal of developing a successful outsourcing industry is heavily dependent on how quickly Chinese companies grasp the importance of outsourcing and its potential to enable high performance. China is still predominantly providing BPO services to others outside the country; Chinese organizations are not yet using such services. Most local outsourcing consumption tends to be of ITO and processing services. However, locally owned Chinese companies are reluctant to fully embrace the ITO services offered in their own country. The talent crunch affecting many sectors of Chinas economy is even more prominent in the emerging outsourcing sector.

Chinas potential as an outsourcing leader

In contrast to Chinas challenges, our research uncovered myriad advantages in Chinas mission to become a center of outsourcing activity. Respondents widely agreed that price currently ranks as the nations premier advantage, even though nearly a third of those surveyed expect this differential to be eroded over the next few years as Chinas cost structure grows more burdensome. Chinas status as a global manufacturing center also offers unique advantages when providing offshore R&D services. And the nation benefits from its longtime investment in education for all. Our research also shows that Chinas outsourcing providers have a potent competitive advantage thanks to Chinas proximity (both geographical and cultural) to Japan and Korea. Indeed, many Chinese service providers are targeting Japan and Korea for future growth. (See Fact sheet on outsourcing in China.) In addition, respondents expressed great confidence that the countrys outsourcing providers will quickly improve in key areas such as talent acquisition and development, service quality, reputation and branding and intellectual property rights protection.

Benefiting from almost 30 years of economic reform, China has built a solid foundation for the opportunities ahead. The nations transportation, telecommunications and network infrastructures have grown rapidly and improved consistently, some achieving the quality seen in developed countries. High-speed Internet access is standard in all of Chinas largest metropolitan areas, backed by an uninterrupted dual power supply. Approximately 150 airports now connect most of the primary and secondary cities. Also, in developed regions such as the Pearl River Delta, the Yangtze River Delta and the BoHai Bay area, industrial clusters form a firm foundation for the transfer of service and outsourcing skills.

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Fact sheet on outsourcing in China

Client composition by country
On average, about 44 percent of revenues for Chinese outsourcing providers come from US and European clients. Just more than a third of revenues come from Japan and Korea, with 20 percent from Chinese customers.

Client composition by industry

The most represented industries are electronics and high technology as well as financial services. In the United States and Europe, the media and entertainment businesses are major customers for Chinese outsourcing services. In Japan and Korea, the chemicals industry is a big buyer. In China, government agencies and the communications industry are the major customers.

Best-selling ITO services

ITO in China currently is outselling BPO, with a universal preference among consumers of all nationalities and industries for the following types of services: customized software development first, with software research and development (R&D), software testing and software localization also in demand.

Best-selling BPO services

Customer relationship management services are the most common BPO projects purchased by American, European and Chinese companies.
Source: Accenture/CCIIP study: Outsourcing Market Research-China and the World

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Critical next steps for China

Our research confirms that China views its burgeoning outsourcing industry as a crucial component of the nations future economic growth and has committed the government at all levels to providing strong political and economic support for outsourcing development. Yet government officials and business leaders alike are realistic about what it will take to achieve success. They are constantly aware that India is Chinas most formidable competitor in providing global outsourcing resources. They know that, to be a serious contender in this market, Chinese providers must continue to improve the fluidity of their business English and the strength of their management skills. These leaders know that new service providers must fully grasp the contract, legal and sourcing frameworks of Western MNCs. And

although due diligence and security measures can limit many sources of risk exposure for its customers, China must continue to strengthen its legal system, improve IPR protection and encourage companies to obtain international standards certification to lure reluctant global consumers and establish China as a serious global outsourcing player. In summary, to achieve its goals in the outsourcing sector, China must acquire, develop and nurture all the characteristics of a mature service industry. Thanks to the Chinese governments 1000-100-10 Project, a workable framework is in place; that, together with the amalgamation of the countrys huge domestic markets, its growing ranks of welleducated workers and its efforts to improve management skills, bodes well for its future success. Still, if China does not set high goals for the development of its outsourcing sector, it may well fall victim to labor arbitrageand foreign clients

in particular will flock quickly to the next emerging market that offers even cheaper outsourcing services. Together, Accenture and CCIIP have uncovered insights that will benefit fast-growing outsourcing firms in China and potentially shape policy decisions for the next stages of development of the countrys outsourcing sector. And for the first time, potential clients of Chinas outsourcing providers will gain an up-close view and in-depth analysis of leading providers in key sectors such as contract research outsourcing (CRO), business process outsourcing (BPO) and information technology outsourcing (ITO). Our research is just the beginning. Chinas growing outsourcing market will benefit enormously from your questions and observations as it ventures into the uncharted territory ahead.

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Part II. Chinas domestic market

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Scope and key definitions in outsourcing market

Scope of outsourcing
Services outsourcing has become an important strategic tool to help organizations become highperformance businesses. Modern information technology has reduced the transaction costs of outsourcing, increased supervision and control over offsite work, and made the delivery of outsourcing services faster and more convenient. International boundaries have become far less important, and outsourcing on a large scale particularly to offshore providersis rapidly becoming commonplace. Accenture and CCIP fully expect that an increasing range and volume of services will be outsourced in the next 10 to 15 years. Although almost any business service can now be outsourced, the areas of greatest activity in China are ITO and BPO. These areas will form the focus of our report, with some discussion devoted to the trend toward knowledge process outsourcing

(KPO) as a high-end outsourcing offering and an ancillary service to BPO, as well as to contract research organizations, a type of outsourcing with more established roots in China. Just as the outsourcing marketplace changes dynamically, so does the scope of the term services outsourcing. ITO, for example, is defined differently by many different vendors and clients. In general terms, ITO refers to the outsourcing of IT processes in order to deliver IT-related products and services such as customdeveloped software applications and management or maintenance of IT assets such as data servers. Similarly, BPO is subject to many different interpretations. Gartner, the market research firm, defines BPO as the delegation of one or more IT-intensive business processes to an external provider that, in turn, owns, administrates and manages the selected processes based on defined and measurable performance metrics,

including enterprise services, supply management, demand management, and operations. According to Gartner, examples of business processes that are outsourced to an [external service provider] include staff functions such as human resources, finance and accounting, and contact centers or vertical specializations such as insurance claims processing or banking payments.4 On the other hand, many companies use the term BPO to refer to certain types of business processes provided and managed by specialist service providers. The business processes tend to be operations-oriented rather than strategic; they are typically highervolume and lower-margin processes in terms of profitability and rarely involve a businesss differentiating core activities. (See Figure 1.)

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Figure 1: Definition of outsourcing terms

Functional area ITO IT infrastructure

Definition5 Entire infrastructure management processes, from network access and desktop management through remote technical support. This category includes IT spend management, data center services, service center, security services, communications services, etc. Custom software development Software R&D Software localization/ globalization Software testing Applications outsourcing (AO) Embedded software development Software development service, usually as an application system and not a software product itself. Overall development of complete packaged software as a discrete product for sales by clients. Translation of software content into multiple foreign languages. Customized and integrated test practices, both manual and automated. Application maintenance and support. Development of software embedded in other products. Typically procure to pay, order to cash and record to report processes. HR activities and administration processes across the entire employment cycle. Administrative and transactional components of technical training and soft skills training, including the sourcing and development of training content. Source to pay processes including procurement spend management. Functions such as client relationship management, including call centers and call center management. Functions such as order management, warehousing, fulfillment and inventory management, transportation management, and returns management. Services such as maintenance support, support of building electrical and communications systems, and in some cases, building development services. Particular services such credit card services in the financial services industry and reservation and revenue management for the airline industry. These services are unique to the particular industryin other words, they cannot be applied to other fields. Usually geared to the pharmaceutical and biotech sectors, covering almost the entire process of new drug development. Usually focuses on testing for drug safety and effectiveness, which includes the outsourcing of pre-clinical tests and clinical trials, data management, new drug applications, and other technical services. Currently dominated by activities such as market research and financial research. Has significant potential in animation, data analysis, education, engineering, legal, pharmaceutical, and tax services along with opportunities to reinforce prized workforce attributes such creativity and discretion.

IT applications

BPO

Finance and accounting Human resource (HR) Training and education

Procurement Client relationship Supply chain/logistics

Facilities management

Industry-specific outsourcing

Services

R&D (CRO)

KPO

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Key players in the market

Overview
The global outsourcing market is experiencing exponential growth. As the maturity and popularity of IT outsourcing relationships have become well established, business process outsourcing has seen a corresponding gradual increase in cultural acceptance. Market research firm Gartner projects that total IT outsourcing revenue worldwide, including IT services, will reach $829 billion in 2012 compared to $592 billion in 2007; the ITO component of that will reach $378 billion in 2012, up from $261 billion in 2007.6 On the BPO front, Gartner reports that global spending reached $156 billion in 2007 and is expected to rise to $239 billion by 2012a compound annual growth rate (CAGR) of 9.0 percent. Although China has a small share of global BPO spending, this sector is growing very rapidly on the back of overall economic growth. Gartners projections see BPO

spending in China almost tripling from $273 million in 2007 to $721 million by 2012, for a five-year CAGR of 21.4 percent.7 For now, though, most of Chinas outsourcing business is near-shore, with only a fraction in offshore outsourcing. By 2012, forecasts Gartner, the United States will still be the worlds largest client for outsourced services; it will account for about one-third of worldwide demand for ITO services and more than half of overall BPO demand.8 A significant part of that spending will flow to China; market-watchers expect Chinas outsourcing revenue to show average annual growth of 25 percent. In general, the outsourcing market in China is still at an embryonic stage and has not yet developed a robust field of outsourcing providers. As this research shows, China remains predominantly an exporter of BPO services rather than a consumer of them; most of the nations

outsourcing consumption tends to involve IT outsourcing and processing services. Even when consuming ITO, however, Chinese corporate clients show only limited acceptance of broad suites of ITO services, preferring to pick and choose discrete services. Contract values remain small.

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Service providers
Service providers in the China outsourcing market For the purposes of this survey, we have grouped Chinas outsourcing service providers into the categories of MNCs and local Chinese companies. China operations of multinational corporations The China operations of MNCs can be divided into three categories as outlined in Figure 2. Local providers To better understand the dynamics of the emerging industry, this research report categorizes local outsourcing providers in three ways: in terms of sources of capital; by target markets; and in terms of service offerings. Figure 3 illustrates more detail at the category of ownership.

Figure 2: MNC provider characteristics by revenue Category High revenue Standard Revenue of more than $200 million annually from serving clients outside China, but starting to generate business in China. Mid-sized annual revenue of $50$100 million outside China and beginning to make inroads into Chinas markets. Revenue of less than $50 million and almost no business in China.

Medium revenue Low revenue

Figure 3: Local provider characteristics by ownership Category Foreign Standard Managed or launched by non-Chinese executives Comments Providers in this category more readily win contracts with non-Chinese clientsparticularly more profitable, high-end work. However, they tend to lack potential for large-scale growth compared to local service providers and therefore are less desirable targets for investors. Moreover, while these firms handle project design work in-house, they often hand off much of the detail work to local subcontractors. Although these companies have promising Managed and growth potential and therefore are attracting owned by native Chinese quite a bit of financing interest, only a limited executives number can successfully serve non-Chinese clients at this stage, which limits their profitability. However, their expand first and develop the market later approach is entirely feasible. As a whole, Taiwans outsourcing companies Managed or owned by have demonstrated striking success, with executives from strong growth and substantial profit streams. Taiwan Our research indicates that Taiwan-owned outsourcing providers in mainland China will likely grow at steady rates, though not as quickly as firms with mainland owners.

Local

Taiwanese

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This report divides Chinas outsourcing providers into four target markets. (See Figure 4.) For the purposes of this report, Chinas outsourcing vendors can be grouped into the following four categories in terms of service offerings. (See Figure 5.) At present, the services provided by Chinas outsourcing vendors remain geared largely to low-cost office services, with some staffing services. They have not yet reached the levels of sophistication and complexity seen in the United States, with its long history of advanced outsourcing activity and technology standards-setting. For now, Chinas ITO vendors are still focused on smaller goals, such as the development of general application software and system integration.

Figure 4: Local provider characteristics by target markets Category US/EU Standard Focus on the United States and European clients with more than two thirds of total revenue from those markets Comments These providers often have existing, strong relationships with Western clients. In some cases, they have been able to penetrate the outsourcing markets through acquisition of outsourcing operations with already established positions in these markets. Some providers have been launched by non-Chinese; others are funded with venture capital from outside China. Providers in this category often have very Focus on clients in Japan robust relationships with Japanese clients. and Korea, with Some have been launched or are owned by more than two Japanese executives or are subsidiaries or thirds of total joint venture partners of Japanese companies. revenue from those markets Focus on the These providers are generally China-owned and run. As a rule, they have good growth China market with more than prospects, and their general approach is to first gain market share in local markets before two thirds of reaching overseas. total revenue from that market No clear Providers in this category usually have been distinction in launched by native Chinese executives and any market have grown with a diversified management team. As a rule, they have operated in isolation from the ups and downs of global outsourcing markets.

Japan/Korea

Domestic

Undifferentiated

Figure 5: Local provider characteristics by service offerings Category ITO Standard Significant ITO activity Comments One interesting subtrend here is that since 2007, many local ITO providers have begun adding BPO service lines. Significant BPO China has very few power players in BPO activity services, largely because little demand has existed thus far in China for such services. A few Chinese providers have a good track Offering both record of providing both types of outsourcing ITO and BPO services. services SI/ITO/BPO The providers in this category are traditional offerings systems integration (SI) companies that have recently entered the ITO and BPO fields on the strength of their rich industry experience and technical backgrounds.

BPO

ITO/BPO

SI/ITO/BPO

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What China must do to succeed in Outsourcing This unique research (See About the Research) study found both encouraging data about Chinas emerging strengths in the outsourcing market and vital areas where China can and must improve if its ambitious plans for growth are to succeed. Below are the surveys key findings. The outsourcing sector in China remains in its early stages of development. The country is still predominantly a BPO exporter rather than a consumer of BPO services. Most local outsourcing consumption tends to be of IT outsourcing and processing services. In the ITO category there is a strong focus on application outsourcing; in BPO, the emphasis is on customer relationships. Only a third of survey respondents are currently outsourcing services in China or are planning to do so within the next three years. Among those who are now outsourcing, the key drivers of high performance are cost, service quality, intellectual property rights protection, workforce skills, and industry expertise along with a high degree of comfort and familiarity with the use of outsourcing as an effective business practice. Locally owned Chinese companies remain reluctant to fully embrace the ITO services offered in their own country. Clients as a whole express concern about issues of trustworthiness and confidentiality, the expertise of Chinas service providers, and the value they think they may gain from outsourcing. For instance, half of the service providers surveyed are using subcontracting as a means to access talent and skills. However, they acknowledge that while subcontracting improves efficiency and costs, it can hurt quality control and lead to delivery issues. Half of the Chinese clients responding to the survey admit to having limited or no understanding of outsourcingmeaning that there is a big opportunity for education. The

clear implication is that Chinas goal of developing a successful outsourcing industry is heavily dependent on how well and how quickly Chinese clients grasp the importance of outsourcing and its potential to deliver high performance to their enterprises. The talent crunch affecting many sectors of Chinas economy weighs even more heavily in the outsourcing sector. Among the service providers surveyed, their major concern is the lack of locally available skilled talent. Chinas competitive advantages are its cost differential and its proximity (both cultural and geographical) to Japan and Korea. Within the next five years, the service providers surveyed expect China to improve in terms of quality service, talent, reputation, and intellectual property rights protectionbut they expect its cost advantage to erode. Chinese service providers are targeting Japan and the United States for future growth. The Chinese service provider landscape Our research shed new light on many aspects of the operations of Chinas outsourcing providers. The highlights follow. More and more local service providers are obtaining international certifications and qualifications, narrowing the gap with foreign rivals and allowing them to compete seriously for significant offshore contracts. In recent years, Chinas service providers have made considerable progress in project and process management, and most outsourcing service providers have achieved the related certifications. These certifications have made an impact on the numbers: By 2006, of the approximately 80 Chinese software companies with more than 1,000 employees, 35 boasted annual sales greater than 1 billion RMB compared to only 12 in 2002.

By the end of 2006, 38 software companies had obtained Capability Maturity Model Level 5 CMM5 (including Capability Maturity Model Integration Level 5 CMMI5), the highest level certification. Twentythree had won CMM4 (including CMMI4) certification, and more than 200 had obtained CMM3 (including CMMI3) certification. In addition, 2,136 Chinese companies rank as qualified system integrators. The results of our survey showed that more than 60 percent of Chinese local providers had obtained CMMI3 and about 44 had won ISO27001a clear indication that more and more local providers have noticed the importance of international certifications and improved their delivery capabilities. (See Figure 6.) Leading global BPO and ITO vendors that establish joint ventures or plant branches in China also are hastening the maturing of Chinas BPO and ITO capacity. In 2006, two of the 20 organizations worldwide that published their Level 4 achievements were in China, as were 16 percent of those announcing CMMI Level 5 certification.9 Chinas outsourcing sector is consolidating rapidly. Numerous mergers and acquisitions (M&A) occurred in 2006 and 2007. This M&A surge is a predictable outcome of the rapid growth of Chinas outsourcing sector. In turn, that growth has been accelerated in the past two years because of injections of venture capitalfrom local financiers such as Legend Capital as well as large, non-Chinese sources of capital such as Citigroup. Many service providers, such as CDG and VanceInfo, have experienced more than two rounds of financing already.

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However, although it is true that M&A activity forms a reliable shortcut to the economies of scale necessary for the next phase of Chinas outsourcing business, it is by no means the shortest of shortcuts. M&A activities usually entail a one to two-year process. By contrast, organic growth offers the advantage of fostering highly cohesive teams. Business in the United States and European markets is developing much faster than markets in Japan. Our survey shows that the average growth rate of local service providers in 2007 was 52.23 percent relative to 2006. The highest growth rate appeared among the subset of providers focused on markets in the United States and European Union (EU)89.10 percent. Those sourcing chiefly to companies in the Japanese and Korean markets returned a growth rate of only 24.28 percent. (See Figure 7.) Chinese service providers are targeting Japan and the United States for future growth. Chinas outsourcing service providers state that within the next five years they will target mainly China, Japan, Korea, and the United States (See Figure 8.)

Figure 6: Certificates or qualifications of outsourcing service providers in China

CMMI3 ISO27001 ISO9001 CMMI5 ISO9000 ISO9001:2000 ISO2000 Other 6% 12% (N=34) 15% 15% 12% 29% 44% 62%

Figure 7: 2007 provider growth rate by market focus

Average Undifferentiated Domestic Japan + Korea US + EU 0.00 Growth Rate 20.00 40.00 60.00 80.00 24.28 89.10 100.00 32.40 52.23 61.29 N=37 N=9 N=5 N=10 N=10

US and Europe: Focus on US and European markets, with more than two thirds of total revenue from those markets. Japan and Korea: Focus on Japanese and Korean markets, with more than two thirds of total revenue from those markets. Domestic: Focus on Chinas domestic market, with more than two thirds of total revenue from that market. Undifferentiated: No clear distinction in any market; no single area accounts for more than two thirds of total revenue.

Figure 8: Survey respondents cite four regions as targets for future growth
China Japan and Korea US EU 32% 44% 44% 45%

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Figure 9: Market breakdown by outsourcing type, ITO ITO

Customized software development Software R&D Software testing Software localization Embedded software development IT infrastructures
29% 25% 23% 19% 13%

US / European clients N=48

46% 42% 38%

Japanese / Korean clients N=48

48% 31% 31% 29%

Chinese clients N=49

39% 24% 20% 22% 8% 12%

Figure 10: Market breakdown by outsourcing type, BPO BPO

Customer relationship Industrial specialized outsourcing HR R&D Supply Chain / Logistics Finance & Accounting Training & Learning Facilities management Procurement
6% 15% 15% 13% 10% 10% 10% 2% 8% 8% 6% 8% 4% 10%

US / European clients N=48

23% 21%

Japanese / Korean clients N=48

4% 13% 6% 10%

Chinese clients N=49

14% 10% 10% 6% 4% 4% 10%

Providers are starting to offer more types of outsourcing services. More and more of Chinas ITO service providers have been expanding into BPO services, and vice versa. Within the ITO category, there is a strong focus on application outsourcing. With BPO, the push is on customer relationships. As a result, in both cases, the services provided by Chinas vendors remain narrowly focused. Given the burgeoning demand for the services these providers currently offer, and the management attention they require, local providers will find it challenging to move up the value chain, expand their services, and compete with those firms offering more profitable services such as R&D and full-suite services. (See Figures 910.) Most local service providers started as traditional software companies or systems integrators. Then they entered the ITO market, and now some have begun offering BPO services. Our survey results reveal that the wave of homegrown ITO outsourcing activity in China
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precedes that of BPO activity. (See Figure 11.) Many of the current BPO service providers started out as traditional software companies or systems integrators and entered the outsourcing sector as opportunities opened up in the market. The new players, such as CDG and ICSS, which began as systems integrators, now have gained rich industry experience that they can leverage to offer services in specialized industries. However, a truly deep understanding of specialized business processes will separate the long-term survivors from their less capable rivals. Indian service providers are Chinas biggest competition. More than half of the local Chinese outsourcing provider respondents cited Indian service providers as their most formidable global competitors. Next on the list of rivals come the China-based MNC outsourcing providers. Recently, many top Indian outsourcing vendors have set up offices and established joint ventures in China, stoking local

providers competitive sense. However, many opportunities remain for Chinese providers to vie successfully against the Indian players. Despite their achievements in other markets, many Indian providers have faced cultural challenges in China, leaving an advantage for Chinese providers to exploit. In addition, both Chinese and Indian firms must keep a watchful eye on burgeoning competition from outsourcing providers originating from Mexico, Russia and Eastern Europe. (See "Overview of global outsourcing hot spots".) Both Chinese providers and MNC providers view quality of services as important. In Figure 12, the categories represent the factors that are critical, important and neutral to their business development efforts and their future success, as gauged by both MNC providers and Chinese providers. Neither group appears to have a competitive advantage in the area of quality of service. Survey respondents ranked MNCs as offering

Figure 11: Relative ages of ITO and BPO providers

Foundation year ITO BPO
34% 35% 30% 26% 26%

Figure 12: Critical, important and neutral factors for business development success as listed by survey respondents; preference in each category as reported by survey respondents
Competitive Advantage
32%

36%

Critical Factors
Quality of service Security and intellectual property protection Neutral MNC providers

Ability to quickly understand of the clients specific needs Neutral

20% 15% 15% 15%

Important
Price 14% Skilled workforce that can meet demand Have good communication channels with client Industry experience Reputation Chinese providers Neutral Neutral MNC providers MNC providers

Neutral
Good understanding of our business culture Neutral MNC providers Neutral MNC providers Neutral Foreign language ability of workforce Low talent attrition Scale of service provider Geographic proximity

90s

2000-2002

2003-2005

2006-2007

Time of the service providers commence the business of ITO and/or BPO (N=50) Foundation year: When the service providers were founded. ITO: When the service providers began their ITO businesses. BPO: When the service providers began their BPO businesses.

superior service to clients but stated that Chinas providers have the upper hand on price. Survey respondents ranked the two groups equally on critical factors such as the ability to quickly understand clients needs and having a skilled workforce. Chinas outsourcing providers worry most about talent. Chinas outsourcing providers cite three major barriers to their development: the lack of suitable talent with specialized technology backgrounds (e.g., knowledge of SAP), lack of a strong brand and lack of capital, in that order. (See Figure 13.) Their lack of strong brand recognition globally is also a matter of concern for many Chinese outsourcing providers. While the Chinese government has pushed to promote the image of the Chinese outsourcing industry in general, the effort has been undercut to some extent by the individual promotional campaigns of specific Chinese citiesa factor that respondents to our Accenture-CCIIP survey believe wastes public resources.

Figure 13: Barriers that currently constrain the development of local service providers

Lack of suitable talents Lack of strong brand Lack of capital Lack of suitable channel to approach clients Cannot offer service at a competitive price Lack of the understanding of Chinas outsourcing market Lack of appropriate definition of core competency Lack of clear strategic positioning Inability to prioritize to exploit its business Lack of a clear future business strategy Others 2% 6% 13% 13% 13% 10% 25% 23% 44% 40%

67%

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Figure 14: The number of employees companies considered to hire with the next year compared to the current number of employment (N=30)

424 Employees expect to recruit in the next year Current number of employees 269

Figure 15: Company considered or is considering shifting its low-end delivery center to Chinas inland and western areas or to Chinas Tier Two or Tier Three cities (N=47)

No 45%
4 11 32 46 Junior level management

Yes 55%

Senior management

Middle level management

Attracting and retaining talent remains a top issue. Outsourcing providers we surveyed feel hampered in their ability to scale their operations in outsourcing hubs, particularly Dalian, Beijing and Shanghai by the competition for talent. However, these Tier One cities10 remain the hubs for outsourcing activity because of their proximity to clients, superior industry infrastructure and stronger talent bases, among other reasons. In a related concern, providers told us they struggle with talent management, particularly when it comes to their employees acquisition of foreign language skillsand especially business English. Providers also grapple with the soaring costs of retaining top talent. The retention pressure may get some relief from recent efforts by Chinas Ministry of Commerce, such as allowances to companies for their staff training or recruitment expenditures. However, turnover rates are still not at the high levels faced by most Indian
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outsourcing providers in their local market. (See detail in sections titled Industry Parks and Talent.) More pressing are recruitment issues. In some cases, local outsourcing providers are planning huge increases in their numbers of junior managers to as much as 60 percent of their current junior management staffing levels in the next year. (See Figure 14.) In general, attracting and retaining management talent is becoming more critical as the local outsourcing providers grow rapidly and they have to compete for relatively limited qualified human resources compared to the expanding speed with other players, including service providers in the market and other organizations which also need staff with similar skills. Some companies already have recruited senior executives from large MNCs. A significant group of service providers surveyed are considering shifting delivery locations to inland and western

areas of China to reduce employment costs. The research survey indicates that 55 percent of respondents are considering making this shift in order to reduce the costs of retaining talent. (See Figure 15.) There are three major reasons for this trend. First, as some multinational clients relocate to Chinas Tier Two cities,11 they create demand for highquality, fast-response services nearby. Second, providers can use their local environments to improve margins quickly, since labor costs, facilities and taxes are generally lower in Chinas inland provinces. And third, the governments of Tier Two cities are more likely to offer incentives to attract investment from MNCs and local outsourcing vendors. However, the management teams of outsourcing providers must compare carefully the considerable costs of relocation against the benefits. Such costs may weigh heavily on smaller firms and may be feasible only for the larger service providers.

Figure 16: Respondents views on the future of Chinas price advantage (N=51)

Q24 - Based on your prediction of the development of Chinas outsourcing industry in the next 5 years, please choose one most likely future trend in each of the following categories (N=51) Unsure
Service quality Talent and skills China brand IPR protection Oversea demand Domestic demand Stable policy support Service cost Staff attrition 6% 18% 2%2% 4% 2%2% 4% 4% 4% 6% 8% 6% 28% 52% 28% 26%

Deteriorate
96% 96% 96% 92% 88% 88%

Remain the same

Improve

20%

52% 8% 34% 28%

52% service providers think there will be a decrease in price advantage.

Quality and reputation will climb, but Chinas pricing advantage probably will not endure. According to the survey data, outsourcing providers believe that, within the next five years, China in general and the outsourcing sector in particular will have made noteworthy strides in quality of service, quality of talent, reputation, and intellectual property rights protection. Yet more than half of respondents think the gains likely will come at the expense of Chinese providers pricing advantage. (See Figure 16.) Analysis of service provider landscape by product offering Information technology outsourcing From a technical standpoint, Chinas software companies are yet to match the sophisticated, high-value offerings of their global competitors because they lack the necessary skills and experience. Like those rivals, they too will have to experience the three key stages of maturity: localization and

globalization; testing and application development; and software R&D. They can expect their profit margins to improve with each step of maturity. For now though, thousands of types of software products need to be localized, and rich opportunity awaits Chinas outsourcing providers. Although the margin at this stage is not especially impressive, many global service providers, including leading Indian vendors, are targeting Chinas huge localization market. If outsourcing providers can match their business models to the appropriate cost structures and skills mixes, they could enjoy promising growth in the market for localization services for some time to come. At the same time, local outsourcing providers have a golden opportunity in the IT upgrades demanded by the many levels of government in China. Many agencies are investing in relatively straightforward upgrades to their existing management

information systems and concurrently evaluating and implementing new systems. These less ambitious projects typically span system development and systems integration as well as maintenance services. Although this basic-level ITO holds many attractions for Chinas outsourcing providers, it should not prevent them from striving to deliver higher-value services. True, as a rule these providers still have much skill and experience to gain, and attracting and retaining talent for these more complex services may prove doubly difficult. Yet Accenture believes that planning for growth into these highvalue markets is vital for the future of Chinas outsourcing industry.

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Case Study #1
Neusoft GroupITO specialist is breaking through with creative models
Neusoft offers a constructive example for rising China ITO service providers. Neusoft achieved its success by restructuring its departments and strengthening its abilities to hire and train talent to suit Chinas business environment. The company also has paid considerable attention to embedded software development, cultivating a competitive advantage in this field. As a result, Neusoft has strong delivery capability, and outsourcing resides at the core of its business, especially to the Japanese and Korean markets. Neusoft Group is Chinas top IT solutions and services provider, leading the countrys software offshore outsourcing market by a significant margin. According to one respected source, the China Center for Information Industry Development (CCID) report, Neusoft has maintained its top ranking in this emerging market for four years based on its talented staff, its sophisticated management system and its technological advantages.12
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Founded in 1991, Neusoft has 13,000 employees, including the 7,000 new hires who joined in 2006 and 2007 alone. Neusoft foresaw the challenge of obtaining enough talent six years ago and founded three Institutes of Information in Dalian, Nanhai and Chengdu to recruit and train students not only for Neusoft but also for the entire IT industry in China. In addition, Neusoft has long-term recruiting partnerships with more than 40 domestic universities. With this structure, Neusoft has acquired the capability to recruit 5,000 potential employees per yearand ensure a rich human resources reserve for the future. The company also has attached great importance to quality management and process improvement and was the first to pass quality certifications and process maturity evaluations that include CMM5 and CMMI (V1.2) 5. These well-established, advanced management approaches and methodologies have not only helped improve the maturity and quality of

the company's software outsourcing development, but they also have reduced operating costs and kept software development cycles on time and on track. This effective HR development strategy, coupled with its impressive talent pool, is enabling Neusoft to acquire and maintain a strong competitive advantage for its future outsourcing expansion. Another significant strength is Neusofts technological advantages. Based on its years of rich experience and abundant resources in outsourcing development, the company has offered a wide range of offshore outsourcing services in software and service for more than 50 wellknown MNCs around the world. Of particular value, it has maintained a dedicated team of nearly 5,000 employees for its embedded software outsourcing operation.

Company Timeline
2006 Neusoft IT Service Co., Ltd. was founded to promote BPO business. Neusoft joined with SAP and Intel in a strategic alliance 2005 A Biomedical and Information Engineering School was established at Northeastern University, China, with joint investment from Neusoft, Philips and Eindhoven University of Technology (TU/e) of the Netherlands. 2003 Neusoft completed its strategic restructuring program. Neusoft Park Industrial Development Co., Ltd. was founded. 2000 Neusoft Institute of Information began construction in Dalian. Neusoft HK Ltd. and Neusoft USA Inc. were established. 1998 Neusoft Medical Systems Co., Ltd. was founded. Construction of Neusoft Park (in Dalian) began. 1996 Neusoft cooperated with Toshiba to establish NETS Systems Integration Co., Ltd. Neusoft Group Ltd. was founded. Neu-Alpine Software Co., Ltd. became the first software company listed on the Chinese stock exchange. 1995 The foundation of Neusoft Park was laid, and construction of the park began. Neusoft Park was approved as Chinas first Software Industrial Base of the National Torch Program. 1991 OpenSoft System Development Company of Northeastern Engineering Institute was founded. Northeastern Engineering Institute Computer Software Research and Development Center cooperated with Alpine Japan to set up the Neu-Alpine Software Research Institute.

In addition, Neusoft has been constructing international outsourcing bases and global delivery centers in major cities including Shenyang, Dalian, Beijing, Shanghai, Chengdu and Nanjing. It also has established localized technical support centers in Japan, with locations in Tokyo, Osaka, Nagoya and Fuchu respectively; the United States; and Europe; aiming to create more opportunities for future global software and service outsourcing growth. The company bases its fast expansion on cohesive organic growth rather than frequent M&A. It has strong backing from multinational shareholders: It collaborates in digital medical care with Philips, in telecommunications with Nokia, in database technology with Oracle, and in management software with SAP. With Intel as a springboard, software outsourcing in the United States market now has become highly likely.

Although software outsourcing forms its core business, Neusoft also boasts significant units in IT solutions, medical systems and IT education and training. The company has successfully developed large-size medical equipment systems, network security products, auto electronics and mobile communication facilities software. Neusoft has leveraged its success in the ITO market to add BPO services to its offerings. Now the company is offering call center, HR and administrative, finance and accounting, as well as supply chain and procurement services. Japan accounts for the majority of Neusoft's offshore business and is the largest contributor to the company's sales revenue. Recently, Neusofts European and North American business has rapidly increased, enabling the company to open a new office in Los Angeles. Its business in Ireland also is faring well.

Neusoft client profile: Japanese mobile phone manufacturer

A leading Japanese manufacturer of mobile phones chose to evaluate the offshore outsourcing of software development to help it meet growing business pressures, enhance its competitiveness and improve its shareholder returns. The decision was a strategic one: innovative embedded software applications are key to highly prized phone features such as mobile imaging and entertainment. But the Japanese company faced high R&D costs and a shortage of engineers skilled in advanced embedded software development. As early as 2002, Neusoft met the Japanese companys expectations during the pilot stage. It demonstrated the ability to capture knowledge and complete assignments within tight
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timeframe goals and to effectively transfer knowledge offshore. Besides meeting most of the clients key requirements, Neusofts proven core competencies made it a vendor of choice. To keep the clients overhead to a minimum, Neusoft set up an offshore development center that now has 270 engineers. The results to date are impressive. Neusofts offshore development model has dramatically reduced the clients total cost of operations and increased its return on investment. New products get to market in less time than before the introduction of offshore outsourcing into the production process. Neusofts quality assurance has helped enhance the clients reputation for high-quality products. And as a result of this partnership, the Japanese company has secured a top-three mobile phone market share in the Japanese market.

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Business process outsourcing Chinas BPO market remains in its earliest stages, and the country stands largely as a BPO exporter rather than a large consumer of domestic BPO activities. The major local BPO consumers are MNCs in China, and the secondary consumers are financial services companies. According to survey respondents, one reason for the lack of BPO growth from in-country consumers is that most local enterprises still struggle with which services to outsource and which to retain in-house. Respondents also point to the limited number of qualified and powerful local BPO service providers in China as a hindrance to the industrys growth. However, BPO in China holds plenty of promise. Buoyed by the nations overall economic growth, the sector will receive a boost as the Chinese government promotes the nations IT sector and its telecom industry, and as reforms and restructuring begin to sharpen the competitiveness of Chinas financial industry. A brief overview of the status of Chinas BPO market follows. Finance and accounting: Accounting firms dominate this segment of BPO in China. Clients mainly outsource repetitive, easily automated backoffice functions, such as ledger entries, data entries, financial record management, and so on. In the financial services industry, much of the BPO demand is to outsource finance and accounting services. Human resources (HR): Recruiting, staffing and HR service centers lead the way. Staffing will drive the major growth, as shortages of workers with the right skills at the right cost in the right places become more acute. More and more local companies are turning to headhunting companies to find senior managers with strong leadership and management skills. Training and education: Outside of the MNCs China offices, our survey found little spending on training and

education in BPO. However, as soft skills increase in importance in the workplace, training and education will necessarily become more complex and costly. As a result, we expect to see a healthy market for specialty providers of these learning BPO services. Procurement: This segment remains quite small. Although other global markets make strategic use of this area, in China the BPO procurement providers focus on less complex tasks such the outsourcing of transactional, repetitive and administrative activities related to purchasing, sourcing, and procurement spend management. As such, procurement offers a potential area for BPO growth in China. Client relationship management: Call centers tend to dominate this segment. (See "Call center services".) The players include pure call center outsourcing providers such as China Center for Information Industry Development (CCID), companies own call centers (such as Lenovos), and local telecom carriers like China Telecom. Consumers look increasingly to call center certification when choosing a provider, though cost efficiency, process efficiency, service quality, and security remain critical criteria as well. R&D: Survey respondents mainly brought up research and development services in reference to contract research organizations, which is discussed below (See Contract research.) Supply chain/logistics: The fast development of third-party logistics services is a significant BPO trend. However, this is still a very small business in China due to the early stage of BPO industry in China which still needs more education and popularization. Industry-specific outsourcing: These kinds of outsourcing services can help companies attain high performance through both cost savings and process efficiency enhancementsat least as long as China remains a relatively low-cost place to do business. The scope of outsourcing opportunities

has grown from relatively simple account data entry work to all but the very core banking processes. Credit card processing serves as a prime example in this sector. Often, service contracts will package several outsourcing processes. For example, a card processing service deal may include account origination services, credit checks, business statistics, and bill printing. Huge opportunities await in the banking sector in China thanks to significant domestic demand. In particular, Chinas own banks face challenges in managing enormous growth in demand for credit cards, fostering increasing need for these outsourcing services. The sections below provide more detailed views of two facets of BPO in China: call center and contract research services. Call center services The call center industry fits into three groups: in-house call centers, outsourcing call centers and ASP (application service providers). The term outsourcing call center usually refers to the complete turnkey service, from client service and sales and marketing to equipment lease and operations management, while ASP refers to the providers that lease others equipment and technology. With more than 10 years of rapid development, outsourcing now has become the mainstay of the entire call center industry worldwide. Japanese and South Korean companies increasingly are transferring the implementation and management of their call centers to China and enormous potential demand lies in Chinas domestic market. Since the late 1990s, the outsourcing market of China's call centers has cultivated by the local providers gradually, accumulating operating experience, training staff, and climbing the learning curve. Years later, along with some providers updating their equipment, they began
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to build their brands, and started to see profits against steady revenues. In recent years, second-generation call centers have begun to emerge and the market started to mature, and in the economically developed cities, market competition became fierce. And since 2007, this industry has been accelerated by demand from the 2008 Olympic Games, the 2010 World Expo, and a proliferating array of conferences and trade fairs. At the same time, falling equipment costs have encouraged many enterprises to start building their own call centers. Several factors will exert a drag on the rapid development of the call center industry in China. First, a sense of what constitutes best-practice service remains hazy within the industry. Limited operational management expertise exists within call centers. And high staff turnover and a lack of talent continue to plague providers. Contract research China is already well-known as a world factory in the pharmaceutical industry: According to the data from China Chamber of Commerce of Medicines & Health Products Importers & Exporters, its companies produce more than 300 billion tablets a year and more than 70 billion capsules. In 2005, Chinas exports of pharmaceutical raw materials totaled $7.9 billion, accounting for a quarter of the global market while the number already increased to $10.6 billion in 2006. Much of that volume was shipped to multinational clients. But now, China hopes to become an even stronger competitor in the contract research organization industry. Contract research organizations first appeared in the United States some years ago. Companies such as Quintiles, Covance and MDS Pharma have held top-three spots in the field for a long time. The global CRO sector is fueled by the pharmaceutical industrys huge R&D funds. Asia Pacific companies became involved in the CRO business because of the continents cost advantages.
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Japan boasts a well-developed industry (where the largest provider is EPS, founded by China native Yan Hao) with a significant presence in both Singapore and India. China joined the CRO sector relatively recently. In 1998, Chinas Food and Drug Administration (SFDA) set up a series of new laws and regulations governing drugs, especially the Clinical Trials of Drug Quality Control, which directly galvanized the development of the CRO market. The SFDA classifies CRO service providers into four main organization types: universities and not-forprofit public research institutions managed along academic lines; foreign-owned CROs, founded mainly by multinational contract research organizations or with foreign capital; local CRO companies such as Excel and NewSummit Biopharma; and joint ventures such as KendleWits and EPS. Some, such as WuXi PharmaTech, are focused on preclinical research during the research and development of new drugs, mainly involving work on related chemicals, such as preclinical pharmacology and toxicology tests. Some, like KendleWits, specialize in clinical trials. And others are engaged in advisory services for R&D on new drugs, such as new drug approval. The CRO business deals in large numbers. The future of isolated CROs looks uncertain; many small players are struggling for want of funding and talent. One solution for these smaller firms would be to raise funds through overseas listings on public marketsa move that would help China build a healthy core CRO industry. In early 2005, Shanghai established a base of biomedical outsourcing services as well as the Pudong biomedical research and development outsourcing center. At a Chinese medicine development summit meeting in July 2006, 22 organizations, including the Beijing Pharmaceutical Group and Zhongguancun Life Sciences, teamed up to form the Zhongguancun CRO Union. Presently, there are more than 300 large and small CRO companies in

China, presenting an array of choices for foreign customers. The challenge for Chinas CRO industry is its youth. Local vendors still lack extensive experience, and other nations provide significant competition. Very active contract research organizations from India and the United States are eager to establish firm footholds in new markets before Chinas CRO sector matures. India is especially well positioned to compete, with more than 220 universities and extensive use of English-speaking researchers. Indias CROs have also benefited from the countrys well-developed software industry. Good database management and rigorous R&D process management have strengthened their advantages. And India has a strong cost incentive: Clinical trials there cost about three-fifths of what they cost in the United States. Indian contract research organizations also attract orders from multinational pharmaceuticals based on their quality and efficiency. India has 61 manufacturers authorized by the United States Food and Drug Administration (FDA), the largest number outside the United States. For the foreseeable future, Indian contract research organizations will be the most formidable competitors for their counterparts in China. Of course, the Chinese contract research organizations offer cost advantages as well. Clinical trials in China cost about one-third of the price tag in the United States. However, the best market opportunities for Chinas contract research organizations will be won by those that quickly can achieve GLPS (Good Laboratory Practice Standards) and GCP (Good Clinical Practice). With Chinas integration into the global clinical trials system, an increasing number of valuable projects will move to China. Contract research organizations that cannot provide sufficient database capacity and sound management of clinical trial processes will gradually lose out.

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Case Study #2
WuXi PharmaTechA pioneer and leader in the CRO sector
China already claims a powerful CRO service provider in WuXi PharmaTech. In 2007, the companys 80 clients included nine of the worlds top 10 pharmaceutical companies by revenue. Founded in December 2000, WuXi PharmaTech is a leading China-based pharmaceutical and biotechnology R&D provider. This Shanghai firm offers global pharmaceutical and biotechnology companies a broad and integrated portfolio of laboratory and research manufacturing services ranging from discovery chemistry (the chemistry disciplines used in discovering new drugs) and pharmaceutical development to biological services and manufacturing of active pharmaceutical ingredients for R&D use. The companys services are not directed at the development of new drugs but rather at the development of service platforms for new-drug R&D. Backed by a strong research team, hundreds of different projects progress each
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day, from forming small compounds to manufacturing pharmaceutical raw materials by the ton. In 2007, WuXi PharmaTechs 80 clients included nine of the worlds top 10 pharmaceutical companies by revenue. (The company does not yet work with Chinese pharmaceutical companies.) With more than 2,700 scientific staff members; a 630,000 sq. ft. research facility in Shanghais Waigaoqiao Free Trade Zone; a 220,000 sq. ft. manufacturing plant in Jinshan District, Shanghai; a new 130,000 sq. ft. Tianjin research facility; and a 323,450 sq. ft. Suzhou drug safety evaluation center under construction; WuXi PharmaTech is well-positioned to offer its clients high-quality services. WuXi PharmaTech received venture capital investment during its second year. The companys top management team comprises Western-trained Ph.D.s and MBAs with experience in drug R&D methodologies and familiarity with Western business

practices. Collectively, its senior management team holds more than 200 patents pending or granted, has published more than 800 publications, and has an average of 15 years of experience working in major international pharmaceutical and biotechnology companies. The Chinese founder and CEO of WuXi PharmaTech is Ge Li, who, as a student at Columbia University in New York in the early 1990s, co-invented combinatorial chemistry technology and set up a company called Pharmacopoeia that was listed on NASDAQ in 1995. Initially, his new company focused on simple synthesis work. However, Li soon developed a more profitable model based on leveraging Chinas low-cost and high-quality advantages to become competitive in the global drug R&D service market. At the same time, the company invested part of its revenues in internal projects, such as the development of new drugs, and made use of its advanced equipment to

take the lead in developing a series of precursors to patent drugs. Currently, WuXi PharmaTech is Chinas largest drug R&D service provider offering new drug R&D services with complete service types. With its acquisition of the US-based AppTec Laboratory Services, Inc. in early 2008, WuXi PharmaTechs services now cover the spectrum of chemical pharmaceuticals, biopharmaceuticals and medical devices. The acquisition will expand its client base and increase the companys cross-selling opportunities and market share.

Milestones
"Deloitte Technology Fast 50 China", 2008, fourth consecutive year "Deloitte Technology Fast 500 Asia Pacific", 2008, fifth consecutive year CEO Dr. Ge Li among "25 Notable Chinese-Americans" from Forbes, 2008 "Frost & Sullivan Award for Best in Class Outsourced R&D in Pharmaceuticals and Biotechnology", 2008 "Top 20 Most Innovative Companies in China" and CEO Dr. Ge Li among "Top 10 Most Innovative Leaders of Chinese Enterprises", 2008 Ms. Trabue D. Bryans, VP and GM of WuXi AppTec's Atlanta Operations, invited to join the Association for the Advancement of Medical Instrumentation (AAMI) Standards Board, 2008

"50 Local Dynamos" from the Boston Consulting Group (BCG), 2008 Completed the acquisition of AppTec Laboratory Services, Inc., Jan, 2008 CEO Dr. Ge Li among "China Top 10 Influential Entrepreneurs", 2007 NYSE listing, Aug 9, 2007 "Top Chemistry CRO" from Pfizer, 2007 Became the largest Beilstein customer, 2006 "Outstanding Strategic Collaboration Award" from Merck, 2006 "Chemical Product R&D Preferred Partner" form Eli Lilly, 2006 "Top 103 National Innovative Enterprises" in China, 2006 Opened its Tianjin facility

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Analysis of service provider landscape by industry According to Gartner, the financial services and communications industries together accounted for nearly half of all IT spending in China in 2007.13 The manufacturing sector also served as a major client. (See Figure 17.) Our survey of Chinese IT outsourcing providers paints a similar picture of the spread of client spending by industry. (See Figure 18.) Financial services rates highly worldwide, with the media and entertainment industries spending significantly in the Unites States and Europe, and the communications industry and government sector spending notably in China. BPO in the financial services sector possesses some unique characteristics compared to other industries. Barriers to entry are high, and potential providers will find daunting requirements for fast, reliable and
34

secure information infrastructure as well as a demand for top-notch talent. Financial institutions tend to be sensitive to outsourcing pricing. And client relationships develop largely in stages: first, software development and services; then data center management, and eventually, in some cases, internet banking. Chinas BPO outsourcing providers offer several advantages to financial services clients. First, the Chinese government grants strong levels of support: In May 2006, the government founded the Research Center of Financial Outsourcing Servicesthe Chinese outsourcing industrys first base for financial information servicesin Shanghai Bank Card Industry Park. China UnionPay, Bank of Communications, Industrial Bank, Shanghai Futures Exchange, and other financial institutions already have moved their credit information centers and settlement centers to this new industry park.

China also presents financial companies with a sound business environment. This is particularly crucial in the area of financial services BPO, which usually requires significant time to implement, test and fine-tune processes. However, some obvious obstacles stand in Chinas path, such as a limited system of credit, the high costs of check processing, the risks of unreliable data, and the need to develop sound oversight mechanisms. Accenture believes that progress is being made on all of those fronts, but China still must travel some way down the road of progress before it can boast truly world-class financial services outsourcing capabilities.

Figure 17: IT services spending in China segmented by industry

IT Services Spending in China by Industry, 2007
Healthcare 2% Process Manufacturing 3% Transportation 3% Retail Trade 3% Education 3% Services 5% Local, Regional Governments 5% Utilities 5% Communications 32% Agriculture, Mining, and Construction 1% Wholesale Trade 1%

National and International Governments 7% Discrete Manufacturing 10%

Financial Services 20%

Source: Gartner MarketView Database, IT Services Market Metrics

Figure 18: Survey data on IT outsourcing spending by industry

US / European clients N=50 Electronics and High Tech Finance Services Media and Entertainment Freight and Logistics Forest Products Communications Medicine Automotive Life Science and Healthcare Industrial Equipment Energy Consumer Goods and Services Government Public Service Chemicals Aviation Industry Retail Public Transportation Aerospace and Defense Mining Tourism Other
45% 37% 27% 24% 24% 24% 24% 20% 20% 18% 16% 16% 14% 12% 10% 8% 6% 4% 4% 2% 4% 2% 4% 2% 4% 10% 12% 2% 4% 10% 14% 29% 4% 6% 12% 8% 14% 12% 4% 18% 6% 18% 16% 16% 14% 24% 14% 18% 12% 14% 14% 10% 32% 10% 32% 16%

Japanese / Korean clients N=49

41% 39%

Chinese clients N=49

44% 32% 20% 26%

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Case Study #3
China Data Group (CDG)Innovation in professional services
CDG at first focused on Chinese clients to hone its delivery capabilities and now is extending its services overseas. CDG has become the industry leader in total solutions for the credit card industry in China, covering 90 percent of its outsourced credit card processes announced by itself. Founded in 1998 as a leading imaging systems integrator for Chinas banking sector, CDG made a strategic transformation in 2003 to become a BPO service provider. Its management team comes from leading financial institutions and professional service firms in both China and abroad. The team members bring industry expertise and technical knowledge as well as experience in managing large-scale BPO operations. In addition, the company bears the strong financial backing of leading international private equity funds. CDG focuses on providing onestop, back-office BPO services to the banking, financial services and
36

insurance sectors. The firm also has ventured into enterprise BPO process solutions, including finance and accounting, payroll, and procurement services. CDG currently employs over 2,500 staff in five delivery centers in the major financial hubs of China, with nearly 30 banks and insurance companies among its clients.

Client profile: Credit card application processing

The client is a fast-growing commercial bank in the Asia Pacific region. Although a relatively new player in the sector, the client operates through a network of 370 branches in 36 major cities in the region, with one of the most highly regarded credit card operations in the industry. Feeling the pressure of market competition and diversified requirements from its own clients weighing on its relatively small size and short operational history, the client needed to offer products and

services at a lower cost, with higher efficiency and shorter turnaround. The client engaged a management consulting firm to redesign its business processes and suggest recommendations on which processes could be optimized. The consulting firm found that many front, middle and back-office functions were repetitive and labor-intensive, added little value, and represented a disproportionate percentage of staff headcount and management challenges. The client decided to focus on its core business and maximize value by offloading non-core credit card application processing to a thirdparty provider. While price was a factor early in the selection process, the clients concern for quality, reliability and data security took priority over the need for pure cost savings. The project scope included all typical non-core functionsfrom mailroom functions to screening, scanning, indexing, quality and credit reference checking, data capturing,

Company Snapshot
Figure 19: FactsheetCDG Total financial services middle and back-office outsourcing solutions... CDG Credit Card Market Position
10 of the big 14 banks 90% of the outsourced operations

...And significant competitive advantage

Large client base

Over 30 top clients based in China

Top brand and client loyalty

Highly recognized brand with many clients with over 3-year service history

Insurance

17 leading insurers 90% of the outsourced operations

Nationwide service network

Five delivery centers out of Beijing, Shanghai and Guangzhou

Most integrated service offerings Banking

Pioneer with the only live offsite client of the sector Services cover several verticals and include both transactional and voice

Strong IT and data security team FAO

First independent FAO provider in the country Pioneer with the only live client of the sector CMMI3 and ISO 27001 certification leveraging Oracles BPM technology

Unique Operations Model

Mass producer and one-to-many delivery

and storage. The complexity, security and segmentation of these processes required that business process management systems be in place at three different client locations. Six months into the project, the team ran into a bottleneck: CDGs back-office data capture capability operated much faster and more efficiently than its onsite staff. CDG proposed to consolidate all middleoffice processesincluding screening, scanning, archiving, and credit reference checkingin a centralized offsite location in Shanghai. Taking its cue from mass production innovations in the manufacturing industry, CDG began to manage these processes via parallel assembly lines. As a result, the client retained quality control and transparency through real-time video feeds, regular quality checks and surprise visits, with project implementation under a steering committee.

Three years into the project, the client became an award-winning credit card operator in the region, with the ability to roll out new products and services with almost no extra investments in fixed assets. Cost savings were realized in office rental, headcount, hardware investment, software development, recruiting, and training as well as in per-head operations costs. In some places, savings were as high as 30 percent year-over year. The satisfaction levels among the clients own clients continued to rise due to improved service quality and shortened productto-market turnaround time. As a result, the clients management was able to focus on its core credit card business.

CDGs success stemmed from its positioning as a long-term strategic partner in the clients core businesses instead of as a simple and passive service vendor. Its proven record of success in processing applications has allowed the company to bundle additional call center servicesfrom telemarketing to client support to gift deliveryto add even more value to its clients enterprises.

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Clients
Clients in China outsourcing markets Currently, most consumers of outsourcing work in China are MNCs. However, Chinas state-owned enterprises (SOE) are starting to embrace outsourcing as well. Our research uncovered several interesting insights with regard to outsourcing clients in China. First, potential clients lack a clear understanding about outsourcing, which indicates opportunities to raise awareness and provide education in the market. Secondly, these prospective clients express substantial distrust of the relatively immature outsourcing market in China. Only a third of those surveyed currently are outsourcing or planning to do so in the next three yearsa strong indication of the reservations these clients feel about local outsourcing providers value, expertise and control of confidential information.
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Among those companies already outsourcing, the survey results indicate that key criteria for choosing providers include service quality, intellectual property rights protection, skilled workforce, and industry expertise. Existing outsourcing clients believe that outsourcing helps them cut costs and improve processes; most are satisfied with their service providers. The most critical factor in the success of an outsourcing project is the compliance of the service provider with the service level agreement (SLA). Chinese clients surveyed also agree with providers that China has a particular advantage in outsourcing over Japan and Koreaculturally and geographically as well as in terms of cost. Further, they agree that China will rapidly improve in terms of talent, quality of service and reputation for reliable outsourcing services that deliver high performance.

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Case Study #4
China Development BankA domestic client that makes good use of outsourcing services
China Development Bank (CDB), founded in March 1994, is under the direct jurisdiction of the State Council. At present, it has 32 branches and four representative offices across the country. Over the past decade, CDB has followed Chinas macroeconomic policies and carried out its macro-control functions in support of national economic development and strategic structural readjustment. CDB has been a major player in long-term financing for key projects and supportive construction in infrastructure as well as basic and pillar industries, which are vital to the development of Chinas economy. Over the past decade, CDB has issued an accumulated total of 1.6 trillion RMB in loans for more than 4,000 projects. As a leading institution in Chinas financial industry, CDBs total assets have seen steady growth. Yet despite this rapid business expansion, its IT development has lagged. At one point, CDBs IT department was composed of just 30 technicians who managed
40

all the banks IT needs. The rapid expansion of its business, together with the increased number of clients, staff, branch offices, and IT equipment, simply added to the complexity. Not surprisingly, the banks management concluded that its systems could not support the structural and operational changes that CDB would have to make in the future. Indeed, the lack of good IT support had become a major obstacle to the banks development. Recognizing these challenges, CDB embarked on a program to upgrade its IT operations in order to capture new business opportunities and compete with its global counterparts. The revised IT infrastructure would not only enable the bank to respond quickly to market changes and adapt to new business models, but it would also lower its total cost of ownership in the long term. After assessing all options, CDB decided to engage the help of a global IT service provider to outsource the

implementation, maintenance and management of its new IT system. HP was tasked with providing the bank with a comprehensive Desktop Service Management program for its offices across China. In the process, CDB became one of the first financial institutions in the country to enhance its competitiveness through technology innovation. Building on the success of its existing cooperation, both HP and CDB signed a three-year strategic IT outsourcing service contract in April 2006 that will continue through 2009. Under the terms of the agreement, HP Support Services will provide a series of comprehensive and long-term outsourcing services that cover the following areas: Onsite support One-stop hotline service Equipment management service Monitoring service for missioncritical systems

 New technologies consultation Client training Outsourcing service management Application testing services E-procurement system setup and management Following the outsourcing of its IT services, CDB has streamlined its business operations. The company has achieved stronger alignment between technology and its changing business requirements. This alignment has endowed CDB with greater agility and, in turn, a competitive advantage in the global financial market. The contract also has provided CDB with faster information cycles that support improved decision-making processes. Having HP China manage its IT system freed CDBs resources to focus on the companys core business offerings, which not only has enabled the company to benefit from the latest technology but also has brought about substantial savings in IT costs.

In addition, outsourcing its hotline services has significantly shortened the response time per call, allowing CDB to achieve higher levels of productivity. This has greatly increased the level of client satisfaction. In fact, CDB resolved 16,802 end-user problems in 2005 without a single complaint.

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Chinas outsourcing providers client base So where do Chinas outsourcing providers clients come from? The Accenture-CCIIP research indicates that about 44 percent of current outsourcing revenue comes from the United States and Europe, with 34 percent from Japan and Korea, and roughly a fifth from Chinese clients. (See Figure 20). A list of sample clients for the services of Chinas outsourcing providers appears in Figure 21. Our research shows that Chinas outsourcing providers, generally speaking, have not yet selected one target market as their priority for the next five years. The Japanese market will grow at a steady rate, while the European and North American markets will continue to play the starring outsourcing segments. Chinas domestic market also holds significant promise for local outsourcing providers. Figure 22 gives an overall market breakdown by client groups, based on the responses from local outsourcing providers.
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Figure 20: Revenue breakdown by client geography

American / European clients Japan and Korea Chinese Other 2% 20% 34%

44%

Figure 21: Representative clients of Chinas outsourcing industry Agile AIA Life Insurance AIG AIS Data Co (US) Alcatel Shanghai Bell Allstate Aviva-COFCO Life Insurance Bank of China Beijing University of Technology BOSCH Blaupunkt Camelot Information System China International Travel Service China Merchant Bank ChudenCTI Comverse Concentrix Crossbeam Systems CSK Dassault Systemes Datang Decathlon Denso Japan Document Sciences Ericsson Eze Castle Freescale FST FUJITSU Japan Harbin City Government HIMACS Holland Literature Digital Library HSBC Japan IBS Lenovo Group Lexis Nexis LG Mecuries Soft (Taiwan) Mitsubishi Electric Infor Sys National Library National Theatre Network Appliance New China Life Novartis Oracle Oriental Cable Network Procter & Gamble Paciolan PASITS (Panasonic) Patni Computer Systems Petrochina Pitney Bowes PSA Q5 RF Rogers Communications (Canada) Samsung SAP media project SHANGHAIWINGTECH ELECTRONICS SK SOL Springer-Verlag Sun SYNNEX Tianjin Daily Tixa.com TNT TTI US Federal Govermment Walsin Lihwa Worth Pointe Yokogawa ZTE

Figure 22: Outsourcing outlook by market Market Share Small

Markets US

Market Size Largest

Potential Big but need substantial effort to develop the market Middle as the growth of the total market size due to system upgrading of many Japanese companies Great but need relatively long period promotion of outsourcing concept Hard to say as the market is strongly influenced by government policy Good

Profitable High

Risk14 High

Competition Intense

Japan

Large

Large

Middle

Low

Moderate

Domestic

Small

Middle

Middle

Low

Moderate

EU

Middle

Small

Highest

High

Intense

Korea

Small

Middle

Middle

Middle

Moderate

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Chinas outsourcing market: Notable phenomena

Multinational corporations shared service centers

MNCs are establishing shared service centers in China to support their global or regional business operations. In a shared service environment, common supporting functions are consolidated rather than spread across an enterprise. Implementing a shared service model requires changes in business processes, infrastructure and even corporate culture. Yet the model brings big benefits: Organizations gain a better understanding of their entire business operation, enabling them to analyze, change and optimize the services they provide to internal clients. Additionally, companies that leverage shared services can realize increased flexibility in instituting business changes, more manageable costs and greater control.

Large corporations often implement the shared service concept as a last step when readying themselves for outsourcing. The process overlaps with outsourcing in many respects. The only difference is if its run internally or by an external service provider. Companies make a choice on one or the other based on culture and readiness, etc., but it is less of a precursor to outsource than it used to be. Accordingly, China has witnessed an increase in MNCs establishing regional shared service centers in tandem with the growth of its outsourcing industry.

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Multinational corporations research and development centers

In recent years, foreign enterprises have established and expanded their R&D centers in China. According to the Ministry of Commerce, there are currently more than 800 R&D centers in China founded by multinational enterprises from North America, Europe, Japan, South Korea, Taiwan, and others. These centers focus on several manufacturing industries, including electronics and communication, transportation, and pharmaceuticals and chemicals. The R&D centers are concentrated in big citiessuch as Beijing, Shanghai, Shenzhen, and Tianjinalthough the western cities like Chongqing, Xian and Chengdu are drawing new R&D centers due to their lower costs. Increasingly, companies are founding R&D centers as sole proprietorship
46

enterprises. Only a few centers have been founded as joint ventures, including those for Lenovo and Intel, and Motorola and HuaWei. China has become a vibrant region for R&D centers for several reasons, including the vast potential of the Chinese market, improvements in the investment environment, and the lower cost of R&D talent. Currently, R&D centers in China mainly engage in technical support and applied research to develop products that are adapted to the Chinese market. However, due to the Chinese governments efforts to encourage independent innovation, the R&D centers of MNCs are starting to track emerging new technologies and autonomous local standards. As they cultivate increased technical power and accumulate research and development experience, more MNCs will likely upgrade their R&D institutions into global research centers.

The Chinese government is paying increased attention to the development of R&D capabilities and has adopted policies to encourage investment in R&D from MNCs. The government also is strengthening the protection of intellectual property rights to answer one of multinational corporations key concernsensuring they are able to protect their core information and technologies.

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Case Study #5
VanceInfoForerunner in the offshore development center sector
Like other Chinese providers in this sector, VanceInfo already can support high-level R&D work and provide full lifecycle services. It also can compete with Indian providers in some areas. To fully differentiate itself from other local providers, VanceInfo has the opportunity to boost profitability by moving into other outsourcing services. VanceInfo, formerly WorkSoft, was founded in 1995 under a long-term contract with IBM. This organization was the first domestic ITO company to successfully trade on the New York Stock Exchange. After receiving Series A venture capital financing from DCM and Legend Capital in 2005, VanceInfo closed its Series B venture capital financing round with funds from Sequoia Capital US, Sequoia Capital China and existing investors. VanceInfo has established a series of offices and delivery centers both abroad and in domestic, tier two cities to
48

strengthen its delivery capability. At present, the company runs at least 10 offices or development centers worldwide, with locations in Beijing, Nanjing, Shenzhen, Dalian, Tianjin, Wuhan, Xi'an, Tokyo, and the United States (in Seattle, New York City and the Silicon Valley). VanceInfo is guided by a globally educated and experienced management team whose members hold degrees from schools in the United States, Germany and Japan. CEO Chris Chen first started his business in the early 1990s. In addition to servicing MNCs in China, VanceInfo provides IT outsourcing services to Asia Pacific, North American and European clients, including Microsoft, IBM, Oracle, NEC, Nokia, HP, and TIBCO. VanceInfos range of IT services includes research and development services, enterprise solutions, application development and maintenance, and quality assurance and testing. VanceInfo targets highgrowth industries such as technology,

telecommunications, financial services, manufacturing, retail, and distribution. Currently, the United States contributes the largest percentage of the companys revenue, accounting for approximately 80 percent of the total. Japan contributed about 20 percent of its revenue in 2007. VanceInfo has become a leading Offshore Development Center provider in China by targeting MNCs that have made strategic investments to develop, test and maintain software solutions to achieve increased productivity, cost savings and faster speed-to-market. VanceInfo currently maintains the largest number of million-dollar offshore development cetners in China (including offshore development centers for TIBCO; PeopleSoft, now Oracle; and EMC2) and employs the largest number of engineers for US-focused projects. However, as the need for high-end talents increases and employees chose to join client companies,

Company Timeline
1995 Founded under long-term relationship with IBM 1999 Started operations in United States; opened offices in Shanghai 2002 Started operations in Japan; opened offices in Wuhan and Shenzhen 2005 Secured A Series venture capital funding from DCM and Legend Capital 2006 Secured second-round financing from Sequoia, Doll and Legend Capital 2007 Listed on New York Stock Exchange

retaining project management talent will likely prove to be a big challenge for VanceInfo. To increase its labor pool, VanceInfo has created Vance University, a program that is co-supported by several top universities in China. The company leverages Vance University to conduct training classes for current employees and recruit university students for employment.

Client profile: Offshore development center project for TIBCO

In 2005, TIBCO sought a development center to provide application development, quality assurance and testing, localization services, and technical support for its software and solutions. The bidding process included both local and foreign outsourcing companies, such as Indias Infosys. VanceInfo won the bid to develop the TIBCO China Development Center based on its management experience,

technical expertise, financial support from venture capital firms, proven software outsourcing business, and scalable technical expertise. Since then, the TIBCO offshore development center has expanded to almost 200 employees and serves as TIBCOs biggest R&D center outside the United States. In September 2007, the center moved to a new office facility in the International Software Building in ZPARK. The TIBCO center managed by VanceInfo is responsible for nearly the entire lifecycle of TIBCO products: from requirements analysis, to structural design of the products and development, through testing and finally to worldwide technical support after sales.

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The use of subcontracting in outsourcing

Subcontracting in outsourcing typically referring to the transfer of work from MNC service providers to Chinas local providersis a notable trend. MNCs that typically subcontract in China include IBM, Capgemini, CSC, HP, BearingPoint, Fujitsu, NEC, and NTT. Key findings from the survey of service providers appear below. Half of the providers surveyed are using subcontracting as a means to access talent and skills. (See Figure 23.) The primary reason for providers to subcontract is to focus on their core outsourcing business, followed by making use of other suppliers specialized skills.

For the service providers interviewed in this survey, the three main criteria in selecting a subcontractor are service quality, workforce skill and IT security. (See Figure 24.) Respondents acknowledged that, while subcontracting improves efficiency and costs, its major drawback is lack of quality control. (See Figure 25.) As a result, subcontracting could have a negative impact on outsourcing, because quality is the key criterion for clients.

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Figure 23: Use of subcontractors Percentage of clients using subcontractors

Dont know 2%

Stated reasons for subcontracting

We tend to focus on core outsourcing business Can only meet clients demand with other suppliers assist 26% 21% 5% 32%

No 50%

Yes 48%

If Yes

The sub-contractor has unique ability in the area Cost cutting

Figure 24: Importance of criteria in choosing subcontractors (N=20)

5= Not at all important
Service quality The skill of workforce IT security Reputation Understanding of clients requirement Price Industry experience Synergy between the two Follow special requirement from clients Previous relationship with the subcontractor Geographical factors, such as proximity Talent attrition

3
14

1= Very important

3 3 1 1 1 2 2 2 1 2 2 1 2 4 4 2 1 3 4 1 5 3 5 1

4 5 8 6 9 8 9 6 5 1 7 5 7 11 6

12 11 8 6 5 5 5 5 3 6 8 2 1

*Absolute values

Figure 25: Impact of subcontracting on project

Negative impact
Improve efficiency

No impact

Positive impact

16

Reduce cost

17

Guarantee on-time delivery

Control quality

13

*Absolute values
51

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Designated industry parks and cities

Snapshot of outsourcing activity in key cities

In line with the 1000-100-10 Project, the Ministry of Commercein conjunction with the Ministry of Information Industry, the Ministry of Science and Technology, and the Ministry of Educationhas named a group of major metropolitan areas as designated outsourcing cities. The cities were chosen based on their capacity to undertake offshore outsourcing. Similarly, the Ministry of Commerce has named a group of state-level showcase areasincluding national economic and technical development zones, high-tech parks, and software parksthat it hopes will play a pivotal role in promoting the outsourcing business of the designated outsourcing cities and surrounding areas.

To date, 14 designated cities and four state-level showcase areas have been chosen. Dalian, Chengdu, Shanghai, Xian, Shenzhen, Beijing, Tianjin, Nanjing, Hangzhou, Jinan, Wuhan, Hefei, Guangzhou, and Changsha comprise the cities, and the showcase areas are Suzhou Industry Park, Wuxi huan-taihu Protection Zone, Daqing Outsourcing Industry Park, and Nanchang High-tech Development Zone. The designated cities and state-level showcase areas will enjoy support from Chinas central government in the form of macroeconomic policies, investment, and coordination. In addition, special-purpose funds will be earmarked for the construction of public information platforms, the development of HR, and the improvement of infrastructure and the investment environment. Most of the designated cities also have issued local policies to promote the outsourcing industry.

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In-depth analysis and suggestions for improvement

Industry parks are an important enabler for the outsourcing industry. Our survey results identified four factors cited by more than 50 percent of respondents who have moved to an industry park as benefits they sought when choosing their location. Respondents listed, in order of importance, favorable policies, available talent supply, support from local government, and reduced operating costs. (See Figure 26.) For service providers that have not moved into industry parks, high migration costs seem to be the main factor keeping them away. (See Figure 27.)

The designated cities and industry parks are making significant efforts in support of Chinas outsourcing industry. From an infrastructure and technology perspective, many have reached the level of developed countries. However, several requirements that are essential to the outsourcing industry, such as intellectual property rights protection and business convenience, have not yet been sufficiently addressed. In addition, this study determined that the management body of the cities and parks must shed its current role in the mold of a real estate developer, in which it merely aims to offer sound infrastructure and lower costs. Instead, it must focus on improving the cities and parks ability to meet the needs of the outsourcing industryoffering everything from financial support to laws to protect intellectual property rights.

Another challenge is the lack of substantial differentiation among the 14 designated cities and four showcase areas. Investors often feel confused when selecting a delivery location, and fierce competition between cities and industry parks vying for investments compounds the problem. As a result of these hindrances, it may take a long time for Chinas outsourcing industry to achieve truly diversified development.

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Figure 26: Factors influencing companies that have moved to industry parks Has your company already moved into any of the industry parks ? (N=48) Please evaluate the factors that an industry park can provide and indicate the level of importance of each factor when you are considering the location of your delivery centers on a scale of 1-5 where 1 is very important and 5 is not important at all. (N=34)
5=Not at all important
Favorable policy of the park No 23% Talent supply If Yes Yes 77% Support from local government Cost of operating in the park Infrastructure Public security in the city where the park is based Positioning of the park Previous cooperation with the operator of the industry park Centralization of similar service providers in this park Centralization of clients in the city where the park is based Price level in the city where the park is based 6% 3% 9% 6% 6% 3%9% 9% 11% 3% 15% 6% 21% 12% 9% 3% 9% 18% 18% 18% 39% 18% 24% 24% 39% 24%

4
3% 3% 22% 32%

1=Very important
67% 65%

26% 29% 43% 36% 33%

60% 54% 37% 27% 21% 21% 36% 39% 42% 18% 18% 9% 6%

Figure 27: Factors influencing companies that have not moved to industry parks Among the 23% of providers who have not moved into an industry park, the following factors have stood in their way: (N=)11
The cost of companys migration is too high Cannot help in the reduction of talent cost Lack of attractive policy Moving into the park will increase operational cost Cannot provide help for our business Low quality service provided by the park Fear of company scale being limited Parks positioning is conflict with the company Others 1 1 2 2 2 5 3 3 3

*Absolute values

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Case Study #6
Accenture Delivery Centers in China: helping clients achieve high performance at three of the countries designated outsourcing cities
The Accenture Delivery Centers in China are located in the country's prime growth areas: Shanghai, Guangzhou and Dalian. More than 1,500 Accenture professionals at these centers deliver information technology services as well as BPO services that range from finance and accounting, capital market research and data management to human resources and procurement. The centers currently help clients in mainland China, Japan, Singapore, Malaysia, Hong Kong, Australia, United Kingdom, United States, Canada and in many other countries to achieve high performance. established to service regional clients in Japan, China and Korea, the Delivery Center in Dalian has a clientele that is now global in scope, reflecting Dalians ability to provide cost-competitive, multilingual technical and business skills. Shanghai (established in 2003) The Delivery Center in Shanghai benefits from its access to the large, highly educated labor pool in one of the worlds most modern cities. The Shanghai center includes professionals with extensive business and technical experience and with deep language skills. Guangzhou (established in 2006) The Delivery Center in Guangzhou is fast becoming a key location for the provision of English- and Cantonese-speaking services. Proximity to Hong Kong and the wealth of IT and financial services companies supporting the Hong Kong Special Administrative Region make Guangzhou an ideal site for outsourcing service delivery. This center is already providing Application Outsourcing services for clients in Hong Kong and throughout Asia.

Languages:
Bahasa Cantonese Japanese Korean Tagalog Thai Vietnamese

Locations:
Dalian (established in 2002) The Delivery Center in Dalian supports Accentures own operations in 12 Asia Pacific markets, and also serves a growing number of BPO clients with a particular focus on finance, human resources and procurement, and has a strong IT development and maintenance capability. Originally
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Services:
Application Outsourcing Business Process Outsourcing Infrastructure Outsourcing Systems Integration

Cross-Industry Business Process Outsourcing Services:

Capital Market Research Custom BPO Services Finance and Accounting BPO Services HR BPO Services Procurement BPO Services

BEA WebLogic, IBM MQ Series, IBM WebSphere, Sun CAPS Business Intelligence/Data Warehousing: Informatica, DataStage, Business Objects Mainframe Control Language/Scripting: JCL Databases: DB2, IMS/DB, VSAM Operating Systems: OS/390, MVS, OS/400, TSO/ISPF Programming Languages: COBOL, Fortran Teleprocessing Monitors: CICS

Certifications:
CMMI Level 5 People CMM Level 5 ISO 27001 SAS 70

Technical Capabilities:
Enterprise Application Suites SAP, Siebel, PeopleSoft, Oracle Netcentric/Web Databases: Oracle, SQL Server, UDB (DB2), Informix Frameworks: Java/J2EE, Microsoft .NET Operating Systems: UNIX, Windows Programming Languages: C, C++, C#, Java, Visual Basic, PL/SQL, Informix 4GL Web: HTML, XML, JavaScript, VBScript Middleware/Enterprise Integration:

Infrastructure Management:
Data Control Services Communications Services Service Desk

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Case Study #7
A tale of Beijings two industry parksA comparison of Zhongguancun Software Park and Wangjing Technology Park
Zhongguancun Software Park possesses almost 50 percent of the total outsourcing market share in Beijing. Software companies were among the earliest tenants of the park, and software exports boosted the development of the park in its early years. Today, because the park is home to the largest number of ITO service suppliers in Beijing, it is the first stop for ITO clients looking for a service provider. Wangjing Technology Park has developed in a different, but also successful, manner. Despite its youth relative to Zhongguancun Software Park, it is surrounded by top MNCs, and some of themincluding Motorola, Novotel and Sony-Ericsson have set up their R&D centers in the park. This proximity has triggered the development of additional R&D outsourcing business as well as BPO business within the park. Today, the park has become the industry base for cell phone design and testing, call centers, and software R&D, among other services.

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City evaluation model

To support the implementation of the 1000-100-10 Project, CCIP worked with Accenture to develop a model for city/ economic zone selection by combining both parties understanding of the outsourcing business. The project centered on quantifying the key attributes and constraints associated with the development of a given city/ economic zone. The team developed a comprehensive methodology to score the attributes of and provide analysis for the sustainability and constraints of multiple locationsthe ability to operate within a reasonable cost structure (Cost Effectiveness) while sustaining a conducive environment in which to operate (Viability).

Cost Effectiveness = f (loaded cost per FTE, facilities cost per FTE) Loaded cost per FTE = f (direct payroll costs, indirect payroll costs) Facilities cost per FTE = f (property leasing costs, building management fees, utilities costs, telco costs) Viability = f (demand and supply of talent, infrastructure and general development, stability) Demand and supply of talent = f (outsourcing provider demand, nonoutsourcing provider demand, fresh talent, experienced talent) Infrastructure and general development = f (transportation, telecommunications and technology, real estate, utilities, social) Stability = f (indirect costs of doing business, exchange rate stability, labor laws and regulations, crime rate, political stability, environmental stability)

The model used a standard scoring approach. The analysis team measured and quantified attributes in different units. To assess each city or economic zone, the team followed a threestep approach (data collection, scoring, and weighting and sum) to transform raw data into a final score. The analysts then developed charts in the model to further illuminate each locations attributes from a variety of perspectives. During the model testing period, a lack of appropriate statistic data proved to be the major obstacle for the model application. However, as the outsourcing industry develops in China and data in each city improves, the model should be able to play a stronger role in assessing outsourcing environments in the future.

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The war for talent

Current situation and analysis

Outsourcing is a talent-intensive industry: its forward development is contingent upon the appropriate talent supply. Yet, according to the Accenture-CCIIP survey, the lack of suitable talent has become a bottleneck in China, and respondents considered it one of three major barriers to the development of service providers. (See Figure 28.)

Figure 28: Barriers to the development of service providers (N=48)

The three major barriers to the development of service providers are the lack of suitable talent, the lack of a strong brand and a lack of capital. Lack of suitable talents Lack of strong brand Lack of capital Lack of suitable channel to approach clients Cannot offer service in a competitive price Lack of the understanding of Chinas outsourcing market Lack of appropriate definition of core competency Lack of clear strategic positioning No priority in business exploitation Lack of clear map of development Others 2% 6% 13% 13% 13% 10% 25% 23% 44% 40% 67%

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Figure 29: Employee training costs

For the majority of respondents, employee training absorbs between 5 percent and 20 percent of their total costs. 20% and above 10% - 20%
11% 30%

On job training by service providers 66% Joint training program ran by universities and service providers Government sponsored training
11%

46%

41%

What percentage of your companys total expenditures went toward employee training in fiscal year 2006? (N=47) Which training mode do you think can effectively solve the problem of talent shortage? (N=46)

5% - 10%

36%

5% and below

23%

Percentage of expenses dedicated to employees training

Commercialized training institutions initiated by social entities

2%

Figure 30: Talent management challenges

Lack of foreign language skills High retaining cost High attrition rate Lack of working experience Lack of outsourcing-related skills I do not have any trouble in this field Other 5% 3% 8% 14% 11% 27% 32%

Although China produces numerous graduates every year (according to data from Ministry of Labor and Social Security, the number of college graduates was more than 4.9 million in 2007) and has achieved progress in reforming its higher education sector, problems still remain, especially in its curriculum design and teaching methodology. A gap exists between what is taught in universities and what is required by the market. This burdens employers with extra training costs. In fact, for the majority of respondents, employee training absorbs from 5 percent to 20 percent of their total operating costs. (See Figure 29.) The survey respondents also indicate that, in terms of talent management, lack of language skills and high retention costs pose major problems. (See Figure 30.) Moreover, 55 percent of respondents are considering shifting their low-end delivery centers to inland and western areas in order to reduce their talent retention costs.
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Introduction of current talent policies

To overcome the shortage of talent, the Ministry of Commerce has included in its 1000-100-10 Project a goal to train 300,000 to 400,000 people for the outsourcing industry and create outsourcing jobs for 200,000 to 300,000 graduates within five years. Starting in 2007, the Ministry of Commerce, in association with the Ministry of Finance, began to allocate funds from the Central Development Fund for Foreign Trade to support the training of outsourcing talent. Through this initiative, service providers in outsourcing delivery hubs, as well as qualified companies listed in the Ministry of Commerces key outsourcing enterprises directory, receive government support to reduce their training costs. In addition, training institutions, including institutions of higher learning, are encouraged to train talent for the international outsourcing business.

In another government effort, qualified outsourcing enterprises may receive a fixed subsidy of not more than 4,500 RMB for each new university graduate with whom they sign a labor contract for at least two years. Qualified training institutions will receive a fixed subsidy of not more than 500 RMB for each outsourcing trainee (college graduate or above) who passes a test of professional knowledge and skills and signs a labor contract of more than two years with an outsourcing enterprise.

Introduction of current pilot training pattern

In August 2007, the 1000-100-10 Project group of the Ministry of Commerce signed a cooperative agreement with the Tianjin Economic and Technology Development Zone to jointly establish a statelevel outsourcing training center in Tianjin. At present, other local governments also have submitted applications to the Ministry of Commerce to build state-level outsourcing training centers. The Tiajan training center was designed to integrate various resources of the Ministry of Commerce, local government, MNCs, and leading enterprises in the industry; create and improve a customized training model; develop a talent training program to meet Chinas needs; create a human resources network; and facilitate the operation of outsourcing HR pools.

The center is run on a non-profit basis and is open to the public. It enrolls college students who will graduate in the current year as well as unemployed graduates for assessment and training in fields related to the outsourcing business. It also trains technical and management personnel for every level of the industry.

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Part III. China and global outsourcing

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The forces driving the emergence of the multi-polar worldthe rapid growth of emerging economies, closer economic integration across geographies, and unparalleled advances in information and communications technologiesare transforming the global outsourcing landscape. In a world that now sources services from multiple locations, China has aggressive plans to ensure that a significant portion of global outsourcing spending will flow to its coffers. Over the last 20 years, China has experienced phenomenal success in developing an export economy that takes advantage of the countrys cheap and abundant labor. Yet while China has strengthened its position as a global manufacturing hub, India has cornered the market for offshore outsourcing of IT services. In a focused effort to balance Chinas manufacturing success with progress in more skill-based service industries, the Chinese government

has committed its support to developing an economy driven by innovation and technology. In 2006, China set an ambitious target of producing $10 billion in outsourcing industry revenue by 2010. It hopes to implement this goal via its 1000-100-10 Project, which seeks to establish 1,000 world-class Chinese outsourcing firms, encourage 100 MNCs to shift offshore outsourcing services to China, and develop 10 outsourcing base cities. With this plan in place, China will be poised to capture both ITO and BPO revenue from several regionsincluding the United States, Europe and the Asia Pacific region. China also will face stiff competition from a myriad of developed and developing nations that have set their own enterprising goals for garnering a share of global outsourcing revenue. The following two sections draw on Gartner research data to present the current and future ITO and BPO spending landscapes.
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Analysis of the global outsourcing market for ITO

Despite instability in the global markets at present, the data suggests that the value and scale of bulk outsourcing contracts will continue to grow steadily. Gartner recently forecasted that total revenue for ITO spending, including discrete IT services, will rise to $829 billion in 2012 compared to $592 billion in 2007, while total IT outsourcing revenue will reach $378 billion in 2012 compared to $261 billion in 2007.15 (See Figure 31.) As Figure 31 shows, despite the relatively small size of Chinas current market, it likely will demonstrate the most dramatic compound annual growth rate from 2007 to 2012. By contrast, the United States and Japan, which boasted larger market shares in 2007, likely will experience less ebullient growth, with Japan moving at the slowest rate. However, the overall focus of the global ITO market will remain in Western Europe, the United States and Japan due to the considerable size of these countries spending base, which accounts for
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nearly 83.2 percent of the global total in 2007 and is forecasted to hover at 79.5 percent in 2012. As for the Asia Pacific region, the Gartner data predicts that demand, particularly from Japan, Korea, Australia/New Zealand, Singapore, and Hong Kong, will experience remarkable growth, tripling in 2011 from 2006 levels due largely to cost and competitive pressures in the financial and high-tech industries. European countries are finally increasing their focus on developing offshore and near-shore capabilities, and spending on outsourcing has risen, especially in France and Germany. Gartner also forecasts that discrete outsourcing contracts, such as application development services, will continue to constitute the bulk of outsourcing spending in the near future. Analysts expect custom application development to see the strongest growth, with significant growth from outsourcing of systems upgrades and rebuilds as well.

On the IT outsourcing spending front, discrete IT services still account for the largest portion of the market, followed by data center, network and enterprise application.16 Application development, network and desktop outsourcing, and systems integration work will continue to constitute the bulk of IT service imports in the Asia Pacific region. The largest markets, which necessarily hold the greatest potential, are hosted application management (AM) in Australia; network, desktop and application outsourcing in India; network and desktop outsourcing in China; and Information System (IS) outsourcing in India, China and Malaysia. Most offshore contracts still center on discrete application development and maintenance. Yet within the global ITO market, Accenture and CCIIP have found that the trend is for clients to purchase higher-valueadded, integrated, outsourced services in order to reduce the costs of their routine services.

Figure 31: Forecasted ITO spending is on the rise

Region

Service

2007 Market size ($millions) Market share (%) 36.1 37.0 36.6 35.4 32.6 33.8 12.5 12.9 12.7 6.0 7.9 7.1 3.9 3.4 3.6 6.2 6.2 6.2 100.0 100.0 100.0 0.4 1.5 1.0

2012 Market size ($millions) 133,750 159,167 292,917 126,295 143,661 269,957 43,569 52,574 96,143 24,468 40,181 64,648 23,355 21,281 44,636 26,807 34,296 61,104 378,244 451,160 829,405 2,904 10,083 12,987 Market share (%) 35.4 35.3 35.3 33.4 31.8 32.5 11.5 11.7 11.6 6.5 8.9 7.8 6.2 4.7 5.4 7.1 7.6 7.4 100.0 100.0 100.0 0.8 2.2 1.6

CAGR 20072012 (%) 7.3 5.3 6.2 6.5 5.9 6.2 6.0 4.3 5.0 9.4 8.9 9.1 18.4 13.3 15.8 10.8 10.9 10.9 7.7 6.4 7.0 22.0 15.8 17.0

Western Europe

IT outsourcing Discrete IT services IT spending

94,234 122,739 216,973 92,266 107,991 200,258 32,571 42,680 75,252 15,592 26,217 41,809 10,047 11,386 21,433 16,037 20,416 36,453 260,747 331,429 592,176 1,073 4,845 5,918

US

IT outsourcing Discrete IT services IT spending

Japan

IT outsourcing Discrete IT services IT spending

Asia Pacific

IT outsourcing Discrete IT services IT spending

Latin America

IT outsourcing Discrete IT services IT spending

Others

IT outsourcing Discrete IT services IT spending

Total

IT outsourcing Discrete IT services IT spending

China

IT outsourcing Discrete IT services

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These more sophisticated, strategic services are increasingly driving outsourcing decisions. The demand for integrating ITO and BPO services is growing as clients seek to reduce the complexity of their processes, strengthen the governance functions of outsourced contracts, and feed strategic growth opportunities. Technological developments that facilitate remote project management have made the integration of ITO and BPO not only possible but profitable. Gartners findings suggest that many small and medium enterprises first engage in offshore ITO as a means to grow their businesses and compete with the resources of larger companies. At present, Global Top 10 IT service providers account for more than a quarter of the market worldwide. (See Figure 32.) They will continue to have a major impact on the direction of the global IT outsourcing marketplace.

Figure 32: Leading global IT service providers by revenue Top IT service providers in the world, 2007 Vendor IBM EDS Accenture Fujitsu Hewlett-Packard Computer Sciences Corporation (CSC) Lockheed Martin Capgemini Northrop Grumman NEC Other services vendors Total Total revenue (US$ millions) 54,148 22,130 20,616 18,620 17,252 16,306 11,957 11,914 9,879 9,014 556,189 748,025 Market share (%) 7.2 3.0 2.8 2.5 2.3 2.2 1.6 1.6 1.3 1.2 74.4 100

* Total excluding hardware maintenance and software support Source: Gartner Market Statistics, 2008. IT Services Market Metrics Worldwide Market Share. April 2008.

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69

Analysis of the global outsourcing market for BPO

On the BPO front, Gartner reports that global spending reached $156 billion in 2007 and is expected to reach $239 billion by 2012, with a compound annual growth rate of 9.0 percent.17 In terms of total BPO spending, Gartner believes the United States will hold onto its position as the largest market in the world for the purchase of business outsourcing services for the next five years, with a market size of $92 billion (59.1 percent of the total) in 2007 and $138 billion (57.7 percent of the total) in 2012. The data indicates that demand management will be the fastest growing BPO outsourcing category in the US market; within that category, customer selection and customer acquisition services will grow strongly. Other fast-growing categories will be enterprise services, such as human resources and payment processing, and supply management, which includes procurement. Enterprise services will continue to be the largest part of the
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outsourcing market with 41.8 percent market share in 2012 compared to 42.4 percent in 2007. Worldwide, the trend is more or less the same: The only significant difference will be in operations services, such as healthcare operations, which are the third fastest-growing BPO category globally.18 According to Gartner, Japan will comprise the next largest global market for the purchase of business outsourcing services but show the lowest five-year compound annual growth rate among the leading markets, at 5.7 percent. The Asia Pacific region as a whole (excluding Japan) will show a five-year compound annual growth rate of 12 percent from 2007 to 2012, followed by 15.5 percent for Latin America, 13.2 percent for the Middle East and Africa, and 12.7 percent for Eastern Europe. Although Chinas share of the BPO spending market remains small, it is growing steadily and

rapidly, spurred by the nations strong economic growth. Gartner anticipates that BPO spending in China will jump dramatically in the next five years, from $273 million in 2007 to $721 million by 2012, with a five-year compound annual growth rate of 21.4 percent. The BPO industry has kept pace with the increasing sophistication of clients in multinational and multifunctional engagements. Cost is still a major driver for companies looking to outsource non-core business procedures, but clients may uncover even greater savings by using outsourcing to create economies of scale across conglomerates. As a result, in parallel to the ITO market, BPO providers are evolving beyond simple and isolated tactical processes toward strategic, cross-functional, and higher-value-added services. Thus, new models of service delivery, such as bundled outsourcing, are born out of necessity.

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Services trend watch: knowledge process outsourcing (KPO)

The traditional outsourcing delivery model has been to disaggregate highvolume and labor-intensive processes to offshore locations where they could be completed at much lower costs. However, with the growth of the MNCs and increased global competition for talent, the offshore outsourcing market has begun to move beyond the arbitrage of simple labor and capital to the offshore transfer of knowledge as well. While cost reduction remains a major benefit of knowledge process outsourcing (KPO), it is not the primary focus. Unlike ITO and BPO, KPO extends an organizations reach to all parts of the world, where it may access talent in its various forms: creativity, experience, independent thinking, and specialized skills. Instead of simply performing disaggregated functions, KPO teams directly support companies core businesses. Therefore, it is critical that KPO services retain the benefits of data and IT integration, physical security, and legal protection typical of onsite services. Depending on the industry, licensing concerns may present a significant barrier to successful KPO. Financial services and market research dominate the current KPO market, but significant potential awaits in animation, data, education, engineering, legal, pharmaceutical, and tax services. Industry experts anticipate that India will capture the majority of the global KPO market, although the countrys talent shortage is likely to hamper its progress. As China moves up the value chain and expands its service economy, it faces the opportunity to enter the KPO market. However, significant challenges lie in its path. Although China is producing impressive numbers of university graduates, its education system still needs to adjust. To win a larger share of KPO contracts, China must cultivate creative, independent and critical thinking, as well as communication and teamwork skills, in its current and future workforce.

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Services trend watch: bundled outsourcing

Accenture believes that many enterprises have already achieved the vast majority of the performance improvements that can be obtained from a single-function approach to shared services and outsourcing. Scaling up and expanding the scope of outsourcing initiatives beyond single business functions requires an approach that Accenture calls "bundled outsourcing." Bundled outsourcing means consolidating multiple business functions and their underlying IT systems with a single service provider and guiding the whole approach with a common system of governance. As organizations have matured in their experience with outsourcing, bundled outsourcing is fast emerging as a strategy used by business and government executives to drive greater value from their IT and business processes, and to improve business performance and increase bottom-line savings as they journey toward high performance. Executives are seeing the need to gain economies of scale across multiple business functions and to optimize end-to-end business processes that cross functional boundaries. One common example is to bundle the finance and HR functions, along with the applications supporting them, under a single provider. Other companies may bundle finance and procurement, learning and HR, or other key functions in different combinations appropriate to their needs, often bundling a particular function or business process with the underlying applications and infrastructure management. Certainly, bundling multiple functions into a single outsourcing contract can present its own unique challenges. However, with new kinds of governance models and a more effective supplier portfolio strategy in place, organizations can use bundled outsourcing as a means of achieving high performance.
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From the clients perspective, the bundled outsourcing model enables executives to coordinate the outsourcing of disparate business functions by sharing resources, applications and platforms. Providers may bundle BPO and ITO services to offer additional value to clients operations through the rationalization of the common underlying business applications and IT infrastructure. Bundled outsourcing also addresses the challenge of governance and eliminates the need to manage various providers and contracts.

Overview of global outsourcing hot spots

India remains the biggest player in the offshore outsourcing market. Yet despite its advantages of widespread English language skills and strong legal traditions, the nation faces significant challenges to its future success. For example, its workforce is experiencing rising attrition and salary costs, especially in established outsourcing cities such as Bangalore. As a result of such challenges, many MNCs are seeking alternative locations to supplement their continued outsourcing to India as well as to better manage their risks. Accenture predicts that no single country will replace Indias dominant role in the outsourcing industry any time soon. However, as technological and cost barriers come down, India likely will find that it is no longer the outsourcing worlds one-stop shop. Outsourcing destinations already have proliferated at incredible speed in both developing and developed countries. Each market has its advantages, particularly for its regional neighbors,
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and many governments have put programs and policies in place to attract further outsourcing investment. The Asia Pacific region, together with Australia and New Zealand, collectively boasts a large BPO business base, although many of its countries remain relatively expensive outsourcing destinations. Historical connections mean that many Asia Pacific nations offer excellent English skills and Western cultural compatibility. Singapore, for instance, while limited in population, has a highly skilled labor force backed by a strong infrastructure and government support for higher-end services. The Philippines has carved a niche for itself in the BPO market with its 77 million English speakers and its compatibility with Western culture. And Thailand, Vietnam and Malaysia are attracting attention for their improvements in education and technical skills on top of their growing English language abilities.

In Europe, European Union (EU) integration and expansion continues to add incentives to outsource within the EU. Central and Eastern European countriesparticularly the Czech Republic, Hungary, Poland, Romania, and Slovakiahave established themselves as mid to lowcost near-shore options that offer language and cultural compatibility with clients in more costly EU nations. Ireland is moving up the outsourcing value chain as another English-language destination. In Africa, the nation of South Africa offers strong English language skills and cultural compatibility, although concerns over political instability and infrastructure remain. Parts of francophone North Africa, particularly Morocco and Tunisia, also have positioned themselves to serve French markets. To many US outsourcing clients, Canada and Latin America seem appealing outsourcing destinations

due to their minimal time differences with the continental United States. To the north, Canada has long been a low-risk option with native linguistic, legal and cultural similarities. Yet, as costs rise, Canadas skilled labor force is quickly pricing itself out of basic outsourcing and into high-valueadded services. To the south, Mexico, Argentina and Brazil remain strong near-shore options. At the same time, many US companies are increasingly looking toward alternatives in the Caribbean and Central America. Appealing options in the Caribbean include Puerto Rico and the Dominican Republic, as well Jamaica, with its native English-speaking population, while in Central America, Costa Rica, El Salvador, Guatemala, and Panama have seen strong interest. In Figure 33, we take a closer look at the policies promoting outsourcing in India, the Philippines, Ireland, Canada, and Russia and compare them with the government efforts to support Chinas outsourcing market.
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Figure 33: Policies promoting outsourcing in five representative nations

Basic Statistics India

Tax Incentives

Policy Highlights National Association of Software and Services Companies (NASSCOM) Government policies overview19 Special regulations on Special Economic Zones20

GDP: $894.1 billion Tax tariff breaks from central Population: 1.13 billion government Language skills: Good Individual states offer further English incentives

The Philippines

Central government working to reduce international telecommunications costs Board of Investment, Philippines Economic GDP: $142.3 billion Income tax holiday for 4 Zone Authority and Business Processing Population: 91.1 years (extendable to 8 years) million for certain businesses registered Association of the Philippines promote and give incentives to industry Language skills: Strong in economic zones, followed English by an option to pay a special 5 percent gross income tax in lieu Permanent resident status for foreign of all national and local taxes21 investors and immediate family members Import tax and duty exemptions for capital equipment22 Unrestricted use of consigned equipment Additional deductions available for some labor expenses Exemption from wharfage dues, duty import and fees23 12.5 percent corporate tax, lowest in Europe Incentives under the Build-OperateTransfer Law, which includes government support for accessing Official Development Assistance and other sources of financing24

Ireland

GDP: $219.7 billion Population: 4.1 million Language skills: Native English

Irish Investment and Development Agency provides financial and practical assistance to businesses Government push to develop higher-end outsourcing in KPO and pharmaceutical R&D Education system produces 5,000 software programmers per year25 National incentive programs for R&D Some specific incentives in provinces and territories Russian Software Developers Association (RUSSOFT)

Canada

GDP: $1.144 trillion Population: 33.4 million Language skills: Fluent English and French GDP: $1.251 trillion Population: 141.4 million Language skills: No widespread foreign language fluency

Lowest payroll taxes among G7

Russia

None

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Chinas outsourcing opportunities and challenges in a multi-polar world

For Chinas outsourcing providers, todays multi-polar world presents two windows of strategic opportunity. First, providers may benefit from the influx of MNCs that have been drawn to China by its impressive economic growth. China already reigns as the worlds largest market for mobile phones, televisions and cars, and the nation is poised to become the biggest consumer market overall by 2025.26 MNCs come to China with deep experience and sophisticated operations, and they bring with them the capacity and desire to outsource services on a large scale. The Chinese outsourcing industry has the opportunity to capture a significant portion of these contracts. Chinese vendors also may add value for MNCs by supporting their other Asia Pacific operations. The Asia Pacific markets are expected to continue to demonstrate the fastest ITO and BPO growth of any region, and China already enjoys geographic, cultural and linguistic advantages

in serving the Japanese and Korean markets. Chinas outsourcing providers may use these opportunities as a springboard for regional expansion. And if they can translate and scale those experiences, effectively matching world-class standards, Chinese providers will be perfectly positioned to compete worldwide. Second, Chinas outsourcing providers may grow by serving domestic companies that conduct business abroad. Just as MNCs seek new opportunities in China, many leading Chinese companies are entering overseas markets. The Fortune Global 500 list contained 24 Chinese companies in 2007, up from 20 in 2006 and 16 in 2005. Chinas outsourcing vendors have a golden opportunity to leverage their existing relationships, local experience and resources to partner with these Chinese companies and serve overseas markets from their base at home. These factors create unique prospects for near and mid-term growth in

Chinas outsourcing market that are unequaled by any prospects enjoyed by its global rivals. To succeed in both of these scenarios, Chinese providers must develop capabilities that align with their clients specific needs. They must evolve the ability to provide bundled services and end-to-end process management offerings that are tailored to the breadth and sophistication of their clients operations, in areas such as application management, customer relationship management, finance and accounting, HR management, and procurement. Despite its bright prospects, China must uphold its end of the bargain in order to realize its potential. Already, China has begun by making massive investments in public education and infrastructure and is reaping the dividends of a decade of support for English and technology education. By contrast, competitor India faces basic infrastructure bottlenecks and struggles to manage a limited supply
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of labor and salaries driven up by unmet demand. NASSCOM, an Indian software industry association, predicts an IT industry labor shortage of 500,000 by 2010. With the benefit of steady government backing, Chinese universities have graduated 575,000 engineers in 2006 alonealmost twice as many as Indias universities, allowing China to steer clear of labor problems at this stage.27,28 Significant challenges remain for Chinas outsourcing industry. In an era of increasing economic openness, China will not be able to rely solely on its cost advantage. Its lower-end manufacturing companies are in the midst of learning this sobering lesson. Chinas ability to scale hinges on the quality, not the quantity, of the output from its education system. Despite increasing numbers of graduates, Chinas workforce must continue to improve its English language and management skills as well as gain a better understanding of the contract, legal and sourcing frameworks of Western MNC operations.
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In addition, while due diligence and security measures can limit risk exposure and help to persuade reluctant MNCs to outsource to China, the country also must continue to strengthen its legal system, improve intellectual property rights protection, and encourage service providers to obtain international standards certification. Chinas success also depends on a political climate that favors continued economic liberalization, allowing labor and capital to move more freely. A slowdown in the Chinese economy may disrupt the countrys social development and governance. If economic opportunities raise the nations fortunes, however, an unintended consequence might be skyrocketing incomes in Tier Two and Tier Three Chinese cities, which would have a significant impact on operating costs in businesses across the country.

As always, outsourcing investments are only as safe as the risks inherent in the host country and its market. If China can meet its opportunities with excellence in quality and a strategic commitment to growth, it can avoid the fate of becoming a destination for simple labor arbitrage. Success in the new global economy will not be easy. But China has the potential to become one of the worlds leading outsourcing hubs.

Outsourcing trend watch: Indian companies in China

Since Tata Consulting Services first entered China in 2002, other Indian outsourcing companies have followed suit, building a solid and significant presence of Indian companies there. Over the last five years, these Indian companies have set up their own full-scale development centers across China, formed strategic partnerships with both global MNCs and local players, built solid bases of support within the various levels of Chinese government, and aggressively expanded their talent base. At present, Indian outsourcing companies employ several thousand people in China and are planning to expand significantly by the year 2010. The Indian players do not merely view China as a low-cost delivery location from which to serve the local operations of many of their biggest multinational customers from the United States and Europe. They also see China as a springboard to the Japanese and Korean markets. And they have identified the value of Chinese corporations with global operations as potential clients, such as the Bank of China, China Mobile and PetroChina. Below we provide a glimpse of the China activities of three leading Indian IT outsourcing providers. TCS China follows a research first, business second approach: Invest in research and technology centers to build a solid foundation, then leverage this foundation to obtain global contracts and local business. Over the past three years, TCS has invested more than $10 million in China. This outlay has not only served as indication of the companys ambitious strategy, but it has also proven to the Chinese government that TCS is committed to the Chinese market. By the end of 2006, TCS China had served 25 clients in China, most of them Fortune 500 companies. In addition to traditional global clients like AIG, Citibank, GE, and Motorola, TCS has successfully developed a number of influential domestic clients in China, such as PBOC, CITIC Bank, Huaxia Bank, and China Telecom, which is a strong testament to the success of its China strategy. The key challenge TCS faces in China is acquiring and retaining top talent.
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Tata Consulting Services

Tata Consulting Services (TCS) was the first Indian outsourcing provider to launch its China strategy by establishing a Shanghai office in 2002. A year later, TCS set up a Global Development Center in Hangzhou, a representative office in Beijing, and an Oracle 11i technology center in Shanghai.29 Then, in 2007, TCS partnered with Microsoft and three local, government-backed software companies to set up TCS China, which focuses on the financial services, telecom and government sectors. The total cash investment of the joint venture is estimated to be $14 million.

According to TCS, recent Chinese college graduates do not meet the requirements the company has set for its Indian college graduates. To develop loyal and qualified teams of employees, TCS has begun working with local universities and Englishlanguage schools to provide special training to students who plan to join TCS after graduation. Over the next few years, TCS plans to expand its Chinese operations, increasing the number of employees to 5,000 and setting up subsidiaries in new cities, with Tianjin, Guangzhou and Xian named as contenders. It will expand its vertical-industry roster beyond financial services and telecom to include airlines, automotive and general manufacturing. TCS also hopes to enhance its position in the Japanese and Korean outsourcing markets, despite facing difficulties in hiring Japanese and Korean language speakers in Shanghai and Hangzhou. In addition to outsourcing, TCS plans to move into the fields of engineering and Six Sigma process consulting to serve Chinas large manufacturing base. TCS also will explore wellestablished small, local, industryoriented outsourcing companies (with 50 to 100 employees) as acquisition targets to drive its growth.

Infosys Technologies
Infosys Technologies (China) Co. Ltd. (known as Infosys China) is a fully owned subsidiary of Infosys Technologies Ltd. Headquartered in Shanghai, Infosys China began operations in 2003 with the goal of building a world-class delivery hub in China. With development centers in Shanghai and Hangzhou and a representative office in Beijing, Infosys China now has about 800 consultants providing ITO and BPO services to global and Asia Pacific clients. The Shanghai center focuses on IT services such as application development and maintenance, enterprise solutions, and independent validation services. The center in Hangzhou specializes in BPO services.30 Infosys established its China operations with a relatively modest investment in Shanghai, but two years later, the company committed $65 million to build additional software development centers in Shanghai and Hangzhou. The new facilities are designed for onsite traininga key asset as Infosys China looks to tap the nations deep talent pool. For its global offshoring work, Infosys China offers a cost-competitive delivery hub for customers interested in alternatives to India-based outsourcing. The company handles large enterprise solutions using SAP and Oracle platforms, and it offers Infosyss own core banking solution, Finacle, which can be deployed at large and mid-sized banks. In 2007, Infosys China became the first company in China to achieve CMMI Level 5 (V 1.2). In the same year, the company was certified to ISO 27001 standards in order to alleviate the security and intellectual property concerns of its global customers.

Wipro Technologies
Wipro got its start in China in 2004, establishing a 50-seat development center in Shanghai. Its initial customer base consisted of the Chinese offices of many of Wipros global customers, with an emphasis on the localization of software, implementation and support services. But Wipro has consistently taken the long view toward serving Chinas domestic markets and addressing the needs of its Japanese customers in China. For instance, since 2004, it has completed two pan-China roll outs of SAP applications in multiple cities for Olympus and for Sanyo.31 Wipro has moved rapidly to expand its footprint in China. Its multiple delivery centers in the Shanghai area and Beijing cater largely to the growing needs of multinational customers China operations. The company currently is planning a major expansion of its China operations and will likely grow from a few hundred people based in China to 2,000 by the end of the decade. But Wipros long-term plans call for capitalizing on Chinas enormous base of talent, setting up software development centers, and pursuing Chinese clients.32

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Part IV. Recommendations

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Charles Hunting - Managing Director Outsourcing, Greater China, Accenture

Recommendations for the Chinese government: Focus on creating capability and capacity for outsourcing though proactive demand generation. 1. Actively encourage and provide incentives for all government departments to pursue an outsourcing agenda. Leverage the skills and experience of global providers to create compelling value propositions and award service contracts though an open and transparent procurement processes. 2. Facilitate the movement of State Owned Enterprise (SOE) backoffice processes and functions to outsourcing providers. Use this as a means to drive transformational change and best practice into a suite of businesses getting ready for competition on the global stage. 3. Continue the education and information agenda in relation to outsourcing. Structure industry briefings that address not only the how and what to outsource but more importantly the why. Imbed the underlying concepts of a service based economy into the appropriate university curriculums. Recommendations for service providers: Focus on value creation. Build service delivery models that solve the unique problems associated with doing business in the worlds fastest growing economy. 1. Look to create collaborative partnerships that bring together diverse skills and experiences to solve local client problems. Partner with local and multi-national providers to leverage specific relationships and enhance competitiveness. 2. Build assets and offerings specific to solving problems unique to economies in hyper growth mode. Not only will this provide real competitive advantage in China, it will be the key to delivering services, business models and cost structures that help drive the next generation of outsourcing in North America and Europe. 3. Focus on delivering cultural and relationship synergy. Providers that truly understand their clients business and work together collaboratively to deliver outcomes will enjoy the best results. 4. Build a business that first focuses on countries in Asia Pacific. This region will become the engine of the world economy and will fast become the cornerstone of our business. Recommendations for potential clients: Achieve high performance through innovation and resilience. Focus on building partnerships rather than client/vendor hierarchies to ensure flexibility and joint problem solving this is what will make your business grow, be more profitable and competitive. 1. Align all outsourcing considerations to the CEO/boards agenda and remember that the most successful engagements are sponsored at this level. Make sure you have the right level of interactions and executive engagement of your providers executives. 2. Work collaboratively with your partner to build a solution specific to your business problem. Start with the definition of business outcomes you are looking to achieve and the respective roles and the principles that will underpin your mutual success. 3. Expand your thinking beyond back-office outsourcing. Some of the best opportunities come from changing the way you integrate with your customers and suppliers.

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References
1

Rover sold to Nanjing Automobile, 23 July 2005, BBC, http://news.bbc. co.uk/2/hi/business/4708739.stm; Huawei accepts 3Com's bid offer to purchase its stake in H3C, 29 Nov 2006, Huawei press release IDC, BPO, Offshore, Worldwide Offshore Key Horizontal Business Outsourcing Services 2007-2011 Forecast and Analysis Mark Boyle and Andrew Sleigh, Chinas Outsourcing Opportunity, white paper Gartner press release, http:// www.gartner.com/press_releases/ asset_123795_11.html Accenture definition, supported by common industry definitions presented by IDC and other third-party industry observers Gartner, "Forecast: Outsourcing, Worldwide, 20002012", 2008 Ibid. Ibid. Cyrill Eltschinger, Source Code China: The New Global Hub of IT (Information Technology) Outsourcing, Sep.2007 One refers to the cities of Beijing, Shanghai, Dalian, and Shenzhen Two cities include Chengdu, Xian, Tianjin, Hangzhou, Wuxi, Wuhan, Nanjing, and others designated by Chinas government report of China IT Outsourcing Service Market 2007-2008, CCID, 2008 Market View Database, IT Services Market Metrics, 2008 risk is based on the responses from local providers. It reflects the difficulty of developing new clients while retaining existing clients in different geographic markets

21 http://www.peza.gov.ph/invest_

31 Wipro

incentives.htm
22 http://www.peza.gov.ph/invest_

incentives.htm
23 http://www.philippinebusiness.com.

delivers a multi location SAP rollout for Olympus (Beijing) Sales & Service Co. Ltd., Wipro press release, Sept 27, 2004, http://www.wipro.com/ news/newsitem1/newstory359.htm

ph/archives/magazine/vol9-2002/9-5/ technology.htm
24 http://www.peza.gov.ph/invest_

32 India's

incentives.htm
25 http://offshoreitoutsourcing.com/

Wipro plans big expansion in China, IDG News Service, Feb 26, 2008, http://www.networkworld.com/ news/2008/022608-indias-wipro plans-big-expansion.html

Pages/Ireland.asp
26 EIU-Accenture

analysis. PPP adjusts for differences between countries in the price of a standard basket of goods and services 350,000 engineering graduates are produced by colleges and universities in India each year. Of these, approximately 120,000 specialize in information technology (versus 75,000 US engineering graduates that specialize in information technology disciplines). http://www.cc.gatech.edu/education/ undergrad/bscs/threads_whitepaper. pdf engineering university graduates in 2004; 575,634 engineering university graduates in 2006. http://www.stats.gov.cn/tjsj/ ndsj/2005/html/U2113c.htm; http:// www.stats.gov.cn/tjsj/ndsj/2007/html/ U2113c.htm TCS site, http://www.tcs. com/worldwide/asia/locations/china/ Pages/default.aspx; TCS Focuses On China Market, ChinaTechNews. com, Sept 22, 2004, http://www. chinatechnews.com/2004/09/22/1829 tcs-focuses-on-china-market/ Infosys China site, http:// www.infosys.com/china/english/ default.asp

27 Approximately

7 8 9

28 442,463

10 Tier

11 Tier

29 Overview,

12 Annual

13 Gartner, 14 The

30 Overview,

15 Gartner, 16 Ibid. 17 Ibid. 18 Ibid.

Forecast: Outsourcing, Worldwide, 20002012, 2008

19 http://www.nasscom.in/Nasscom/

templates/NormalPage.aspx?id=6169
20 http://www.nasscom.in/Nasscom/

templates/NormalPage.aspx?id=6157
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Copyright 2008 Accenture & CCIIP All rights reserved. Accenture, its logo, and High Performance Delivered are trademarks of Accenture. CMMI is a registered trademark of Carnegie Mellon University. ISO is a registered trademark of the International Organization for Standardization. This document makes reference to trademarks that may be owned by others. The use of such trademarks herein is not an assertion of ownership of such trademarks by Accenture and is not intended to represent or imply the existence of an association between Accenture and the lawful owners of such trademarks.

About Accenture
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