China Outsourcing Market Research 2009 · 3.1 Overview 57 3.2 Brief overview of government policies...

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China Outsourcing Market Research 2009

Transcript of China Outsourcing Market Research 2009 · 3.1 Overview 57 3.2 Brief overview of government policies...

Page 1: China Outsourcing Market Research 2009 · 3.1 Overview 57 3.2 Brief overview of government policies 58 3.3 Brief Introduction of the ChinaSourcing brand 61 3.3.1 Overview 61 Case

China Outsourcing Market Research 2009

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Table of Contents

Foreword 5

Executive Summary 7

Part One: About the research 8

1.1 Research objectives 10

1.2 Defining the outsourcing industry 10

1.3 Key research findings 12

Part Two: Chinese domestic market 14

2.1 Market overview 15

2.1.1 Global demand for outsourcing services 15

2.1.2 The Chinese outsourcing market 16

2.2 Service provider landscape 18

2.2.1 Service provider landscape overview 18

2.2.2 Service provider landscape by performance 20

Case study one: Improving processes to support delivery and growth 24

2.2.3 Service providers landscape by product offerings and revenue 26

2.2.4 Growth constraints for service providers 27

Case study two: The emergence of a whole process finance service provider 30

2.2.5 Future trends for service providers 32

2.3 Buyers landscape 33

2.3.1 Overview of the buyers of Chinese service providers 33

2.3.2 Buyers landscape by target markets 36

Case study three: A Chinese company in the Japanese market 38

2.3.3 Overview of outsourcing revenue for Chinese service providers 40

Case study four: Releasing demand in the Chinese market 42

2.3.4 Buyers landscape in domestic markets 44

Case study five: Releasing government outsourcing demand 46

2.4 Analysis of outsourcing landscape by industry 48

2.4.1 Overview 48

2.4.2 Outsourcing landscape in the financial services industry 49

2.4.3 Outsourcing landscape in the telecommunications industry 53

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Case study six: Exploring opportunities in the telecommunications industry 54

Part Three: Overview of Government promotion activities and the ChinaSourcing brand 56

3.1 Overview 57

3.2 Brief overview of government policies 58

3.3 Brief Introduction of the ChinaSourcing brand 61

3.3.1 Overview 61

Case study seven: Profile of an outsourcing model city 64

Part Four: Significant phenomenon and hot topics in the Chinese outsourcing market 66

4.1 Trend watch: Migration of delivery centers from Tier One cities to Tier Two cities 67

4.1.1 Overview 67

4.1.2 Analysis of reasons for migration trend 68

4.2 Trend Watch: Mergers & Acquisitions 70

4.3 Trend Watch: Shared service centers (SSC) 73

4.3.1 Chinese SSC Overview 73

4.3.2 Chinese SSC Landscape 73

4.3.3 Profiles of a MNC SSC and a local SSC 74

4.3.4 Future Outlook for SSCs 75

4.4 Hot Topic: The impact of financial crisis 76

4.4.1 The impact of the financial crisis on service providers 76

4.4.2 Analysis of the impact of financial crisis on the Chinese outsourcing industry 76

4.5 Hot Topic: Outsourcing industry and employment 78

4.5.1 Overview 78

4.5.2 Offshore business and employment 79

4.5.3 Domestic business and employment 79

4.5.4 More graduates are interested in the outsourcing industry 79

Conclusion 80

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China continues to be an exciting and dynamic place to do business. When our team began the research last year we hoped to find out more about the Chinese outsourcing industry and to provide information to buyers, the government and service providers to help the sector grow. The report enjoyed a warm reception, and we felt it important to go back and examine how the sector responded to the global financial crisis.

The three big advantages we identified for China last year still hold true. First, China’s government is committed to developing a world-class service sector with outsourcing at its core. Second, China boasts an education system that reaches deep into Chinese society thereby enabling a future talent pool of unprecedented size and impact. And third, China’s outsourcing firms will continue to have, for some time, a low-cost advantage.

Some of the suggestions from last year’s report found a sympathetic audience, and the government has provided incentives for government departments to pursue an outsourcing agenda, continued the education and information agenda in relation to outsourcing, and started to facilitate state-owned enterprises (SOEs) movement towards using outsource providers for some back office processes and functions.

This year we found that there is better local understanding of outsourcing and its capabilities and this is reflected in the growth of the domestic market which has insulated Chinese service providers from some of the downturn in the global outsourcing market. However, while service providers in China have begun to build scale through M&A

deals, most are still not big enough to compete for the global mega-deals. Brand was identified this year as a rising factor in the development of the sector and China and Chinese service providers still need to develop their brands to compete with foreign outsourcing providers. Until a service provider emerges with sufficient scale and a global reputation, the fiercest competition within China will continue to be between Chinese firms and based multi-nationals with operations in China.

The research continues to tell the story of the development of the Chinese outsourcing sector – a story which my team and I are excited to be part of as we use our outsourcing experience to help our Chinese and our global clients to become high-performance businesses.

Charles Hunting, Managing Director – Outsourcing Great China, Accenture

ForewordBy Charles Hunting, Managing Director — Outsourcing, Greater China, Accenture

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Foreword

The Chinese outsourcing sector continues to enjoy rapid growth despite the global financial crisis which has resulted in a slump in China export trade. Although the emerging Chinese outsourcing industry is still in its infancy, the China outsourcing sector is drawing the world’s attention with its huge market, abundant human resources, and relatively low cost value propositions.

This report gives a complete and accurate picture of the ongoing development of China’s outsourcing industry and its market characteristics. Many experts, entrepreneurs and government officials have contributed to this report.

Our research has the Chinese domestic service market is gradually gaining attention from global service providers. Although the current service purchase volume from domestic buyers remains relatively small, our research indicates a huge potential for domestic market growth within the next 5 years, primarily due to the improvement of IT management and the government’s incentive policies.

Emerging Chinese service providers are already experiencing robust growth and are scaling capabilities to meet this growth. Faced with the challenges borne from the global financial crisis, the Chinese outsourcing sector has maintained a healthy and consistent development schedule. According to our 2008 survey of China’s top 10 leading service providers, the increasing growth of these top 10 slowed slightly due to the financial crisis, however, the average number of staff increased to over 5,000 and turnover per person stood at around $30,000 USD, which increased by

30.7% and 34% comparing with 2007 respectively. However, there is still a long way for China’s service providers to go to catch up with the international leading service providers.

This report also makes useful analysis and assessment on the development dynamics of the Chinese outsourcing industry. It’s more readable by providing insight into the following trends: the delivery centers have transferred from Tier One cities to Tier Two cities; domestic service providers have begun to pay their attention and start the research on the launching of Mergers & Acquisitions (M&A) at domestic and overseas markets; and the shared service centers (SSC) have witnessed a rapid development.

I sincerely hope that 2009 China Outsourcing Market Research, accomplished by the research team from Accenture and CCIIP, will be of great value to our industry insiders, and we hope to share the research results with all the friends who cares for China Outsourcing Market.

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

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

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The Chinese outsourcing sector continues to grow rapidly despite the global financial crisis which has resulted in a downturn in the global outsourcing market. 58% of local revenue for Chinese service providers last year came from domestic buyers. As the global market has slowed, Chinese service providers have looked to local buyers and have expanded their service offerings into business process outsourcing (BPO) and knowledge process outsourcing (KPO) to meet growth targets. The result has been fierce competition among Chinese service providers and multi-national corporations (MNCs) with Chinese operations. Domestic demand will continue to grow through state-owned enterprises (SOEs), branches of MNCs operating in China, private enterprises, and federal and state government.

Information technology outsourcing (ITO) is still the biggest source of revenue for Chinese service providers, comprising over two thirds of revenue last year. ITO services also seemed to be resistant to the global economic crisis. BPO and KPO services are new to the market and require market maturation before they grow to the size of the ITO market. Within ITO, there is a strong focus on customized software development, while the majority of BPO deals are for industrial specialized outsourcing.

A number of constraints to future growth were identified by service providers, including - lack of talent, absence of a strong brand and shortage of capital. The lack of talent needs to be addressed through uniform training and assessment and continued training by Chinese service providers. The absence of a strong brand was identified at a national and individual service provider level and is being addressed by the establishment of the national outsourcing institution, and the efforts of model cities to promote industry experience overseas. ChinaSourcing, a working committee under CCIIP, selected the top 10 and

100 fastest growing service providers to help promote China internationally. But companies must grow to become global players. To date there are still very few firms with the size or experience to challenge Indian players for the global mega-deals.

M&A is becoming an increasingly accepted tool for growth with 31 percent of respondents saying they have considered or completed an M&A deal in the past twelve months. The most attractive targets for an M&A deal were identified as either other Chinese service providers or overseas branches of a MNC. Lack of access to capital is a constraint with short-term loans being identified as the most difficult to obtain. As a result, Chinese service providers rely on their own funds for growth.

There is optimism in the industry that all constraints will be addressed other than the issue of staff attrition. With a quickly growing sector, talent is mobile and will be in demand, thereby increasing the challenges from attrition. For example, as firms move from first to second tier locations in an effort to control costs, talented staff members are often unwilling to move to less favored locations.

Shared service centers (SSCs) are a growing trend and provide an approach for large companies looking for a strategic move into outsourcing. SSCs are stand alone companies that initially provide outsourcing services to just their parent company. As they grow in size and experience they begin to offer services to a wider external market thereby turning a cost center into a profit center. But to succeed SSCs must be supported by the founding company with capital and personnel.

Executive summary

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Part 1

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About the research

In 2009, the State Council issued the document, Reply to issues on the promotion of development of service outsourcing industry (No.9, 2009 of the General Office of State Council), to encourage the development of a Chinese outsourcing service sector which, ultimately, would take a place in the ranks of the world’s leading outsourcing centers.

In tandem with the 1000-100-10 initiative, the China Council of International Investment Promotion (CCIIP) also 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 China’s 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 was designed and led by a team of Accenture and CCIIP industry researchers and outsourcing experts. The research centered on two multiple-choice surveys. The first survey, which focused on outsourcing buyers was sent to senior managers at local Chinese companies, senior managers in China at multinational corporations (MNCs) with Chinese operations, and senior managers at the global headquarter offices of these MNCs. (MNCs were defined as companies in which foreign investment comprises more than 50 percent of the companies’ capital structure). A separate survey, which focused on outsourcing service providers, was sent to senior managers at locally owned and multinational service providers across China.

Altogether, the research team sent the questionnaires to 120 outsourcing buyer companies, and received a response from 31 of them (25.8 percent). Three hundred questionnaires went out to service providers, and 101 (33.7 percent) responded. The questionnaires were sent by e-mail and were followed up by phone calls. All survey responses were confirmed in follow-up phone calls. To ensure and complement the detailed and precise survey findings, the research team also conducted 16 in-depth interviews with executives across China’s outsourcing industry, including 2 government officials involved in the outsourcing industry.

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1.1 Research objectivesLast year’s report, Outsourcing Market Research — China and the World 2008, covered 53 service providers, 37 buyers, included 15 interviews, and was successfully launched at the China Outsourcing Summit 2008. However, with the impact of the financial crisis being felt across the globe, it was important to update the research and examine the impact of the crisis on the Chinese outsourcing sector. It is hoped that the research will help potential buyers to better understand the capacity of the Chinese outsourcing industry, help Chinese service providers to better understand emerging trends and the requirements of buyers, and to assist government policy makers by providing an updated overview of the domestic and overseas outsourcing industry.

The objectives of the joint research project were adjusted to address the changes in the outsourcing market in Year 2009:

•TogiveChineseserviceprovidersan overview of the outsourcing landscape and alert them to important points and future trends.

•Tohelpthepotentialbuyersbecomefamiliar with and understand the outsourcing industry in China, including the current business environment, government promotion policies, delivery capacities, and competitive advantages.

•Toprovidethegovernmentofficialswith a strategic view of China outsourcing which could serve as a reference to assist with decision making about the sector.

As this is the second year of the research program, Accenture and the China Council for International Investment Promotion (CCIIP) decided to build on the findings from last year and focus on the domestic outsourcing market. The analysis was carried out by vertical industries: Finance, Government, Manufacturing, Retail, Education, Service1, Energy & Utilities, Transportation, Media, Telecom, Public, and Healthcare.

In order to reflect the current state of China’s outsourcing strategy, the research focused on the domestic market, including service providers and buyers. About 75% of the responses from service providers were from Chinese domestic service providers, including 41% with international branches and 34% with purely domestic operations.

Because the study was undertaken to reveal the decision making process and considerations of buyers in outsourcing projects, the research targeted the buyers’ leadership teams. Moreover, as ITO still dominates the Chinese outsourcing market, the research targeted CIOs of buyers with a relatively small number of respondents from CFOs and other leaders responsible for business operations. The majority of the responses from service providers are from the senior managers. (See Figure 1.1)

1.2 Defining the outsourcing industry As the outsourcing marketplace changes dynamically, so does the scope of the outsourcing industry. Outsourcing is defined differently by vendors and buyers and there is still no global standard definition of the outsourcing industry. However, to promote the development of the Chinese outsourcing industry, the government published Scope of Advanced Technology Service Enterprises (Pilot) in early 2009, which defined outsourcing service providers as advanced technology service enterprises.

In general terms, ITO refers to the outsourcing of information technology (IT) processes in order to deliver IT-related products and services such as information system maintenance and operation, and software research and development. Similarly, business process outsourcing (BPO) is subject to many different interpretations. Accenture’s perspective is that BPO refers to certain types of critical but non-core business processes provided and managed by specialist service providers. The business processes tend to be operations-oriented rather than strategic, typically higher-volume and lower-margin processes in terms of profitability, and rarely involve a business’s differentiating core activities. A new type of outsourced service is also emerging in the international arena knowledge process outsourcing (KPO) which is defined as the high-end outsourcing offering including contract research organizations (CROs) and other knowledge-based and technology-based services, such as intellectual property, animation and Web design. (See Figure 1.2)

Using these definitions, some traditional IT services are now included in outsourcing scope so the revenue analysis will not be compared to last year’s results.

CEO

CFO

CIO

Senior management department

Junior management department

Others

1%

1%

2%

55%

20%

VP, CTO

President/GM assistant

Junior level employee

5%

9%

6%

Marketing department

Planning department

Administration department

Other departments

12%

11%

10%

8%

26%

Figure 1.1 Status of respondents from service providers

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Figure 1.2: Definition of outsourcing terms

Business type Definition2

ITO Information system maintenance and operation

Information system maintenance service

Entire infrastructure maintenance processes, including network access and system maintenance, etc

Basic IT service Entire infrastructure operation services, including IT spend management, data center services, security services, communications services, etc

Software development

Software R&D Overall development of complete packaged software as a discrete product for sales by buyers

Customized software development

Software development service, usually as an application system and not a software product itself

Embedded software Development of software embedded in other products

Software localization Translation of software content into multiple foreign languages

Software testing Customized and integrated test practices, both manual and automated

IT R&D service Including IC design, testing and related technical support services, and e-commerce platform to provide information and other services

BPO Internal management service

Finance & Accounting

Typically procure to pay, order to cash and record to report processes

HR HR activities and administration processes across the entire employment cycle

Training & Learning Administrative and transactional components of technical training and soft skills training, including the sourcing and development of training content

Operation service Customer relationship

Functions such as buyer relationship management, including call centers, call center management and other related services

Industrial specialized outsourcing

Particular services such credit card services in the financial services industry, which are unique to the particular industry, including financial services, manufacturing operations, retail, health care, etc. industry-specific business process outsourcing services

Customized business process

Including services in business processes of a particular buyer

Supply Chain management Including procurement, and supply chain / logistics services

Business process design service Process design services and other related services to internal management and business operation, such as consulting services

KPO Including intellectual property, pharmaceutical and biotechnology R & D and testing (contract research organizations), animation and Web design, and courseware development and education

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1.3 Key research findingsFor service providers •AlthoughtheTier1cities,Beijing

and Shanghai are still the largest outsourced service delivery centers, the salary gap between Tier One and Tier Two cities is likely to push more service providers to shift services and delivery centers to lower cost destinations.

•Whilesolidgrowthisexpectedinthe Chinese outsourcing market despite the global economic crisis, leading service providers still need to improve their scale and capability to successfully compete for big and stable contracts.

•AlthoughITObusinessaccountedfor over two thirds of the total outsourcing revenue, BPO and KPO business are growing and it is anticipated that they will continue to grow.

•Thefinancialcrisishasthreatenedoverseas business of some local service providers, but has had a very limited negative impact on domestic business. BPO services seem more resilient to the financial crisis compared with ITO and KPO services.

•Tocompensateforadeclinein business opportunities and profit margins, some local service providers extended their business offering from ITO to BPO services and into each others’ markets, thus introducing greater local competition. As a result, competition among domestic Chinese outsourcing providers and MNC outsourcing providers with operations in China is even more intense than their competition with Indian players.

•BothChineseprovidersandMNCproviders identified quality of service as the most important factor for business development while reputation emerged as a critical factor this year.

•Themajorbarriersthatconstrainthe development of service providers are identified as lack of talent, lack of a strong brand and lack of capital, as well as the impact of the financial crisis.

•Serviceprovidersexpecttheissuesaround access to talent, quality and reputation will improve, while they have found that the pricing advantage in China seems to endure. However, the area identified as the most uncertain to improve is staff attrition.

•Internalsharedservicecenters(owned and managed by buyers themselves) are likely to have a significant impact on local service providers in the near future especially in the financial services and telecom industry.

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For buyers•MNCbuyersfocusingoncost

cutting are considering moving their delivery centers to lower cost locations which would include China.

•CIOsidentifiedtheirmajorchallenges as: enterprise IT costs and revenue trade-offs, IT service management and IT governance, and implementation of data backup and disaster recovery strategies.

•Whilelocalbuyersgenerallyhavemore in-depth understanding of the outsourcing business than last year, they still need further education on the benefits and opportunities of outsourcing.

•Overhalfoftherespondentswereplanning to outsource some services in the next six months and no respondents reported that they were planning on changing their outsourcing strategy because of the financial crisis.

•Limitedvaluecreationandcost reduction, and operational complexity were identified as the two main reasons for buyers rejecting outsourcing as a strategic approach while efficiency improvement and cost saving were the main reasons identified to adopt outsourcing services.

•Thecriticalfactorsforselectingservice providers were identified as: quality of service, skilled workforce, industry experience, intellectual property protection, and service price.

•TheexpectedimprovementsinChina’s outsourcing capabilities were identified as confidentiality, synergy between the parties, and government regulatory/policies to promote the industry.

•Somestate-ownedcompaniesfocus on the stability of personnel and centralized control rather than cost reduction and profit maximization when taking the decision to outsource.

•Forsomelocalbuyersthepathintooutsourcing services was to spin-off shared service centers for their IT and other related departments into independent service providers.

For the government•Anumberofdifferentministriesof

the Chinese government and local governments have launched a series of policies for the promotion of the Chinese outsourcing industry.

•Whilesomegovernmentdepartments may consider fully outsourcing services, most tend towards staff augmentation where the outsourcing provider simply provides bodies and the buyer manages them directly to support their requirements onshore rather than offshore.

•China still lacks a unified brand approach to promoting Chinese outsourcing capability, and current promotional activities are scattered, uncoordinated and not effective enough.

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Part Two

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2.1 Market overview

2.1.1 Global demand for outsourcing services The global economic crisis of 2008 and 2009 has had an adverse affect on the demand for outsourced services across global markets. However, the IT services market has shown the greatest resiliency within the outsourcing sector. Figure 2.1 shows reduced growth rates across all IT services for 2009. Core management services spending for ITO and BPO is forecasted to be relatively flat year over year; this finding includes services such as enterprise application outsourcing in ITO and customer relationship management in BPO, with ITO spending forecast at US$268 billion, BPO at US$156 billion in 2009, and discrete IT services at US$337 billion, respectively with a decrease rate of 4.4, 4.2 and 7.2 percent.3 (See Figure 2.1)

Chinese domestic market

Figure 2.1 Global outsourcing market overview4

$Billion

ITO BPO Discreate IT services Growth rate of IT service

CAGR 3.4%1000

900

800

700

600

500

400

300

200

100

0

12%

10%

8%

6%

4%

2%

0%

-2%

-4%

-6%

-8%2007 2008 2009 2010 2011 2012 2013

10.7%

8.2%

-5.6%

3%

4.6%

5.4%

745

806761

784820

864912

5.5%

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2.1.2 The Chinese outsourcing market Although affected by the global economic situation, China’s outsourcing industry enjoyed a rapid development during the first half of the year due to the active promotion activities of the Chinese government. According to the official statistics, the total IT service market reached RMB757.3 billion (equivalent to US$118.7 billion) with a growth rate of 29.8 percent in 2008.5 The total offshore signed contract volume in 2008 is US$5.84 billion while total offshore executed contract volume is US$4.69 billion.6 (See Figure 2.2)

In the first half of 2009, 1406 new service providers entered the market, and a total of 297,000 new jobs were created in outsourcing, bringing the total number of outsourcing service providers in China to 6,637 and total employment in the sector to 1.2 million people. Through June 2009, the executed contract volume in the sector was US$3.29 billion, of which the offshore outsourcing business accounted for 77.8%, an increase of 42.4% compared with the same period of last year.8 The cumulative executed contract volume reached US$14.24 billion, of which the offshore outsourcing business accounted for 94.9%.9

Signed contract volume Executed contract volume

Others,0.46,7.9%

ITO, 4.07,69.7%

BPO, 1.31,22.4%

Others,0.42,9.0%

ITO, 3.21,68.4%

BPO, 1.06,22.6%

OthersITO BPO $Billions

Figure 2.2 China offshore outsourcing market overview, 20087

Note: “Others” refer to KPO business and other outsourcing related services.

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Source: Accenture/CCIIP study: Outsourcing Market Research, 2009

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Fact sheet on China’s outsourcing 2009

Buyer composition by country On average, about 47 percent of the revenues of Chinese outsourcing providers come from domestic buyers. Just 21 percent of revenues come from Japan and Korea, and 29 percent from U.S. and EU (including China branches of MNCs from the countries above)

Buyer composition by industry The greatest numbers of buyers are from the manufacturing and financial services industries. In the United States and Europe, manufacturing, finance and service industries are major customers for Chinese outsourcing services. In Japan and Korea, telecom and service industries

are also significant buyers of Chinese service providers. In China, government agencies and the telecom industry are the largest customer- groups while the government is cited as most important source of business in next 3 years.

Best-selling ITO services Demand for ITO in China is greater than the demand for BPO, with a universal preference among consumers of all nationalities and industries for customized software development, information system maintenance service, software research and development (R&D), in that order.

Best-selling BPO services Industrial specialized outsourcing services rather than customer relationship management services are the most common BPO projects purchased by all the foreign and domestic buyers.

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3%

KPO N=80/44/15ITO BPO

0% 0%

24%

2%

7%

16%

11%

7%

15% 14%

0%

26%

30%

20%

15%

41%

53%

1% 2%

13%

80’s 90’s 2000-2002 2003-2004 2005-2006 2007-2008 2009 H1

Figure 2.3 Entry into the market in ITO, BPO or KPO

Note: ITO: When the service providers began their ITO businesses. BPO: When the service providers began their BPO businesses. KPO: When the service providers began their KPO businesses.

2.2 Service provider landscape

2.2.1 Service provider landscape overview The Chinese outsourcing industry is 20 cities have been designated as China Outsourcing Model Cities 20 cities have been designated as China Outsourcing Model Cities and have been broken into two tiers. Tier One cities include Beijing, Shanghai, Dalian, and Shenzhen, while Tier Two cities include Chengdu, Xi’an, Tianjin, Hangzhou, Wuxi, Wuhan, Nanjing, and others designated by China’s government. Almost all of the major service providers are located in these model cities. The revenue of offshore business, in these cities accounted for about 90 percent of the total in 2008.10 A new trend emerged in this year’s research; service providers are migrating from the Tier One cities to the Tier Two

cities. This will be discussed in more detail in section 4.1: Trend watch: Migration of delivery centers from Tier One cities to Tier Two cities.

Service providers who initially offered ITO services are expanding their services to include BPO and KPO services. Our survey results reveal that Chinese firms initially enter the outsourcing market by offering ITO activities and, when they have become more established, move into BPO and KPO services. Figure 2.3 shows that more than one half of the KPO service providers entered the market after 2007. (See Figure 2.3) However, unlike ordinary discrete IT services or traditional ITO business, service providers offering BPO and KPO services require specialized sector understanding and good industry experience. These requirements have created a barrier to access for some firms and successfully addressing them will separate the long-term survivors from the also-rans.

Although ITO accounted for over two thirds of the total outsourcing revenue, BPO and KPO are expected to grow in value. (See Figure 2.4) The average ratio of ITO to BPO services in the global market is around 1.711; however the ratio in China is over 2.3. There are a number of reasons why the Chinese market has lagged behind. First, BPO and KPO services are relatively new to the market and are developing as service providers move from ITO to other service offerings. Second, a number of the vertical industries in China are still maturing and are not ready to purchase BPO and KPO offerings.

However, China is still making progress in its program of economic reform and industries continue to consolidate and upgrade their systems and processes. For example, recent finance reforms to encourage competition in the global sector resulted in the regulation of daily operations and standardization

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of some business processes within financial institutions. Moreover, the reorganization and reform of the telecommunication industry intensified competition in the sector, resulting in an increased demand for effective cost reduction and efficiency improvement. Further development and innovation within industries, coupled with in-depth understanding, standardization and optimization of business processes will significantly increase future demand for BPO and KPO.

An increasing number of Chinese service providers are obtaining CMM/CMMI® certification and other international certifications and qualifications.Over half the firms included in our research are already CMM/CMMI® certified, and over 10 percent of service providers have achieved CMM5/CMMI5 certification, the highest level of CMM/CMMI certification. In addition to CMM/CMMI® there are other international certifications and qualifications such as ISO27001 and SAS70 which some firms have achieved. The trend towards international certification and qualification indicates the importance for Chinese firms to prove their maturity of delivery capacity, standardized management processes, and reliable service quality, as they look to build their reputation and narrow the gap with foreign rivals allowing them to compete for significant offshore contracts.

China’s outsourcing sector is consolidating further while numerous mergers and acquisitions (M&A) occurred at home and abroad. According to the data from CCIIP, the top 10 leading service providers and 100 growing enterprises contributed $1.5 billion and $1.57 billion to the total revenue from outsourcing business, which equates to 32 per cent and 33.5 per cent respectively of the national total. It is evident China’s outsourcing service providers can be classified into three distinct ladders: the top 10 enterprises are the first ladder; the 100 growing companies belong to the second ladder, and the rest fall into the third ladder. Each of the ladders represents one third of the total revenue.12

Currently, the scale of service providers is a critical factor for survival in the intense competition of the outsourcing industry. Moreover, M&A is an efficient way to help address the talent crunch problem, which is cited as the top barrier constraining development.13 However, according to the survey data, only 31 percent of respondents have already completed or are in the progress of an M&A deal currently.14 There is still a large gap in the scale between leading Chinese service providers and Indian players, so the Chinese service providers should accelerate consolidation through M&A, as well as focusing on organic growth. More details about M&A will be discussed in section 4.2, Trend Watch: Mergers & Acquisitions.

MNC outsourcing providers with operations in China emerged as the biggest rivals but not to Indian firms. The demand for outsourcing services and the price charged for the services decreased during the financial crisis, which compressed profits and threatened the survival of many service providers. To survive, service providers were forced to expand into other providers’ business areas to find new opportunities. At the same time, the need for expansion and business development required the service providers to find new growth points. However, the Chinese service providers still lack of the capacity to challenge the Indian players sufficiently, and, as a result, have to compete with each other, resulting in intensive competition among MNC outsourcing providers with operations in China.

As a result of declining market size, more than half of the local Chinese outsourcing providers cited MNC outsourcing providers with Chinese operations as their most formidable global competitors followed by the Indian service providers. There are two possible approaches to relieve the intensity of the internal competition: first, increasing domestic demand by the release of further work into the market (primarily from state-owned enterprises and government departments); second, encouraging mergers between large-scale service providers which would result in firms with sufficient capacity to fight for the market share with Indian service providers.

Figure 2.4 China outsourcing market breakdown by service types, 2008

N=69

BPO29%

KPO3%

ITO68%

Figure 2.5 Percentage of surveyed Chinese service providers with respective qualifications, 2008

CMM5

CMM4

CMM 1-3

CMMI5

CMMI4

CMMI 1-3

ISO27OO1/BS7799

ISO20000

SAS70

3%

1%

7%

8%

5%

30%

29%

21%

3%

CMM=11%

CMM=43%

N=101

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Both Chinese providers and MNC providers view quality of service as the most important factor for winning new business while reputation emerged as a critical factor this year. From Figure 2.6 below, the categories represent the factors that are critical, important and neutral to business development efforts and future success, as gauged by both MNC providers (U.S. and E.U. plus Indian providers) and Chinese providers. Quality of service is viewed as equally important by both Chinese providers and MNC providers, followed by security and intellectual property protection. In contrast to last year, the reputation of service providers has emerged as a new critical factor mainly due to the uncertain economic environment.

U.S. and E.U. service providers appear to have a competitive advantage in all the identified critical areas including quality of service. Survey respondents ranked MNCs as offering superior service to buyers but stated that China’s providers have the upper hand on price and geographic proximity to the Japanese and Korean markets.

The financial services industry is an important source of outsourcing business while buyers from high-tech and telecom are believed to be most important.15 The financial services industry is the second largest source of all target buyers except for domestic U.S./E.U. branches, while manufacturing, telecom, government and services take the largest proportion respectively in different groups. The largest and most important buyers are found in the domestic high-tech and telecom industries, the foreign manufacturing industry and the Chinese government. More details can be found in section 2.4, Analysis of outsourcing landscape by vertical industry.

The financial crisis has impacted overseas business but service providers have confidence in the domestic market and its demand for BPO services.16 Compared to the uncertainty of overseas business, most respondents expressed confidence on their domestic business, especially for BPO business, which is discussed in more detail in section 4.4, Hot Topic: The impact of the financial crisis.

2.2.2 Service provider landscape by performance Solid growth is expected in China’s outsourcing market despite the financial crisis. While the business environment was difficult in 2008 and 2009 the Chinese economy has maintained relatively solid growth. More than one third of the respondents expected their business’ growth rate to be less than 20 percent while over one half expected a growth rate of less than 40 percent, which is far less than last year’s average growth rate of 52.23 percent. However, five percent of the companies surveyed expected to double their growth from last year. From the perspective of revenues, 75 percent of the service providers recorded revenues less than $20 million with over 40 percent having less than $5 million. Interestingly, most of the service providers with a growth rate over 60 percent had revenues below $5 million. However, 5 percent of the respondents enjoyed revenue of over $100 million, demonstrating that China is developing a number of leading service providers. (See Figure 2.7).

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Reputation emerged as a critical factorthis year due to the uncertain economic environment.

Critical factors

Quality of service

Security and intellectual property protection

Reputation

Quick understanding of the clients’ specific needs

US and EU providers

US and EU providers

US and EU Providers

US and EU providers

India, US and EU providers

Chinese providers

Equal

US and EU providers

Indian providers

US and EU providers

Equal

India, US and EU providers

Industry experience

Price

Skilled workforce that can meet demand

Have good communication channels with clients

Foreign language ability of workforce

Good understanding of our business culture

Low talent attrition

Scale of service provider

Competitive advantage

Important factors

Neutral factors

Chinese providersGeographic proximity

N=90

Figure 2.6 Critical, important and neutral factors for business development success as listed by survey respondents; and the leader in each category as reported by survey respondents, 2008

Figure 2.7 Revenue and anticipated growth rate of service providers, 2008

100 and more

50-99

20-49

5-19

1-4.9

Less than 1

5%

Total revenue in 2008, USD mil N=97

8%

12%

33%

26%

16%

Anticipated growth rate in 2009 N=83

>100%

80%-100%

60%-79%

40%-59%

20%-39%

0-20%

Negative growth

5%

10%

5%

14%

27%

36%

4%

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Figure 2.8 Contract deal size and contract length, 2008

USD

4%9%

7%16%

16%14%

26%25%

48%36%

Mil

>10

5-10

3-5

1-3

<1

>5 years

4-5 years

2-3 years

<1 year

6%17%

7%8%

48%51%

39%24% 87%

Average contract term N=89

Longest contract term N=78

Average value N=82

Biggest contract value N=76

Leading service providers still need to improve scale and capacity to compete for big and stable contracts. From Figure 2.8, one-half of the outsourcing deals have an average contract size of less than $1 million while only four percent of deals have an average contract size over $10 million. In terms of contract term, the majority (87 percent) of the respondents show that the average contract term is shorter than three years, with about 40 percent no longer than one year.

Contracts reflect the delivery capacity of a service provider and Chinese service providers still lack capacity and scale to secure large and stable outsourcing deals over a longer term. There is an urgent need within the Chinese outsourcing industry, not only to increase the number of service providers, but to enhance their scale and capacity.

However, the change of deal size and term must also be viewed within the context of the global economic crisis. Smaller average contract size and duration seems to be a global trend during the economic crisis. Gartner confirmed that outsourcing contract deal sizes and terms contracted in 2008. Twelve “megadeals”17 with a total contract value (TCV) of $17.1 billion were signed in 2008, compared to 10 with a TCV $12 billion in 2007, which was significantly less than annual average TCV of megadeals around $28 billion from 2000 to 2006. Although the number of contracts over $50 million decreased, the number of contracts of less than $50 million increased. However, the total market for outsourcing deals shrank and the average contract length shortened.18

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Figure 2.10 Anticipated growth rates of service providers in China by target markets, 2008

IncreaseNo changeDecrease

Japan and Korea

N=393% 5% 3% 29% 8% 13% 18%

13%17%13%23%7%10%

2%

2% 7% 14% 12% 23% 12% 30%

6% 6% 3% 21% 14% 25% 11% 14%

6% 17% 9% 33% 13% 20%

21%

17%

>20% 10% -20% <10% ~ <10% 10%-30% 30%-50% >50%

DomesticUS and EU

DomesticJapan and Korea

Domestic local N=64

US and EU N=43

N=36

N=30

Figure 2.9 Anticipated growth rates of service providers by target markets, 2008

Average

Undifferentiated

Domestic

US+EU

Japan+Korea

22.81 N=79

N=14

N=25

N=24

N=16

30.0025.0020.0015.0010.005.000.00%

26.54

23.50

26.82

13.66

Anticipated growth rate

Note: Domestic: Focus on China’s domestic market, with more than two thirds of total revenue from that market.

U.S. + E.U.: Focus on U.S. and European markets, with more than two thirds of total revenue from those markets.

Japan + Korea: Focus on Japanese and Korean markets, with more than two thirds of total revenue from those markets.

Undifferentiated: No clear distinction in any market; no single area accounts for more than two thirds of total revenue.

Note: ~ represents no change of the revenue

The domestic outsourcing services market dominated total outsourcing revenue in 200819 while U.S./E.U. market is expected to enjoy the highest growth rate in 2009. According to the updated scope of outsourcing, 58 percent of the total revenue was from the domestic market, in which local buyers contributed 47 percent.20 The service providers focused on U.S./E.U. market are expected to enjoy the highest growth rate of 26.82 percent, followed by the domestic market of 23.50 percent, although the anticipated average growth rate

in 2009 was only 22.81 percent, well below the average growth rate of 52.23 percent in 2007.21 The growth rate of service providers focused on the Japanese and Korean market is only 13.66 percent, around half that of U.S./E.U., which indicates that the Japanese market is suffering from the financial crisis and the revenues from the market have decreased more seriously than that of other markets. (See Figure 2.9) According to our interviews, a number of service providers are targeting the Japanese market as they believe the market will begin to grow in the near term.

Figure 2.10, details the anticipated growth rates for service providers in China by market. 77 percent of service providers expect continued growth in the U.S./E.U. market and 30 percent expect a growth rate of over 50 percent. By contrast, 17 percent of service providers expect a reduction in demand from Japan and Korea and 10 percent even predict a decrease of more than 20 percent.

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Through advanced IT outsourcing solutions, iSoftStone helped China Petroleum Finance, a financial services company, improve its core business systems and realize more efficient operations company-wide.

SituationFounded in 1995, China Petroleum Finance Co., Ltd (CPF) is one of the biggest Chinese finance companies. It provides financial services for member corporations of the China National Petroleum Corporation (CNPC). CPF needed to update and modernize its information networks and IT technology support, including localization of cross-regional business and the integration of settlement and accounting systems.

SolutionBeginning in 2001, CPF began working with iSoftStone to apply advanced IT outsourcing solutions to the company’s business processes. iSoftStone developed several business systems including a core settlement business

system, credit management system, foreign exchange management system, and online banking system. Given the large and widely-spread network of CNPC subordinate companies, as well as the frequency and large number of transactions, CPF’s new solutions enabled them to centralize and supervise funds to optimize liquidity and security, and allocate resources efficiently. As business expanded, CPF also launched a settlement system and a funds management system to achieve the most flexible and efficient utilization of funds.

With the rapid growth of CNPC overseas business, CPF systems provide the financing required by overseas enterprises. CPF systems also supervise overseas funds through foreign exchange transactions, foreign exchange settlement and sale business on the platform of bank-enterprise direct connections operating between the signing banks and CPF. CPF has centralized 785 foreign exchange accounts involving 37 currencies, 45 countries, and 169 banks.

OutcomeCPF systems have operated stably and efficiently. Over the past eight years, CPF has increased its buyer list from 700 to 3,500; daily settlements have grown from 500 to 3,000 transactions; and settlement quantity from $300 billion to $1.95 trillion per year. By the end of 2008, CPF shareholders had increased from 20 to 35 and registered capital from ¥800 million to ¥3 billion (including $120 million). Total corporate assets were $43 billion (including assets entrusted), operating revenue was $1 billion, and pre-tax profit was $395 million. These figures reflect the gains CPF made after applying the solution systems that iSoftStone created.

Case study one Improving processes to support delivery and growth

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21% 13% 27%

11%

28%

8%

6%

13%

11%

9%

17%

27%

12%

11%

10%

5%

12%

22%

30%

10%

10%

18%

6%

36%

27%

2%

8%

1%

1%

4%

3%

20%

Information system maintenance service

Basic IT service

Software R&D

Customized software development

Embedded software

Software localization

Software testing

IT R&D service

ITO US/European clientsN=98

Japanese/Korean clientsN=98

Domestic clientsN=98

Average revenue percentageN=69

1

2

3

Note: represents aimed business type in the future while the number in it represents for the rank of the priority of aimed business types.

2.2.3 Service providers landscape by product offerings and revenueCustomized software development in ITO and industrial specialized outsourcing in BPO are the most common outsourced services for both foreign and local buyers. Within the ITO category, there is a strong focus on customized software development, followed by software R&D and information system maintenance service. With BPO, industrial specialized outsourcing has become the most common service replacing customer relationship which was the most common last year.22

In terms of revenue, information system maintenance service and customized software development dominate ITO category and industrial specialized outsourcing dominates BPO services. The rank of aimed business types in the future is the same in the perspective of

both buyers and service providers which indicates that the supply is in accordance with demand at the present time. (See Figures 2.11–2.12)

The results are a bit different in terms of buyers and revenue in ITO category:

1. Compared to the results from last year, the demand for information system maintenance service in domestic market increased dramatically, from about 12 percent23 to 27 percent.

2. Contracts for information system maintenance projects are usually relatively large in size with stable terms compared to contracts for customized software. The result is that the average revenue of the latter is a bit smaller than that of the former, although from the buyers’ perspective, customized software achieves higher cost savings. For the same reason, there is a big gap for Software R&D between the two perspectives, which indicates that the contract size of this type is relatively smaller than other types.

3. The decline in software testing and software localization shows that service providers are challenging to move up the value chain and expand their services. However, it is still difficult to determine whether the trend is positive or negative, as the demand for both of the service types are large and relatively stable. More importantly, the Chinese service providers have natural advantages in software localization due to their language capability.

Figure 2.11: Market breakdown by products offering, ITO

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2.2.4 Growth constraints for service providersWhile the financial crisis was cited as a growth constraint, the lack of talent, a strong brand and capital are cited by local service providers as barriers that constrain their development.

Note: represents aimed business type in the future.

5% 5% 4%

6%

8%

7%

5%

6%

8%

4

6

3%

2%

5% 9%

7%

3%

3%

3%

6%

3%

3%

4%

10%

4%

6%

4%

6%

15%

2.8%

0.5%

0.4%

3.8%

1.5%

8%

0.6%

4%

11.6%

Finance and accounting

HR

Training and learning

Customer relationship

Industrial specialized outsourcing

Customized business process

Business processdesign service

KPO

BPO

KPO N=98

US/European clientsN=98

Japanese/Korean clientsN=98

Domestic clientsN=98

Average revenue percentageN=69

Supply Chain management

Figure 2.12: Percentage of service providers by product offering and market, BPO/KPO

Lack of outsourcing related talent

The impact of financial crisis

Lack of strong brand

Lack of capital

Lack of the understanding of Chinese outsourcing market

Cannot offer service in competitive price

Lack of clear positioning in value-added chain

Lack of suitable channel to approach clients

No priority in business exploitation

Lack of appropriate definition of core competency

Lack of clear strategic positioning

Lack of a professional legal adviser to cope with international dispute

49%

47%

39%

38%

16%

16%

15%

11%

14%

9%

3%

1%

Figure 2.13 Barriers that currently constrain the development of local service providers, 2008

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Lack of talent The lack of skilled talent was the most often cited barrier with 49 percent of respondents indentifying it as a barrier to growth.

Talent shortage is mainly reflected in three ways:

1. There is an insufficient supply of talent although there is a huge talent pool: The demand for talent increased rapidly due to the dramatic expansion of the outsourcing industry in China. However, there is still no uniform training program or assessment and certification criteria at a national level. To narrow the gap between the demand and supply, standard development and training assessment criteria must be developed and agreed quickly.

2. High cost of retaining talent: The lack of senior level talent and high attrition rate of junior level talent24 resulted in high retention cost which was reported as the major problem in term of talent management this year. (See Figure 2.14-a)

3. Insufficient training by service providers: The impact of the financial crisis not only led to reduced spend on training, but also increased focus among firm leadership on survival relative to employee development. A joint training program run by universities and service providers may be a possible way to solve this problem, and support from the government will also play a key role. (See Figure 2.14-b)

Lack of strong brand While the impact of the global financial crisis was the second most cited barrier to growth, the third, identified by 39 percent, was the lack of a strong brand.

The lack of a strong brand manifests itself in two ways:

1. The lack of a strong brand for the service provider itself: As the importance of reputation grows during difficult economic times, there is still a large gap of scale and capacity between Chinese service providers and Indian players. Moreover, there is still no convincing successful case of a huge outsourcing project successfully delivered by local service providers.

2. Lack of a strong national “brand” for China’s outsourcing capabilities: Competition between model cities in China has been detrimental to an international campaign because the cities each promote their own situations thereby fragmenting a national promotion effort. However, ChinaSourcing, as a brand for China’s outsourcing industry, has been initiated recently by MOFCOM and should help to rectify this situation. (More details will be discussed in section 3.3, Brief Introduction of ChinaSourcing brand)

Lack of capital Service providers rely on their own funds when in need of capital as they lack an efficient and diversified channel to outside capital sources. Figure 2.15 shows that short term loans are identified as the most difficult to obtain As most of the service providers are small and middle sized private enterprises (SME), they have difficulty obtaining short-term loans during times of economic crisis. However, the problem could be resolved along with better economic performance as well as introduction of new financial tools such as Growth Enterprise Market (GEM) which is mainly for SMEs and should be available in late 2009.

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Venture capital

The short-term loan is most difficult to get in near term due to the financial crisis

Stock market

Short-term loan

Long-term loan

Own funds

6%

7%

6%

7%

18%

17%

5%

9%

94%

13%

major capital source

capital source with trouble currently

N=100

Figure 2.15 Sources of capital, 2008

Figure 2.14 Talent challenges of service providers, 2008

High retaining cost

Lack of working experience

High attrition rate

Lack of foreign language skills

No trouble in this fieldLack of outsourcing-related skills

45%

N=94 N=97

18%

41%

23%

23%

27%

12%

9%

2%Others

5% and below

2006 2008

5% - 10%

10% - 20%

20% and above

* The major problems emphasized by respondents last year were “Lack of foreign language”(32%) and “High retaining cost” (27%)

Talent management challenges Percentage of expenses dedicated to employee’s training

23% 29%

53%

16%

2%

36%

30%

11%

a b

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Case study two The emergence of a whole process finance service provider

Ping An Data, is the branch company of China's Ping An Insurance (Group) Co., Ltd. Ping An Data originated from the operation management center of Ping An Corporation in 2004, and was registered as an independent operating company in May 2008, with a registered capital of $30 million. Ping An Data developed cross-business services in various fields. The services include call centers, data processing, insurance underwriting and claims, process reengineering HR services, banking background management, financial settlement and information technology support services. Currently, Ping An Data has established seven operational centers in Shenzhen, Shanghai, Suzhou, Chengdu, Luoyang, Meishan and Neijiang. Each center can operate independently and in parallel operation and all of these centers have disaster backup capabilities.

SituationOne client of Ping An Data - a property insurance company offering over a hundred type of insurance, such as motor vehicle, commercial property, aircraft, home property, building, public liability, and medical malpractice liability has grown to include more than 40 agencies and over 1100 branches.

The size and scale of the operations was a tremendous challenge to coordinated growth and management business decisions often lagged far behind the market. The branches often provided different standardization of services which affected customer satisfaction. Development and training of staff was time consuming and expensive, consequently new staff couldn’t match the development pace of business which restricted its growth. Allocating resources was

difficult and some services were duplicated in planning and execution reducing the ability of the business to respond quickly to market changes.

SolutionPing An Data redesigned the workflow process with the goal of sharing centralized operations across the agencies. With the use of the whole process outsourcing solution, this process raised the overall back office operations service capabilities of the insurance company.

Using the whole process of auto insurance as an example, by outsourcing its business, each branch of the insurance agency needed to deal with all of the service modules which increased business risk. Also, the decentralized network operations of the various agencies were inefficient and not conducive to the sharing of knowledge and experience. After

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outsourcing, the insurance company only needs to focus on two service modules: survey/set loss and the filing/drawing. Ping An Data assumed responsibility for the other six service modules: accepting the claim, pricing, loss auditing, underwriting, closure, and payment.

OutcomeThe time cost of the whole claim process in the insurance company has decreased rapidly, and the resources and professional expertise have been shared across the whole company. Operating and service standards achieved consistency in all the branch companies which led to great improvement of the service quality and efficiency of the back office services. This is reflected in the service limitation increasing by 61%; services error rate being reduced by 54%; customer complaints falling by 37%.

61%54%

37%

Insurance company A Ping an datawhole process

serviceBranch A Branch B Branch ...

Insurancecompany A

All branches

Vehicleinsurancecustomer

Vehicleinsurancecustomer

Vehicleinsurancecustomer

All vehicleinsurancecustomers

accept the claim

survey / set loss

pricing

loss auditing

filing / drawing

survey / set loss

filing / drawing

underwriting

closed

payment

accept the claim

pricing

loss auditing

underwriting

closed

payment

Before outsourcing

Every service indicators obviously improved after outsourcing

After outsourcing

Service timeliness

Error rate Amount ofcomplaint

Before outsourcing

After outsourcing

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Figure 2.16 Future trends of the Chinese outsourcing industry, 2008

Talent and skills

N=95

China brand

Service quality

IPR protection

Domestic demand

Stable policy support

Overseas demand

Service cost

Staff attrition

Improve Remain the same Deteriorate Unsure

More “Improve” mentions at below categories observed this year.

Stable policy support

Service cost

Staff attrition

78%

2009

56%

45%

52%

2008

34%

28%

88%

2008

Less “improve” mentions at below categories observed this year.

Domestic demand

Overseas demand

82%

2009

71%

95% 3%

95% 3%

1% 1%

92% 7% 1%

2%

90% 8% 2%

82% 8% 3% 6%

78% 13% 1% 8%

71% 7% 8% 14%

56% 14% 16% 14%

45% 24% 11% 20%

88%

2.2.5 Future trends for service providers Internal shared service could be the new approach for service providers entering the market. There are two approaches for companies wishing to establish shared service centers. In the first approach, a company will establish the center to provide services only to itself. As the center develops experience and delivery capacity it may be allowed to seek external buyers. The second approach is to establish a shared service center which immediately begins to provide services to other businesses, often in the same industry or related industries. This approach requires the founding company or companies to support the service center with capital and personnel as it expands its delivery capacity. (More details will be followed in section 4.3 Trend Watch: Shared service centers (SSC).)

There is optimism that every aspect of the Chinese outsourcing industry will improve with the exception of staff attrition.According to the survey data, outsourcing providers believe that, within the next three years, China in general and the outsourcing sector in particular will have made noteworthy strides in talent and skills, reputation, service quality and intellectual property rights protection. And more than half of respondents think Chinese providers’ pricing advantage will endure, which is in contrast to last year’s finding. Service providers seem to be more confident in stable policy support and attribution; however, the confidence in domestic and overseas demand was slightly decreased probably due to the concern of the financial crisis. (See Figure 2.16)

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2.3 Buyers landscape

2.3.1 Overview of the buyers of Chinese service providers While the global outsourcing market suffered an inevitable decrease due to the impact of financial crisis, the Chinese local market did not. In order to offset the adverse impact from the crisis, several departments25 of state government and some local governments26 developed a series of measures to ensure the traditional advantage (price, geographic proximity) of China’s outsourcing industry and to stimulate domestic demand by local buyers, in order to maintain the sustained and sound growth of the industry.

Our research indicates that the Chinese local market segment composed of state-owned enterprises (SOEs) and private enterprises has risen dramatically over the past year, to become the largest source of outsourcing projects, contributing 47 percent of the total revenue, which is significantly more than the small percentage in last year’s survey.27

Local buyers generally have more in-depth understanding and consideration of the outsourcing business than last year. The knowledge and understanding of the outsourcing business of potential buyers has enjoyed a steady improvement and over three-fourths of the respondents are familiar with or have a deep understanding of outsourcing, which is up from only 54 percent last year. Only around 10 percent of firms surveyed are currently not considering outsourcing as a strategic option, which is down from 41 percent last year. Finally, over half of the surveyed firms are outsourcing or plan to outsource part of their business currently, which is up from only 33 percent last year. However, the one third of the respondents that considered outsourcing but finally gave up citied limited value creation and cost reduction, and operational complexity as the reasons for abandoning outsourcing as a strategic approach.

All of the figures show that the Chinese local outsourcing market is developing well but is still relatively immature. Local buyers are more likely to consider outsourcing information services rather than business processes such as financial and operational services. Internally, local buyers do not have departments dedicated to outsourced services and the departments responsible for outsourcing are more focused on achieving cost management and control. As a result, business process outsourcing is rarely discussed by the senior leadership team.

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The critical factors for Chinese buyers in selecting an outsourcing service provider are quality of service, skilled workforce, industry experience, intellectual property protection, and service price. Chinese buyers benefit from cultural and geographic proximity and enjoy the same price advantage identified by the service providers. (See Figure 2.17)

Service price rises as a critical factor this year as clients more focus on cost control under current economic environment

Critical factors

Quality of service

Skilled workforce that can meet demand

Industry experience

Service Price

Security and intellectual property protection

US&EU providers

Equal

US&EU, India providers

Chinese providers

US&EU, India providers

Chinese providers

US&EU providers

Chinese providers

Chinese providers

Chinese providers

Chinese providers

Chinese providers

US&EU, India providers

Quick understanding of the clients’ specific needs

Reputation

Low talent attrition

Good understanding of our business culture

Geographic proximity

Language advantages

Have good communication channels with clients

Scale of service providers

Competitive advantage

Important factors

Neutral factors

Figure 2.17 Critical, important and neutral factors for business development success as listed by Chinese buyers; the leaders in each category as reported by survey respondents, 2008

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The areas expected to improve are confidentiality, synergy between the parties, and more favorable government regulatory/policies.This year government regulatory/policies has dropped from second to third which is partially as a result of recognition that the industry and government have been working together, and partially due to the promotion and implementation of policies by the government.

Over half of respondents are likely to adopt outsourcing services within six months while none reported that they were planning on changing their outsourcing strategy despite the current financial crisis. The majority of respondents indicated that they would take positive methods to address the impact of the economic crisis such as adjusting their operational structures and reducing operational costs, or adjusting business structures and looking

for new growth points instead of changing their outsourcing plans or contracts. Chinese buyers are focused on transferring employees to other business units or service providers rather than making people redundant.

CIOs are concerned with enterprise IT costs and revenue trade-off, IT service management and IT governance, and implementation of data backup and disaster recovery strategies. As information and data security becomes more important, disaster recovery services have become a more significant challenge beyond cost and management. (See Figure 2.18)

Some Chinese buyers have established their internal IT and other related departments into independent service providers. ChangHong Group, a Chinese appliance manufacturer, consolidated its internal IT departments into an independent service provider in March 2008, which focuses on providing IT outsourcing services. In addition

to obtaining services from this newly founded provider, the group transformed it from a cost center to a profit center by providing services to outside buyers. However, these new service providers may need a relatively long time to accumulate experience and build up their reputation.28 This approach is not limited to Chinese buyers, as many MNCs have adopted the self-built or “captive” shared service center model. (More details will be discussed in section 4.3 Trend Watch: Shared service centers)

Figure 2.18 List of challenges identified by CIOs, 2008

Enterprise IT costs and revenue trade-off

Emphasis on IT service management and IT governance

Implement data backup and disaster recovery strategy

Improve the efficiency of data storage

Data growth and data to solve the problem of expansion

The support of other departments and co-ordination

Green IT and save energy

CEO’s attention to the extent and degree of support

7

6

5

4

3

3

2

2 N=13

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2.3.2 Buyers landscape by target markets From Figure 2.19, it is clear that the United States and Japan still account for a large portion of the global outsourcing market. However, each market has its own characteristics and preferences in outsourcing business. Generally speaking, the delivery model of the outsourcing service provider can be divided into two categories, on-shore and offshore; while offshore could be divided into two further types, far-shore and near-shore. Regarding the offshore market, the far-shore model is well accepted in the U.S. market. India, China and the Philippines are all major destinations

with low costs and abundant human resources. European and Japanese markets prefer the near-shore model and choose destinations within a short distance and with cultural proximity. For example, China takes the largest portion of Japan’s offshore business and Ireland is an important destination for Western Europe’s offshore business. In contrast to India, China possesses a large domestic outsourcing market for the future growth of service providers. Different characteristics of the major target markets will be discussed in the following paragraphs.

Figure 2.19 Forecasted IT services market is on the rise,29 2008

Region Service 2008 2013 CAGR %

Market size ($millions)

Market share (%)

Market size ($millions)

Market share (%)

2008-2013

U.S. ITO 96,220 34.4 119,407 36.8 4.4

BPO 94,912 58.1 117,353 60.8 4.3

Discrete IT Services

113,074 31.2 142,365 36.1 4.7

Japan ITO 36,888 13.2 41,147 12.7 2.2

BPO 14,282 8.7 16,532 8.6 3.0

Discrete IT Services

50,233 13.9 50,355 12.8 0.0

Western Europe

ITO 99,430 35.5 109,724 33.8 0.6

BPO 33,712 20.6 34,734 18.0 2.0

Discrete IT Services

132,193 36.5 123,842 31.4 -1.3

China ITO 1,463 0.5 3,468 1.1 18.8

BPO 409 0.3 1,073 0.6 21.3

Discrete IT Services

5,556 1.5 9,997 2.5 12.5

Others ITO 45,921 16.4 51,114 15.7 2.2

BPO 20,134 12.3 23,375 12.1 3.0

Discrete IT Services

61,497 17.0 67,323 17.1 1.8

Total ITO 279,922 100 324,859 100 3.0

BPO 163,449 100 193,067 100 3.4

Discrete IT Services

362,552 100 393,883 100 1.7

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Market by countryJapan The most prevalent outsourcing business model in Japan is a hierarchical structure somewhat like a pyramid. Initially, the buyer outsources a project to a general contractor. After the general contractor finishes some front-end processes such as analysis, architecture and design, the buyer divides up the remaining pieces and outsources some of it to first tier providers and some to second tier providers. This process continues through third, fourth and fifth tier suppliers. The service providers from Japan occupy the position of general contractors and Chinese service providers only have access to third or even fourth tier work. The hierarchical structure is based upon long established business relationships between buyers and providers.

However, due to the impact of financial crisis, the pyramid-like supply chain system is now viewed as costly and buyers have cut down the original chains and brought back some outsourced business internally. As a result, although the size of the IT outsourced service market in Japan in 2008 was about the same as last year, the callback of original outsourced projects and the end of newly outsourced projects directly affected the business of first tier, second tier and other service providers in the low-end of the supply chain. The result was an average decrease of revenues of around 30 percent to 40 percent,30 which resulted in many Japanese service providers going bankrupt.

The adjustment of the original supply chain system could prove to be an opportunity for Chinese service providers. Through long-term cooperation with Japanese

buyers, coupled with rapid advances in delivery capacity, some Chinese services providers have already become familiar with the demands of Japanese buyers and could take on large-scale development projects. Some Japanese leading service providers are pursuing a similar strategy in the Chinese market. Fujitsu is looking in the middle and long term to a strategy which includes making use of Chinese R&D staffs as a complement, exploring the Chinese industry solutions market in cooperation with Chinese local service providers, and entering the international IT services market with Chinese partners.31

Overall, domestic demand in the Japanese market is quite attractive to Japanese service providers and could be an incentive for them to release offshore business to Chinese service providers. As the economic crisis abates there should be a new period with high growth in the Japanese outsourcing market and the Chinese service providers with large scale and industry experience will be better positioned than smaller competitors.

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Case study threeA Chinese company in the Japanese market

When founded, SinoCom Software Group (SinoCom) was focused on providing outsourcing software development and related after sale service to Chinese buyers. In 1999, SinoCom forecasted that there was increasing potential in the Japanese software markets and adjusted its strategy to target Japanese buyers.

SituationDue to the global financial crisis, SinoCom’s Japanese outsourcing market has suffered but it has maintained stable growth. In 2008, sales amounts to HK$658 million, a 16.5% increase compared with the same period last year, the 13th year of consecutive double digit increase on net profit and sales. In response to market conditions, SinoCom is improving its service capabilities and expanding its relationship with existing buyers. Sales to buyers in the Japanese market have increased nearly 16% compared with the same period of last year, and the technological support services also increased 37%

compared to 2007. The appreciation of Japanese Yen in 2008 had a positive effect on SinoCom’s business in the Japanese market.

SolutionSinoCom has developed hundreds of overseas software development programs focused on the Japanese market. SinoCom’s capacity for software development management has been greatly improved and it is now capable of running a single project with more than 100 staff per month and the development of implicational software on large computers.

SinoCom completed several acquisitions after the public offering, including the acquisition of Shanghai Shensoft in 2007. With the completion of this acquisition, SinoCom enhanced its resource base in the Eastern China region. SinoCom can also leverage ShenSoft’s customer base more and offer improved services to them by combining their existing

expertise. SinoCom also merged its three subsidiaries in Japan, SinoCom Japan KK, Shensoft Comtech KK, and SinoCom Hitech KK in 2008. The integration aimed at offering more flexible, unified and integrated customer support in Japan.

OutcomeSinoCom was listed on the Stock Exchange Hong Kong in 2004 becoming the first Chinese outsourcing enterprise listed on the foreign stock market. SinoCom currently employs more than 3000 people.

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U.S.The U.S. market for outsourced IT services operates much more like a free market than the pyramid structure in the Japanese outsourcing market. The predominant business model is mainly overall outsourcing or periodic outsourcing, and, as a result, individual projects are usually more profitable, but the requirements for the service providers are relatively high and strict.

The accelerated transfer of some software R&D, testing projects from software companies and service providers in the United States to China in the early 2000s provided extraordinary development opportunities for a series of small Chinese companies. However, other Chinese service providers are still in the early stage in entering the U.S. market and do not have the capability to offer services across the whole life cycle, including design, architecture, coding, testing, integration, maintenance, and upgrade.

Although most of the Chinese service providers could not currently compete directly with vendors from India, recent security issues and recent governance and accounting scandals in India have forced some multinational companies to consider back-up destinations for delivery centers. Although the problem of information security in China is still a big concern for perspective buyers, China has nonetheless attracted attention as a possible back-up destination.

If China could replace India or become a destination for back-up shared service centers, it would initiate a period of rapid growth for the Chinese industry. More details will be discussed on the part Trend Watch: Shared service centers.

The importance of the U.S. market results not only from its size, but is also due to its advanced management and business models and rich experience in outsourcing business, which is quite valuable when introduced into the Chinese domestic market.

ChinaIn contrast to India, China has a large potential domestic market for outsourcing services. Although the Chinese market has experienced solid growth and has the potential to become an important source of outsourcing business, it is still in its early stages compared to the total size of the Chinese economy.

There is great potential in the Chinese domestic outsourcing market. It is believed to have a golden period ahead with accelerated release of domestic demand. According to Figure 2.19, the compound annual rate of growth (CAGR) of the global IT services market is around 2.5 percent, while that of the China market is around 14.4 percent, 6 times the global rate. As a result, the domestic market (or on-shore market) will be more and more important to the China outsourcing industry as a foundation. For more details please refer to the section 2.3 Buyer landscape in total market.

2.3.3 Overview of outsourcing revenue for Chinese service providers Revenue from Chinese buyers dominated total outsourcing revenue for Chinese service providers in 2008.32 As Figure 2.20 shows, 58 percent of the total revenue for Chinese service providers was from the domestic market, in which Chinese buyers contributed 47 percent and another 11 percent was from MNC branches from the U.S/E.U. or Japan/Korea. The remaining 42 percent came from offshore buyers, primarily in Japan/Korea and the U.S./E.U. It is clear that buyers from Japan and the U.S. are still the largest two source of overseas outsourcing business. (See Figure 2.20)

The statistics from MOFCOM also show that in terms of offshore executed contract value, Japan and the United States are the top two offshore markets, and accounted respectively for 20.7 percent and 19.4 percent of revenues in 2008, followed by Hong Kong33 and Taiwan. (See Figure 2.21)

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Figure 2.20 Revenue of Chinese service providers breakdown by target markets, 2008

Figure 2.21 China offshore revenue breakdown by target markets, 2008

8.7%

1.97%

47.32%

5.91%

13.92%

18.54%

3.64%

N=82

Domestic clients (China branch of EU/US enterprise)

Domestic clients (local enterprise)

European clients

US clients

Japanese/Korean clients

Others

Domestic clients total: 58% (57.99%)

Japan

U.S.

Hong Kong

Taiwan

U.K.

Germany

Others

Japan971.620.7%

U.S.909.319.4%

Others1846.639.4%

Germany146.93.1%

U.K.148.63.2%

Taiwan154.03.3%

Hong Kong512.910.9%

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Case study four Releasing demand in the Chinese market

The ShineWay Group engages in feed manufacturing, animal breeding, slaughtering, meat processing, retail grocery outlets, and bio-pharmaceutical operations. It has 45,000 workers and total assets of RMB7 billion. It has expanded operations to Japan, Singapore, and Korea with imports and exports of more than $100 million.

SituationAs the group’s operations grew to include breed aquatics, logistics and slaughtering the inefficiency of IT management became a bottle-neck to development. Recognizing this, ShineWay began to introduce software and management systems to support operations. However, with ShineWay’s complex structures, divisions and geographic locations, its supply chain involves many industries so a single service outsourcing companies could not address all its needs.

SolutionIn 2000, ShineWay established its own software development company focusing on advancing the IT group’s operation. ShineWay sent all IT outsourcing business to this company which now has more than 300 workers. The development and applications reduced the management cost of the group rapidly and made it more competitive. During the financial crisis ShineWay doubled its investment in IT and it is estimated that it will double it in 2009 as well.

The increase in the volume of information resulting from the dramatic decrease in data management and transmission investments has brought higher work efficiency, a decrease in staffing levels, smaller storage, higher turnover rate of goods and higher turnover rate of fund in ShineWay. For example:

The Luohe delivery center had 70 workers taking charge of 60 chain shops. Before the introduction of the business chain delivery system, the workers usually worked until 2AM with an error rate of 13%, and the number of shops could not be increased. After introducing the system, 4 workers managed over 200 shops without working overtime and with an error rate below 0.1%. The delivery cycle was reduced from three days to two and the output was fresher. Compared with the same period in 2001, monthly sales increased by 5.8%, gross benefit increased by 3.7%, warehouse costs decreased by 6.4%, and inventory was reduced by 15.1%.

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Figure TBA Revenue after adopting outsourcing services (100 million RMB)OutcomeIn general, the systems which are customized not only reduce overall costs and increase the work efficiency, but also build a real-time, unified and centralized management platform for the ShineWay Group. This platform allows the management team to make the whole supply chain more competitive and support the implementation of scale and a rapid development strategy.

60

2000

120

2003

160

2004

220

2005

240

2006

300

2007

368

2008

Year Revenue

0

50

100

150

200

250

300

350

400

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2.3.4 Buyer landscape in the domestic market According to the survey results, there are four distinct buyer groups defined by ownership in China: government, state-owned enterprises, private enterprises, and MNC Chinese branches.

Branches of multinational corporations (MNCs)The buyers of multinational corporations can be divided into overseas buyers and Chinese branches of overseas companies. The outsourcing business from branches of MNCs in China is an important source within the domestic market, with a market share of 11 percent.34 According to our survey, the decision making and process control of outsourcing of Chinese branches of the MNCs are generally in accordance with their global headquarters. This business can be further divided into U.S. & E.U., Japan & Korea, and other categories in terms of the approach to outsourcing of the parent company based on its location. For more details please refer to section 2.3.2 Analysis of outsourcing landscape by target markets.

State-owned enterprises (SOEs)SOEs have different drivers from private enterprises. SOEs are concerned with efficient resource allocation, centralized control of the business and personnel, and market relevant growth. SOEs are not concerned with cost cutting measures. Outsourcing, especially in difficult economic conditions, can result in a change in employee numbers which can result in instability. As a result, there is a disincentive for SOEs to outsource services and functions when the result might be a loss of jobs for employees. In addition, the complex governance structure and non-standard business practices of many SOEs may make the cost of outsourcing slightly higher than the current cost of internally delivering services, regardless of operational risk. There is one recent example of a SOE ending an outsourcing agreement and establishing a shared-service center after the outsourcing provider was unable to understand the internal business process of the

SOE. The inability to understand the business processes resulted in frequent requirement modifications to the service which made the outsourcing cost prohibitive for both parties.

Some departments of the Chinese government are considering and putting forward policies to regulate and increase the demand for outsourced services from SOEs. For example, the State-owned Assets Supervision and Administration Commission published The guidance on IT system development for SOEs in May 2009.35 The document outlines the concept of cooperation outsourcing among the SOEs. Those enterprises which are behind on information system construction can adopt outsourcing services and their demand for the construction of an information network platform and management information system and daily maintenance could be satisfied by the network operators, system integrators and software developers among the SOEs. All of the processes during the cooperation would be directed by the State-owned Assets Supervision and Administration Commission. The National Development and Reform Commission also published the first list of twelve national information outsourcing pilot enterprises in August 200936, to establish successful samples of outsourcing projects and promote the outsourcing concept.

As long as outsourcing makes operations more efficient and profitable, it will ultimately be accepted by the SOEs who wish to be prominent players in the global market.

Private enterprisesChinese private enterprises are already a significant portion of the Chinese outsourcing economy. As a result of the cost pressure from competition and the pursuit of profit maximization they are usually more open to new concepts and willing to take risks. As they are leaders in innovation their successful initiatives are often accepted by others including SOEs. Currently, many of the private enterprises have adopted outsourcing services although they still focus on information technology. However, the survey results show that with the

continuous expansion of enterprises, scale, and the demand for cost control, private enterprises are looking at other outsourced services including BPO.

Since many private enterprises are relatively small and more sensitive to price, they often choose Chinese service providers for their IT services on the basis of cost and geographical and culture closeness. The alternative for private enterprises is to create shared service centers from their IT departments rather than buy services from non-Chinese suppliers.

GovernmentGovernment continues to be an important source of outsourcing revenue for Chinese service providers, even though the government is in the early stages of outsourcing functions and services. As governments look to capture and retain more information they are required to build up their own networks and application systems. As the demands increase so too do the requirements, such as timely, precise, smooth and efficient information transmission with a friendly interface, easily operation, and sufficient scalability. The most obvious requirement is to make the application systems leaner and more efficient.

Currently, the system maintenance for Chinese government departments is resourced by independent IT sections. These sections are also responsible for planning, selecting, purchasing and implementation of information systems. However, due to the limitation of human resources and technology, these sections can only afford system integration and software development on a limited scale, and the buyers are only the relevant departments of domestic governments. However, with the progress of administrative system reform and promotion of the e-government project, the IT staffs will be decreased, which means that the adoption of outsourcing services could become a viable option.

Outsourcing should also be a very attractive business for the government to encourage and promote. Unlike the traditional manufacturing industry there is more added-value and less pollution. The outsourcing industry can also stimulate employment conditions

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for the new graduates which could be a critical factor in persuading the government to increase its demand for outsourcing services.

Although increasing outsourcing business from governments is a much discussed topic, there are three main barriers to government take-up:

1. One of the critical selling points for outsourcing is the reduction in cost for the buyer. Governments generally are not under urgent cost pressure so there is insufficient impetus for the governments to purchase outsourcing services solely for the purpose of cost reduction.

2. Information security is one of the most important considerations for organizations considering outsourced solutions. Governments are in a unique situation as much of their information security concerns are national security concerns. Disclosure of information during the process of outsourcing services would be a national security issue. Some departments of government tend to augment their staff by purchasing headcounts from service providers and manage them to support their business onshore rather than offshore, which enhances the control over the processes and increases the security level in their opinion.

3. Finally, as there are no widely accepted standards to asses service providers, governments struggle to adapt their procurement process to buying outsourced services.

However, even with these barriers, overseas governments have purchased outsourcing services to improve efficiency and reduce cost. The US government has enjoyed high-performance services within a relatively short time frame and with only a small investment. The successful outsourcing experience of other governments could be a good reference for the Chinese government, although it may still take a relatively long period of time to address all of the government’s concerns.

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Case study five Releasing government outsourcing demand

Chengdu, capital city of Si Chuan province, with an area of 12, 400 km2, has a population of 12.71 million. The GDP of local area in 2008 amounted to $57.37 billion,37 a 12% increase compared with 2007, which is also the 18th consecutive year of double digit increases.38

SituationThe Chengdu Bureau of Commerce reported that from January to July the orders from foreign buyers grew more than 500% in Chengdu.39 However, many local enterprises said that the buyers from Europe and the United States made tougher demands on the quality and price which brought a reduction of profits and increased costs pressure. As a result, most service providers indicated that they would rather not accept the orders from Europe and the United States. In addition, many businesses are smaller than the largest industry players so they are unable to compete for the largest contracts.

"Thousand-scale" is the goal identified by the Bureau of Commerce for the service providers in Chengdu. Currently there is no company with more than 1,000 staff members and annual sales of more than $10 million. The Chengdu Bureau of Commerce said that the city’s short-term goal is to cultivate a number of thousands-scaled enterprises, and to help enterprises become stronger and bigger to improve their ability to get orders.40

SolutionIn order to help service providers dealing with the global finical crisis and to cultivate their delivery capability, Chengdu plans to initiate government outsourcing by release demand from the government. All government networks are required to procure outsourcing services from a local company in the following areas: system services, desktop administration, electronic supervision, and information storage. Staff at government information departments will be only involved in

process optimization programming and improving service sufficiency and levels, and excess staff to be transferred to other departments. As a result, the demand released from local government is now around RMB100 million and this trend will continue.

The local government has organized local service providers to participate in international outsourcing expositions, invited global service providers to Chengdu, cultivated and improved local service providers’ capabilities on accepting international orders, and given guidance to service providers to take the initiatives to get orders. In 2008, “The 1st International Outsourcing Summit” was successfully held at Chengdu, and in February 2009, the local service providers were organized by the Chengdu Government to take part in the NASSCOM, paying visits to the Indian GTT system, Indian service provider Infosys, NIIT, 3I Technology and also the outsourcing center of the German company Bosch in India.

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OutcomeIn 2006, the outsourcing industry revenue in Chengdu was around RMB20.6 billion, a 52.3% increase compared to 2005, and the revenue amounted to RMB27 billion in 2007, an annual increase of 31%. Currently more than 10,000 people are employed in the outsourcing industry in the areas.41 According to the estimate from the local official of the Information Department, the software service export revenue of Chengdu exceeded $300 million, a 30% increase compared to 2007. From Jan to May in 2009, the pace of increase slowed but was still nearly 30%.

Accenture, China Mobile Communication Corp Multi-media Call Center, IBM, FLEXTRONICS, China Ping (an insurance call center,) and Vanad have established centers in Chengdu. In 2008 the GDS Chengdu Data Center was built which symbolized the formal launch of a national data storage center and information back-up base at Chengdu. The total investment for this program is RMB1.6 billion and will

eventually cover an area of 120,000 m2. When this program is finished it will provide a data center as a core service to all the companies around the world.

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2.4 Analysis of outsourcing landscape by industry

2.4.1 OverviewThe financial services industry is the second largest source of all target buyers except for domestic U.S./E.U. branches, while manufacturing, telecom, government and services take the largest proportion respectively in different group.(See Figure 2.14) In terms of vertical industry, manufacturing and financial services industries are the major source of outsourcing business for Japan/Korea, and U.S./E.U. buyers and domestic Japan/Korea branches,

while service and manufacturing for domestic U.S./E.U. branches, and finance and telecom for domestic local buyers, are the prominent sources. Moreover, government industry will be targeted as quite important by a majority of providers in the next 3 years. Overall, the financial services and manufacturing industries are the most important overseas buyer sources, and the financial services and telecom industries are the most important domestic buyer source currently. However, the government is already viewed as the most important domestic buyer source for the next 3 years.

The largest and most important Chinese buyers are mainly from the high-tech and telecom industries, and the Chinese government. The most

important foreign buyers are also in the high tech and telecom industries and in the manufacturing industry. (See Figure 2.22)

Joining the World Trade Organization (WTO) accelerated Chinese firms’ involvement in the global market resulting in increased international competition for the Chinese finance and telecom industry. To successfully compete with international companies, the Chinese companies examined and adopted new management and business models. As they looked for ways to reduce cost and improve efficiency, the demand for outsourcing in the finance and telecom industries grew which is why they hold the two largest positions in domestic market by industry. (See Figure 2.23)

Figure 2.22 China outsourcing landscape by industry plus target buyers, 2011

Finance

Telecom

Government

Manufacturing

Service

Transportation

Education

Utility

Retail

Energy

Health

Media

Others

N=98

%

Domesticlocal buyersin three years

%

Domesticlocal buyerscurrently

%

DomesticUS’s/EU’sbranches

%

DomesticJapanese/Koreanbranches

%

US’s/EU’sbuyers

Japanese/Koreanbuyers

%

34

31

35

18

14

15

9

30

24

20

13

13

7

29

29

25

16

11

11

5

25

24

17

12

13

9

12

11

7

4

6

6

15

21

9

9

7

3

5

9

2

0

5

1

3

4

13

8

3

3

0

3

23

13

6

5

2

8

3

24

10

10

9

4

6

19

15

5

5

5

9

9

20

17

6

7

4

4

Domestic clients

Number of mentions

High-techand telecom

66 85

33

26

19

11

3

56

10

5

Government

Manufacturing

Resources

Finance

Foreign clients

Figure 2.23 Service providers top buyers by industry, 2008

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Other industry sectors are under similar pressure to reduce cost and improve efficiency. WTO membership has accelerated the competition in the energy and transportation industries and the government has focused on health care and education. As a result, the demand for outsourced services should increase in these industries increasing their position in the domestic market. However, compared with the mature outsourcing market in developed countries, the business processes of some vertical industries are still not clearly structured and standardized, which becomes a major barrier to further release the demand for outsourced services.

The following analysis will focus on the finance and telecom industries, which are the largest two sources of outsourcing revenue.

2.4.2 Outsourcing landscape in the financial services industryThe number of outsourcing projects in the financial services industry with a deal size of more than $20 million decreased from 130 to 100 from January to September 2008, while the total of all deals fell to $11 billion, from $18 billion.42 The positive news for Chinese outsource service providers is that the leading US banks intend to increase staff count in low-cost regions and maintain the original offshore outsourcing projects over the next two to three years, according to McKinsey.

Since information technology and business process outsourcing is still in its early stage, current business is focused on the information technology outsourcing and, as a result, did not suffer as severely during the crisis. Generally speaking, most of the financial services institutions that outsourced services achieved obvious benefits, including effective utilization of outside resources, the ability to concentrate on their own core business, the shortening of the development and promotion cycle for new businesses or products and reduction of cost.

There are mainly three categories of outsourcing services in global financial services industry:

1. Logistical support services, including human resources management and documents management;

2. Technical services in special domains, including information technology, legal and audit services;

3. Part of business operations support, including data entry, information validation, and other background operations.

According to the ownership of the financial services institutions, there are two main categories purchasing financial outsourcing services in China, foreign financial services institutions and domestic financial services institutions.

The foreign financial services institutions are the pioneers of financial outsourcing services in China. Citibank outsourced some invoice audit in the trade financing process and computer systems operations of Chinese branches to Malaysia branches as early as 1997. Then many foreign banks began outsourcing part of their background operations, such as remittance, and credit management operations to other branches, which became responsible for such specialized outsourcing operations. The outsourcing services adopted by the foreign financial services institutions in China are comparatively extensive, including data processing, IT services, human resources, and parts of the operational business. However, along with the opening up in security and insurance sectors, the foreign security institutions and foreign insurance institutions gradually have become the purchasers of outsourcing services in China. In terms of the suppliers, there are currently mainly two groups, one is the branches of the financial services groups and the other is the wholly-owned subsidiaries of the financial services groups. There are few examples of foreign financial services institutions outsourcing its operational business to corporate bodies wholly independent from the institutions in China right now.

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Along with the further involvement in the global market, some domestic financial services institutions have started to outsource parts of their business, following the steps of the foreign financial services institutions. For example, China Development Bank outsourced the maintenance and management of its IT systems, both software and hardware, to HP in February 2004, and signed another long-term IT outsourcing contract in June 2006. Moreover, Shenzhen Development Bank, renewed its contract on disaster backup systems with Global Data Solutions Ltd., a domestic service provider specializing in disaster recovery services, in April 2007 which will run for another 5 years.

LIU Mingkang, the chairman of the China Banking Regulatory Commission (CBRC), delivered a keynote speech at the 2009 Lujiazui Forum in Shanghai in May 2009. In that speech he indicated that the CBRC would enhance the regulation on the outsourcing business in the banking industry in the near future.43 Shortly thereafter, the Pilot Administration of Consumer Finance Companies was issued by CBRC in August 2009, in which a series of regulations and rules on outsourcing the business of consumer finance companies was formulated.

Figure 2.24 Samples of outsourcing projects in finance industry in China

Financial Institutions Outsourcing Projects Service Providers

China Development Bank

IT maintenance for hardware and software systems HP

Core system software System Access

Systems integration and development Digital China

ICBCSystem maintenance for open platform, data center services

Digital China

Call Center, document imaging system Sunyard

China Everbright BankCore business and management accounting system

Lenovo IT servicecompany First Data

Credit card

Shenzhen DevelopmentBank

Disaster recovery services last for 5 years Global Data Solutions Ltd.

China Merchants BankIP video conferencing systems and software development

UNIHUB

Bank of China Call centers for credit card Unisgs

Agricultural Bank of China International remittance business Western Union

Industrial Bank,Minsheng Bank and other20 banks

Bank card businessChina Unionpay DataServices Co., Ltd.

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Figure 2.25 Outsourcing services in finance industry by product offering, 2008

ITO

IT R&D service

BPO

KPO

The number of mentionsN=95

0 10 20 30 40 50 60 70 80 90 100

4

2 2

9 7 2 26

531512611 34

14 9 17 88

Software testing Software localization Embedded softwareCustomized software development Software R&D Basic IT service Information system maintenance service

Business process design service Supply chain management Customized business process Industrial specialized outsourcingCustomer relationship Training & Learning HR Finance & Accounting

According to the research, ITO still accounts for most of the outsourcing projects in the financial services industry, about twice that of the BPO category, and the KPO category is at a very early stage of development. Moreover, customized software development dominates the ITO category followed by information system maintenance service and software R&D; while industry specialized outsourcing dominates the BPO category, followed by supply chain management, customer relationship and finance & accounting. (See Figure 2.25)

Customized software development, disaster recovery services in ITO, and bank & credit cards business and call center services in BPO have experienced solid growth and become the major offerings in the banking industry. For the insurance industry, BPO dominates in the field, especially the low-end services such as policy printing and entry, and call center services.

Alongside the in-depth reform of China’s financial services system, services will be more comprehensive and products will be more complex and customized to meet various requirements from specific buyers. The development of the Chinese finance industry will provide more business opportunities to local service providers to help them accumulate more experience and improve delivery capacity, and the improvement of the service providers could in turn promote the Chinese finance industry.

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Figure 2.26 Outsourcing services in telecom industry breakdown by products offering, 2008

ITO

IT R&D service

BPO

KPO

The number of mentionsN=95

0 10 20 30 40 50 60 70 80 90 100

1 1

44233311 21

20131620124113 99

Software testing Software localization Embedded softwareCustomized software development Software R&D Basic IT service Information system maintenance service

Software R&D Basic IT service Information system maintenance serviceBusiness process design service Supply chain management Customized business process Industrial specialized outsourcingCustomer relationship

2.4.3 Outsourcing landscape in the telecommunications industryWith the constant deepening of the Chinese telecom industry reform, many telecom operators have become full-service oriented and moved into all business fields related to telecom operation which resulted in increased competition in the sector. The increased demand for efficiency and cost savings has led to an increase in the outsourcing of non-core business process. With the focus on the construction of a 3G network, firms have been forced to outsource the maintenance of the original network. All of these pressures have led to an expansion of demand for outsourcing services in the telecoms industry and an increase of outsourcing opportunities for equipment manufactures and independent telecom service providers.

The equipment manufacturers are increasingly focused on providing services to and in partnership with telecom operators and enhancing the cooperation with the independent telecom service providers. However, the competition between the independent telecom service providers is not so intense, and they could enjoy more development space.

According to the research, ITO still contributes the majority of outsourcing projects in telecom industry, with almost five times as many projects as BPO services, and the data shows that KPO services are at an early stage. Within ITO services, customized software development and information system maintenance services dominate, followed by software R&D; while finance and accounting and HR services are the most prevalent BPO services followed by customized business process,

industrial specialized outsourcing and customer relationship management. (See Figure 2.26)

Due to 3G licensing and the reorganization of the telecom industry in 2008, the expenditure on consulting services and management services should continue to increase. Moreover, as the telecom operators accumulate more experience and a better understanding of business process design and management, the demand for outsourcing services in the business operations should grow dramatically over the next five years.

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Case study six Exploring opportunities in the telecommunications industry

Zhong Rong Information Service Corporation Limited (Zhong Rong) was the wholly owned subsidiary of China Network Communications Corporation, but now is owned by China Unicom Corporation (China Unicom).

SituationZhong Rong was established by China Unicom to provide high quality, efficient, and professional outsourcing services through a call center which helps clients focus on their core business and improve their core competitiveness by lowering cost.

SolutionUsing the abundant resources and national wide service network from China Unicom, Zhong Rong provides buyers with a customized one-stop scalable service which can help buyers expand their business scope. Currently the services provided includes: corporate customer services, public affair hotline, medical services hotline, IT services backup, and data cleansing and analysis.

Zhong Rong is also establishing service networks. In September 2008, with an initial capacity of 500, Mi Yun Base became operational; its capacity will increase to 3000 in the coming three years.

Zhong Rong has also expanded its product offerings to include a variety of expandable service types (call in and call out) through its medical service hotlines including, reservation, health records, illness on line checks and other related medical services.

OutcomeOn July 13, 2009, Zhong Rong won the bid of the Haier Asia-Pacific calling center program, to provide a buyer calling center service within Southeast and Eastern Asian regions. The implementation was divided into two stages. The first stage, a call center servicing Malaysia, Indonesia, Thailand and Australia opened on October 1, 2009, to provide a fast, accurate and direct info from overseas end-users, and also monitor the service demands from clients during all these

process. The second stage, which will come on-line in the near future, will cover Japan, Korea and Hong Kong. The multi-language customer service center of Zhong Rong will provide a full range of backup services to drive Haier’s corporate strategy of “Smile Service” and “High Value Brand”.

On October 19, 2009, Zhong Rong also established a technical support center for China Unicom targeting iPhone mobile customers in China. The center will provide end-users with all related business services including, iPhone Consulting, iPhone Software and iTunes, and other related professional solutions. The center will also provide iPhone technical support to other end-users through customer calling centers in local provinces under China Unicom.

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Part Three

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Overview of Government promotion activities and the ChinaSourcing brand

3.1 OverviewThe research shows that over 80 percent of respondents are familiar with various government outsourcing preferential policies, including training, certification, tax and local special support funds. However, relatively few respondents are familiar with these policies for public information platforms. Government promotion activities have been successful as many more service providers are familiar with these activities compared to last year. As was the case last year, a majority of service providers favor a reduction in tax, financial allowances

for training, and an increase in government efforts to implement the policies. Investment in building outsourcing industry parks is cited as the lowest priority in the research. (See Figure 3.1)

39%

36%

25%

20%

18%

19%

16%

21%

25%

22%

26%

25%

28%

30%

31%

22%

21%22%

9%30%

4%12%Reduce tax or give financial allowance to service providers

76%

58%

54%

44%

40%

39%

37%

32%

30%

22%

19%

Increase efforts to implement the policy

Invest in training suitable talent for outsourcing industry

Improve the framework of a sound legal system

Help enterprises expand their business

Outsource part of government business functions

Invest in construction of industrial standard

Promote domestic enterprises’ awareness of outsourcing

Invest in construction of industrial shared-service platforms

Invest in building outsourcing industry association

Invest in building outsourcing industry parks

Extremely high High Moderate Relatively low No priority

High priority

Low priority

Figure 3.1 Recommended government policies from the perspective of service providers, 2008

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3.2 Brief overview of government policiesThe Outline of the Eleventh Five-year Plan (2006-2010) on National Economic and Social Development of the PRC in 2005 proposed to put great efforts into developing the outsourcing industry.

In 2006 The Ministry of Commerce, in cooperation with other ministries, launched the 1000-100-10 Project, which focuses on the development of the Chinese outsourcing industry and has become a blueprint for its development. The MOFCOM expects the emerging sector to play a large part in the development of China’s own commercial infrastructure and to help the nation take its place in the ranks of the world’s leading outsourcing centers.

In 2007, Announcement No.343, 2007 of Ministry of Commerce and Ministry of Finance, The notification on support and undertake the task of managing international outsourcing business development fund in 2007 by the Ministry of Finance and the Ministry of Commerce, benefited outsourcing service providers and related training institutions.

In 2008, after Suggestions on accelerating the development of Service industry from State Council, (No.7, 2007 of State Council) was issued in 2007, a new document, Suggestions on implementation of policies and measures on accelerating the development of Service industry from the General Office of State Council (No. 11, 2008 of the General Office of State Council), was issued with the intention of accelerating the development of offshore outsourcing. Moreover, The notification on support and undertake the task of managing international outsourcing business development fund in 2008 by the Ministry of Finance and the Ministry of Commerce (No. 140, 2008) was issued in 2008 and provided funding for approximately 1000 service providers and training institutions.

In January 2009, with the approval of State Council, Reply to issues on the promotion of development of service outsourcing industry was issued by the

General Office of State Council (No.9, 2009), designating Beijing, Tianjin, Shanghai, Chongqing, Dalian, Shenzhen , Guangzhou, Wuhan, Harbin, Chengdu, Nanjing, Xi'an, Jinan, Hangzhou, Hefei, Nanchang, Changsha, Daqing, Suzhou, and Wuxi, as China Outsourcing Model Cities. The cities were also given the responsibility for promoting international outsourcing business.

In February 2009, the Vice Premier Wang Qishan hosted a forum on outsourcing in Nanjing, and reiterated the importance of promoting the outsourcing industry for the State Council. The government has committed to provide support in various areas such as financial support, taxation, man-hour systems, talent training, telecom services, and financing services. The forum confirmed the government’s objective to promote the outsourcing industry and is seen as a historic event in China outsourcing industry development.

In order to further implement the preferential policies in Reply to issues on the promotion of development of service outsourcing industry (No.9, 2009 of the General Office of State Council) the relevant ministries launched a series of policies, including those addressing taxation, man-hour systems, financial support, training, financial services, infrastructure, and information security.

Policies on taxThe document, Reply to issues on the promotion of development of service outsourcing industry (No.9, 2009 of the General Office of State Council), continued the implementation of pilot tax policies for advanced technology service enterprises in the Suzhou Industrial Park. Qualified technology service enterprises can enjoy a 15 percent reduction of their income tax rate, a reduction in the taxation of training costs (calculated as 8 percent of total gross salary), a deduction from income before calculation of the duty of enterprise income tax, and tax free offshore outsourcing business revenues.

In April 2009, the Ministry of Finance, the State Administration of Taxation, the Ministry of Commerce, the Ministry of Science and Technology

and the National Development and Reform Commission jointly issued the document, The notification on issues about related tax policies to advanced technology-based service enterprises (No. 63, 2009), which defined the scope and qualifications of advanced technology service enterprises, including information technology service outsourcing (ITO), technical business process service outsourcing (BPO) and technical knowledge process outsourcing (KPO).

Policies to promote employmentThe Ministry of Education and the Ministry of Commerce jointly issued a document, Suggestions on reinforcing education of the service outsourcing talented to promote graduates employment by the Ministry of Education and the Ministry of Commerce, which provided the objectives of training 1.2 million people in five years and creating 1 million new employment opportunities for college graduates. The Ministry of Commerce and the Ministry of Education are jointly responsible for the identification of outsourcing talent training centers initiated by the model cities and the construction of an outsourcing talent training system to increase the talent pool. They need to coordinate with other agencies to increase the financial support for talent training.

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Policies on financial supportThe notification on support and undertake the task of managing international outsourcing business development fund in 2009 by the Ministry of Finance and the Ministry of Commerce published by the Ministry of Finance and the Ministry of Commerce provides that when a service provider hires a staff member with college or higher degree and on a contract lasting more than one year, it would receive up to 4,500 RMB of financial support. A training institution would receive up to 500 RMB for the training of each staff member. There is also funding support from various regions and model cities to help service providers purchase infrastructure and to acquire international certifications.

Policy for encouraging government authorities and enterprises to outsourceOn September 23, 2009, nine ministries and commissions including the Ministry of Commerce, National Development and Reform Commission, Ministry of Science and Technology, Ministry of Industry and Information Technology, and Ministry of Commerce, jointly published the Guidelines on Encouraging Government Authorities and Enterprises to Outsource in an Effort to Promote the Outsourcing Industry ([2009] No. 200). These guidelines stipulate that future focus should be directed at encouraging government authorities and enterprises to outsource, and that government authorities should be encouraged to outsource business operations including, information technology, operations maintenance, software development and disposition, testing, data processing, systems integration, training and leasing.

Financial support policies On September 7, 2009, the People’s Bank of China, Ministry of Commerce, Banking Regulatory Commission, Insurance Regulatory Commission, and the State Administration of Foreign Exchange co-published a report, Suggestions over Offering Financial Support to Facilitate the Development of the Outsourcing Industry ([2009] No. 284).

Support from the banking industry Efforts will be made to actively develop new credit products that will suit characteristics of the outsourcing industry and promote the formation of a multi-level credit system that is outsourcing industry friendly, including; expanding credit support for supplementary services, and financial products and services innovation will be piloted in specific cities.

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Support from the securities industry Assistance will be provided for eligible companies listed domestically. Lending and financing products will be adopted to support the development of outsourcing companies, and community funds will be encouraged to be invested in the outsourcing industry by methods of share holding or capital lending.

Support from the insurance industry Measures for the perfection of export credit insurance policy will be adopted, new insurance products will be created, and export payment and debt collection services as well as convenient business financing services will be provided for outsourcing service providers.

Foreign Exchange Support Efforts will be made to reduce risks posed by foreign exchanges to encourage the use of Chinese Yuan as settlement currency among outsourcing service providers to

help develop offshore outsourcing businesses. Preferential policies on account opening and funds transaction will be formulated for offshore outsourcing service providers, and foreign exchange accounts under the current account will be used by service providers to collect and pay foreign exchange funds as salaries and allowances on behalf of customers.

Import and export support policyOn November 6, 2009, General Administration of Customs and Ministry of Commerce co-issued the Notice on Carrying out Pilot Supervision on Protective Tariff for Imports of International Outsourcing Business, advising pilot supervision on protective tariff for imports of international outsourcing business will be carried out in ten cities - Shanghai, Dalian, Shenzhen, Nanjing, Suzhou, Wuxi, Harbin, Daqing, Xi’an, and Changsha.

Policies on special man-hour systemsThe Ministry of Human Resources

and Social Security and the Ministry of Commerce issued a document, The notification on issues about the adoption of special man-hour system by outsourcing service providers, which authorizes qualified advanced technology enterprises in the 20 outsourcing model cities to adopt special man-hour systems with the approval from relevant authorities if they can not implement the standard man-hour system due to their business operations.

Policies on infrastructureIn order to meet the industry requirement for high quality internet connections to support heavy internet traffic, the Ministry of Industry and Information Technology issued the document, The instructive comments on supporting the development of international communication of service outsourcing model cities, which proposed to set up security programs for international communication services. It also directed the major telecom operators to designate outsourcing service providers and industrial parks as

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important buyers and provide efficient, high quality international communication services.

In order to implement the intentions of the State Council in the document Reply to issues on the promotion of development of service outsourcing industry and to promote the service outsourcing industry in the central and western regions of China, the General Office of the Ministry of Commerce issued, The notification on enjoying Central Fiscal Interest Subsidy on service outsourcing infrastructure construction program at National Economic and Technological Development Zone of mid-western regions from General Office of the Ministry of Commerce. This document announced that loans for the outsourcing infrastructure construction in the central and western state-level economic and technological development zones could enjoy financial support.

3.3 Brief Introduction of the ChinaSourcing brand

3.3.1 OverviewChina has becomes the manufacturing hub of the globe and, after several decades of development and support, Made in China enjoys a good reputation all over the world. By contrast, the outsourcing industry in China is still in its early stage and ChinaSourcing as a national “brand” for China’s outsourcing capabilities is not well understood or accepted by foreign buyers.

The brand of China outsourcing industry can be divided into three levels: national brand as the first level, regional brands as the second level, and service providers’ brands as the third level. (See Figure 3.2)

National brand for overall strengthChina, as a whole, has a number of advantages as it develops its outsourcing industry such as

international economic strength, government support, political stability, and a large talent pool compared with other leading or emerging outsourcing regions.

The emerging Chinese outsourcing sector continues to enjoy rapid growth despite the downturn in the global outsourcing market. However, while service providers have begun to build scale through M&A deals, most are still not big enough to complete for the global mega-deals. Chinese service providers need to develop their brands to compete with foreign outsourcing providers.

In order to build the image of Chinese outsourcing overseas, the ChinaSourcing working committee of CCIIP, selected the top 10 leading companies and 100 growing enterprises to help potential international buyers become familiar with and understand the outsourcing industry and providers in China.

ChinaSourcing

National brand

Regional brand

Company brand

Financial service centers Culture creation centers • • • • •

Delivery capacity in globaloutsourcing industry as awhole country

Delivery capacity in aspecial vertical industryas a city

Delivery capacity inspecial business fields asa respective leadingservice provider

Leadingserviceproviders1

Leadingserviceproviders1

• • • • • • • • • • • • • • • • • • • •

Leadingserviceproviders2

Figure 3.2 Structure of China outsourcing brand

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Top 10 Leading Service ProvidersChina’s top 10 leading service providers have seen their growth rates slow due to the affects of the global economic crisis. However, they are still in growing rapidly. The total turnover in 2008 touched $1.5 billion, and the employment scale reached a population of 50,000 people, up by 34 per cent and 30.7 per cent respectively compared with 2007, while the per capita turnover reached $29,800 (See Figure 3.3).

15.0

11.2

8.0

39.8%

34.0%

55.8%

32.2%

45.5%

30.7%

4.4

6.9

3.92.6

9.1

5.0

2006

Total revenue(100 million USD)

Offshore revenue (100 million USD)

Number of employees(10 thousand people)

2007 2008 2006 2007 2008 2006 2007 2008

Chart 3.3 Growth rates of top 10 leading service providers’ revenues and employment scale

Data source: CCIIP

TOP 10 China's Leading Service ProvidersThe names are listed in no particular order:

1 iSoftStone Information Service Corporation

2 Beyondsoft (Beijing) Co.,Ltd.

3 Dalian Hi-Think Computer Technology,Corp.

4 Neusoft Corporation

5 hiSoft Technology International limited

6 Inspur Group Ltd.

7 VanceInfo Technologies Inc.

8 WuXi AppTec Co.Ltd ChinaSoft International Ltd.

9 ChinaSoft International Ltd.

10 SinoCom Computer System(Beijing)Co. ,Ltd.

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Top 100 Growing Service Providers Besides the leading enterprises mentioned above, 100 fast-growing service providers have also been identified to present the industry’s overall competency and enrich the ChinaSourcing brand.

The top 100 growing service providers secured total revenue of $1.57 billion in 2008, of which $750 million was contributed by offshore outsourcing business. The employment scale reached a population of 72,000 (See Figure 3.4).

Using a regional brand for aggregation effectAt present, some outsourcing model cities have used their original industry advantage or location to further develop their regional outsourcing industry. They intend to promote regional advantages internationally to develop an international reputation in providing outsourcing services in specialized industries.

For example, Hangzhou has targeted financial outsourcing services and worked to develop a reputation as an internationally renowned delivery center for financial services by leveraging its proximity to Shanghai, which is developing as an international financial center. Daqing, the largest oil production base and an important petrochemical industrial base of China, tends to focus on technical support services related to the petrochemical industry such as exploration and geographical information systems (GIS) to build a brand within the petrochemical industry. Moreover, Changsha is focused on becoming the delivery center for culture creation services relying on its current leading position in the culture creation industry.

Allowing each region to promote itself using its areas of expertise is a way for each region to promote itself internationally as an effective complement to the ChinaSourcing brand.

Company brand for core competenceThe continued development of an industry must be supported by the development of a series of leading companies. More and more local service providers have obtained international certifications and attend fairs and summits to promote their reputations. However, the size and capabilities of top service providers in China are still far from those of foreign competitors, including Indian providers. To remedy this, the development of company brands should be included in the goals of ChinaSourcing. The government should focus on supporting leading service providers in the scale expansion and capacity enhancement which would allow them to develop a brand to compete with foreign service providers.

15.7

11.5

7.6

51.3%

36.4%

76.2%

40.0%43.5%

40.6%

3.1

5.4 5.13.5

7.5 7.2

2006

Total revenue(100 million USD)

Offshore revenue (100 million USD)

Number of employees(10 thousand people)

2007 2008 2006 2007 2008 2006 2007 2008

Chart 3.4 Growth rates of top 100 growing service providers’ revenues and employment scale

Data source: CCIIP

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Case study sevenProfile of an outsourcing model city

Hangzhou, the capital of Zhejing Province, has an area of 16,596 square kilometers, and a population of 7,966,000. In 2008, the GDP of the city reached $70.31 billion44, an increase of 11.0% from the previous year at comparable prices, which was the 18th consecutive year of double digit increases.45

SituationAccording to "The Development Strategy and Planning of Hangzhou Outsourcing Service Industry ", report Hangzhou will be developed into an internationally known financial outsourcing services delivery center, a leading software outsourcing development center and the SME hosting management center by 2015. According to the plan, the Hangzhou service outsourcing industry will reach RMB150 billion -2,000 billion by 2015, and the city will have 500-600 large and medium-sized outsourcing service enterprises.

The offshore business in Hangzhou comes mainly from Europe and the USA. According to statistics, from January to July of 2009, businesses in Hangzhou delivered contracts from Europe and the USA totalling $213.6 million, which comprised 64.59% of total delivered contracts of offshore service outsourcing in Hangzhou. Contracts from India reached $45.55 million, which comprised 13.77%, and contracts from Japan reached $31.4 million, which comprised 9.49%.46

SolutionHangzhou is focused on the development of financial outsourcing services, especially the financial software outsourcing delivery platform. In the development of financial outsourcing services, Hangzhou will focus on the development of financial software outsourcing, professional financial outsourcing and highly technical financial process outsourcing. Hangzhou is also establishing a service base to support financial systems for R&D and financial process services.

At present, Hangzhou already has a number of leading financial outsourcing services companies, such as State Street Technology (Zhejiang), which is State Street’s wholly owned subsidiary in China and provides software development services and technical support to State Street for its financial assets. The company has also established a Fund Accounting Center in Hangzhou in early 2008 to provide offshore financial services.47 The financial software products of Hundsun Technologies makes up over 80 percent of these similar types of products in the Chinese market. Hangzhou has also set up a financial outsourcing union. In the domestic market, 40 percent of securities, 80 percent of the IT system design in funds is done in Hangzhou.48

The Foreign Trade and Economic Cooperation Bureau in Hangzhou analysis shows that the rapid development of the financial outsourcing services industry is inseparably connected with the local economic structure. Hangzhou is the fifth largest financial market in the country, after Beijing, Shanghai,

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Shenzhen and Guangzhou. Hangzhou had a total of 203 financial institutions in 2007, accounting for about 60% of the Zhejiang province. At present, the number of banking institutions in Hangzhou has reached 35, including seven foreign banks and 47 insurance companies are based there.49

Hangzhou has its own advantages in technology, and is adjacent to Shanghai. Supported by the strength of the financial center in Shanghai, Hangzhou wants to build China's "Boston", and create a financial background service center.

SME hosted applications management centerHangzhou already started Project "Gazelle" in September 2008. The city will appropriate RMB560 million of funding to support SME development. In the next three years Hangzhou will support at least 50 large enterprises in establishing e-commerce platforms, and the city will provide financial funds to help 10,000 small and medium enterprises develop e-commerce applications.50

Cai Qi, the mayor of Hangzhou, said that Hangzhou will focus on cultivating 10 e-commerce enterprises, comprised of five listed companies with e-commerce business, as well as five e-commerce services companies whose revenue is over RMB100 million. Hangzhou will become the professional website center and the national network operator’s center of the country by 2010. And the city will become internationally branded as "the capital of China’s Electronic Business”. Hangzhou will be the hosted application management center for SMEs.

The Hangzhou Fiscal Bureau will allocate special funds every year. These funds are to be used to support infrastructure and key areas of research and development of e-business, and support to give special assistance to the backbone of the e-commerce enterprise. At the same time Hangzhou will intensify the training for small and medium-size entrepreneurs, training 10,000 SME managers every year.

In addition, the SMEs will be encouraged to use e-commerce platforms like Alibaba and the government will share part of the expenses.

OutcomeFrom January to July of 2009, Hangzhou had signed $762.5 million of contracts for service outsourcing and the delivered contracts totaled $436.2 million. These included $547 million in signed contracts of offshore service outsourcing, and $330.7 million for executed contracts, which represented an increase of 202.06% compared with the same period last year.51

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Part Four

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Significant phenomenon and hot topics in the Chinese outsourcing market

4.1 Trend watch: Migration of delivery centers from Tier One cities to Tier Two cities

4.1.1 Overview Although Beijing and Shanghai are still two major destinations for delivery centers, the salary gap between Tier One and Tier Two cities52 is likely to push more service providers to move operations to lower cost destinations.

According to this survey, most service providers have delivery centers in Beijing, Shanghai or other Tier One cities. However, in terms of numbers of people employed in the sector, Dalian takes the largest share followed by Hangzhou and other cities. Average headcounts of delivery centers in some Tier Two cities are already over or near those of Tier One cities such as Beijing and Shanghai. The gap between Tier One and Tier Two is narrowing as more service providers shift delivery centers to lower cost destinations. (See Figure 4.1)

The location of delivery centers

Beijing

24

16

14

11

605

463

400

336

293

2569

9

7

7

6

5

4

4

4

4

Shanghai

Nanjing

Guangzhou

Dalian

Chengdu

Shenzhen

Hangzhou

Wuxi

Tianjin

Wuhan

Suzhou

Chongping

Jinan

Xi’an

Beijing

Shanghai

416Nanjing

Guangzhou

Dalian

420Chengdu

Shenzhen

519Hangzhou

392Wuxi

Tianjin

66Wuhan

435Suzhou

363Chongping

223Jinan

88Xi’an

N=82Average number of employees indelivery centers

Figure 4.1 Location of China service providers, 2008

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There are a number of reasons for moving a delivery center:

1. Cost pressure – increased competition and the current economic climate has forced service providers to relocate to Tier Two cities to optimize their cost structure;

2. Secondly, in order to comply with the national policy of promoting the service outsourcing industry, all the designated cities are intensifying their efforts to promote their cities and attract investment. Government policies to support improved infrastructure, investment and other kinds of preferential policies, have all encouraged service providers to shift locations;

3. Finally, as the buyers expand their business in new regions, the service providers are establishing delivery centers to support the buyers’ business from those regions.

To capitalize on cost reduction many service providers have already shifted

or established delivery centers in Tier Two cities. Delivery centers that remain in Tier One cities focus on high value-added projects or front-end processes such as consulting, architecture and design, while Tier Two cities focus on less-profitable or back-end processes such as coding and testing. Some service providers, however, are planning to shift high-value projects to Tier Two cities while keeping only offices or exhibition centers with the necessary senior engineers and administrative personnel in Tier One cities.

4.1.2 Analysis of reasons for migration trendAccording to the survey results, the staff turnover rate in Tier Two cities is relatively lower than that in Tier One cities. Although the turnover rate of junior level employees both in Tier One and Tier Two cities is significant, at around 5 to 10 percent, it is still much lower than that of India service providers. (See Figure 4.2-a)

Salaries are increasing in Tier One cities faster than in Tier Two cities for senior and middle level staff, but slightly slower for junior levels. (See Figure 4.2-b) As the senior and middle level employees account for more than half of the total headcounts and their average salaries are double that of the junior level employees, the rising salary levels is a bigger factor for Tier One cities. (See Figure 4.3-a)

13% 11% 13% 16%6% 7%

10%9%5%

7% 23%15%

34%35%

35% 35% 25%33%

9%

13%

13%

19%

8%5%6%

25%

19%

40%

40%

3%

88%

Tier 1cities

91%

Tier 2cities

65%

Tier 1cities

78%

Tier 2cities

27%

Tier 1cities

39%

Tier 2cities

Senior levelemployees

Middle levelemployees

Junior levelemployees

45%

Tier 1cities

49%

Tier 2cities

42%

Tier 1cities

42%

Tier 2cities

46%

Tier 1cities

46%

Tier 2cities

Talent attrition

15%_>

5%_<

N=60

10% - 15%5% - 10%

15%_>

5%_<

10% - 15%

5% - 10%

2% 2%

Senior levelemployees

Middle levelemployees

Junior levelemployees

4% 4%

a bN=60Rise of employees salary

Figure 4.2 Talent attrition and increase of employees’ salary in Tier One & Tier Two cities, 2008

Note: Junior level: With less than 2 years experience Middle level: With 2-5 years experience Senior level: With more than 5 years experience

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Figure 4.3-b demonstrates that there is more than a 30% salary gap between Tier One and Tier Two cities at all levels, except those with 2 to 5 years experience.

The lower salary rate and the decreased problem of attrition in Tier Two cities could result in at least 30 a percent savings in Tier Two cities. Moreover, the facilities cost in Tier Two cities is also at least 30 percent lower than that in Tier One cities, without significant difference in infrastructure. In addition, facilities subsidies from local governments can usually be obtained in Tier Two cities as the local governments intend to attract more service providers to locate in these cities.

As a whole, the potential cost of service for centers in Tier Two cities is at least 30 percent lower than that in Tier One cities. However, there are some critical barriers in the transfer processes: business opportunities and senior talent. Senior outsourcing talent can be found more readily in Tier One cities, and these people do not want

to travel to Tier Two cities frequently, let alone move there permanently. The service providers must carefully consider future business opportunities in potential locations: for example, if they will be able to support their buyers from those locations, or if the new locations are potential markets.

Pairing strategy is often mentioned as an effective way to connect the delivery centers in Tier One and Tier Two cities. Pairing is helpful to improve the delivery capacity of new centers and to solve the problem of new business opportunities. In a pairing strategy, a delivery center in a Tier Two city supports the business of a delivery center in Tier One city, such as Tianjin to Beijing and Wuxi to Shanghai. In order to take advantage of pairing strategy, a company must have a strong management team and processes to support multi-location controls.

If Tier Two cities want to continue to narrow the gap with Tier One cities, they must invest in training capacity and increase the local talent pool,

especially at the senior level. Tier Two cities should explore potential business opportunities attracting buyers and identifying local demand for outsourced services.

Working experience Average annual salaries (RMB, 1,000)

1-2 year ≤ 1 year≥ 5 year 2-5 year

N=68

12%

≤ 1 year

≥ 5 year

107

83

53

36

80+34%

+12%

+39%

+33%

74

38

27

1-2 year

2-5 yearFirst tier cities Second tier cities

26%

25%

36%

a b

Figure 4.3 Employees experience and average annual salaries in Tier One & Tier Two cities, 2008

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4.2 Trend Watch: Mergers & Acquisitions (M&A)As reputation becomes a critical factor in selecting vendor service providers, larger service providers with stronger brands will be rewarded with the most lucrative and prestigious contracts. The top five Japanese service providers accounted for about half of the Japanese IT services market, and, in the global market the top five service providers have around 20 percent in 2008,53 which is much higher than in China.54 Big outsourcing contracts with a TCV of over ten million dollars and requiring thousands of staff members are not uncommon in Japan.

To create service providers with the necessary size to handle the biggest contracts, M&A is a quicker path than organic growth. There are mainly four paths for industry integration and consolidation in the overseas market for domestic service providers right now:

1. Chinese service providers establish branches abroad, for example, Neusoft in the United States.

2. Form a long term strategic partnership with a foreign service provider.

3. Set up joint ventures with foreign companies.

4. Merge or acquire a foreign service provider.

The M&A path is well established in the industry as a means of rapid expansion and to obtain sufficient size. Examples include the acquisition of ESS, an India service provider, by Beyondsoft in July 2007, and the acquisition of Sidaronghe and the Services & Outsourcing Unit of MDCL-Frontline by iSoftStone in March 2009,55 Although M&A has become accepted in China, over half of the

respondents show that they have never considered M&A, compared to 31 percent which have already completed or planned a M&A. (See Figure 4.4)

Figure 4.4, shows there are two major reasons why service providers are not attempting to grow via M&A: first, the main strategy is to focus on its own business; and second, the company expected no economic benefit would be generated via M&A. Lack of enough operational cash was not cited as a relevant reason to dismiss M&A as most of the service providers rely on their own funds and their cash flow has not suffered serious impact from the financial crisis.56

In Figure 4.5, local providers without overseas branches and overseas branches of MNCs are identified as the most attractive targets of M&A by Chinese service providers. M&A with Chinese providers without overseas branches is comparatively easy to carry out and supports the strategy of the domestic service providers, which is to enlarge the scale of company and engage in new business fields. Acquisition of the target’s resources, including sales force, buyers, etc. is also an important reason to adopt M&A, especially for a deal with overseas branches of an MNC.

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The main objective of your companyis to develop you own business

Useless to generate economic benefits

Lack of suitable target companies

Not reduce costs

Lack of enough operational cash

Worry about the lost controlof your own company

Worry about the leakage ofconfidential information

6*

5*

3*

2*

*Absolute values

The major tworeasons that service providersgives up M&A2*

2*

1*

Has alreadycompletedseveral M&A

14%

Has consideredM&A and is planningM&A

17%

Hasconsidered M&A butgives up

5%31%

Neverconsidered M&A

Withoutanswer

52%

12%

5%give up

Enlarge the scale of the company

Engage in new business area

Target company’s sales force, clients, industry

In accord with the development of your company

Corporation structure similarity

Entering target’s market

Suitable target company emerges

Finanacial crisis accelerates the pace of M&A

Reduce costs

73%

73%

65%

43%

33%

30%

25%

13%

5%

Already merged Reasons to adopt M&APlanning

N=33

N=40

MNCbranchesin China

18%15%

Overseasbranchesof MNC

33%

12%

Localproviderswith abroadbranches

27%

9%

Localproviderswithout abroadbranches

39%

21%

Figure 4.4 M&A adoption and reasons for giving up, 2008

Figure 4.5 M&A types and reasons to adoption of M&A, 2008

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According to our research, the top three identified factors which affect the success of M&A are: target company selection, risk assessment and preventive measures, and integration after M&A (See Figure 4.6). This demonstrates that local service providers have already become cautious and serious about M&A. They intend to pay more attention to selecting the potential target for M&A, and taking risk management and preventive measures to ensure the success of M&A. Besides that, they recognize that the integration after M&A is a very important in order to achieve the expected result.

Those companies who have used M&As are pleased with the results and most of them are successful and will continue M&A to achieve fast expansion in scale and acquisition of new capabilities, especially in the domestic market.

Target company selection

Risk assessment and preventive measures

Integration after M&A

Your company’s strategy

Your company’s operational cash

Your company’s scale

Your company’s culture

Personnel in charge of M&A

Move fast to seize the M&A opportunity

Outer factors, such as financial crisis

Cooperative financial organizations

N=37

83% 3%8% 6%

67% 11% 3% 3%17%

41% 8% 3% 8%41%

35% 19% 5% 8%32%

17% 31% 8% 11%33%

14% 28% 11% 19%28%

11% 25% 11% 17%36%

6% 36% 17% 11%31%

22% 32% 8%38%

46% 19% 8%27%

64% 3%33%

1 = Very important 2 3 4 5 = Not important at all

Abroad Local

Willcontinue?

Quite successfulSuccessfulNot successful

YesNo

10

8

14

Absolute value

19

13

2

9

Abroad Local

14

13

15

13

10

Figure 4.6 Critical factors for the success of M&A, 2008

Figure 4.7 Result of M&A and future trend, 2008

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Total SSC N=154MNCs SSC N=86Local SSC N=68

Airline

s

Autom

obile

Bank

ing

Chem

istry

Compu

ter/El

ectro

nics

Energ

yFu

nds

Health

care

Indus

try go

ods

Insura

nce

Invest

ing/Se

curit

ies

IT co

nsult

ing

Pharm

aRe

tail

Telec

ommun

icatio

ns

Trans

porta

tion

Trave

l age

ncies

Cons

umer

12

3

9

54

1

19

30

25

20

15

10

5

0

5

14

1 10

2 2

0

20

14

6

1 10

3

0

3

1 10

24

15

9

6

2

4

21 1

17

15

2

54

1

8

3

5

19

109

65

1

3

0

3

Figure 4.9 SSC situation by industry

4.3 Trend Watch: Shared service centers (SSC)

4.3.1 Chinese SSC OverviewThe working model of the “captive” shared service center was introduced to China by MNCs in the 1990s. 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 buyers. Additionally, companies that leverage shared services can realize increased flexibility in instituting business changes, are more able to manage costs and have greater control.57

Since 2000, and especially in the past five years, domestic large companies have recognized the SSC’s benefits and have utilized this working model to reduce their cost.

4.3.2 Chinese SSC Landscape

The research has shown that customer care/call centers are the most likely to be established as a SSC. (See Figure 4.8)

Figure 4.9, shows a similarity between the overall SSC market and the MNC SSC market in terms of the distribution of SSCs by industry. It’s very obvious that MNCs are in the leading position and have tremendous impact on China’s SSC market, especially in the industries of IT consulting (Accenture, IBM and HP), industry goods (Michelin China, Epson and Canon) and consumer (Amazon, Amway and InBev).

Cross functions

Others

Finance

HR

Customer care

7.14%

1.95%

7.79%

1.95%

81.17%

Figure 4.8 SSC by business functions

Note: The number of researcher shared services center is 154. Source: Public sources, APAC Research analysis

Note: The number of researcher shared services center is 154, including 86 MNC shared services centers and 68 local companies shared services centers.

Source: Public sources, APAC Research analysis

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The MNC SSCs have the following characteristics:

•SSCsofITservicesplayersarecross function or Global/Asia Pacific support centers. As leaders with the best understanding and capability in the market, these SSCs now service external buyers changing them into profit centers.

•Thelargemanufacturingcompaniesare targeting China mainland consumers, and most of them have set up their own customer care/call centers to handle the various business tasks related to their products, which include product orders and complaints.

In the domestic SSC market, rapid development of SSCs has been concentrated in several major industries, such as banking, aviation, telecommunication and industry goods, and the customer care/call center function is most often involved. This indicates that SSC development in domestic companies is still low level and the management skill and technical ability are not yet competitive.

Due to the maturity of developed urban city talent resources, preferential investment policies, and outstanding outsourcing development experience, approximately 50% of SSCs are centrally located or near Shanghai, Beijing, Dalian and Guangzhou. Including the Yangtze River Delta and the Pearl River Delta, makes the proportion even larger. This distribution parallels with the outsourcing distribution.

However, within the past three years, due to the successful promotion of the western development policies, the more attractive labor cost and the potential inland market, both MNCs and local companies have begun to establish SSCs in inland locations, such as Chengdu and Xian.

4.3.3 Profiles of a MNCs SSC and a local SSCProfile of an MNCs SSCHSBC Group Service Center for banking, financing and customer care servicesHSBC Group Service Center (GSC) is one of the biggest banking and financial service organizations of the HSBC Group. It has approximately 10,000 subsidiaries in 83 countries and areas of Europe, Asia Pacific, America, and the Middle East and Africa. In China, HSBC GSC has two subsidiaries, HSBC Electronic Data Processing (Guangdong) Ltd located in Guangdong and Foshan and HSBC Data Processing (Shanghai) Limited in Shanghai.

HSBC Electronic Data Processing (Guangdong) Limited was established in Guangzhou as the first offshore site undertaking operations from HSBC Bank, Honk Kong, in June 1996. The second center started to offer services in November 2004, in 2007; a third center was established in Foshan.

The first Guangzhou center offers the following services: credit cards (including retail services), analytics, global banking and markets, payments, finance, general processing, IT operations, customer care and trade.

The second Guangzhou center provides services in Analytics, Credit, Credit Cards (including retail services), general processing, insurance and mortgage. The Foshan center offers a number of services including credit cards (including retail services), general processing, payments, insurance and customer care.

These centers offer services to Asia Pacific countries, the UK and Canada and have more than 4,500 employees.

According to the data from Dow Jones Factiva, the sales of HSBC Electronic Data Processing (Guangdong) Limited reached US$68.58 million in 2006 increasing by 22.35% over 2005.

HSBC Data Processing (Shanghai) Limited is a wholly owned subsidiary of HSBC group. It was established in Shanghai in March 2002 and provides operation support to banking and transactions across the Asia Pacific countries. The number of staff is rapidly increasing and now totals around 1200 people.

Total SSC N=154

Beijin

gDali

an

Guang

zhou

Qingda

o

Shen

zhen

Chen

gdu

Nanjin

gXi’

an

Suzh

ou

Shijia

zhua

ng

Kuns

han

Other

Unclea

r

Shan

ghai

35

1614

12

6 5 4 3 3 2 2

43

7

2

50

45

40

35

30

25

20

15

10

5

0

Figure 4.10 Chinese main SSCs by location

Source: Public sources, APAC Research analysis

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Profile of a Local SSCAlibaba Service Center for retail, customer care, and e-consumer services.

Alibaba is the world's largest online marketplace for global trade and the leading provider of online marketing services for importers and exporters. The number of registered uses is more than 40 million, from over 240 countries. The customer care center offers services on product orders, payment and complaints.

The first Alibaba call center was established in Hangzhou in January 2004. Infobird, one of China’s local leading call center solution players, was responsible for the construction and supplied the overall system. During the beginning phase, Infobird set up 500 seats, but it rapidly increased into 1380 by the end of 2004. At present, the Alibaba call center has established nine branches and has operations in around 50 cities on the China mainland. In 2008, the total number of employees exceeded 3200 and the centers were supplying services in English, Mandarin, Cantonese and Japanese.

4.3.4 Future Outlook for SSCsEnvironment and PoliciesTo promote the outsourcing industry, central and local governments all have published related preferential policies and this promotion it is expected to last for a relatively long term.

Therefore in the next few years, the outsourcing and shared service center business/model will continue to develop in China, as it is proven to be effective in achieving high performance for enterprises.

Drivers and Barriers

Drivers Barriers• Solid economic foundation as well

as strong government support.

• Cost and infrastructure advantage still remains.

• The advanced management experience and talent from the MNCs promote the development of domestic company SSC.

• The shared services center sector is still in the early stages of development.

• Domestic companies are reluctant to use SSCs due to low awareness of the operating model.

Market TrendTherefore, we can predict the following trends in the Chinese SSC market:

MNC SSC Local SSC

Outsourcing operation model transition

In the global shared services market, some large corporations have implemented the shared service concept as a last step when readying themselves for outsourcing. In China, the same thing has happened. For cost reduction and higher performance management, some companies closed their own shared service centers and transitioned to outsourcing, such as Honeywell outsourcing its Shanghai finance shared services center to HP.

Sustainable development of SSC in IT services industry

At the same time, as the major global IT services providers, such as IBM, Accenture and HP, develop their SSCs in China, they are also able to gain the opportunities and strengthen their abilities, consolidate their outsourcing leading position and enlarge their market share in China outsourcing market.

Play the new role in the outsourcing market

A number of leading SSC players, such as ZTC, have the experience and knowledge in the domestic SSC market and therefore plan to offer a similar service to external enterprises. Through successful outsourcing business development, they can complete the strategic transformation.

Improve SSC more valuable operation

With the increase of multi-business needs, the improvement of IT systems and adequate operation experience, some local company SSCs have aimed for more effective SSC functions. For example, National Development Bank is arranging the construction of a finance shared service center; and China Netcom Headquarters began pilot on a human resource, administration, finance, and MIS integrated multi-functional shared center.

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4.4 Hot Topic: The impact of the financial crisis

4.4.1 The impact of financial crisis on service providersThe financial crisis has threatened overseas business of some local service providers, but it has had very limited negative impact on domestic business. BPO services seem more resilient to the financial crisis compared with ITO and KPO activities, which may consist of more discretionary projects. The financial crisis leads has had a great impact on the global economy, including the Chinese outsourcing industry. However, compared to the uncertainty of overseas business, for which about one third of the service providers felt the pressure, 95 percent of service providers showed confidence on domestic business. (See Figure 4.11)

Moreover, BPO seems more resilient to financial crisis compared with ITO and KPO, while contract renewal rate also suffers the most negative impact. (See Figure 4.12)

4.4.2 Analysis of the impact of the financial crisis on the Chinese outsourcing industryGenerally speaking, the impact of financial crisis on China outsourcing industry has had the following impacts:

1. A decrease in the number of outsourcing contracts.

2. A decrease in profits due to the appreciation of RMB.

3. The complex domestic economic environment.

4. The migration of outsourcing projects.

The business of domestic service providers is relatively small and scattered, which means less impact from global economic

forces. Except for a downturn of the growth rate, the overseas business maintained solid growth, especially for the U.S. market.58

The Indian Rupee also appreciated at the same or even a higher rate than the RMB, which meant domestic service providers did not suffer a more serious impact. However, the service providers should also make use of financial instruments including, hedging, to reduce the cost pressure. They should also pay more attention to exploring the domestic market to improve anti-risk capability.

The third point is more complex and hard to forecast. Although total volume of imports and exports of China from January to July 2009 suffered a decreased rate of 22.7 percent, compared with the same time last year the domestic economy has continued to maintain momentum. China’s economy has shown relatively large elasticity in face of the financial crisis and measures to stimulate the economy initiated

by the government, including a $4 trillion investment program, makes the Chinese market more attractive with many investment opportunities.

As for the fourth impact, the cost pressure pushed foreign companies to reconsider its outsourcing strategy to further reduce its cost. Compared to India, the Chinese outsourcing industry still enjoys a price advantage. It is expected that China would be an option for foreign buyers when they intend to migrate delivery centers from India. Although the migration of foreign companies means that companies are exiting China as well, this is taking place mainly in the traditional manufacturing industry. And some foreign companies have migrated to central and western region of China, where there is still a cost advantage.

Figure 4.11 Respondents on the impact of financial crisis, 2008

DomesticBusiness

Overseasbusiness

Threat overcomeopportunity

100%

Opportunityovercome threat

No influence

5%

35%

30%

35%

55%

95%

40%

65%

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Figure 4.12 Change of business under the impact of financial crisis, 2008

Increase

15%

38%

20%

22%

23%

33%

20%

18%

20%

44%

67%

48%

66%

65%

29%

28%

57%

34%

35%

19%

18%

15%

13%

13%

48%

39%

23%

48%

45%

37%

No change Decrease

The financial crisis have a negativeimpact on the contract renewel rates, contract length, and the cash returning of existing contracts, especially the contract renewel rate.

BPO are more resilience to financial crisis compared with ITO and KPO, while ITO sees the most negative impact.

Greater impact on overseas business, while smaller impact on the domestic business.

Contract delay rate

Contract renewel rate

Average contract length

Recovery rate of the contract funds

BPO revenue

ITO revenue

KPO revenue

Contract amount of domestic business

Domestic contract the proportion of business volume

Contract amount of overseas business

4.13 Impact of the financial crisis on different service provider types, 2008

Outsource demand drop of international financial institutions

Negative Influence Chinese SP

Smaller negative impact on China service providers

2.58

2.35

2.53

2.54

Indian SP

1.67

1.88

2.45

2.21

US/EU SP

1.49

1.75

2.97

2.00The difficulty in cash flow credit

Trade protectionism

Affected by main industry of transactional corporations, adversely affected the impact of outsourcing business

US/EU service provider might be less impacted by trade protectionism

Due to cost factors Multinational companies will consider more outsourcing

Positive InfluenceSlightly greater positive impact on China service providers

2.24

2.20

2.00

2.22

2.30

2.49

2.19

2.57

2.53

2.57

2.71

2.59International expertise’s liquidity increase the supply of outstanding talents

2.25 2.26 2.37Lot of high quality technology and client network information service enterprises’ assets shrink, providing M&A opportunity

2.41 2.71 2.88Small-scale enterprise charge more reasonable acquisition price

Low-cost supplier is more attractive tointernational company

The national economic policy can effectively stimulatedemand for the promotion of outsourcing

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From Figure 4.13, the negative impact on the Indian and U.S./E.U. service providers is shown to be greater than that on Chinese service providers, along with the positive impact being slightly less than that on Chinese service providers.

Respondents also indicated that positive methods were taken by most respondents to confront the financial crisis.

The economic crisis has had an influence on both the domestic and foreign outsourcing industries, however, most respondents believe that the influence will disappear in one to two years and the domestic outsourcing industry will recover more quickly than the foreign outsourcing industry.

4.5 Hot Topic: Outsourcing industry and employment

4.5.1 OverviewWhile every sector in the market was affected by the economic crisis in 2008, the outsourcing service industry has continued to improve at a fast pace and has created a large number of employment opportunities. Under the pressure of this financial recession, corporations in other industries have chosen either to reduce headcount or to decrease salary; however, the Chinese outsourcing service industry has turned the recession into an advantage by relying on its ability to organize the labor force to meet growth demands. From January to June of 2009, the industry has hired about 297,000 new employees,

including 239,000 graduates which accounts for 80.4% of the total figure. By the end of June, there were 6,673 outsourcing service companies in China and over 1.2 million employees, including 989,000 graduates, who accounted for 81.3% of the total employment.59 It is quite obvious that the global economic recession provides a clear opportunity for China’s outsourcing service industry, and the global business is moving rapidly towards China’s market. In addition, local companies are starting to release outsourcing demand and the continuous fast growth of the overseas and local business has provided abundant employment opportunities. Therefore, China’s underemployment figure has been reduced in a way, and this new type of business has become more and more popular among the graduate students in 2009.

Figure 4.14 Methods adopted during the financial crisis, 2008

Defense methods Positive methods

44%

36%

33%

16%

12%

4%

Enlarge business scope

Recruiting experienced talents

Increase employee training

Plan potential integration target

Others 3%

80%

71%

71%

27%

Focus to domestic marketing

Cutting low profit business

Lowering service price

Delay listing plan

Cutting employee

Others

Figure 4.15 Forecast of the impact of the financial crisis, 2008

Have influence or not? If yes, how long do you think the influence will disappear?

ForeignOutsourcingIndustry

DomesticOutsourcingIndustry

If Yes

Have influence No influence Within 1 year 1-2 years 3-5 years More than 5 years

100% 96%

4%0%

ForeignOutsourcingIndustry

DomesticOutsourcingIndustry

5% 53% 38% 4.30%

26% 55% 10% 3.37%

100%

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4.5.2 Offshore business and employmentThe global economic crisis made people aware of the importance of improving productivity and the efficiency of managing resources in outsourcing services. Against this background, China, has become one of the models for lowering costs, and gained opportunities for outsourcing service providers. At the same time, many foreign companies are partnering with Chinese firms to lower their spending and to establish and explore new business projects in both China and global market. This trend will improve the relationship between China’s domestic and other offshore companies, and China will become an important link to more high-end opportunities. From January to June of 2009, the total volume of outsourcing services was $3.3 billion, of which 77.8% was offshore business. This data shows that offshore business plays a major role in China’s total outsourcing service business, and provides a large percentage of the employment in the industry.

4.5.3 Domestic business and employment The Chinese government’s polices encourage the rapid development of outsourcing services which means that the industry continues to create employment opportunities even while other industries stop hiring.

The outsourcing service market western corporations showsmore maturity compared with China’s. A recent CBI (Confederation of British Industry) survey of the presidents, managers, and senior management from manufacturing, financing, media, and service industries in Britain shows the number of firms considering offshore outsourcing services is increasing. More than 50% of British firms feel more pressure to offshore some functions, and about 25% of the firms are considering outsourcing. Outsourcing and offshoring have resulted in net jobs lost in the UK however; more than 50% of the British firms are exploring new domestic growth opportunities while outsourcing more transactional business activities. 60

4.5.4 More graduates are interested in the outsourcing industryOn April 10, 2009, China’s Ministry of Education and Department of Commerce announced that universities should establish specific programs for training for the outsourcing industry. The government expects universities to provide about 1.2 million well trained students for the industry and expects the industry to create 1 million jobs for incoming graduates in the next five years. This announcement also allows universities to rearrange current disciplines and establish more specific classes focusing on outsourcing services. In addition, the government authorized social training organizations to teach outsourcing services and help graduates to move directly into the industry. The government also suggested that outsourcing service companies provide internships for university students.

While the government is promoting the training of outsourcing talent, graduates are also starting to pay more attention to this new industry. Currently, there is a survey called, “the graduates’ employment tendency 2009” covering 1683 graduates among universities from 8 provinces such as Guangzhou, Shenzhen, Wuhan, Changsha, Chengdu, and Xi’an in Mainland China. Among all the surveys, 201 students would consider about working in the outsourcing service industry, which accounts for 11.94% out of the whole survey.61

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China has the reputation as a manufacturing powerhouse, producing many of the goods used by companies and individuals across the world. The reputation of the Chinese outsourcing service sector, while not as strong, continues to grow. The Chinese government’s promotional activities have helped to kick-start the development of the sector and the government continues to support its growth through releasing government demand for outsourcing services.

Overseas, China continues to exploit its three powerful advantages:

1. The government commitment to building a world-class service sector;

2. An education system that can and will build an unrivaled talent pool; and

3. And a low-cost advantage that should exist for some years to come.

Chinese service providers must assist the government by building businesses of a size and scale that can compete with Indian service providers. To be successful, Chinese service providers need to differentiate on true capability and experience. Currently Chinese service providers are focusing on price – “doing it cheaper” – rather than focusing on filling the gap in capacity between them and their largest competitors. Chinese service providers can fill this gap by focusing on KPO, disaster recovery outsourcing and other areas where they can build a competitive advantage. Simply relying on arbitrage and the ‘China interest effect’ for growth is not a successful strategy for the long term. They need to focus on selected customer groups where they can create value and very often this will be found in industry specific outsourcing, for instance CRO for pharmaceutical industry.

The government must continue its support for the industry through policies and financial incentives and it must drive the adoption of outsourcing at a provincial and central level of government. Encouraging the adoption of outsourcing in both government departments and state-owned enterprises will create new demand for Chinese service providers and support innovation in service offerings. On the supply side, the government can help improve the talent supply by supporting educational programs and training in areas that will improve service providers’ ability to compete at a global level. Given the fierce competition and the support other countries invest in the development of offshore based outsourcing businesses, the Chinese government should consider a step beyond the current preferential policies for establishment of outsourcing facilities (taxation, simplification, etc.), and extend the support to the full industry value chain.

Small and medium sized businesses (SMB) are a potential growth market for outsourced services in China. The government has only gradually recognized the role SMBs play in job creation and the recognition will bring government support to boost SMB growth. For Chinese service providers SMBs are an attractive target because they are flexible and have a result driven mentality. There are fewer barriers to entry and success such as redundant headcounts which are found in state-owned enterprises. However, their smaller size means that often they have not developed the specialized functions and teams found in larger companies and they can struggle to retain their best talent and the contracts for outsourced services will be smaller.

The innovation that will result from service providers solving the unique problems in China’s own domestic

market will create a suite of offerings which will be of great interest to buyers across the globe. China’s position as a global manufacturing hub will generate a number opportunities in supply chain related outsourcing such as third-party logistics and shipment to name two areas. As Chinese manufacturers upgrade their capabilities new opportunities will arise in areas such as research and development outsourcing.

In the future, China can lead the way in the development of services which break away from the intrinsic link to headcount such as the adoption of cloud computing and services which can be leveraged in the analytics and business-to-consumer space.

Conclusion

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1 Service industry covers software publishers, IT service providers, professional, scientific and technical services, real estate, and business and consumer services.

2 Accenture updated definition, supported by common industry definitions presented by Gartner, IDC and other third-party industry observers, and comprehensively considered industry definitions from MOFCOM.

3 Gartner, Dataquest Insight: Outsourcing Forecast Assumptions, Worldwide, 2000-2013, 2Q09 Update

4 Gartner, Forecast: Outsourcing, Worldwide, 2000-2013

5 Statistics from Ministry of Industry and Information Technology of the People’s Republic of China, http://www.miit.gov.cn/n11293472/n11295057/n11298508/11990293.html

6 Source: a regular press conference of Ministry of Commerce of the People’s Republic of China (MOFCOM) on July 15, 2009. http://www.mofcom.gov.cn/aarticle/ae/ah/200907/20090706400844.html

7 Statistics from Ministry of Commerce of the People’s Republic of China, 2009

8 Ibid.

9 Ibid.

10 Statistics from Ministry of Commerce of the People’s Republic of China, 2009

11 Calculated from data in Gartner: Forecast: Outsourcing, Worldwide, 2000-2013

12 Source: Report on development of China’s outsourcing for 2008

13 See Figure 2.13

14 See Figure 4.4

15 Refer to the part Analysis of outsourcing landscape by vertical industries.

16 Refer to the part Hot Topic: The impact of financial crisis.

17 Refers to contracts with deal size over 1 billion.

18 Gartner: Outsourcing Contracts Annual Review, 2008, Shows Outsourcing Growth, but There Are Signs of Change

19 Due to the updated definition, some traditional IT services are included in outsourcing scope this year. So the revenue analysis result is significantly different from last year as a result of the range changes.

20 Refer to Figure 2.10

21 Accenture: Outsourcing Market Research – China and the World, 2008

22 Accenture: Outsourcing Market Research – China and the World, 2008

23 Accenture: Outsourcing Market Research – China and the World, 2008

24 Refer to Figure 4.2.

25 National Development and Reform Commission, Ministry of Commerce, Ministry of Finance, Ministry of Industry and Information Technology, Ministry of Science and Technology, Ministry of Education of the People’s Republic of China and etc.

26 Mainly referred to Beijing, Shanghai, Dalian and other outsourcing model cities

27 Refer to Figure 2.20

28 Source: http://www.chinanews.com.cn/it/news/2009/08-10/1810744.shtml

29 Gartner, Forecast: Outsourcing, Worldwide, 2000-2013

30 Beijing Association of Software Service: IT - Service Outsourcing, in July 2009com/china/english/ default.asp

31 Beijing Association of Software Service: IT - Service Outsourcing, in July 2009

32 Due to the updated definition, some traditional IT services are included in outsourcing scope this year. So the revenue analysis result is significantly different from last year as a result of the range changes.

33 As Hong Kong is often a hub or transfer place for overseas business to the China mainland, revenue from Hong Kong included business originally from Japan, the U.S. or other markets.

34 Refer to Figure 2.20

35 Source: http://www.sasac.gov.cn/n1180/n1566/n259850/n259910/6373630.html

36 Source: http://www.chinanews.com.cn/it/news/2009/08-10/1810744.shtml

37 Changed to US dollars with exchange rate 6.8

38 Chengdu Bureau of Statistics

39 Ibid.

40 Ibid.

41 http://chinasourcing.mofcom.gov.cn/cd/content2.jsp?id=45423

42 Gartner: Outsourcing Contracts Annual Review, 2008, Shows Outsourcing Growth, but There Are Signs of Change

43 http://www.cbrc.gov.cn/english/home/jsp/docView.jsp?docID=20090701B27AFADFC2390B07FF34D5FBB03DBC00

44 Exchange rate to US dollars was calculated at 6.8

45 Hangzhou Statistical Bureau

46 At the end of June 2009, the Ministry of Commerce adjusted the statistical indicators and statistical coverage of service outsourcing, equally emphasized the statistics on both onshore and offshore services. According to the service outsourcing statistical standard of the Ministry of Commerce, Hangzhou has included the fields of embedded software, medical R&D, and communication R&D into the service outsourcing information management system and every indicator of service outsourcing increased dramatically.

47 http://www.hangzhou.com.cn/20080923/ca1581826.htm

48 http://www.hangzhou.com.cn/20081020/ca1593151.htm

49 Ibid.

50 http://news.xhby.net/system/2008/09/06/010333614.shtml

51 Statistics from Hangzhou Foreign Trade and Economic Cooperation Bureau

52 “Tier One cities” refers to the cities of Beijing, Shanghai, Dalian, and Shenzhen, while “Tier two cities” include Chengdu, Xi’an, Tianjin, Hangzhou, Wuxi, Wuhan, Nanjing, and others designated by China’s government

53 Gartner: Market Share: IT Services, Worldwide, 2006-2008

54 Statistics from MOFCOM shows that the top 5 service providers in China accounted for less than 15 percent. (Top 5 accounted for 25.4 percent of top 100, while top 1000 accounted for less than 60 percent of the total)

55 Source: iSoftStone Announces the Acquisitions of Sidaronghe and the Services & Outsourcing Unit of MDCL-Frontline, http://www.isoftstone.com/en/news/2009/20090312.htm

56 See Figure 2.19.

57 “Accenture China Outsourcing Report 2008”

58 Refer to 2.10 about business

59 Source: a regular press conference of Ministry of Commerce of the People’s Republic of China (MOFCOM) on July 15, 2009. http://www.mofcom.gov.cn/aarticle/ae/ah/200907/20090706400844.html

60 http://www.tdb.org.cn/interMarket/50937.htmlvvv

61 http://news.xinhuanet.com/tech/2009-06/11/content_11525224.htm

References

Page 82: China Outsourcing Market Research 2009 · 3.1 Overview 57 3.2 Brief overview of government policies 58 3.3 Brief Introduction of the ChinaSourcing brand 61 3.3.1 Overview 61 Case

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