First, the global services outsourcing trend
Services outsourcing is becoming an irreversible trend of the new round of global industrial revolution and transfer of industries. the global services outsourcing has experienced a shift from mid-developed countries such as Ireland to developing countries such as India, the Philippines and the Mainland of China which is similar to the shift in the 1990s in the global manufacturing industry from Europe to the United States, from the United States to Japan and South Korea, and from South Korea to Taiwan China and Southeast Asia. The rapid growth of services outsourcing provides new opportunities for development of the global economy and industry, and becomes an important factor for multinationals when considering global layout and international competitiveness. In recent years, services outsourcing shows the following development trends:
(1) Area of businesses in services outsourcing is in development and extension
China¡¯s traditional definition of the scope of service outsourcing business is restricted to IT application services (and software outsourcing) and business process outsourcing. At present, new areas are explored globally, so we need to continuously expand the definition of services outsourcing, which can be classified into the following four categories of specific businesses:
1. lT application refers to the act of outsourcing information technology construction of the company to professional services company, including the application software development and maintenance, systems integration and consulting.
2. Business process outsourcing (BPO) refers to outsourcing a number of processes or functions to vendors, who will reorganize these processes, such as human resources, finance, procurement and customer support centre.
3. IT infrastructure services refer to offshore outsourcing of hardware, software, personnel and related facilities involved in IT infrastructure operations, including data centers, networks, servers and mainframe operations and management, as well as desktop and user support services.
4. Design and R&D services refer to the outsourcing activities related to the design and R&D of product, including the product concept design, computer aid design, embedded software design and development, product development, testing, and localization and other activities.
(2) IT Application services outsourcing and business process outsourcing has been relatively mature
With the rapid development of IT application services outsourcing and BPO, IT infrastructure services and design and R & D services outsourcing are also rising rapidly. With continually raising telecommunications infrastructure quality, dwindling communication cost and improvement of efficiency in distant collaborative work process, leading multinational companies will outsource IT infrastructure globally, which will result in a maximum 60% cost savings of the manpower or about 30 percent cost savings of the IT infrastructure operations. India's leading companies have set foot in this field. For example, TCS, Infosys and Wipro have started providing data center operations, network design and management, emergency management and other services to their major customers. At the same time, outsourcing product design and development to developing countries is becoming another emerging trend. Driven by the low-cost of labor in the outsourcing destination country, personnel reserve, adjacency to the local market and production and other factors, transnational enterprises are transferring R & D to Eastern Europe, India, China, and other countries.
(3) The potential market of global offshore outsourcing is huge
The potential market of global offshore services outsourcing is huge, and has reached 465 billion US dollars, of which IT applications, business process outsourcing, IT infrastructure services and R & D design services account respectively potential market of 900 billion dollars, 170 billion dollars, 85 billion dollars and 120 billion dollars. The potential market size is expected to grow to 600 billion US dollars by 2010. At present, of the potential market of 465 billion US dollars, only 9 percent realize offshore outsourcing, with17 billion US dollars in IT application services, 10 billion US dollars in business process outsourcing, 1 billion US dollars in IT infrastructure services and 12 billion US dollars in R & D and design services. So to speak, the industry still has great potential for development.
(4) Many countries and regions will set services outsourcing industry as the strategic focus of the country's development
Many countries and regions have realized the huge potential market size of offshore services outsourcing industry and its role in promoting healthy development of the economy, and has entered the fields based on their own competitive advantages, and strive to become a leading offshore outsourcing destinations. In business domains, every country has a unique value proposition and advantages: Ireland, Eastern Europe have geographical proximity with outsourcer; India, China, and the Philippines own large low-cost talent pool and connect with outsourcers in the language and culture, as well as large scale of available infrastructures; Singapore is the preferred support centre when encountered devastating events such as disaster recovery.
The Opportunities and Challenges of China on Developing Service Outsourcing
According to the relevant data of the Ministry of Information Industry, in 2006, China¡¯s software exports had reached 6 billion US dollars, with achieving more than 50% annual compound growth (2001 ¨C 2006), meanwhile, China has developed a number of local leading outsourcing providers and built more than 50 high-tech parks and software parks, it has built an absolutely leading position in North Asia service outsourcing market. Looking to the future, if China would further expand its global market share and influence, it should make full use of its advantages based on the existing foundation, seize the five major opportunities of global service industrial development, and positively face to the six challenges in order to achieve leapfrog development.
First, the five major opportunities of service industrial development
1. Lead to develop IT application service and business process outsourcing in Noth Asia, Europe and the United States.
China has established the leading advantages in North Asian market; it has brought up a group of local leading enterprises based on Dalian, Beijing, Shanghai and so on. At the same time, as the European market is still the main source of offshore outsourcing (In 2005, it accounted for about 90% of IT application service offshore market and 70% of business process offshore market.), China should further expand the European and American market on the basis of North Asian market. Through cooperating, conforming and uniting with those foreign companies which own client resources and brand advantages, China can enhance the awareness of customers in European and American market, and also improve the delivery capacity and project management level; China should provide language and culture training to meet the demands of clients.
2. The prospect of IT infrastructure service offshore outsourcing is broad.
In 2005, the global IT infrastructure service offshore outsourcing was 1 billion US dollar, it is less than 2% of the potential market with 85 billion US dollars, this is much lower the property of 20% in IT application service field, so it shows there exists enormous potential. The main factors of attracting IT infrastructure service offshore outsourcing are the local infrastructure, personnel supply, social stability and business environment. Compared with other countries, China has high-qualified infrastructure, stable society and policy, a wild range of engineering and IT personnel and abundant foreign investment, with the base of a large number of multinational corporations and manufacturing, all these have provided a good environment for developing IT infrastructure services.
3. The design and R & D of global manufacturing is gradually transferring to the developing countries.
China has the strong manufacturing base, closing to the local market and production are the unique factors of China to attract multinational companies to transfer the design and R & D. China has become the world¡¯s largest or leading market in many fields, there are a lot of opportunities in the following fields consumer electronics (cell phones, digital products, household applications and etc.), digital TV/Network Television (IPTV), auto, industry and so on, as well as the related embedded software is developing rapidly. China should seize the opportunity of developing embedded software, strive to establish a unified industrial standard and platform, develop the advantage of independent innovation, and then, expand to design and product R & D which are in the upriver industrial chain, at the same time, China also should encourage multinational companies to intensify the personnel and activities of R & D in China.
4. Independent software vendors increase personnel of R & D in China.
China has a large number of IT professionals, those leading independent software suppliers (such as Microsoft, SAP, Oracle and others) have all set up R & D centers in China, some R & D centers are still doing development, testing, localization and other infrastructure work. From a long-term perspective, China should gradually expend to the high value-added basic research and design, in order to enhance its global position of R & D center, so that these R & D centers can develop independently for China even for the global market of multinational companies to develop and design products.
5. Encourage Chinese large enterprises to outsource non-core IT businesses.
Take the telecommunications industry for example, at present, the main IT content about outsourcing of Chinese enterprises is software development. Compared with international counterparts, the proportion of Chinese outsourcing on IT operation and maintenance are low. To change the operation concept of large enterprises, encourage them to outsource the non-core IT businesses can make the enterprises to focus on the core businesses; meanwhile, this can gradually drive the small and medium enterprises to outsource in order to promote the rapid development of the whole service outsourcing industry.
Second, the six major challenges of the development of service industry
1. Personnel bottleneck: Although China has a large number of primary human resources; it still has a gap of the skills of personnel. On ¡°hard skills¡± (academic background, language skills, service delivery capacity) and ¡°soft skills¡± (practical ability and problem-solving ability, project management skills, international experience and cultural similarity), expect the academic background, China has differences with other leading outsourcing places. In the next five years, China will face a talent gap of 340,000 qualified personnel in developing offshore software outsourcing industry.
2. Providers¡¯ capacity: The leading Chinese IT service providers fall far behind of the international leading enterprises on scale; they also have differences on delivery capacity, service level, industrial expertise and other aspects. In the top Chinese software companies, only 20% of them have got CMM4 or 5 certification, but the property of the international leading outsourcing places can reach 80%. In the long term, Chinese enterprises should improve the project management experience, be familiar with Western business processes, strengthen the human resources management process for recruitment, train and retain talents, expand the enterprises¡¯ scale and improve the international influence.
3. International customer resources: Compared with the leading international fellowtraders, Chinese local service providers are lack of the key international customer resources. Recently, most of Japanese offshore outsourcing businesses are from Japanese large IT system integration vendors, Chinese enterprises haven¡¯t set up direct, deep and strategic customer relationship, most of service outsourcing enterprises don¡¯t have the experience and ability of international marketing, this has seriously blocked its future development.
4. The traditional operating mode of Chinese enterprises: As the restriction of the traditional concept, the level of China to get IT service outsourcing is still low; the outsourcing contracts of Chinese enterprises¡¯ clients are system integration and software development. Whether can gradually establish large domestic enterprises outsourcing and drive other enterprises to follow up rapidly will be the key factors of whether Chinese domestic service outsourcing market can be successful or not.
5. Lack of a strong brand: Although Chinese software parks and local governments have launched propagandas in the world; this cannot eliminate the major concern of international clients to China. Compared with other countries, Chinese service offshore outsourcing industry is lacking of an influential industrial organization which can present national service outsourcing industry, so it is hard to develop brand strategy with government and hold brand establishment activity by focusing on Chinese unique advantages in the world.
6. The support of regulations and policy: Compared with other countries, China is still lacking of a good policy environment to develop service outsourcing. At present, the related regulations of service outsourcing industry is still being perfected, at the aspects of data privacy protection, intellectual property protection, concession and incentives as well as Labor Law and etc., China still has differences with other countries. About the revenue, the preferential tax policy of 18th document is only for software companies but not for the whole service outsourcing industry, and the margin of preference is not as attractive as in India, the Philippines and other countries.
Third, the policy initiatives and future goals of developing China service outsourcing industry
1) Policy Initiatives
1. Reach a consensus at all levels of government rapidly; enhance the awareness of the importance of service outsourcing industry.
At the level of central government, it is necessary to ensure that service outsourcing industry is the keystone for China to enhance the global competitiveness, define the specific industrial development goals (such as the goals on export and employment) and industrial programming, increase the media propaganda of service outsourcing, make the development of service outsourcing as the important component part of external bilateral and multilateral trade relationship. At the level of local government, according to different conditions, comparative advantages and the overall economic development strategy, constitute the local service outsourcing industrial development plan. The central government should establish the real guidance and coordination to the local plans, in order to have complementary advantages and avoid redundant construction.
2. Strengthen to promote the basic work of developing service outsourcing industry.
Refer to the international successful experience, to set up service outsourcing industrial association, work on the industrial development with all levels of governments and enterprises. The association should give advice to government for establishing industrial policy, bring the best practice for enterprises to improve operating and delivering capacity, work on international marketing and brand construction, etc. At the same time, the government should assort with the related departments or agencies to establish and perfect the service outsourcing statistical system and unify the statistical caliber, at last, publish the statistical systems and management procedures.
3. Formulate and perfect the relevant policies, laws and regulations.
Government should publish the related policies on the basis of balancing the short and long term objectives, and also create an industrial environment for the development of service outsourcing. For example, further expanding the favorable policies which was only limited to software companies so that service outsourcing industry and the related facility businesses can be benefited, however, the industrial association should regard the protection of intellectual property rights as an important goal, lead the member enterprises to appear important announcement of complying with intellectual property rights, evaluate regularly the status of complying with intellectual property rights of the members in association, and set up the related certification system, etc.
4. Promote the international cooperation; help the local service outsourcing enterprises to be bigger and stronger.
Encourage enterprises to cooperate with the leading multinational companies to establish joint venture or other cooperation in order to get the international customer resources, set up brand image and cultivate professional skills. At the same time, support the leading local service outsourcing enterprises with good conditions to go out and purchase the foreign companies or clients¡¯ internal service departments. Cooperate with the industrial associations and leading global enterprises or consulting organizations, provide professional consultation and advice for merger. Help enterprises to establish a good channel for financing, to establish a loan, credit guarantee quick access in order to give enterprises capital support.
5. Encourage to outsource the demonstration projects, promote the change and innovation of IT operation mode.
Start from the local governments, spearhead the service outsourcing, establish 1 ¨C 2 demonstration projects and propagandize greatly, encourage 3 ¨C 5 large Chinese enterprises (such as aviation, telecommunications, banking and etc.) to outsource IT services, or do IT service outsourcing through joint ventures and cooperation with leading international service outsourcing companies.
6. Create the international brand of ¡°Chinese Outsourcing¡±
Formulate Chinese overall outsourcing brand strategy, establish the propaganda point of global outsourcing clients and service providers, and publish the specific measures to enhance the advantages, capacity and preferential policy of China. Establish the national service outsourcing authoritative forum which will be an important platform for executing brand strategy, build up a good image of Chinese service outsourcing, in order to achieve the regular intercommunion with global outsourcing clients and service providers. Set personnel or department in the consulates abroad to propagandize and contact service outsourcing businesses. Meanwhile, cooperate with those current world-renowned multinational companies in China, create a landmark case with global rallying point and propagandize their successful experience in China of outsourcing. Coordinate with other places to propagandize service outsourcing, this can ensure the consistent with the overall brand strategy and also help them to emphasis the distinctive and unique advantages.
7. Establish public-private cooperation personnel training mechanism; strengthen the cultivation of service outsourcing talents.
Design and establish the course system with the international standards, set up the national service outsourcing talents certification systems (such as language, professional skills, industrial knowledge, project management capacity and etc.), encourage public-private cooperation mechanism, government provides certain educational funds and define the policy guidance, education institutions (provision of training places, lecturers), industrial associations and enterprises (provision of training contents, lecturer training, etc.) participate jointly, and also encourage to set up the third-party service outsourcing training institutions, as well as provide service outsourcing vocational skills training to community-service-oriented staff.
8. Take good use of Chinese current advantages.
China has a high-quality and large-scale infrastructure and manufacturing base, as well as the growing IT service market, there are more than 200 multinational companies have established R & D centers in China. At the same time, China has a large number of projects and IT talents, the human resources are abundant. In addition, since China is similar with North Asian countries (such as Japan and Korea) on geography and culture, and also with the language advantages, China has established its leading position in North Asian service outsourcing and offshore market. Rationally and scientifically use these unique advantages is the basic impetus of achieving service outsourcing.
2) Long-Term Goals
China should effectively grasp the five great opportunities and positively answer the six major challenges, achieve a leap forward development of Chinese service outsourcing industry, and strive to achieve an average annual increase of 30%, in 2010, it will achieve the revenue of 18 billion US dollars, in 2015, it will achieve the revenue of 56 US dollars.
At the same time, China should strive to become the ¡°four global centers¡±. The North Asian integrated offshore center, global IT infrastructure services management center, global manufacturing R & D center and global software R & D center, and achieve ¡°two global leadings¡± ¨C create one global leading ¡°Chinese Outsourcing¡± brand, develop 2-3 large international leading service outsourcing suppliers. In fact, we have a long way to achieve the long-term goals, it is necessary for us to follow the overall development methods and guidelines of ¡°Based on unique advantage, grasp new opportunities and achieve leapfrog development¡±, try to make China become global service outsourcing industrial giant as soon as possible.
