Has the time come to consider China as an IT outsourcing destination?

Typically a choice of IT outsourcing partner is made by considering players from one of three groups:

• Global service providers (6 or 7, based in the US or Europe, with revenue of anything from £7 to £77Bn),
• Around half a dozen tier 1 Indian providers who pull in £2 to £5Bn
• A number of tier 2 providers, predominantly based in India, earning from £100 to £600M. 

Whilst this gives a fair field in which to make a selection, China is often mooted as an alternative outsourcing destination. Is the IT outsourcing market in China really attractive to a client based in the UK or Europe?

• The market lacks scale. Total revenues for the IT outsourcing industry in China in 2010 were in the £2Bn range – smaller than the revenue of any one of the Indian tier 1 players. There are however around 10 players who on size and scale terms rank against the tier 2 Indian players
• The market focuses on product development, with limited penetration in Europe. Many players focus on the domestic market, followed by the Far East, US and finally Europe. Core competencies of those providing service in Europe centre on software product development, testing and localisation for specific long-term clients through offshore development centres 
• Lower cost development may be possible. A simple metric to compare likely rates for people-based services is to look at a company’s revenue per employee. This metric indicates that development costs from a Chinese outsourcer may be up to 40% lower than a comparable tier 2 Indian player
• All may not be what it seems. There has been considerable excitement around Chinese tech stocks over the last few years. Some providers looking worryingly familiar to anyone who worked in outsourcing in the dot-com era – when many new service providers in the US and Europe acquired dozens of smaller outfits to achieve a large valuation with little integration – few of these providers survived the burst of the stock market bubble

So should you think about China as an IT outsource destination?

• If you are looking to outsource support of core infrastructure or applications, now is probably not the time – providers do not yet appear to have the scale, experience or focus on the European market
• If you are looking to build up an offshore development team for a sustained development effort over a number of years, then China should be on your radar – but choose your partner wisely…
• Contact the Source team at www.sourcecentral.co.uk for further information and independent advice