China IT outsourcing Industry Analysis – Part I

Updated: May 06, 2010

Specific Problems in China IT outsourcing Industry
The whole industry shows prosperous scene due to the high-speed development. Both the support from government and appropriate opportunities in market pushed IT outsourcing and kept the advantaged direction, so overall, we are optimized and full of hope. But we have to keep a cool head to find out the existed industry problems from specific angle or particular cases in order to determine the right development direction.

China IT outsourcing companies was affected by the economic crisis in 2008 and 2009, and some of them even worse. We can see that China IT outsourcing rely on market deeply. This is a serious question to think about: How to survive in depressed market?

A large number of IT outsourcing companies, especially some top ranked large companies excessively rely on one client only, and the most revenue comes from this major client. There is no doubt that this is not a healthy operation in service industry. How rotten wood can be carved? There is no real completive ability between these kinds of companies. In this situation, IT outsourcing companies will lose very thing once clients terminate the transaction.

China IT outsourcing model still be placed at the bottom of outsourcing model. Human resource assignments model is the main operation model for IT outsourcing companies, a large number of professional engineers have been sent to client side to participate research and development work. At a certain stage, IT outsourcing market and IT outsourcing companies were pushed to the positive side because this operation model has stable revenue with no risks and do not need too much abilities in high level. But in the long term, IT outsourcing companies are hard to accumulate experience in technologies and management due to leak values in this kind of operation, and no talent pool. In short term, labors paid sweat, but actually they paid blood if we look further.

Taking offshore outsourcing projects from abroad is still at the initial stage, no matter it is operation model or management level both of them should be more competitive. China launched software outsourcing market was much later than India, the band influence is still at the rising stage. So currently, China needs scaled operation and matured service model.

Though Offshore Development Center (ODC) has been developed rapidly, we are passive when we negotiate business with our clients, and mostly, we just provide offices with equipments and talent pool not IT services. We still are passive when we taken software projects because clients and change IT outsourcing venders at any time or transfer whole development team to their companies.

We can not win if we compete with IBM or Accenture. That is not a problem because we still at developing stage. However, that can be a serious problem if we have no ambition for the future.

The existing problems are inevitable, and we can gain more from the problem analysis.

IT outsourcing Market and Business Model Analysis
Nobody suspects the huge IT outsourcing market and nobody suspects IT outsourcing industry will be existed and developed. Research data can explain how huge the market opportunity is.

Based on our analysis and knowledge, IT outsourcing market will be affected by many different levels, locations and factors. Different with software products and equipments such as ERP and chips, only the leading enterprises can be survived. But IT outsourcing industry allows thousands of IT outsourcing companies existed with various level, locations, scale, ability, focused areas, and fields. The reason is clients have to consider languages, cultures, locations, time differences, politics etc. not only costs and quality when they are choosing IT outsourcing companies. Survival of the fittest is working in IT outsourcing industry but not the strongest, and the key point is how to find out the right position.

Today, China IT outsourcing companies have already survived and developed well. But is it fit for us? Is it still working tomorrow?

Currently, there are four types of IT outsourcing business model: human resource assignments, offshore development center (ODC), fixed price projects, and outsourcing the whole project.

Perhaps in most cases, human resource assignment is the low level outsourcing, offshore development center (ODC) is the medium level outsourcing, and whole project outsourcing is the high level outsourcing. But can we find the core issue between business model and service model? Is it the core issue of working on client side or IT outsourcing company side? Or is it the core issue of unit-price contract or fixed-price contact? IBM engineers work on client side with unit-price contract. So we can see that the core issue is the value provided by IT outsourcing companies.

We should have the ability of providing our core values under any business model and any service model. The level of core value determines the service competitive ability.

Now we have to make a choice, how to provide IT outsourcing core value, how to find the right position. Are we satisfied with being resource provider just like Middle East countries provide oil, or being high level value provider?

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