Given the commonly accepted estimate of well over a thousand software outsourcing companies in China, most of which have less than fifty employees, I’ve been anticipating a wave of consolidations to create at least a couple of premier outsourcing companies with the scale in terms of resources and revenues to really carry the banner forward for China’s software outsourcing industry.

To date, this issue has generated a lot of smoke, but very little fire.  I hear that all of the companies are talking, and receiving inquiries, but the actual number of intra-China deals has been pretty small.  The deals that have been completed haven’t been well publicized.  When I ask about the slow progress towards consolidation, I’m given lots of possible explanations, including the very independent nature of Chinese entrepreneurs, the relative lack of transparency in accounting, the scarcity of strong middle managers, the fact that the industry is relatively young, the hope for higher valuations to come along later & etc.  Perhaps the wise folks over at China Law Blog have some thoughts on this…?

In spite of all the perfectly good explanations for why it’s not happening, I still believe that consolidation will be very healthy for the industry in China.  I’ll even go so far as to assert that China’s software outsourcing industry won’t be able to be a true global leader until at least one, or two, very strong companies emerge with the scale and depth to pull the rest of the industry up among the world’s best.

I also suspect that there are mounting pressures on the players to start consolidating.  These pressures include the need for scale to compete effectively, access to capital from the US, owners’ need/desire to take some money off the table and the pack mentality - I think once the wave picks up momentum, a lot of companies will jump on.

With an eye towards whether momentum is building, there have been a few relatively small deals.  Late last year, Worksoft bought SureKam and HiSoft bought Ensemble.  Most recently, in a deal very close to my heart, The Symbio Group acquired an absolutely great company in Chengdu called Horizon Software.  While the mega monster company hasn’t emerged yet, I can’t help but wonder whether the wave is at least starting to build.

There are also a number of US firms looking at the Chinese software outsourcing companies with the notion of creating some sort of roll-up play.  Darwin Partners’ merger with Suzsoft is one example of this that I’m familiar with.

I firmly believe that the pace of consolidation within the industry will accelerate.  I’m also absolutely convinced that someone is going to figure out how to do this right and build a truly world class outsourcing company with a foundation in China’s excellent software outsourcing resources.

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