We have all been trying to figure out how the software outsourcing industry was going to evolve.  Currently, there seem to be well over a thousand firms providing some sort of software / IT outsourcing in China.  These range all the way from a couple of folks in an apartment up to the really big players, like ChinaSoft and Neusoft.  In short, the industry is very fragmented, and even the “big” players previously referenced haven’t really emerged as industry leaders.

I’ve been asserting for several years that China wouldn’t become one of the world’s leading outsourcing hubs until at least a few companies emerged as leaders that could drive the rest of the industry.  As I see it, there are three primary paths that a given group could follow to become an industry leader (I dismiss pure organic growth as a viable path to leadership):

• Raise external capital and grow both business and capacity through domestic acquisitions
• Merge with a western outsourcing company and effectively become a resource base for the western consultants
• Get acquired by an Indian company

Without some sort of strategy for gaining industry leadership, I’m afraid that the Chinese companies are kind of sitting ducks for the multi-national outsourcing vendors to come in, set up captive labs in China, and simply mine the resources.  Although this has been a problematic path for outside companies in the past, they are getting better at it.  I saw this in a recent post on the “Economic Times“, an India Times site.  According to the article, Tata Consultancy Services (TCS) currently has a captive lab in China with 1000 resources.  TCS is currently planning to open it’s third IT center, and commits to having 5000 resources within the next couple of years.  So that’s one threat.

I’ve also heard a lot of talk recently that a few of the more successful Chinese outsourcing vendors are hurtling towards initial public offerings.  According two the rumors, a couple of the companies are close to completing listings on the NASDAQ, while others are working towards the Hong Kong or Shanghai exchages.  One has to assume that these companies will use some of the money raised in their public offerings to accelerate their growth through acquisitions.  I predict that we’re going to see some very interesting developments through the next several months.

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