Cyrill Eltschinger’s opinion piece “China Rising” in Forbes.com presents a very interesting take on the current state of the industry.  According to Mr. Eltschinger:

“Outsourcing and offshoring are entering a new phase in their development. With the dollar falling and demand for outsourced talent rising, traditional choices for these services are changing and, as a result, incumbent players are no longer an automatic choice. In fact the shift toward global nearshore is growing strong. So parallel with this approach, the China market is increasing in popularity.”

Cyrill is the founder of I.T. United, and was one of the pioneers among western business people setting up outsourcing operations in China.  He recently sold the company to Softtek, the leading Mexican software outsourcing firm.  I first met Cyrill at an event in Shanghai several years ago.  He has always been a very outspoken advocate for the industry (I’ll never forget the time that Cyrill tried to enlist us to storm the Gartner Outsourcing Summit in Las Vegas to demand that they pay attention to China), and I believe that his decision to sell out to Softtek says a lot about the current state of the Chinese software outsourcing industry.

It appears to me that the market is becoming stratified into three very distinct layers. 

• The organizations that are committed to building global scale, including VanceInfo (formerly WorkSoft), hiSoft and BeyondSoft are examples of the companies in the top level.
• The strong domestic companies including Chinasoft and NeuSoft make up the middle layer.
• Everybody else is in the bottom tier.

As the potential buyers become more sophisticated, and the competition heats up, companies that want to break out of the vast bottom layer will have to explore strategic alternatives, like merging with a leading company from another geography.  I applaud Mr. Eltschinger for recognizing this and making an aggressive move to become a key component of Softtek’s mixed-shore offering.  As usual, Cyrill looks like a visionary.

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