Lee Gomes wrote an interesting article(sorry, subscription required) in the Wall Street Journal’s Portals column about a subject that has been bothering me for a while.  I’m glad to see that he’s covered both sides of the story regarding the Aberdeen Group’s business practices.

‘There were many excesses during the Internet bubble; one involved the Aberdeen Group, which passed itself off as a technology consulting and research operation, but which was for the most part a “pay-for-praise” operation. If you saw an Aberdeen report saying that Acme MicroMacro sold world-class solutions, you could be sure that Acme had written Aberdeen a world-class check.

Times have changed. Harte-Hanks, which bought Aberdeen in 2006, ended the practice. There is a new Aberdeen, with a new business model, one that it calls “sponsored research.”‘

Well, OK, they can call it “sponsored research”, but it still feels very much like “pay to play” - at least to me.

“The current Aberdeen comes up with a research topic, typically involving some new technology trend, and then approaches tech companies selling products associated with the trend. For what customers say is roughly $30,000 a company can become a report sponsor. Aberdeen, which wouldn’t discuss its fee, then sends questionnaires to tech users, asking about their current activities and future plans for the area in question. The reports are meant to be a snapshot of the marketplace and don’t mention specific companies.”

These guys hit me up last year to provide background to one of their analysts for a report on China outsourcing.  I did the pre-work, then set aside the time to talk with the fellow.  Imagine my surprise when an account manager / pushy sales guy sat in on the call with the analyst and then tried repeatedly to pressure me into sponsoring the report.  He even used the scarcity ploy, “Well, I’ve only got four slots, two are already committed and three of your competitors are interested in the final two…”  He went so far as to name the competitors.

“The sponsors’ funding is fully disclosed. Sponsors have their logos on the report’s front page and are passed along with the contact information of everyone who downloads it.”

OK, but I was given the distinct impression that, my company would not be mentioned in the report, unless I signed up as a sponsor.

“The potential conflict in this approach, though, is clear. The reports are big business — there were 212 last year — each typically with four or five sponsors. But if much of your top line is dependent on getting tech companies to sponsor your research reports, you’ve got quite an incentive to design questionnaires that will yield the kind of reports tech vendors will want to sponsor.”

Mr. Gomes reports that the company charges $30K for a sponsorship — that’s consistent with what I remember.  So, this is a pretty good business: 212 reports * 4.5 sponsors * $30K == $28,620,000.

Based on my experience with this organization, I can’t believe that they have any credibility.  At least the “analyst” had the decency to leave the call while the sales guy was trying to close me.  From my perspective, this is just paid writing / PR.  There’s nothing wrong with paying for this service, but it’s probably not as meaningful as getting real coverage from an actual analyst.  Does anyone actually base their decisions on material from Aberdeen?

Technorati Tags:  China, China Outsourcing

Another thought (fear?) provoking post from Deb Perelman over on eWeek’s Career Blog.

“China Now Trumps the U.S. in Tech Competitiveness

Since World War II, the United States has been the main driver of the global STEM economy, but a new study warns that this is no longer the case.”

I confess, I Googled “STEM” - as the post finally explains in it’s final paragraph, STEM is an acronym for “Science Technology Engineering Mathematics.”  I’m embarrased to admit that I didn’t recognize it straight away - thank goodness for Google!

“China has replaced the United States as the leader in what the study, conducted by researchers at the Georgia Institute of Technology, calls Technological Standing, or an output factor that indicates each nation’s recent success in exporting high tech products.

“China has really changed the world economic landscape in technology,” said Alan Porter, another study co-author and co-director of the Georgia Tech Technology Policy and Assessment Center, which conducted the research. “When you take China’s low-cost manufacturing and focus on technology, then combine them with the increasing emphasis on research and development, the result ultimately won’t leave much room for other countries.”

China should not just be viewed as a low-cost producer of manufactured goods, but a global tech powerhouse, finds the researchers, moving in the last 15 years from being “in the weeds” to a world leader.

The “High Tech Indicators” study ranks 33 nations relative to one another in technological standing, based on national orientation in technological competitiveness, socioeconomic infrastructure, technological infrastructure and productive capacity. China had a standing of 82.8 in 2007, compared to a U.S. standing of 76.1 and 66.0 for Japan. China’s score was only 22.5 11 years ago, while the United States peaked in 1999 with a score of 95.4.

This isn’t the only recent study which waved a red warning flag about the United States’ STEM (science, technology, engineering and mathematics) competitiveness: the annual PISA (Program for International Student Assessment) report results found in December that the average combined science literacy scale score for U.S. students fell to 25th place in math and to 21st place in science.”

I need to carry a wallet-sized copy of this post around so that I can hand it to people when they ask me about why I choose to work closely with Chinese technology companies.

There are two bits of information in this post that should be particularly worrisome to my colleagues in the U.S. technology industry.  First, we’ve managed to fall behind China with respect to a metric that could suggest that we will soon lose our ability to lead in technological innovation.  I don’t even want to think about what our economy will be like if we don’t innovate, don’t manufacture and therefore don’t contribute goods and services that are valuable in the 21st century global economy.  I guess that we can all become lawyers and file patent infringement suits against the Chinese - oh wait, we won’t hold the patents.  Second, we should pay attention to the rate of change of the scores for the U.S. and China. China went from 22.5 in 1996 to 82.8 in 2007. The U.S. peaked in 1999 at 95.4 and has subsequently gone down to 76.1 in the past 9 years.  Not pretty trend lines for us.

I certainly don’t purport to know what how we should “fix” this situation.  I sincerely wish that I had an answer! Of course, the implication for the Chinese outsourcing business is the suggestion that the U.S. companies seeking innovation and technical leadership will look to China for solutions in the not too distant future.

Technorati Tags:  China, China Outsourcing

Deb Perelman over on eWeek’s Career Blog posted an interesting assertion about the future of outsourcing.  According to Ms. Perelman, the current weakness of the U.S. dollar, combined with our failure as an industry to meet expectations the expectations of our clients, will combine to slow down the outsourcing trend. Here’s the content of her post:

“Offshore IT Outsourcing Not Expected to Increase

If there has been one theme in outsourcing commentary from the last year, it is this: offshoring is not a panacea.

Between 1995 and 2005, however, it seemed as if it was. The dollar was strong enough that it was nearly impossible for IT professionals to be price-completive[sic] with foreign workers and almost equally impossible for CIOs to justify not taking advantage of what many saw an easy cost-saving measure.

But the model was simplistic, and as the wage advantage slipped and the secondary costs of offshoring mounted, many CIOs started bringing their work back home.

This trend is further evidenced a survey released by Robert Half Technology, an IT recruiting and staffing firm, earlier this week which found that nine out of 10 CIOs didn’t expect to increase their levels of overseas IT outsourcing by 2009.

Among companies that had tried it in the past and did so no longer, nearly six in 10 (59 percent) cited management challenges as the top reason they wouldn’t again. One third (30 percent) said that their costs savings were never realized and 23 percent said that the quality of work wasn’t good enough.

Down in fourth place, 11 percent of CIOs said that they stopped offshore outsourcing because it lowered the morale of U.S.-based workers. Hey, at least it was on the list!”

While I can’t argue with any of these assertions, it’s worth noting that the yuan / dollar exchange rate is controlled by the Chinese government, so China outsourcing hasn’t felt the same impact of the dollar’s recent challenges as have some of the other geographies (checked out the rupee / dollar exchange rate lately?).  Assuming for a moment that the Robert Half survey is accurate, the real issue is that, as an industry, we’re simply not meeting the expectations of our clients.  We are not doing nearly enough to make this work for our clients.  We need to get much better at managing the programs effectively and delivering real value.

I’ve recently had the pleasure of meeting with some very smart executives from the IT / software industries.  Since they came from the client side, these folks truly understand what we need to do.  They are leveraging their expertise from the IT & software industries to start new outsourcing operations in China that are oriented towards solving real problems for their clients.  As these executives get their operations established, and start rolling up some of the established vendors, we should see rapid improvement in China’s ability to meet the expectations of our clients.

Technorati Tags:  China, China Outsourcing

I noticed this article on the China Daily site.

“China announced plans Saturday to build nearly 100 new airports by 2020 to cater for soaring demand.

The proposals will mean eight out of every ten residents will live within 100 kilometres (60 miles) of an airport within 12 years, the General Administration of Civil Aviation said.

It put the cost of building the 97 new airports at 450 billion yuan (US$61.6 billion).

Air traffic volume rose 16 percent to 185 million passengers in 2007, according to official figures.

The General Administration of Civil Aviation predicts passenger traffic will grow by 11.4 percent a year between now and 2020, and freight traffic by 14 percent.

The number of airports serving more than 30 million passengers a year will rise from three now to 13, it said.”

As a frequent “victim” of the U.S. commercial air travel industry, I can’t help but marvel at the contrast.  We can’t even construct a modern runway configuration at the San Francisco International airport, let alone build major new airports.  This could be one more example of our failure to invest in our infrastructure causing us to lose competitive advantage…

Technorati Tags:  China, China Outsourcing

I know that this is just a press release, but in their recent announcement regarding a new testing / development center in Beijing, Flander, a Finland based mobile testing and software development service provider gave some insight into their internal security procedures.

“…new customer teams in dedicated high-security working spaces suitable for 30 to 100 professionals. Each space is equipped with a fingerprint-controlled lock and monitored with a CCTV video camera system. All critical projects are carried out using dedicated, protected servers.”

Providing key clients with dedicated lab space, as well as state of the art surveillance and access control is consistent with best practices among the leading Chinese software outsourcing companies.  These types of precautions help us all to ensure that our clients’ intellectual property and proprietary data are fully protected.  The folks from Finland clearly have this all figured out.  I hope that all of the new participants in the industry will follow this lead!

Technorati Tags:  China, China Outsourcing

Flander, a mobile testing and software development service provider based in Finland (of course), announced that it has opened a testing / development center in Beijing.  It appears that the core of the team came from the acquisition of Beijing Hexin Ditital Technology Limited’s mobile testing business.  According to Flander’s press release, organic growth has accounted for about 40% of their current staff.

This story caught my attention for two reasons:

First, it further validates the concept of leveraging Chinese engineers for mobile software development and testing.  Last year, Symbian also announced that it had established local operations in China, and it has subsequently been working with local vendors to secure qualified engineers.  With the rapid build out of China’s mobile infrastructure, and the local excitement around mobile technology, (cell phones are considered an important status symbol, and wireless LAN testing / development are very desirable jobs), I believe that we’ll see China outsourcing companies increasingly offering services to the wireless industry.

Second, Flander demonstrated real sophistication by acquiring an existing business and then growing the team.  This is absolutely the right strategy for most of the western companies that want to establish development / testing operations in China.  Attempting to build a China center from nothing is generally the slowest and most risky path to establishing a local operation.  By taking this approach, Flander will be able to quickly maximize the effectiveness of their western focused sales, marketing, PM and technical resources, by leveraging the lower cost engineering resources in China.

I believe that this move illustrates an accelerating trend and that the coming year will see many more mergers of strong western companies with existing Chinese outsourcing operations.

Congratulations to Flanders for this very wise move!  I’m confident that they’ll be extremely successful, and I’m thrilled that they selected China for their expansion beyond northern Europe.

Technorati Tags:  China, China Outsourcing

This wasn’t a particularly good day for Chinese software outsourcing stocks. VanceInfo (VIT) traded as low as US$4.90, while Longtop Financial (LFT) was as low as $13.03 today.

I’ve focused on these two companies, because they are the most direct way to track the acceptance of Chinese outsourcing as an investment thesis by the public equity markets.  While I was considering their recent performance, however, I also thought of a somewhat indirect way to observe this space.  eOn Communications Corp. (EONC) invested in The Symbio Group in August of 2007.  Since Symbio, like the vast majority of Chinese software outsourcing companies, is closely held, it’s difficult to get any real sense of what they might be worth.  I know that what I’m about to say isn’t sound from a stock analyst’s standpoint, but then I’m just a engineer…  Anyway, in light of the promised synergies, one could think of eOn’s performance as something of a proxy (albeit a somewhat tenuous one) for the perception of Symbio.  For those who are interested, eOn briefly traded at $.25 (yes, twenty-five cents per share) today.  `nuff said.

Technorati Tags:  China, China Outsourcing

From the, “What are they thinking…?” category, Compuware published an interesting, and somewhat disturbing, report (registration required) on the use of “sensitive consumer data” in application testing.  The highlight, for me, from their press release:

“52 percent of respondents outsourced their application testing, and 49 percent of those respondents shared live data with the outsourced organization.”

Of course, Compuware has a product, File-Aid, to help address test data privacy, but I believe that their vested interest doesn’t minimize the importance of this issue.

While I’m not aware of a single data breach among Chinese outsourcing vendors, it’s discouraging to see that clients aren’t being more careful with sensitive data.  Most of the mainstream firms have world-class security procedures in place, including constant training and reminders regarding the importance of confidentiality.  However, as we all know, the human element is the weakest link in most security chains.  It seems prudent to expend a little extra effort to at least do some sort of “anonymization” of the data.  It also seems reasonable to do periodic rigorous audits of your vendor’s security procedures and practices.

Technorati Tags:  China, China Outsourcing

I’m sorry that this article from SDTimes is just a bit dated (2007-11-20), but I think that it contains some excellent advice, so I decided that it was worth highlighting.  The article advises using a quality audit to make sure that your testing vendor is using acceptable testing processes.  The article quotes Steve Rabin, CTO of Insight Venture Partners.  Mr. Rubin advocates a quality audit plan with five phases:

1. Pre-assessment planning - This includes setting expectations, defining a timeline and getting executive sponsorship for the project audit. The deliverable for this phase is agreement and buy-in of the audit process and a follow-up commitment for improvement. Typically, this is capped by a meeting with the audit sponsor and key stakeholders on the audit process and objectives.

2. Data gathering - Phase two involves developing interview questions and surveys, and gathering all documentation (bug reports, test cases) prior to the interview process.

3. Assessment - The assessment phase involves conducting the interviews and developing preliminary findings. It’s important that that team members understand the process and that their input will be kept strictly confidential. A meeting explaining and justifying the process should be held with the entire team.

4. Post audit - After reviewing documents and interview notes, the analyzed information is synthesized into a list of findings and remediation steps, prioritized by importance to the project.

5. Presentation of findings - In the final phase, audit findings are presented with the sponsor and team, and agreement is sought on the highest-priority improvement areas.

Mr. Rabin encourages teams to repeat the audits at regular intervals.

I know that many teams will object to this as being “too much trouble to perform with offshore testers.”  I disagree strongly.  Lack of management discipline and high quality communications are two of the primary reasons that many offshore projects fail to meet expectations.  Insisting on a structure like the one suggested here could go a long way towards ensuring that your bi-directional communication is clear and that your own management processes are fully supporting the offshore project.

Rather than simply clicking our tongues and shaking our heads over the failures of offshore projects, I hope that we can all step up and actually manage them so that they will be successful, but that’s just my rant for a rainy day in January.

Technorati Tags:  China, China Outsourcing

One of my most reliable sources in China scheduled a call with me yesterday.  Unfortunately, due to the storms in California, both my home and my office were without power, so I couldn’t use Skype.  I ended up trundling down to the local Hampton Inn and they were nice enough to let me use both an AC outlet and an Ethernet port so that I could talk to my colleague (and also check my e-mail).  For the record, I really appreciate them.  I had run down the battery in my laptop, so I couldn’t risk hoping that I would be able get a seat near an available outlet at the local Starbucks.

Anyway, the rumor in Beijing is that both hiSoft and iSoftStone are planning to tap the U.S. public markets early this year.  My friend didn’t have specific information about what form they were going to use for their offerings.

Does this sound like a good idea?  Given the recent performance of VanceInfo (VIT) (they priced their offering at US$8.50; it immediately jumped to $9.50 when it opened; it closed yesterday at $8.91) and Longtop Financial (LFT) (priced at US$17.50; reached $35.22 during the second day of trading; closed yesterday at $22.12), I can’t help but wonder about the level of demand in the U.S. public markets for shares of Chinese software outsourcing companies.  Would you buy the shares, or American Depositary Shares, of any of these companies?

Update: Last week was pretty much a disappointment for the broader indexes, but our two favorite stocks had a particularly bad week.  Longtop Financial (LFT) hit a 52 week low of US$14.43 on 2008-Jan-16, and VanceInfo (VIT) likewise traded at a 52 week low of $5.91 on 2008-Jan-18.  We can only hope that the coming week is kinder.

Technorati Tags:  China, China Outsourcing