If you can stand the advertisements, Forbes has a post, provocatively titled, “The Next Indochina War” by Sramana Mitra, a Silicon Valley based technology entrepreneur and strategy consultant. According to Ms. Mitra:

“China, so far the world’s manufacturing superpower, is making a credible play for a share of the IT outsourcing pie, much to India’s chagrin. China’s well-oiled machine, once it makes up its mind about rolling out a policy, is capable of doing so more effectively than most other governments.

Somehow, its communist past comes in handy: China has created an education system that is scaling well in the engineering disciplines. Statistically, the United States graduates roughly 70,000 undergraduate engineers annually. China graduates 600,000 and India 350,000. Although India compensates with an additional 300,000 IT graduates through non-engineering programs, in higher education, China is racing ahead, producing engineering Ph.D.s at a much faster pace than either the U.S. or India.

As India struggles to cope with raging attrition and salary inflation challenges, and a generally unstable, mercenary workforce, let’s take a look at the situation in China.”

The discussion includes a nice plug for VanceInfo (VIT). It also discusses the well-known opportunities for Chinese software outsourcing companies to grow by successfully serving their own domestic market. As some of the reader comments point out, there’s not much new ground covered in the post, but it’s good to see a thoughtful treatment of the issue from a source other than promotional material from Chinese outsourcing companies (including some junk that I’ve written over the years).

Anyway, it’s an interesting note, although I might wonder at Ms. Mitra’s conclusion that:

“…this competitive force from the Chinese contingent will whip India’s youth back into shape.”

Maybe it’s just that I’m an old guy, but I doubt that China’s growing dominance will really be a motivating factor for any group of young people beyond the country’s own borders.

Technorati Tags:  India, IndoChina, China, China Outsourcing

As I’ve been talking to vendors and clients lately, I’ve noticed an interesting gap between what the clients seem to want and what most of the Chinese outsourcing vendors are set up to deliver.  A series of conversations I was involved in last week provide a good example (minor details changed to make sure that neither party yells at me).  The client company wants to have a team in China for a web service development project.  The scope looks like it will be roughly 10 engineers, plus a lead, for about 8 months, perhaps up to a year.  So far, so good.  Now comes the hard part.  They also want an onsite project liaison person, with domain expertise, for coordination, an on-shore PM (at least part time) and fluent spoken English skills for everyone on the team (rapid development and constant communication).  Of course, the client still wants the blended costs to come in below $20 per hour, since they have heard from other companies that this is a fair rate.  They talked to a number of vendors and were able to find at least one that claimed that they could provide the service to meet these expectations.

I’m somewhat familiar with the vendor that they’ve selected.  The company doesn’t have any permanent technical staff in the U.S. for deployment on projects like this.  Further, given the constraints on the blended billing rate, they are unwilling to hire fully qualified individuals at U.S. salaries.  Finally, as with most of the Chinese vendors, fluent spoken English is not a common skill among the firm’s line engineers.  Of course, they’ve neglected to fully explain this to the client.  In fact, they’ve mostly just said, with a smile, “Of course we can do that!”

The vendor is currently trying to identify someone from their Chinese staff to come to the U.S. to handle the liaison role.  There are several potential problems with this.  First, they’ll need to find someone who can get a visa to travel here.  If I recall correctly, they are not likely to get approval for an eight month stay on a standard visa, so they’ll either have to substitute someone else after each 90 day period, or else the liaison person will have to return to China to renew their visa, then come back, at least twice.  Finally, many of their engineers in China don’t drive, so the person is likely to get stuck in Silicon Valley for several months without basic transportation (maybe a bicycle…?).  This doesn’t sound like a happy situation, 6000 miles from home, no car,… It’s not a job, it’s an adventure.

If they can’t identify someone currently on their China staff, they will try to find an inexpensive Chinese-American contractor who can fill in.  Due to the constraints imposed by the rate targets, I don’t think that they’ll be able to find someone with much domain expertise.  This route will also mean that the “liaison” doesn’t actually have existing relationships established with the China delivery team.

They plan to have someone from their U.S. sales team fill in as PM, because that individual is considered “free.” They’re already paying her salary to do sales, so they don’t consider it an incremental cost to the organization.

I’m pretty sure that both sides are going to be disappointed by the results, but who is really at fault?  The vendor clearly doesn’t have the infrastructure to support these arrangements, but they want to win the business so they’ll give it a try.  The client is fully aware of the cost for resources here, but they figure (incorrectly) that the vendor can cover the costs based on the blended rate.  After all, reducing costs appears to be the client’s primary motivation for moving the work offshore.  The natural response from the “winning” vendor is to try to find ways to reduce costs to that they can deliver some semblance of the service while still making the engagement profitable.

This is the classic case where the two sides have failed to negotiate as “partners”.  I know, I know, I hate the way that the term has become a buzzword as much as the next person.  However, by insisting on the low blended rate, the client is almost guaranteeing that their expectations will not be met.  By agreeing to these requirements, and this rate, the vendor has ensured that they will be forced to use resources that the client will consider less than acceptable.

There’s no such thing as a free lunch…

Even though it’s a competitive business, vendors need to recognize when they have to either reset expectations prior to closing, or walk away from the deal.  If you realize that you can’t possibly deliver to expectations, profitably, be prepared to let it go.  Signing the contract, then screwing up, is far worse for our whole industry.

Clients need to understand that the more specialized their requirements are, the higher their costs will be.  If you need domain experts on site, and fluent spoken English, please don’t expect that the vendor will deliver it all for “standard China” prices.  If you force your vendors into taking shortcuts, you’ll find someone who will, and you won’t like the results.  You really do get what you pay for.

I apologize for this long rant, but this kind of behavior, on both sides, is making it hard for us to establish China as a credible global software outsourcing player.

Technorati Tags:  China, China Outsourcing

This “fact sheet” from the U.S. Department of State has been covered by all of the major media, but I’m mentioning it because it touches on something that I’ve wondered about since the first time that I stayed in the “State Guest House” in Beijing.

“PRIVACY & SAFETY: All visitors should be aware that they have no reasonable expectation of privacy in public or private locations.  All hotel rooms and offices are considered to be subject to on-site or remote technical monitoring at all times.  Hotel rooms, residences and offices may be accessed at any time without the occupant’s consent or knowledge.  Many hotels and apartment buildings may be of substandard construction, lack emergency exits, fire suppression systems, carbon monoxide monitors and standard security equipment (locks, alarms, and personnel).”

I’ve always relied on the philosophy of, “Why would they care about me…?”, but it’s probably good to get a reminder that we’re not in Kansas anymore.

Speaking of “substandard construction”, the last time I was in Beijing, I stayed in a relatively new high-rise hotel.  The company that I was visiting had arranged for me to have a very nice suite.  The room had great views, plenty of space and was actually pretty comfortable.  Until it started to rain.  During the storms, and for several hours after they ended, water literally ran down the walls of the room in streams.  We mentioned the issue to the hotel office, and they just acknowledged that it was a known problem.

Technorati Tags:  China, China Outsourcing

Lawson Software (LWSN) has announced that it has acquired the Product Livecycle Management (PLM) software division from FreeBorders.  This move apparently will allow Freeborders to focus on it’s outsourcing business as a pure play operation.  Terms of the deal were not announced.

This seems like a no-brainer for Freeborders.  Running a software product company is a completely different discipline from successfully building an outsourcing company.  Beyond the distraction of trying to keep both moving forward, you’ll face the inevitable questions about conflicts of interest, including:

• “Do customers of your software product get preferential treatment from the outsourcing group?”
• “If there is a resource squeeze, which side of the business gets a break?”
• “Are you really serious about outsourcing, or is this just a service component to your product offering?”

From the time that I first met Freeborders, I thought that their product business was a possible weak link in their story.  This move clearly shows that Freeborders is serious about their outsourcing business and that their new management is making changes to the company that will allow them to compete even more effectively.  We should all keep a close watch on this organization.

Technorati Tags:  China, China Outsourcing

I’ve been wondering when the seemingly unstoppable trend towards globalization would mitigate concerns regarding which specific country is winning / losing as production is distributed around the world.  Up to this point, we have asked questions like, “Is India better than China for software outsourcing?” and “Should I place my big BPO center in the Philippines or in Costa Rica?”  To my mind, the basic assumptions behind these questions are faulty.  As reliable bandwidth becomes ubiquitous, and as various regions compete to the point that incentives become commoditized, we may see a time when the only question is, “What is the most efficient way to perform X?”  The right answer might be to do the work locally, or, perhaps, the best course would be spreading the work to many countries, or it could be to focus on an even less utilized region like Southeast Asia, or Eastern Europe.  I think that this is the basic thesis put forth by Thomas Friedman in his series of books and articles.

Mark Kobayashi-Hillary has an interesting post on this topic.  Mr. Kobayashi-Hillary observes that:

“…most senior executives I meet and talk to are really much more focused on the capabilities of partner companies, regardless of where that company is registered.

Can they do the job? I don’t care if they are based in California, Cornwall, or Korea. Yes, when companies are planning an offshore captive facility they will need to examine the fundamentals of that region, but I would argue that outsourcing is a lot more common than offshoring and creating a major captive for services.

Companies offering IT or IT-enabled services from regions such as China and the Philippines might want to work harder at developing their own reputation as a company, rather than supporting government-led initiatives and trade missions that do little more than present a sea of statistics and images of golf courses.”

Mr. Kobayashi-Hillary makes an excellent point in his advice that companies focus on their own strengths, rather than emphasizing national differences.  While I fully acknowledge that geo-political risk can be a factor in deciding against some countries, I still think that clients would be well served to concentrate on finding the right vendor, rather than picking a nation and then trying to identify a suitable organization.

Technorati Tags:  China, China Outsourcing

I met a very interesting team from Radio Netherlands Worldwide this week.  Hans Jaap Melissen is an International Correspondent and Sigrid Deters is a Producer.

They are in the U.S. doing research for a fascinating project.  Along with a group of colleagues who have spread out around the world, they are trying to develop a picture of China’s role in globalization.  This seems to be a pretty big deal for their organization.  Sigrid and Hans are spending a month over here talking with people on all sides of the issue.

Sigrid and Hans were kind enough to express an interest in understanding my positions and they asked a number of really insightful questions.  They are clearly developing a well-rounded perspective regarding China’s new role in the world.  I’m very much looking forward to seeing what they conclude.

I’m quite impressed with the depth of understanding that Sigrid and Hans demonstrated.  Perhaps this is just election year grumpiness, but I couldn’t help feeling that most of us are only thinking about the impacts of globalization at a very superficial level and many of us are establishing our positions based on sound bites from the campaigns.  In contrast, this news organization in the Netherlands is making a significant investment of time and resources to develop a deep and nuanced understanding of the issues…  Hmmm.

Technorati Tags:  Netherlands, Radio Netherlands Worldwide, China, China Outsourcing

I noticed this post highlighting some key points from a report “Outsourcing Trends in Central and Eastern Europe: The Second Wave.”  The document was produced by Technology Forecasters, Inc.  I’m relying on the summary post because I can’t afford to buy the actual report.  Although the discussion concentrates on manufacturing, I believe that many of the key points also apply to software outsourcing.

With all of the focus on India and, more recently, China, I suspect that many western companies have overlooked the opportunity to tap the very skilled resources in Romania.  According to the report:

“[Romania’s] labor costs are not as low as China’s, but for European markets Romania is nearly the same as China on a total landed cost basis.”

The report goes on to assert that:

“Romania has the lowest labor costs of all European Union members.”

We’ve had the pleasure of working closely with a ITC Networks one of the country’s top software businesses.  Assuming that ITC is a fair representative, Romania has a pool of very strong software engineers and project managers that are fluent in written and spoken English.  These folks routinely perform excellent work.  Unfortunately, it seems that the size of the available resource base is somewhat constrained, as the report notes:

“[Romania] has a skilled labor shortage”

I actually am going somewhere with all of this…  I’m becoming convinced that the shortest path to really successful China software outsourcing will be through building a truly multinational organization that plays to the breadth of the resource pool in China as well as the depth of the available talent in countries like Romania.  The Indian companies have attempted to put this together, but they’ve met with limited success for well understood reasons.  I’ve covered combinations of Chinese teams with U.S. based front-ends in previous posts.  This is another very intriguing slant on the issue.

Technorati Tags:  China, Romania, China Outsourcing

Information Week’s Startup City blog carried a really nice video interview with Augmentum’s COO, Frank Yu.  Frank may be the smartest guy in the business and it’s really fun to watch him. They present a good testimonial from one of their clients, as well.

The YouTube presentation of the interview is here.

Augmentum has always led the way with their media relations strategy.  I still get calls from Chinese clients who want to be interviewed by Business Week!

Technorati Tags:  China, China Outsourcing

EETimes Asia seems to have picked a slightly misleading headline for its story.  Careful reading of the text suggests that the operation in Hangzhou will be more of a design support center.  Intersil’s VP of Asia Pacific Sales reports that,

“The Hangzhou applications team will provide key support for Intersil’s business around the world, and help us to better serve our Chinese customers in ‘real time.’”

It appears that the team will be charged with providing application support to Intersil’s Chinese customers, rather than actually contributing to Intersil’s product engineering.  In any event, this is a good indication of how important China based clients are becoming to western technology companies.  It will be interesting to see whether the company decides to leverage this center to actually start performing development work at some point in the future.

Technorati Tags:  China, China Outsourcing, Semiconductor

As I’ve suggested previously, merging with a western firm is perhaps the most direct and effective way for Chinese outsourcing companies to build their business here.  The most recent transaction is iSoftStone’s acquisition of Seattle based Akona Consulting.

As is standard with these announcements, iSoftStone touts the potential expansion of their U.S. Operations and the opportunity to develop “strategic” services.  It sounds like they plan on using Akona as a front end for their China based teams.  From the company’s news release:

“Today iSoftStone Information Service Corporation (iSoftStone) and Akona Consulting announced they have finalized their agreement whereby iSoftStone will acquire Akona Consulting, a business and technology consulting firm headquartered in Seattle, Wash., USA. With the acquisition of Akona, iSoftStone will significantly grow their United States operations and expand their core offerings into strategic business services which include research, business strategy and interactive design.”

We’ve seen several of these deals recently, including:

• Darwin bought Suzsoft.  The company recently changed its name to Dextrys
• hiSoft bought Envisage
• Longtop Financial did deals with both Longtop International and Minecode (also Seattle based)
• I’ve heard that FreeBorders was created when John Cestar and his team combined a U.S. front end with an existing Shenzhen based software company.
• Sierra Atlantic (a Bay Area company with resources in India) bought ArrAy Inc.
• Softtek (a Latin American near shore outsourcing provider) bought I.T United

While these combinations have met with wide ranging levels of success, I’m convinced that they are based on a sound concept and that we’ll see a number of similar deals announced over the next 18 months. There are a number of discussions currently underway…

Technorati Tags:  China, China Outsourcing, Merger, Acquisition, M&A