Steve Hamm wrote a Business Week article and a post describing a trend of companies that are selling captive labs in India to outsourcing vendors.  Mr. Hamm attributes this to:

“…currency swings, the increased costs of doing business in India, and the need for some Western financial services to raise cash to handle shortfalls elsewhere.”

Perhaps it’s a reflection of the relative maturity of China’s outsourcing industry, but we’re not hearing much of this sort of thing.  We’re still at the stage where clients are insisting that contracts include an option for them to take the outsourced team captive at some point in the future.  I suspect that the contrast can be partially explained by two factors.

First, the scale and process maturity of the Indian vendors is generally higher.  Infosys, for example, has something on the order of 100K employees.  They are able to invest in processes and methodologies that they can deploy companywide to operate more efficiently.  The largest Chinese vendors have roughly one tenth of this scale, and many of the resources are deployed in staff augmentation roles.  There is simply less perceived benefit to making significant investments in process improvements within the Chinese outsourcing companies.

The other part of the explanation is the potential value of expanding direct operations in China.  Many western companies understand the tremendous strategic benefit of cultivating China as both a market and a resource base.  With this in mind, firms may choose to go direct once their operations in China reach a certain critical mass.

One other comment from Mr. Hamm’s article caught my attention.  He notes that

“[Infosys] plans to hire another 10,000 [new employees] this quarter alone.”

When pondering relative scales, one might note that Infosys is adding the headcount equivalent of China’s largest outsourcing companies in this quarter.  Put another way, Infosys will be adding more than twice as many employees in this quarter as VanceInfo (VIT) currently has in the entire company.

Technorati Tags:  China, China Outsourcing