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China Struggling to Compete in the IT Outsourcing Arena

By Stephanie Overby, CIO
September 13, 2013 03:35 PM ET

CIO - The Chinese government has made no secret of the fact that it wants to compete with IT and business process outsourcing powerhouse India on the global outsourcing stage. In 2006, the country's Ministry of Commerce unveiled it's "1,000-100-10 Project" with aimed to double China's services export by establishing 10 outsourcing hubs, attracting 100 multinationals to its shores, and developing 1,000 local vendors capable of meeting the demands of international customers.

So how's that been going? Very slowly, according to Arie Lewin, director of the Center for International Business Education and Research at Duke University's Fuqua School of Business.

The country's IT and business process services industry, which Lewin conservatively estimates is worth about $50 billion today, has seen little growth in recent years. "China has a national goal to build up this industry as new lever of economic development and this idea that they could leapfrog India," says Lewin. "But progress has been very slow."

Chalk part of it up to bad timing. "They're trying to get into an industry whose growth rate has leveled off, and it's tough to take market share away from anybody," says Lewin.

China's Services Providers Need Better Talent and Security to Compete

More fundamentally, providers in China face two other impediments: talent problems and a terrible reputation for intellectual property protection and security. Few Chinese professionals see business services as a viable career path. Providers who want to attract the best and brightest often pay a 20 percent premium on salaries, says Lewin, and there's already little labor arbitrage to be had in cities like Shanghai.

Lack of training in project management and process leaves many companies stuck doing low level work. And lack of English proficiency excludes most players from the lucrative outbound call center business.

[ IT Outsourcing in China: What CIOs Need to Know About New Data Privacy Guidelines ]

Then there's the IP problem. Rightly or wrongly, Chinese service providers suffer "the negative consequences of organizations in China that are bombarding Western corporate Web sites and violating intellectual property," says Lewin. "Companies are not giving providers work because of this insecurity." One U.S.-based provider is spending $3 million a year to maintain its firewalls, Lewin says. "If that's what has to happen, it's unreasonable."

How Chinese Service Providers View Their Position

To find out more about how providers view the situation, Lewin along with Shanghai Jiao Tong University professor Liu Yi recently surveyed 250 providers in China, 71 percent of whom are headquartered there. What they found was a universe of undersized, young companies struggling to compete for international business.

Small providers (fewer than 500 employees) account for 87 percent of the market, according to the survey; and 79 percent of the providers had been in business for less than ten years. Just 22 percent of respondents said they had implemented Six Sigma principles, while 60 percent reported implementation of some ISO standards.

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