As the global economy slows, many business software companies are seeing fewer sales opportunities as businesses cut software budgets and delay purchases.  Despite the current economic climate, there is still a large and growing market for business software in China.  An increasing number of US software companies are focusing on China market entry strategies and leveraging the knowledge of Chinese software outsourcing companies to aid with China market entry.

A recent study sponsored by Dextrys titled Marketing Business Software in China discusses the Chinese market for US business software.  The key findings from the study are:

China has enormous potential for business software sales - 87% of the companies surveyed evaluated or purchased business software within the past 12 months

• US software companies are neglecting this market - only 30% of the companies considered US software products
• Chinese companies can and will “Buy American” - 52% of respondents would like to see more US software on the market and an additional 27% are willing to buy software from any location
• Traditional mass marketing is a poor investment for entering China – potential buyers rely on peers and the Internet for their information
• Quality and price are the two most important product attributes – and fortunately, 84% of survey respondents perceive US software quality to be high
• Chinese companies buy software following traditional models – 90% prefer to buy software licenses; leasing and hosted solutions have very low market penetration

Many US companies have not entered China yet because of the risks and lack of China experience, but working with Chinese software outsourcing companies can significantly mitigate the risks associated and provide much needed local business knowledge.  In recent years, a significant and increasing number of US software companies have leveraged partnerships with Chinese outsourcing companies to enter the Chinese market.  As a result, some Chinese outsourcing companies have experience working with multiple US software companies an a variety of different market entry strategies.  These outsourcing companies now understand the best strategies for US software companies entering China.  So, US software companies entering China can significantly reduce the learning curve by partnering with local outsourcing companies.

Typically, American software companies’ China initiatives begin with outsourcing software localization to China, but as sales grow, so do the offshore teams as product customization and support is required.  So, Chinese software outsourcing companies have a vested interest in ensuring their US clients success in China and enthusiastically help in order to grow the account.   These win - win outsourcing and market entry partnerships are also used by Chinese outsourcing companies to offer value added services over India.

The most common concern when entering the China market are fears around IP.  US software companies are concerned if their IP is leaked then they will create competitors.  However, I believe this view is short sighted, and that competitors will be created purely due to market demand.  If there is a demand in China for a software package, the entrepreneurial Chinese will soon develop software to fill the gap.  Initially the software may be inferior to the American companies software, however without competition from US software firms, the Chinese company will corner the market in China and invest in improving their product. As has happened in many other industries, after perfecting their product by servicing the local market, the Chinese companies will use their China cost advantage to compete globally.

Chinese outsourcing companies have a strong understanding on how to protect IP in China and since they have a vested interest in the US software companies results, they are able to offer informed advise on how to protect IP in China.  The risk that in the future a US software company will need to compete with their Chinese competitors far outweighs the risk around IP in China .

Although how to market and grow revenue from business software sales in China, may be a question mark for US firms.  It is certain that the Chinese business software market will continue to grow as China further develops.  US firms are well advised to develop a China strategy that includes working with Chinese outsourcing companies to take advantage of this growing market.

When given the option, it is always better to co-operate rather than compete with Chinese companies, ask anyone in manufacturing and I am sure they will agree.  Although the local Chinese have not made as many advancements in business software as manufacturing, rest assured, they will, and US companies should be the ones leading the way with high quality localized business software.

Related posts:

1. Indian outsourcing companies change China market entry strategy
2. Advice for selecting a Chinese software outsourcing company
3. Overcoming the Software Developer Experience Gap in China

My last post before the holidays, Chinese software services revenue predictions fall short, discusses how the Chinese offshore services industry has not met analyst predictions in previous years, but did not get into why. One reason China has not reached expectations, is software development experience within the country.

The graph on the left shows an impressive increase in software related University graduates over the past ten years, but when developing software, experience is more important than number of developers assigned to a project.  Analysts predict only 5%-10% of software developers in China have the skills and experience necessary to work on projects for Western companies.  The difficulty to consistently build effective teams from China’s current labor market is a key issue being faced by software outsourcing companies in China.

Increased government focus on software development education from 1998 to 2007 resulted in a 1200% increase in the number of software related graduates from China’s educational institutions.  Although education and jobs are abundant in China, there are not been enough senior developers mentoring and leading the newly graduated work force.  Without a significant number of middle managers and senior team members, it is difficult to deliver more complex software development projects from start to finish.

Salaries in China are similar to India, while the average experience level of software developers in China is less than Indian.  As a result, Chinese software outsourcing companies have difficulty competing purely on value with Indian competitors, because experienced software developers are significantly more productive than less experiences developers.

The chart on the right breaks down experience based on government stats, and in 2007, 80% of software developers have less than five years experience.  So, software outsourcing companies need to carefully select the top talent in order to build effective teams for Western clients.

However, there is currently a significant amount of lower level software development being done in China for the local and Japanese markets, which is providing much needed hands on experience for the educated workforce.  As a result, the current experience gap will level out within the next ten years.

I assumed a modest 10% increase in graduates from 2007 - 2015, to create the graph on the left.  Looking at the experience ratios up until 2007, it is easy to see why software development teams in China have not been able to compete with more experienced Indians, and are often only considered for lower value work.  However, as the industry matures the experience ratio will level out and by 2015 China will be able to create a massive number of software development teams able to work on more complicated, higher value projects.

Although there is still a lack of experience throughout the country, I have noticed a substantial improvement in the quality and efficiency of developers within the past three years and as this continues, Chinese developers will provide more value to western companies, and by 2015 will be competing head to head with Indian software developers.

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1. IT career opportunities in China
2. Has the economic crisis helped outsourcing companies in China?
3. Chinese software services revenue predictions fall short

It was interesting reading because predictions around India were accurate while predictions regarding China fell short substantially.  The discovery of this report changed the focus of this post from future predictions to a historical look at the offshore software services industry progress in the past decade.

In 2002, Gartner predicted software services revenues for 2006 with 0.6 probability

• Indian software services revenues - $27.5 billion
• Chinese software services revenues - $27.1 billion
• Indian software services revenues delivered from China - $10.8 billion

However, the actual 2006 software services revenues as reported by CIO.com were

• Indian IT services revenues - $30 billion
• Chinese IT services revenues - $12 billion
• Indian software services revenues delivered from China - NA (I suspect the revenues are significantly lower than $10.8 billion)

It is widely known China’s software services industry has not lived up to expectations.  However, another interesting section of the Gartner report contained a SWOT analysis of the Indian outsourcing industry, the industry weaknesses included

• Positioning and brand management
• Cultural differences
• Sales and marketing
• Leverage experience for higher-value addition
• Business process experience
• Legal system
• Globalization skills

Most would agree Indian outsourcing companies have overcome these weaknesses in the past 6 years to become global players.  In 2008, a SWOT analysis of the Indian software services industry would include the 2002 weakness as today’s strengths.  In addition, today these seven attributes are often listed as China’s software services industry weaknesses.  It is commonly reported the Chinese outsourcing industry is 10+ years behind India, however if India was able to overcome these weaknesses in 6 years, will China overcome the same challenges within the next 6 years?

Overall, there has been significant improvements in each of the areas listed above over the past 2 years in China.  However, a significant gap between Indian and Chinese software services companies still exists, particularly in maturity of business development.  Chinese companies realize this difficulty and are allocating more revenue towards business development by developing sales and marketing teams internally or through acquisition of foreign companies.   Cultural differences are also becoming less of an issue, as China’s “opening up” has increased exposure to international business standards but there is still substantial room for improvement.  Expect to see noticeable improvement in these areas in the coming year as the Chinese software services industry continues to mature.

More recently IDC predicts Chinese cities will overtake Indian cities by 2011.  Looking at poll results from Dao of Outsourcing readers, one third predict China will surpass India as a preferred services offshoring location within 10 years.  Only time will tell how the China-India software services rivalry will play out, please weigh in your vote in the polls section on the right hand side of this page.

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An essential skill when doing business in China is the ability to develop rapport and build relationships with Chinese associates.  There is a learning curve, and these skills develop over time.  Having a sincere respect for China and Chinese culture enables foreigners to overlook the small obstacles that inevitably arise when working with Chinese partners.  Here are four tips that help improve the ability to build business relationships in China.

Learn Chinese history

China has a long, often bloody and interesting history.  China’s past and the difficulties of previous generations has shaped Chinese culture.  Chinese are very proud of their history, and many popular Chinese sitcoms are based on historical events and characters.  A masters in Asian studies is not necessary to do business in China, but taking a general interest China’s history gives foreigners more respect for the country.

Chinese enjoy discussing China’s history, so a basic understanding allows foreigners to participate in conversations which helps build relationships.  A good resource is A Traveller’s History of China, because it covers the complete history of China and is a quick and easy read on the flight over.  This book will give you the basics to engage in an intelligent conversation about Chinese history, and increase awareness and interest in China.

Travel within China

The main cities for business in China are Shanghai, Hong Kong, Beijing, and Shenzhen, and most foreign business people in China rarely venture from these cities.  If only exposed to China’s “westernized” cities, it is easy to develop an inaccurate perception of China.  The heart of China is in the midsized cities and inland provinces.  Taking a weekend or even week long vacation to the countryside or tourist attractions provides a different and more well rounded perspective of China.  Also, business associates will often be interested to join, which will improve the relationship, and provide conversation topics for dinner banquets.

Enjoy Chinese food

Dinning is an integral part of relationship building in China.  Chinese are proud of their food (as they should be, it is delicious), and in the initial stages of relationships with Chinese, food is often a topic of conversation.  An open mind is necessary as the types and parts of animals Chinese enjoy eating are different from western cuisine.  For the adventurous with strong stomachs, jump in and enjoy, but if offered a delicacy and the “gross factor” is to high, a polite refusal is appropriate. For example, “I tried <insert strange food name here> before and it was delicious, but unfortunately my stomach is not accustomed to Chinese food so I need to pass this time”.

Respect different political beliefs

Those from democratic counties often have an strong belief that democracy = good and communism = bad combined with strong ideals around free speech.  Although conversations do not turn towards politics often in China, it is important to discuss politics diplomatically.  Generally, Chinese are nationalistic and proud of their country so negative conversations regarding China’s politics may damage relationships.  It is not essential to agree with Chinese government policies but and a good response to questions related to the government is, “I am impressed with the governments ability to bring so many citizens out of poverty over the past ten years and sustain such a substantial growth rate.”  Remember, changes in government policies are the underling reason foreign companies are now interested in China and relationships with Chinese businesses.

Building and developing mutually beneficial relationships is essential for business success in China. As China grows and matures as a power in the worlds global economy, the ability to work with Chinese companies will become more important.  Investing time in understanding China and Chinese culture increases the ability to create rapport and develop relationships. After developing a sincere respect for China and Chinese culture you will receive respect in return, creating a bridge of friendship that will lead to specific business results.

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1. Onsite offshore coordinator vs. offshore onsite coordinator
2. Indian outsourcing companies change China market entry strategy

Economic crisis – As sales slow or decrease in America and Europe, Indian companies need emerging markets to increase revenue.

Opportunistic acquisitions – A previous post on how the global economic downturn has affected Chinese outsourcing companies, mentioned that many smaller Chinese outsourcing companies are experiencing cash flow problems making them prime targets for acquisition.

Local business development – In China, relationships (or guangxi) are essential in winning local contracts.  Many small outsourcing companies in China were setup because of relationships with buyers and have significant guangxi helping win local business.

China’s services growth – Analysts are predicting signification growth in the local Chinese outsourcing industry over the next 10 years.

Due to the cash flow problems of many smaller Chinese outsourcing companies, they were probably purchased at a significant discount.  This strategy may prove to be an economical way for Indian providers to increase their China market share.  However, it will be interesting to see how effective the Indian companies will be in integrating these smaller, less process oriented companies into their China operations.

It should be noted, that the Chinese outsourcing companies who grew through acquisition with venture capital did not meet significant success.  Also, larger local Chinese providers turned down proposals before before Indian providers were approached.  Which begs the question, do the larger Chinese companies know something the Indian providers do not?

It will be interesting to see how this strategy plays out and if the Indian tier 1’s significantly increase their market share in China in coming years.

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1. Is the global economic downturn affecting Chinese outsourcing companies?
2. Chinese software services revenue predictions fall short
3. Evaluating financial stability of offshore outsourcing companies

In China, online recruitment websites account for the majority of software outsourcing companies job applicants and recruiting budgets.  Zhaopin.com is the Chinese equivalent of monster.com and is used by most outsourcing companies in China for recruitment.  A search of the number of jobs posted on zhaopin.com is a indication of open positions at outsourcing companies and recruiting budgets.

Outsourcing job postings on zhaopin.com

Overall, it seems Chinese outsourcing companies are still actively hiring and have not reduced recruiting budgets. The largest local outsourcing vendors top the list and the ratio of # of jobs posted to total China headcount equals 5 to 15 percent for most of the companies. For example, Vanceinfo has 599 jobs posted / approximately 5000 employees = 12%.  However, this does not mean that Vancinfo has 599 open positions because companies will often advertise jobs multiple times and collect resumes for anticipated positions not yet open.

Vanceinfo tops the list, but the cause may be turnover as Vanceinfo is ranked last by software outsourcing job seekers on seecoco.com.  Two other standouts are Dextrys and Dalian Hi-Think because they have posted a surprising few jobs for companies of their size. Without accurate historical data it is impossible to conclude these numbers are an increase or decrease, however I suspect the number of jobs posted now is similar to six months ago.

Although the economic crisis has caused many Chinese outsourcing companies to shift strategies and priorities, it has not significantly alleviated the skilled labor shortage affecting the industry as a whole.  However, as hiring slows in other industries, a career in outsourcing becomes more attractive and companies will receive more resumes via website like zhaopin.com.

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1. Is the global economic downturn affecting Chinese outsourcing companies?
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3. Overcoming the Software Developer Experience Gap in China

However, China Daily and China Tech News both report continued growth in the industry and increased demand both at home and abroad.  Also, the majority of demand for services outsourcing from China does come from America or Europe, the areas impacted most by the economic down turn.  So, why are these Chinese outsourcing companies in trouble?

The Chinese outsourcing industry has grown substantially over the past ten years.  Active support from central and municipal governments with capital from local and foreign investors speculating on industries growth has created a “China software outsourcing bubble”.

As happens with tech bubbles, many small Chinese software outsourcing companies have emerged that have not been able to reach the economies of scale required to compete with Indian and local rivals.  Although, demand for outsourcing services has grown this year, the rate of growth has decreased. This combined with an increase in the RMB has caused challenges for many Chinese software outsourcing companies.

As the economic downturn continues worldwide these smaller Chinese outsourcing companies may be forced to shut down, while stronger companies continue to grow at double digit numbers.  Although major changes will continue within many China software outsourcing companies in the upcoming year, the reasons around projected growth of the Chinese outsourcing industry are still sound

• Large educated labor force
• Strong government support
• Steadily improving infrastructure

As the impact of global economic crisis trickles down we are sure to see more changes within the industry.  However, as a whole, the Chinese software outsourcing industry will emerge from the crisis stronger and better able to service global and local clients once the current realignment has been completed.

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Dragon is a good example of the new generation of Chinese professionals.  Unsatisfied with a stable career (the old iron rice bowl), they seek a challenging career with quick advancement opportunities.  My first thought was he had an inflated perception of an IT career in China.  With hundreds of thousands of newly graduated software developers competing for entry level jobs it is not an easy industry to get into.  But on second thought, many of the 30 year old project managers I had met at software outsourcing companies were managing 30+ man offshore development centers.  When considering the conditions in Chinese public hospitals, I would assume a 30 year old software development project managers salary would double a 30 year old doctor in China.

Ambitious young Chinese professionals like Dragon have noticed the IT salary inflation in China over the past couple of years and want a piece of the action.  The current demand for English speaking software developers in Shanghai and Beijing is higher than supply resulting in increased turnover and higher salaries, but this will balance out in due time as there is no shortage of Chinese entering the software industry.  Although Dragon has a long way to go before he will be working in an offshore development center for an overseas company, he is intelligent and driven and I am confident he will be successful in his newly chosen career.

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1. Overcoming the Software Developer Experience Gap in China
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I recently read a good blog post on Pragmatic Outsourcing titled The Myth of the Onsite Coordinator. Often offshore software outsourcing vendors place employees on the client site as part of the offshore engagement.  As Nick Krym mentions in his blog post, there are disadvantages to having an onsite offshore coordinator, the main being cost to the client.  An alternative approach that can be more effective is for the client to place an employee on the outsourcing supplier site.

Although an offshore coordinator could be employed by the outsourcing vendor or client, for the purpose of this post when I refer to “offshore onsite coordinator”, I mean a client employee or contractor managing the outsourcing initiative offshore.  This offshore onsite coordinator is responsible for managing the communication and coordination between the client and the vendor and may also be responsible for managing the vendor.

Advantages for the offshore outsourcing client

Improved communications - Their are two main reasons communication is difficult with a offshore team, mode of communication (phone, chat and email vs face to face), and cultural differences.  Without the offshore coordination role these factors compound resulting in communication issues.  An offshore onsite coordinator, who is a native English speaker and understands western business culture is communicating with the American office, so there are few communication issues between these two groups.  The onsite offshore coordinator then communicates directly with the offshore team face to face, which will decrease communication issues.

Improved offshore efficiency - The most efficient offshore teams I have worked with in China have had offshore onsite coordinators.  I believe the reason for this is motivation of the offshore employees.  When the client is onsite working with the offshore team, the teams have direct contact their customer and are more motivated to perform up to the clients productivity expectations.

Offshore team ramp up time - The offshore onsite coordinator brings much needed domain experience to the offshore team.  Having a domain expert in the office to answer domain related questions substantially decreases the amount of time to ramp up the offshore team on the clients domain.

Clarity into offshore operations - Because an offshore onsite coordinator is a client employee, they will accurately report issues and challenges back to America.  This creates a higher level of trust between client and vendor which is essential for a successful outsourcing initiative.

Improved vendor-client relationship - While onsite, the coordinator will learn the difficulties offshore outsourcing companies face and transfer this knowledge back to home office.  This will improve understanding between the client and vendor, thus improving the relationship.

Risks of using an offshore onsite coordinator

Vendor backlash - For the most part, I find that the offshore employees welcome the offshore onsite coordinator however, the vendors management team may not be as welcoming.  This is not always the case, and needs to be dealt with carefully.  If the vendor is resisting an offshore onsite coordinator, there is probably an underlining issue between the client and vendor that needs to be addressed.

Turnover - Living in a second world country like China or India is not for everyone.  All expatriates experience culture shock when moving to a new country, how well the offshore onsite coordinator will deals with culture shock is the question.  Sometimes employees initially excited at the opportunity to gain experience overseas will get homesick after a couple of months and request, if not demand to be transferred back home.

Choosing the wrong offshore onsite coordinator - A significant amount of patience and cultural sensitivity is need to work side by side with an offshore team.  An offshore onsite coordinator who becomes impatient with the offshore team, or fails to respect the culture will decrease the productivity of the offshore team rather than increasing it.

Many offshore outsourcing destinations like China have developed substantially in recent years.  There are more facilities and services geared towards foreigners than a couple of years ago.  Having a native to the clients country acting as an onsite coordinator has several advantages and should be considered as an alternative to having the vendor send a coordinator to the client site.

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1. 5 things to know before offshoring software outsourcing to China
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3. Chinese software outsourcing companies compete for English speaking developers

Wading through websites developed by Chinese software outsourcing companies who have meticulously placed keywords to rank high in Google becomes tedious quickly.  It is easy to find more than 100 websites of Chinese software outsourcing companies that are generic and do not actually represent the companies core competencies.  As a result, buyers of offshore services often opt for expert option from service provider lists to create their initial shortlists of potential software outsourcing partners in China.  Although these lists are helpful and save time in creating shortlist, buyers should understand the analysts who create the lists do not have the resources to verify the information provided by the outsourcing companies in the application form.  Without being referred to a vendor by a trusted colleague, or hiring an outsourcing consultant to aid in vendor selection, lists provide an inexpensive way to create a shortlist.

The two most respected lists in the global services industry are compiled by IAOP and Neo IT. Both lists include outsourcing companies from around the globe, and are compiled by thought leaders in the outsourcing industry. IAOP ranks the top 100 companies, while Neo IT lists the top service providers without rankings.  Here is how the Chinese outsourcing companies have ranked over the past three years on the two lists.

Chinese software outsourcing company list

Considering both these lists are compiled by industry experts, it is surprising how much they differ.  For example, IAOP ranks Hisoft as the 20th outsourcing provider in the world, while Neo IT does not include Hisoft in their top 100.  The fact that these lists differ substantially shows the difficulty in ranking Chinese outsourcing companies from overseas.  If the industry experts can not agree on the top companies in China, think of the difficulty Western companies new to outsourcing have creating a list from scratch.

By combining the stats to see how Chinese software outsourcing companies ranked over time, it is easy to see how Chinese outsourcing companies capability have grown in they eyes of analysts over the past three years.

* In 2007 Softtek acquired IT United, removing IT united from the lists

Individual companies have moved around on the lists over time, but there has been a steady increase in the number of Chinese software outsourcing companies listed and their average ranking.  There has been a lot of talk about locally grown Chinese offshore outsourcing companies not being able to compete on a global scale, but these lists show how the competitiveness of local Chinese software outsourcing companies continues to grow.

Public lists created by analysts are a good place to start when creating a Chinese software outsourcing company list, but buyers need to understand that applications for these lists are usually filled out by an outsourcing companies marketing department.  So, a companies ranking often shows little more than the maturity in the capability of the marketing department, not in the vendors delivery capability.  With more Chinese software outsourcing companies setting up their marketing departments in America and allocating profits toward marketing, expect to see the Chinese software outsourcing companies listed move up in 2009 and more home grown Chinese companies added to the list.  For Western companies looking to quickly create a shortlist, public industry lists like these are a good place to start, but it is always better to consult experts advisers like CSO Group when selecting a long term Chinese software outsourcing partner.

Related posts:

1. Is the global economic downturn affecting Chinese outsourcing companies?
2. Has the economic crisis helped outsourcing companies in China?
3. Advice for selecting a Chinese software outsourcing company