The Dao of Outsourcing

This article discusses how Chinese software developers rank major offshore outsourcing companies as employers by analyzing a popular Chinese website for high tech employees in China.

Of the hundreds of thousands of software developers in China’s high technology parks, a small percentage speak English or have more than five years experience.  As a result, software outsourcing companies compete for experienced English speaking developers as an increasing number of Western companies move software development to China.  For companies planning to offshore software development to China, it is difficult to assess a software outsourcing companies HR capabilities.  Average turnover rates are lower in China than India, but some offshore outsourcing vendors still experience 30%+ annual turnover.  How does a Western company evaluate the employee satisfaction of a potential offshore outsourcing partner in China?

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This post discusses best practices for evaluating financial stability of an offshore software outsourcing company.  I will focus on evaluation of midsized vendors which are not public.  These  are best practices for choosing vendors, based on my experience with Chinese software outsourcing companies.

There are advantages choosing small or midsized software outsourcing vendors along with increased risk.  One risk which is difficult to evaluate is the financial stability of the vendor.  Outsourcing companies under financial pressure can endanger the buyers offshore initiative if they become interested in clients IP for increasing revenue, change business strategies, or shut down operations.  When selecting an outsourcing company the buyer needs to consider internal and external pressures on the vendor and cross check any information provided during due diligence.  This will save significant time in the long run and increase the likelihood of a successful offshore outsourcing initiative.

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Many companies have internal experience and best practices for choosing outsourcing vendors, few have experience working with Chinese software outsourcing companies. Here are 5 key areas to consider when looking at China as a global services delivery location.

Choosing a Chinese software outsourcing company should not be a yearly task. However, many American companies are forced to go through the vendor selection process more than once which is time consuming for managers and defeats one of the main advantages of offshoring, to allow managers to focus on core business activities. Below is a list of five selection criteria that are often neglected or forgotten causing the need to switch to a new vendor.

What is the vendors financial stability?
Without naming names, there are more than a few Chinese software outsourcing companies going through tough times financially.  Over the past three years most companies competed on price with India which resulted in margins that were raze thin.  These companies have gone through tough times over the past year with the appreciation of the RMB causing cutbacks and even layoffs.  Check the financials of your chosen partner to ensure they will be in business for the length of the contract.  This is not easy as most local vendors are not public but if you build a good relationship with the vendor through the sales process they will normally share this information with you.

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So, you go and talk to Gartner and they say that after India, China or Mexico are the next best options for software outsourcing. Great, now what? Well before you start contacting vendors, here are 5 things to think about before investing any more of your time, or money in considering China. If you decided to go with China as an offshore software development destination you will come to terms with these 5 eventually, so why not start now.

1. This is China - China is not India, Mexico, Ukraine ….
This statement may seem so obvious that you can’t believe you wasted your time in reading it. However, the number of people who have said, “but it worked when we did it this way in <insert second world country name here>, why didn’t it work in China” would amaze you. Plan time to adjust approaches and strategies (often substantially) for China.

2. Communication will be a problem
No matter what the vendor tells you, how many English teachers are on staff, or if you have native Chinese speakers you have at your company, communication will be a challenge.  Plan for increased ramp up time of the offshore team.  If a key success factor is speed to setup the offshore engagement then China may not be your best option.

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