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Should North Americans Send More Software Development Work to China?

Written By: Yu Chen
Published On: November 17 2008

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Nowadays in North America, finding a developer from India to back up the software you are using is probably as easy as finding "Made in China" on the tag of the jacket you are wearing. But, have you ever thought that one day China—the mighty "hard" goods producer—will become much stronger on the "soft" side?

The past few years have seen China's tremendous efforts on promoting its software development capability—and it has gained a strong hold over one specific area: the embedded software sector. In fact, embedded software accounts 2/3 of the $10 billion software export that China accomplished in 2007 [1]. Moreover, China's outsourcing business is doing exceptionally well in Japan. In 2007, over 65% of the country's software outsourcing workload was sent to China. [2] Based on these achievements, it's clear that China certainly wants to increase its share in more software sectors and in a wider geographic range. The question is "Should North America accept what China wants to offer in the software outsourcing business?" Before answering this question, let's take a look at some major risks and opportunities of outsourcing to China.

Managing Risks

There are many risks related to outsourcing. In this article, we will look at only a few of the greater ones. Since North American clients have built strong partnerships with Indian outsourcing vendors, comparisons between India and China might be more efficient in addressing major risk factors.

Vendor Availability

As the global software and business process outsourcing center, India has established a stable outsourcing ecosystem with a number of qualified outsourcing vendors. In the list of The 2008 Global Outsourcing 100, produced by the International Association of Outsourcing Professionals [3] , China has less prominence than India. One may then pose the question, "Even if I want to send my software projects to China, how can I locate the right vendors if there are not many available?"

The truth is that China does have a lot of software developers—but most of them are small and have low presence on the global stage. According to Liu Jiren, the leader of Neusoft (one of the largest software outsourcing providers in China), the software industry in China and India are about the same size in terms of total revenue, but their revenue structures are very different. About 90% of China's software revenue comes from the domestic market, but India only receives about 10%–20% from its home market [4] . This means that China has strong software development forces. Chinese software developers just haven't done outsourcing as much as their Indian counterparts.

Quality of Service

By working with North American clients on numerous development projects for a long period of time, many Indian software developers are able to reach satisfactory service levels. But, are Chinese software outsourcing vendors able to achieve the same level of functional completeness, an absence of bugs, proper documentation, on-time delivery, and so on in order to deliver quality services? It is hard to answer without really trying out any Chinese outsourcers, but evidences show that Chinese developers are growing quickly.

Chinese software developers now believe that third party capability maturity model integration (CMMI) is the way to reach the global market. During the past few years, China has made tremendous progress and has seen more CMMI certified software developers than ever before. In less than 3 years since 2006, China has had more than 360 companies certified with CMMI (level 3 or higher) [5] . While being CMMI certified doesn't mean that the adopters will automatically receive overseas orders, the certification does play an important role in both process improvement and marketing.

Copyright Protection

Since outsourcing vendors will have certain access to clients' intellectual property in order to develop software, copyright protection should be enforced on both the input side (clients' patents, development methodology, application programming interfaces [APIs], and so on) and the output side (the finished software). In China, copyright regulations have been enacted but the enforcement is yet to be more robust. Will the situation be better? It seems likely.

The improvement of copyright protection is expected to be a long process, but it seems to be on the right track. For example, it is very easy to find unauthorized video content on various Chinese web sites, but this summer Beijing did a great job on protecting authoritative Olympic Games videos. The success shows clearly the Chinese government's gesture to tackle copyright issues, and it also indicates that copyright protection is technically and politically feasible in China. The lawsuits that some Chinese dot-com companies recently faced due to violating online copyright regulations are also encouraging signs for copyright holders.

Experience Dealing with Chinese Vendors

The truth is, many North American clients are not as skillful as their Japanese counterparts when dealing with Chinese software outsourcing vendors. However, it is also true that Chinese vendors feel less confident dealing with North American clients. The beginning stage of the partnership is like a blind date—both parties have to act carefully due to their lack of information. But eventually some partners may get along well with each other and achieve positive results.

Decades ago, when North America needed to find Chinese manufacturers, the situation was substantially worse than what it is now. Since China has opened its doors to the world for the last 30 years or so, communication barriers have been significantly reduced. And in the IT industry, China now has more people with work or study experience within the North American setting. Also, it is not too difficult for a North American client to hire people who have competencies that help bridge the western and eastern ways.

Identifying Opportunities

With the majority of companies going to India for software outsourcing, there isn't much space for organizations to gain a competitive edge. Exploring opportunities in other regions that are not yet popular may lead to different risk exposures, but it is also rewarding if you can operate properly.

Cost Savings China's gross domestic product (GDP) per capita is more than double than that of India [6], but software programmers in China don't earn as much as their counterparts in India. In the article Dealing with Cultural Nuances in Offshore Outsourcing Relationships, Kathleen Goolsby writes that "IT salaries can be 30 times higher in India than in China" [7] . Although the number seems somewhat high to me—based my understanding of the Chinese labor market—I do agree that there is a good cost savings opportunity in China today.

Price convergence may occur sooner or later since China is one of the countries that have recently recorded high salary increases (7-8% in year 2006 and 2007) [8] . This means North American clients should become early movers in order to take the full advantage of lower labor cost.

Domestic Market Demands

Based on the revenue volume and structure mentioned previously, China's domestic software market is about six times greater than India's. Hence, China is a place where North American software vendors cannot only develop cheaper software, but where they can also sell more products. Electronic data systems (EDS), an HP company focusing on global business and technology services, is promoting its Best Shore® Outsourcing approach [9]. One of the main ideas behind this approach is to take the advantages of proximity between development and delivery. Following this idea, it makes a lot of sense to develop software in China and sell it to the Chinese market.

An additional benefit of building partnerships with Chinese software vendors through outsourcing is that some major Chinese software outsourcing vendors are also significant players in business application integration and implementation in China. SAP seems to understand this well. In May 2006, SAP announced it would invest 10 million Euros ($12.8 million USD) to buy a nearly 3 percent stake in outsourcer Neusoft. "The agreement will help integrate SAP's technology and Neusoft's national network across China", said Henning Kagermann, president and CEO of SAP [10]. If you are not ready to invest in Chinese market leaders, like SAP did, one alternative could be outsourcing to them to show your willingness to build up partnerships.

Building Your Strategic Plan for Moving to China

The above analysis shows that due to the recent development of Chinese software industry, risks can be managed and China has become a feasible outsourcing destination for more North American clients, especially when you need to think about further cost reduction during the economic crunch or you want to expand your business reach to the world's most populated country.

In the manufacturing sector, building a vendor portfolio is a common practice to mitigate risks associated with vendor reliance. A North American manufacturer usually has a few major subcontractors and a lot of minor ones. From cost and quality control perspectives, it might not make sense to keep subcontractors that produce small quantities of goods at a higher cost per unit. However, one day, a smaller supplier might become a bigger and better supplier than the current major ones—given the efforts by both your company and the small subcontractor. The same idea is applicable to the software industry, and opening your door to China means you have a bigger pool to select your minor vendors, if you are not ready to make them your major outsourcers at the moment.

Moving to China also makes sense if we consider the complementary factors between China and India. Although the two neighboring countries have some major similarities—both are highly populated and are in the development phase, there are also some significant differences (e.g., social system, culture, economic structure, etc.). By building a vendor portfolio that includes India, China, and other countries (such as Ireland and the Ukraine), North American software vendors will be able to offset risk factors and achieve stable product or project delivery.

If you are not familiar with specific Chinese software outsourcing vendors, I've included a few tips that might be helpful for you to expand your outsourcing footprint in China.

  • Try out a few pilot projects before you send out important ones.

  • Outsource certain parts of the development processes (such as coding and testing) instead of the whole package. Japanese companies use this approach.

  • Contact the Chinese government at different levels to seek sourcing supports. Sometimes, the services they offer are very generous.

  • CMMI certificate increases creditability, but don't use it as the only criterion for vendor selection.

  • If you find significant language mistakes in a vendor's marketing materials, it might be an early warning sign that you shouldn't proceed further.

  • Don't be scared if the price is too low. It might be a scam or it could be that the vendor wants a project without profit in order to build its overseas business.

  • Use the Outsourcing Evaluation Center to evaluate vendors. There is a good selection of Chinese vendors and their number keeps growing.


1 http://www.unsbiz.com/information.do?method=detail&id=150996
2 http://tech.sina.com.cn/it/2007-06-20/14081573341.shtml
3 http://www.outsourcingprofessional.org/content/23/152/1197/
4 http://www.lndrc.gov.cn/list.asp?name=jjck&id=140
5 http://news.ctocio.com.cn/290/8354290.shtml
6 http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal)_per_capita
7 http://www.outsourcing-journal.com/oct2008-offshore.html
8 http://info.yidaba.com/dbzxnew/ccgk/239473.shtml
9 http://www.eds.com/services/bestshore/
10 http://www.china.org.cn/english/BAT/169112.htm

 
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