China emerges as the world’s new back office- OUTSOURCING
Should businesses be considering China for some of their business process outsourcing (BPO), and how can BPO be used for strategic Chinese market entry? Jon Aries writes.
China has long been established as the pre-eminent destination for outsourced manufacturing. In the past few years, however, China has emerged as a credible destination for the delivery of services and software outsourcing, challenging the dominance of traditional destinations such as India.
Business has long recognised that there is value to be gained from offshore outsourcing. More and more companies seek to use it as a means to realise cost savings, break geographical ties, streamline workflow and increase revenues by acquiring new customers in emerging markets.
According to research firm IDC, the worldwide BPO/IT service offshore outsource market is experiencing explosive growth and is expected to reach US$38bn by 2010. China is anticipated to gain a significant share in this growth, primarily due to:
• the desire to increase revenue by accessing and supporting operations in China’s internal market
• cheaper costs
• as an alternative to other offshore outsourcing centres
• superior infrastructure.
To corroborate this, in a recent IDC survey a quarter of US CEOs said they anticipated outsourcing services to China in the next year to two, which is more than for any other location.
Means of entry
While taking advantage of cheaper costs are an important aspect of global sourcing, cost-cutting is no longer the sole reason for outsourcing or offshoring. According to PricewaterhouseCoopers’ 9th annual CEO survey, there are other reasons: “CEOs are focusing on winning new customers in emerging markets.”
The survey found that China is the most promising market, with nearly four-fifths of all companies planning to sell their products there.
Clearly then, the combination of the ‘right ticks’ in the outsourcing basics and a significant opportunity to increase revenue in the domestic market makes China a good choice for service outsourcing.
But for companies that want to operate their own centres there are hurdles to setting up in China, among them:
• choice of location: China has a bewildering array of possible places, and it is often hard to decide which is best
• the bureaucracy: there is an elaborate series of permits, licences and other paperwork at municipal, provincial and central government level to be secured
• logistics and services: it takes time to sort out the premises, and to connect up phones, water and so on
• getting the staff: recruiting trained and skilled employees can be a problem.
On top of that, there are some more fundamental issues that businesses need to address.
First and foremost is the question of protection of intellectual property. Whilst IPR enforcement is rapidly improving in China it is essential that companies manage the risks by ensuring providers can offer the necessary levels of IT and physical security, as well as demonstrate good human resource practice.
The second main problem is the need for English-language speakers and operators. The skills’ level is undoubtedly increasing but it may be that there will not be a critical mass of English-language call centres for maybe 10 years. However, this should not inhibit companies from software projects or where their main focus is on “non-voice” processing or on serving the domestic market.
To overcome these obstacles indigenous BPO operators can offer a ‘build, operate and transfer’ (BOT) model on either a time-limited or evolutionary basis. The three-stage model involves:
Build: The construction of a customer-dedicated infrastructure, either within the service provider’s own facilities or from greenfield.
Operate: A series of activities including staffing, knowledge transfer, process set-up and improvement that establish the operation.
Transfer: The transition of all tangible and non-tangible business assets on the reaching contractually specified criteria related to factors such as time, capacity, output, productivity and quality.
"A recent example, of a multinational company which worked with our company to establish a new operations centre in Tianjin was Standard Chartered Bank. The bank's third back-end hub (the others are in Chennai, India and Kuala Lumpur, Malaysia) will eventually serve all SCB needs in China as well as for other countries.
Jon Aries is managing director of CompuPacific Europe, the European trading arm of CompuPacific International, a business process and IT outsourcing company based in Beijing and Detroit.
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