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Offshore outsourcing: Can China steal India's thunder?

Stephanie Overby | Nov. 19, 2010
China is touted as the only threat to India's dominance in the IT services industry. But can China really overtake India's current position?

Still, we're not seeing U.S. or European CIOs signing billion0dollar outsourcing deals with Chinese providers—or even the Chinese divisions of multinational providers. And the Chinese IT services market has yet to produce any major names of its own. "The market continues to be fragmented with no really dominant firms," Master says.

IT outsourcing customers are today still experimenting in China. "The routes they're taking to learn about China are multifaceted," says Karamouzis. "They're not just signing up with one company in China." Some may send smaller projects to one or two Chinese vendors to supplement their larger deals with an Indian or U.S.-based provider. Others are mitigating some risk by signing up with a smaller Western IT services companies dedicated to China-based outsourcing. Still others set up captive shared services operations in the country.

Customers are exercising extreme caution around master data security, adequacy and enforceability of contract rights, operational transparency, and supplier due diligence, says Master. Vashistha of Neo Advisory suggests that clients to use China to only to support their Asian operations and, even then, to use U.S. educated Chinese managers to lead operations or handle relationship management.

It's difficult for industry watchers to say when—or if—China will catch up to India as an offshore outsourcing provider. If it is a horse race, it's one in which the finish line is always moving.

China has mature offerings in some areas—embedded software, basic application development—but its five years away from maturity in ERP support, for example. And it could be at least a decade before the country is able to offer anything near the end-to-end IT services necessary to encroach on India's $70 billion offshore outsourcing market. "China has made a lot of progress, but India continues to raise the bar," says Master. "China may never truly compete with India on the entirety of services offered by Indian providers."

If China is to make gains on India in offshore outsourcing, the biggest sign to look for, says Karamouzis, is "ink on deals. Clients signing outsourcing deals with China demonstrates a level of confidence." If customers begin to consider bids from Indian and Chinese providers on equal footing, says Master, that will be further evidence of China's maturation. And "when we start seeing Chinese suppliers set up operations in India," jokes Master, they will have won.

In the end, it may not be an either-or proposition. "Each market must be considered as a delivery location on an individual contractual basis," says Butler of Ovum, "as each has social, political and economic advantages." "One of the fascinating aspects of the whole India vs. China consideration," adds Master, "is the reality that India and China are not, and never will be truly fungible."


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