The development of information technology has enabled enterprises to effectively re-structure and utilize the global resources. The global economic integration integrates the resources all around the world into a global delivery system. In 2008, the global service industry was valued at USD777.3 billion, and the market value for the global offshore outsourcing industry was USD33.8 billion, with an increase of 6.5% and 21.8% respectively. The outsourcing industry driven by information technology has become an important foothold for nations to develop their knowledge-based economy.

China’s outsourcing industry seems to develop from remaining unknown, “sub-health” status with walking on the edge of favorable policies to reaching its golden age with having public wide attention and all tailored favorable policies overnight. Since the “Thousand-Hundred-Ten Project” launched by the Ministry of Commerce in 2006, China’s outsourcing industry has drawn deep attention from the government and the society and seen precious development opportunities.

When we celebrate sweetness coming after bitterness for the service outsourcing enterprises, new issues appeared one after another. In 2009, the State Council approved 20 cites to be China’s outsourcing demo cities and gave them a series of preferential policies in terms of taxation, government funding, finance and intellectual property protection. This initiative shows the determination and vigour of the state and local governments to foster outsourcing industry.

Meanwhile, in order to accelerate the achievement of industrial target, promote local employment and optimize industrial structure, some demo cities overlook their unique regional advantages, increase their input of elements for homogeneous competition, and re-take the development path of manufacturing industry—using fiscal and land preferential policies to attract companies. Preferential policies have been used as weights by cities for competing bids, which not only disturbs enterprises’ normal development plan but also leaves their practical needs unsatisfied.

For an ordered, stable and sustainable development of service outsourcing industry, all demo cities should return to enterprises‘ demands, explore their own advantages and create their own unique development paths. Moreover, the central government should provide appropriate guidance at proper time to speed up the industrial development as well as minimize resource waste caused by inter-city competition.

Overall Advancement—A New Development Pattern

According to the status quo of offshore and onshore outsourcing industry, the 20 demo cities are growing at respective level in parallel. Beijing, Shanghai, and Dalian have achieved outstanding results in offshore market because of an early start, the high level of globalization, strong language/technical competency and high attraction to high-end talents. Beijing is determined to be “the economy headquarter”. Shanghai is seeing itself as “the service outsourcing contract center”. While the goal for Dalian is to become “China’s leading city” in service outsourcing industry. These three cities are playing an important role in promoting the development of China’s service outsourcing industry.

The second-level cities in the industry, such as Shenzhen, Guangzhou, Nanjing, Hangzhou, Chengdu and Xi’an, are characterized as having good commercial environments, sufficient educational resources, strong economic strength and economic vitality. Apparent cost advantages and sufficient talent supplies helped leading outsourcing providers to accelerate their expansion of local business, forming a sizable assembly of outstanding enterprises. In the meantime, with the ongoing optimization of IT industry environment and the rising demand for services, domestic demand in these cities are increasingly released, which creates huge attraction to global corporations and leading service suppliers.

In addition, there are some cities that are currently in the early development stage of service outsourcing industry. They started outsourcing business relatively later so that the maturity of their service outsourcing industries still has a long way to go. However, these cities are generous in terms of favorable policies and supporting funds, which benefits some cost- oriented enterprises Meanwhile, with the understanding of service outsourcing industry getting deeper and deeper, favorable policies are moving towards those directions such as optimizing commercial environment and developing characterized industries.

The competition among 20 cities ended the “tripod period” of Beijing, Shanghai, and Dalian and greatly stimulated the release of China’s domestic demand. Healthy competition among cities has led to different development modes, which will maximize cities’ effectiveness, optimize China’s outsourcing resources, and achieve a real boom of this industry. According to the current competition pattern, many local governments are still simply providing blind support. If they are able to gain insight into their own superior resources and potentials, and then offer tailored support based on the needs of enterprises at different development phases, there will be a win-win situation for both the cities and enterprises.

Prioritizing Enterprises’ Demand, Pursuing Differentiated Development

For those enterprises with commercial operations, the delivery location is where their profits are maximized. Meanwhile, enterprises should also concentrate on reducing cost and increasing revenue to maximize profits. Most of the favorable policies issued by demo cities focus on the “cost-saving”. While “source-exploring” is the one that needs attention for differentiated competition. The so-called “source-exploring” refers to how to achieve the ultimate goal of maximum profit through improving efficiency. This requires enterprises to be equipped with abilities of accurate insights of existing and potential market opportunities, quick access to key technologies and talents, continuously optimizing business processes and improving management efficiency, to enhance competitiveness and realize sustain development.

As enterprises in different development stages have different business needs, their standards of selecting delivery locations are different. (see the appendix for details). Therefore, demo cities should accurately position their own characteristics, stick to the principle of sustainable development, build up a positive interactive and complementary relationship with other cities indifferent development stages, and choose their own unique competition patterns during the process of making local strategic development plan and attracting enterprises settling down in the city.

Mature enterprises have been equipped with good brand reputation, strong market driven force and well-developed capability of service delivery. Foreseeable penetration of new areas, regional development planning and technology layout that are compatible with enterprises’ business strategy and low operational costs are key factors to attract enterprises’ settlement. Providing market opportunities, making enterprises realize breakthroughs in new area with the help of current high-end consultation and architecture competencies, building up more comprehensive databases, enriching best practices to utilize project experience are greatly attractive to mature enterprises. Meanwhile, maintaining a high level of information interaction with local demands under the driven force of the same development concept can maximize enterprises’ creativities vitality and creativity. Moreover, the well-developed operational management system of mature enterprise can ensure effective collaboration with multi-point layout. Setting up branches in low-cost areas can effectively reduce an enterprise’s operation costs and speed up the achievement of its strategic goal of exploring low-tier cities through local operations.

However, for those enterprises in the fast-growing stage, their market influences have not formed yet. In order to reduce business risks, those enterprises need to choose the cities with more mature commercial and IT environments. In terms of revenue expansion, the advantage of those enterprises lies in re-using current experiences and technologies to drive efficiency by scale. Easily accessible local market with huge potentials and demands is the key to attract those companies. In addition, they also need government support in terms of business operation, branding, fund-raising, training, etc.

Due to many uncertain factors in the current development process, newly established companies need more attention and patience from governments and actively seek the opportunities to dock with the market according to the characteristics of their target markets and their own operational capacity.

Exploring New Resources is Better than Cutting Expenditure

Besides the common interest of cost reduction, the difference in the standard of choosing delivery location among enterprises in different development stages is big. How to find a balance between market compatibility and maximum efficiency is a key issue that demo cities should consider in their self-positioning process.

1. For those demo cities in optimized development stage, their leading positions have inevitably increased costs and improved the ability to attract talents. Under this circumstance, it is wise to release some related policies to enhance local enterprises’ core competitiveness in high-end market rather than simply offering favorable policies on costs reduction.

Take Beijing as an example. Instead of reduce Beijing’s competitiveness in outsourcing market, the consistently rising costs promote enterprises to take more effective resource allocation that is keeping headquarters, marketing functions as well as high-end knowledge-based services (such as IT consulting, product design and architecture analysis) in Beijing and moving those works related to function and large-scale delivery to low-cost regions. The leading offshore outsourcing companies, such as VanceInfo and iSoftStone, headquartered in Beijing will continuously regard Beijing as the most important strategic location and improve its capability of delivering high-end services to enhance their international competitiveness when they expand the national market.

Higher service level means closer relationship with clients, leading to tougher requirements for information security and product innovation. Hence, the issue of relevant policies and regulations is significantly important for keeping industry vitality and maintaining leading position. Besides, as those enterprises with high public attention gradually increase their requirements on soft environments, some factors (such as cultural construction, environmental compliance, etc.) that have no effects on business so far will become hot topics in the future.

2. Although the industry has started to see its shape, how to enhance current achievements and seek new growth points is a tough problem that needs to be solved as soon as possible for those cities which are currently in break phase as well as face competitors with better cost advantages and favorable policies need Those activities like ensuring a long-term stability of policies, giving enterprises confidence, intensifying local contracting combined with resources of competitive industries to develop technology advantages in local industry as well as helping enterprises with deepening the level of local businesses and achieving economic scale are more important than those short-term activities such as offering better cost advantages.

Take Xi’an as an example. A sufficient talent supply has enabled the city to be treated as a strategic base for international corporations with layout plan in Western China. Many famous global companies have already set their R & D centers in Xi’an. In the occasion that the outsourcing industry is gradually shaping, Xian has also switched its focus from attracting investment to serving settled enterprises and built up more systematical and comprehensive platform services (public services/personnel training/ enterprise interaction and market promotion). These activities have seen positive outcomes: Since its establishment in 2004, the number of employees in Digital China increased to 700 in three years. Affected by financial crisis, NEC cut down 20 thousand jobs globally, but increased its business volumes in the R & D center in Xi’an.

As the current industrial agglomeration and enterprises‘ satisfaction provide measured basis for those new enterprises that plan to settle down, the government should not dramatically change current policies but provide better policy supports  aiming at improving enterprises’ abilities of international operations, services and large-scale deliveries. At the same time, the government should optimize local commercial environment, encourage local firms to release demand, in order to create a predictable vision for settled outsourcing service providers.

3. Those Cities which are still in  the initial development stage should avoid competing with other  leading cities in "Red Sea" field. Instead, they should explore their own unique advantages and search for their own development paths. Undoubtedly, it is important to drive the industry by attracting enterprises . However, it also easily leads to over-promises when a city‘s bargaining power is weak and its local industrial environments are not mature. Therefore, the cost of developing service outsourcing industry is somewhat high for those cities without strong financial capability. The endless compromises on policies will not only disturb the competition patterns among cities but also increase enterprises’ decision-making costs, as well as make their decision-making periods longer. These  will do more harm than good to the industry in a long term.

When developing service outsourcing industry, these cities need to carefully inspect their own characteristics and conduct a deep exploration in terms of industrial features, government efficiency, domestic demand potentials, etc. Meanwhile, they should  pay more attention to evaluating newly established enterprises and providing  more  supports and conduct long-term cooperation for those enterprises with high development potentials.

To sum up, demo cities should both improve their own advantages and capabilities from enterprises’ needs and improve  cities‘ competitiveness from the essence in order to ensure China’s outsourcing industry develops in a highly effective and healthy way. Under the background of international service outsourcing trend and China’s rising position in the international offshore outsourcing industry, China‘s service outsourcing industry will embrace a  brighter future.

Appendix: Service delivery location selecting criteria used by enterprises that are in different stages of development

(The author is a senior research analyst with Services Team of IDC China)

(Reproduced from "ChinaSourcing" magazine)