Predictions of China's services outsourcing development trend

Although the increase of offshore outsourcing demands will be apparently more than that of domestic market demands in the future, the domestic market will still contribute 80% of the industrial income by 2010 according to the prediction of BearingPoint. The internal demands will still be the main source of income for the services outsourcing industry.

Analyze industrial chain of services outsourcing

We can see from the services outsourcing levels and classifications defined by BearingPoint that service providers on different levels locate differently in the chain.

Strategic services outsourcing is the highest level of services outsourcing, and it is usually undertaken by the local consulting organizations and local branches of multinational consulting companies, the offshore mode isn't used to provider services usually. The outsourcers, especially those global enterprises, will resort to consulting organizations when formulating outsourcing strategies. They will consult about the purpose of outsourcing, part of the business to outsource, level of outsourcing, place to outsource, type of outsourcing service provider, and so on.

In terms of function outsourcing and business process outsourcing, we see that offshore outsourcing service providers are involved, offshore delivery model has enabled service providers to achieve scale merits much easily.

In terms of business function outsourcing, more and more outsourcers in the high-cost areas begin to outsource the business functions to offshore outsourcing service providers. Local service providers will also outsource some highly repetitive work to offshore outsourcing service providers for saving costs (these "offshore service outsourcing providers" include branch offices set in the low-cost area). Specialization in various functions and scale benefits are the directions for service providers to improve.

In the high-cost areas for business process outsourcing, using offshore outsourcing is gradually becoming the mainstream. The local service providers in high-cost areas will also outsource part of their businesses to offshore suppliers. On this level, the upgrade of industrialism and professionalism are one direction for the suppliers in the industrial chain; on the other hand, standardized process and automation are also ways to promote business capability.

Business function outsourcing will include business process outsourcing. Outsourcing suppliers will outsource business process work to the next outsourcing supplier according to different standards of cost and expertise. Offshore outsourcing will become the main delivery mode of business function outsourcing and process outsourcing in the future. "Offshore opportunities" in China means those opportunities to do business function and business process outsourcing.

IT service outsourcing mainly includes IT consulting, software service outsourcing, hardware infrastructure service outsourcing and IT training. According to the statistics from IDC, software outsourcing took up 66% of the 467 billion US dollars' global service outsourcing market in 2006. Offshore outsourcing is mainly applied to software outsourcing, especially in the phases of development and maintain, while IT consulting and appliances are usually required to deliver locally. In terms of hardware infrastructure service outsourcing, offshore model is usually adopted for low-end appliance through daily telephone support, but onsite support is also indispensable. As a result, offshore outsourcing opportunities lie mainly in the software outsourcing market.

The domestic market for IT service outsourcing is largely developed by the supporting services of hardware products in China, and thus gradually expands to software development and supporting services and even IT operation services. Similar to the global IT service outsourcing market, China's software outsourcing accounts for more than half of the business. But service outsourcing concerning hardware infrastructure still takes up to 40%. So from this point of view, China's IT service outsourcing still lags behind the global level.

Considering the services that offshore outsourcing providers undertake, the proportion of software outsourcing is obviously on the rise.

The proportion of IT training in China levels is the same as that of the world, but so far the strength of IT training is still weak, especially in the case of offshore IT service management training and software engineer training. One reason is the lack of training staff, the other is related to enterprises. Many companies worry about the high risks of losing their staff if they invest a lot on the staff training. As a result, most companies have strict controls over training costs. In recent years, IT training industry for enterprises develop is in a slow speed while personal IT training is developing vigorously as the result of fierce competition.

In BearingPoint's view, offshore IT service outsourcing will take up 30% of China's offshore outsourcing businesses along with the global trend of shifting offshore software outsourcing businesses to China.

Industrial Development Trend

With the continuous development of the domestic information and technology, BPO (Business Process Outsourcing) businesses will increase rapidly, especially BPO on financial, telecommunications, government, and other industries will be widely applied, it is expected that in the next four years, there will be more business centralized managing centers using BPO mode to operate.

The upgrade of the professionalism, managing capability and service ability of local service providers, industrial reform, and the complexity of outsourcers' demands will promote the upgrade of China's service outsourcing industry. The costs of low-end business process outsourcing will be less and less, service providers need to continuously upgrade their service capability, managing ability and professionalism, in order to provide more high-end service to maintain the partnership with customers, therefore the market share will be consolidated. Moreover, with the reform of industry, it is possible for some industrial repeat operations to peel off, but the prerequisite of peeling off is to have qualified service providers to undertake the service. In addition, from the perspective of global trend, the outsourcing demands of outsourcers will be more and more complex, it requires the service providers to have the integrative service capability, not only requiring it to have certain service expansibility, but also have the capacity of process optimization and IT tools innovation.

Offshore services outsourcing undertaken by China will grow rapidly in the future, in the next four years, the offshore services will be largely driven by the growth of IT services outsourcing. But it is just the beginning of China undertaking offshore business process outsourcing service; the industrial contribution is still not large in a short term.

The development of services outsourcing industry globalization will lead the service jobs moving from high-cost areas to low-cost areas, this will increase the talent pressure of low-cost areas. Many global large enterprises have taken the strategy to reduce the staffrimmer and move the jobs to low-cost areas in order to alleviate the cost pressure. For example, Citigroup plans to cut 17,000 staff in the next three years, at the same time, move some full-time and part-time employees to work in the low-cost areas in order to achieve the goals of saving the cost with 4.6 billion US dollars per year. In 2005, in order to coordinate with the cutting-cost strategy of the parent company --- France Telecom, Orange which is the biggest mobile operator in the UK will move 1500 jobs to India.

Developing Trend of Fractionized Market

Software services outsourcing will still be the key point of China service outsourcing industry, it will not only promote the rapid growth of IT services outsourcing, but also software services outsourcing is the basis of developing business process outsourcing.

BPO is still fractionized market that cannot be overlooked recently, such services will become an important cash flow of outsourcing service providers, it will help the service providers to achieve rapidly the scale benefit.

There will be a large number of domestic demands of industrial process outsourcing, whether this fractionized market can develop depends on the undertaking capacity of domestic outsourcing service providers.

For China's service provider, the opportunities of offshore services will be mainly in software services outsourcing, customer service, human resources outsourcing, as well as financial and accounting outsourcing, other opportunities of fractionized market will be at home.

Geographical Market Trend

From the perspective of the future trend of outsourcing section:

Because of the geographic advantage, China will still remain the dominant position of outsourcing in Japan, South Korea, and other regions.

In the next three years, the North American region is expected to overtake Japan and become the largest outsourcing country of China.

As for the caution of Europe to outsourcing, in short order, China will mainly play the role of second-class subcontractor.

From the perspective of the outsourced region:

The development of BPO is restricted by the information technology level of this region; this determines the geographical developing imbalance of China's service outsourcing industry.

The geographical centralization of fractionized service will gradually increase.

Due to the operation cost, the outsourcing bases will gradually move to the second-tier cities and regions.