Analysis of Present Outsourcing Service Market

In 1989, the famous management scientist Peter Derek had mentioned in his book, "Any work in an enterprise that only serves just as a supporting backstage and doesn't bring direct benefits should be outsourced, and every activity and business which do not bring senior development opportunities should also be outsourced."

As the information technology is penetrating deeply into enterprises' core operations and influencing enterprises' strategies and development, companies raise increasingly higher demands over the reliability, usability and swift adaptability of information technology. From this point of view, how to perfect the management of IT systems, and to use effectively the IT resources are the serious problems to enterprises. Moreover, with exacerbation of the market competition, enterprises have to concentrate on their core businesses; this becomes one of the

Concept of IT outsourcing

IT outsourcing usually refers that enterprises strategically choose external professional technology and service resources to replace the internal departments and staff, in order to overtake the enterprises' IT system or IT services of business process operation, maintain and support over system.
The purpose why enterprises choose outsourcing is really simply, that is to do what they are good at and outsource what they are not good at to other enterprises who are good at in that field, therefore they can enhance their competitiveness through concentrating on their core businesses.

IT outsourcing services include IT system outsourcing and business process outsourcing. IT system outsourcing means that enterprises outsource the whole or part of IT system to the professional service companies which will manage, operate or maintain the precative IT system service process according to service level agreement. It focuses on the enterprise's infrastructure construction, such as server, network, operating system, support, etc. According to different levels of the precative system, IT system outsourcing can be divided into IT infrastructure outsourcing and application outsourcing. However, BPO focuses on the enterprise's internal operation or customer's back-end activity, such as call centre outsourcing, software offshore outsourcing, etc. BPO requires higher level of outsourcing enterprises' management and services, and it brings more profits.

IT system outsourcing services can be divided into three types according to different transaction modes: 1) Traditional outsourcing service. Service provider and client will fulfill one-to-one operation maintenance outsourcing activity. The service provider owns all or part of the client's IT operation system as well as part of ownership and responsibility based on the agreement. 2) The managing "trusteeship" service is the second generation of outsourcing mode. Such as, the internet data centre model developed in 2000 and 2001 in our country, service provider offered the one-to-many service based on network, like host computer trusteeship. 3) The third type of outsourcing service called utility computing model is still in the initial phase. On Demand which is developed by IBM in recent two years is just an example of this type. Utility computing model provides one-to-many standard services using flexible pricing mechanism based on the using dosage payment principle. This type of outsourcing is still waiting to develop in China.

The competition pressure makes the enterprises have to effectively control costs, especially the fixed costs. IT outsourcing service can release enterprises from the pressure of long-term fixed IT costs according to the IT service outsourcing mode offered by the customers. So IT outsourcing can make the providers to share part of the fixed costs and transfer the fixed costs to variable costs in order to ease the pressure of the enterprises, which can enable higher flexibility and efficiency in terms of new products' core businesses.

Analysis of Chinese IT Outsourcing Service Market

Nowadays, IT outsourcing is a common phenomena in America. Compared to America, Chinese IT outsourcing market belongs to an extremely scattered market. There are thousands of IT outsourcing service providers with great differences in scale and capability. The global IT outsourcing service providers with the advantages of international experience, brand recognition, capital scaled, etc, dominate the advantageous positions in the domestic IT outsourcing service market. The current top IT outsourcing providers in Chinese market are mainly the foreign-invested companies such as IBM, HP, CSC, etc. The Chinese IT outsourcing market started in 1998, through 6 or 7 years development, in 2004, the capability of Chinese IT outsourcing market reached 438 million USD which taking up 9.9% of the whole market share. However, the market scale is still in its taking-off stage.

View from the industry, most clients of IT outsourcing services in the domestic market were branch offices of foreign companies before 2000, only after that year some domestic companies resort to IT outsourcing services. Recently, most domestic clients are those big companies in financial, telecommunication, manufacturing areas and etc. According to an investigation, although it is agreed that Chinese IT service developing space is huge, some renowned IT outsourcing service providers clearly state that Chinese IT outsourcing market is not mature, therefore, they don't plan to invest largely in Chinese market in the coming years.

Analyzing from the economic perspective, there are two factors causing the "much talk, little action" situation of the market.

Demands Aspect

Despite the fact that the IT development in China is really rapid, the overall informatization of the society is still at a low level. Enterprises, especially the numerous small and medium enterprises are weak to rely on information technology systems. So the overall rise of Chinese IT outsourcing market must rely on the level of informatization of the society and enterprises as well as the increasing demands from domestic small and medium enterprises.

Another reason why many enterprises wouldn't like to outsource their IT service is China has low local labor cost, some low-end IT service enterprises can resolve internally. Only when the outsourcing cost is higher than its IT service company, enterprise will choose the latter. Moreover, it will work out the employment problem.

Therefore, only when the IT technology can go deep into the enterprise's core business and affect the enterprise's decision-making and development, but enterprise raises increasingly higher demands of the stability, usability and quick adaptability of IT environment, with the continuously embedding of the market process and the intensified competition, and the pressure for enterprise to control the IT costs, enterprise's outsourcing could become the mainstream.

To startup fully Chinese IT outsourcing service market, we have to overcome the biased understanding of outsourcing from the clients. Because lacking of a reasonable industrial regulation and policy basis, enterprises cannot see deeply through the benefits, effects, classifications and contents, these limit the maturity and development of IT outsourcing service market. Chinese are used to the method that one is small but all-encompassing. For the effect of habit, worrying about information security, hard to receive the charging service form, and etc, many enterprises tend to have the resource control in their hands. Therefore, it needs great breakthrough for the domestic enterprises to know the concepts of IT service and outsourcing.

Supply Aspect

The domestic IT outsourcing services market is dispersed and lacking of the absolute leaders. Investigations show that even IBM, the leading IT outsourcing service provider, takes only no more than 10% of the market share. There are many cases when they are unable to achieve scale economy or gain profits, and numerous transactions ended up with deficit, for example, Shanghai GM project, IBM gains nothing but loss, HP is the same on this project. This situation restrains the service providers to enter the market to some extent.

It is easy for low-end IT outsourcing service market, so a great amount of small companies to enter this field, further increasing the competition in the market. However, because the IT outsourcing services market is not deeply explored, many service providers are unable to gain reasonable profits but to pay for the continuous scale expansion and technical facilities.

For the reason that the domestic IT outsourcing service is still in its take-off stage and the market is in short of professional service providers, the services provided by enterprises cannot meet the demands; this weakens the customer's acceptance and demand for outsourcing service. Gartner's survey shows that 80% of large-scaled outsourcing contract goals cannot met the demands. Therefore, how to ensure the quality of services and increase the service capabilities have become the keys to expand the market.

In addition, the market is lack of leading vendors and policy basis, without reasonable industry standards to help the clients to reduce the costs and improve the competitiveness, these factors will limit the further maturity and development of IT outsourcing service market.