Outsourcing Software Development to China: Leaks in the Great Wall

By Giuseppe De Filippo and Chris Ip
Sun, January 15, 2006


An increasing number of software companies as well as CIOs from a variety of industries are looking to China to outsource some of their software development. Good experiences in India have made the prospect of going far offshore more palatable. And as prices in India and other markets rise, cost-conscious CIOs are looking for even less-expensive alternatives.

If done properly, outsourcing to China can be a great opportunity. Chinese development is considerably less expensive than in most other places now being used. And China’s capabilities are growing rapidly, thanks to increasing economic development and improving technology education.

But there is one big red flag that gets raised when U.S. executives talk about sending work to China—weak intellectual property (IP) protection. A recent survey by China’s Ministry of Information Industry found that 61 percent of foreign companies operating in China see software piracy as the number-one problem of doing business there. Indeed, the IP issue may be why the Chinese outsourcing industry is facing fragmentation and low market share. In 2004, China captured only $700 million (U.S.) of the global IT outsourcing market, valued at $198 billion, and there are virtually no outsourcing players there with more than a few thousand employees. Multinational companies based in the United States, European Union or Japan fear that disreputable service providers could resell their software under a different name or even sell the code to competitors.

However, while there has been a high rate of theft of personal productivity and entertainment software at the consumer level (software that usually ships in a few CDs and does not require customization or expert knowledge for installation), there are few, if any, documented cases of IP being stolen or compromised when a Chinese development company was involved. The low theft rate of Chinese-developed software is due in part to the fact that most of the software work now done in China is for the Japanese market, which splits the source-code development across many vendors so that no one vendor has access to the complete code.

In reality, software developed for corporations is difficult to copy because it invariably is tailored to specific business requirements and so is not easily replicable, and it’s likely to require expertise to install. The China head of a leading ERP software company confirmed that the company does not face issues with piracy in China because its software "does not come shrink-wrapped in a CD, and you cannot just press ’install’ to install it." Its software requires complex configuration, and companies can’t derive business benefits until such configuration happens.

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