What You Should Know About Outsourcing to China

A veteran watcher of India's outsourcing market, researcher Joseph Rottman says that China is worth evaluating for offshore work but he warns labor costs are rising.

In 2004, Joseph Rottman of the University of Missouri-St. Louis took a tour of outsourcing hubs in India, hopping from Bangalore to Hyderabad to Mumbai. The trip kicked off four years (and counting) of research on IT services offshoring set to culminate in the publication of a new book by Rottman and colleague Mary Lacity, Offshore Outsourcing of IT Work: Client and Supplier Perspectives, next spring.

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A few weeks ago, Rottman took a similar trip to what some say is the next big IT outsourcing destination: China. This time he focused on Dalian, a city in the northeastern province of Liaoning dubbed “the Bangalore of China.” Fresh from his fact-finding mission, Rottman shared his initial impressions with CIO.com, including how Dalian compares to Bangalore, the biggest impediments to China’s success as an outsourcing destination for [North American and European] IT services, and why any IT leader who offshores to Dalian solely for labor cost savings is likely to lose his shirt.

CIO.com: Why did you decide to go to Dalian?

Joseph Rottman: I’ve been interested in China for a while. Dalian is being marketed by the Chinese government as “the Bangalore of China,” a hub for IT outsourcing (ITO) and business process outsourcing (BPO). I happened to have a little luck because while I was in Dalian, two national conferences were being held, one featuring a lot of national officials looking at the services model in general for China, and the other about outsourcing to China.

Whom did you interview?

Rottman: When I went to India in 2004, I interviewed customers and then asked if I could talk to their suppliers. In China, we started with the suppliers. I talked to individuals at five Chinese software companies. I looked at three U.S. companies who had captive centers [a company-owned, not outsourced, IT service delivery center] in Dalian. I also spoke to officials who run the technology parks there. In all, I conducted 37 interviews.

What captive U.S. centers did you visit?

Rottman: The only one I can name is Oracle. They have a 100-person center in Dalian. The other two wanted to remain anonymous. They were a Fortune 100 financial services firm and a 25-year old, privately held professional services firm who had set up a captive center to serve one client. Rottman: Mary (Lacity) and I went through the same thing in India with outsourcing. At the beginning of the movement, the companies want to hold their cards close to the vest.

The Oracle center does Japanese-facing BPO. There’s a large population of Japanese-speaking Chinese people in Dalian, since it was once occupied by Japan. So about 80 percent of the work done in captive centers and Chinese development companies supports the Japanese market.

Next: Who's doing business in Dalian

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