Outsourcing Is Cheaper In China

When Mike MacKenty first considered sending Web-based development and maintenance work to China two years ago, he was already well-acquainted with the fourth-largest country in the world. He’d visited his company’s various manufacturing sites in China, a country coming on strong in the offsourcing scene, several times. So he thought he had a good handle on the problems he might face in sending IT work there. He knew he would need to find good IT talent with decent English skills and beef up his own IT department’s internal processes for packaging up projects to send abroad. And he would have to address any internal opposition to offshoring.

Also, as corporate vice president of IT and supply chain services for Nypro, a $605 million global plastics manufacturer, he had access to something other IT leaders might not. His company already had an internal 30-person IT shop in Shenzhen that provided network support and business system implementation for Nypro’s nine facilities in China—which stretch from Beijing in the north to Hong Kong in the south. Surely, he thought, that organization and its native, Mandarin-speaking IT workforce could be a huge help both in setting up an outsourcing relationship there and dealing with any potential problems down the line.

But the Shenzhen-based IT team wasn’t big enough or sophisticated enough to attract the kind of workers MacKenty would require for the offshore projects. Nor were they aligned closely enough with his own business back in the States to help as a liaison between his staff and the offshore partner he eventually selected. Instead, MacKenty and his staff had to do a lot of work back at their Clinton, Mass., headquarters to overcome the difficulties, including deciding on the right type of outsourcing arrangement, creating both more rigorous and more efficient processes for sending work offshore, and coming up with solutions to cross-cultural and communications problems.

It hasn’t been easy. But now, more than a year into the outsourcing, MacKenty has been able to create a relatively stable relationship with his offshore provider and the small staff of 10 Chinese professionals dedicated to Nypro projects. He’s been able to greatly increase the amount of IT work his organization can take on, without having to significantly increase his budget. And he’s learned important lessons about what’s possible and—perhaps more importantly—what’s not.

The Promise of China

Analysts have talked increasingly about China’s bright future as an outsourcing destination for American IT work. Gartner has posited that China could rival India as the leading offshore IT services market as early as 2007. And CIOs are listening. The number of IT leaders who said they expect to outsource some IT function to China sometime within the next three to five years jumped from 8 percent in 2004 to 40 percent this year, according to a survey by DiamondCluster International, a Chicago-based consultancy. However, the same study reveals that only 6 percent of CIOs are actually sourcing in China today. “It seems like China has gotten mind-share acceptance among CIOs, and part of it is the hype. Everything you read says watch out, India, here comes China,” says Tom Weakland, managing partner of DiamondCluster. “But another part of it is that we’re starting to see small pockets of success stories emerging from China.”

MacKenty’s experience is a good example of what CIOs can actually expect from the IT services market in China today. “If people expect a turnkey operation when going to an offshore model in China, they’re kidding themselves,” MacKenty says. “It takes a lot of dedication to work it.”

Setting Up Shop

MacKenty first started to explore offshore outsourcing two years ago. His motives were clear. There was a backlog of Web-based development work that his team of 22 in Clinton couldn’t get to, and a host of maintenance-level work he wanted to free them from to focus on more high-value, full-scale development work such as adding integrated bar coding with Nypro’s ERP system or developing the company’s internal portal. “I was looking to be able to take on more IT work without adding a lot of costs,” he says. A 25-year veteran of IT who has worked at companies such as offshore outsourcing pioneer GE, MacKenty knew offshore outsourcing might be a way to accomplish that.

MacKenty first had to figure out what type of offshore arrangement would work best. He could offshore one project at a time, he could set up Nypro’s own captive offshore development center, or he could contract for a dedicated development center at an offshore vendor, whereby the vendor devotes a certain number of full-time workers to the client.

In addition to the application development, he hoped to send maintenance work offshore, which would require more continuity than a project-by-project arrangement could provide—so he ruled out option one. Still considering the other two options, he explored both India and China, traveling to Bangalore and Beijing back-to-back in February. The talent available in India was remarkable. But MacKenty was turned off by turnover rates at Indian vendors in general, and he worried that a company the size of Nypro would get lost in the shuffle at the huge Tatas and Wipros. PricewaterhouseCoopers estimates that using China-based outsourcers can result in savings of 37 percent over comparable India-based companies. And much of the reason CIOs might choose China today is “not necessarily for labor quality, but because it’s a buyer’s market,” according to a 2004 report from San Ramon, Calif.-based offshore consultancy NeoIT.

So he turned to China. “In China,” MacKenty explains, “We were significant enough to get attention paid to us and to get a reasonable amount of their mind-share.” But concerned about the lack of English fluency and IT skills in the Chinese workforce, he decided against setting up his own captive offshore development center. MacKenty knew from research and discussions with other CIOs that a 50-person shop was the threshold to cross to make owning your own offshore IT site successful. He decided on the dedicated offshore development route, as he was willing to pay what he calls a “people premium” to an offshore vendor in exchange for that company handling the trying task of attracting and retaining the best staff.

MacKenty explored two providers in Beijing. He eventually selected a company called Objectiva, started by graduates of MIT, Columbia University and Beijing University, all with expertise in distributed software development servicing the U.S. market. MacKenty liked what he saw of their hiring process. “They really won me over,” he says. “They spent a lot of time finding a certain level of talent who could speak English.”

MacKenty was also impressed with the vendor’s software testing capabilities. One of the bigger issues he feared back at the home office was backlash from users if the systems churned out in China were buggy. Satisfied that Objectiva could handle the quality testing work, MacKenty agreed to send some development work on a trial basis.

Back home at the 18-acre former carpet mill that is Nypro’s headquarters, “there was fear and trepidation” among the IT staff, MacKenty recalls. “To a lot of people, offshore outsourcing means I lose my job.” The CIO took the time to explain to his employees that that wasn’t the case in this instance. “Our goal was not to eliminate headcount,” says MacKenty. “Our goal was to add resources and enhance people’s careers by offloading maintenance-level work so our people could take on higher-level work.”

Feeding the Machine

Nypro began its work with Objectiva with two pilot projects last April. One was straightforward technologically but required some creativity—the company’s external website. The other was straightforward in terms of user needs but was much more involved technologically—a new system for making a capital equipment request (CER). The two projects turned out to be great test cases for the offshoring proposition and helped MacKenty and his team uncover potential problems and come up with tenable solutions.

One of the major issues MacKenty had predicted surfaced right away—figuring out how to hand off work from the United States to China. MacKenty’s staff had to be much more precise with their requirement definitions and technical specifications.

The more rigorous processes of requirements-gathering documentation seemed to do the trick. The workers in China—totally focused on a single project—were completing tasks three times faster than could his internal staffers, who might get distracted by other business needs. Not only was he saving money on these projects, he was saving time. On the other hand, MacKenty feared that business users and his internal IT staff would have trouble keeping pace with the Beijing-based workers. He’d beefed up internal processes for handing the work off to the offshore vendor, but the process was slow.

If all went well with the pilot projects, Objectiva would begin its full-time engagement with Nypro. If MacKenty’s team couldn’t keep them busy, any savings on sending work to them could be squandered. So Nypro had to become more efficient at the front end of the development processes of technical design—specifically, collecting requirements from users more quickly. Mac-Kenty was able to convince the business users that they needed to spend more time meeting in the initial phases of the process—every day, rather than every other, and getting back very quickly to IT on what they thought or needed.

Anybody Here Speak Mandarin? And What Time Is It in Beijing?

During the first nine months of the pilots, MacKenty’s applications director, Jay Leader, was working with one of Objectiva’s relationship managers who acted as a liaison between Beijing and Clinton. She was originally from China and spoke both fluent Mandarin and English, a big help. The problem was, she was based in San Diego. The added layer of communication and the additional time difference slowed things down, particularly with the website the Beijing-based workers were trying to design for sales and marketing users back in Clinton.

So in January, as the first of the pilots (the CER system) wrapped up, at MacKenty’s request, Objectiva instead hired Mike Tulloch as a senior project manager based in MacKenty’s office, working 20 hours a week. He does the same type of relationship management work as the previous project manager did. He oversees business-requirements gathering at Nypro, addresses issues sent via e-mail overnight from Beijing, produces daily reports on Objectiva’s work for Nypro, and meets weekly with Nypro’s applications director to review the status of all projects and prioritize work for the following week. But being onsite has made much of the work Tulloch has to do with Nypro’s IT and business staffs a lot easier. “When there’s a problem, [Nypro employees] want to be able to communicate to someone who is sitting right here with them,” he explains.

But, Tulloch says, “I do not speak Mandarin.” And the offshore technical team leader, while a technical whiz, spoke very labored English at best. So as he began conducting his weekly conversations with the Beijing team, he encouraged all six to speak up. After a few weeks of Web conferences and calls, he found his translator, a young junior programmer named Ray Liu, who happened to be fluent in English.

Another problem that persisted was the time difference, with Beijing exactly 12 hours ahead and the onshore and offshore teams passing like ships in the night. So Tulloch now works until 11 p.m. three nights a week so that he can be available to address questions or problems with late-night e-mails, IMs or Web conferences.

Some Tasks Don’t Export

The website pilot project went live in March, just before Objectiva’s full-time engagement with Nypro began in April. MacKenty was completely satisfied with the end products and the work Objectiva had done. Beyond the speed, he was pleased with the quality.

Thus, MacKenty was eager to experiment with sending other types of IT development and maintenance projects to Objectiva. He was keen to offload network support activities to his offshore vendor. His e-mail administrator, who was doing this work in the United States, was really progressing and was ready to move on to higher-value projects. It was seemingly a good opportunity to do what CIOs always talk about when outsourcing—sending the lower-level “commoditized” tasks out the door in order to free up employees to focus on higher-end, higher-value work.

The results were disappointing. The amount of effort required to define the work before sending it off to the person in Beijing simply wasn’t worth it. Objectiva is now monitoring mail servers and sending a daily report back to Nypro, but the work of network administration is done by MacKenty’s employees.

MacKenty learned a lot, specifically, “what work you can and cannot easily send to China, particularly from an administrative standpoint,” he says. He hasn’t given up on the idea of being able to send more network administration work to his Chinese vendor, and he’s trying to do it with some support for Nypro’s European data centers.

But MacKenty has found another obstacle to offloading certain lower-value tasks to Objectiva: the lack of specific skills. Mac-Kenty is interested in sending some Cobol and AS/400 work over there, “but all the recent grads in China are skilled in the ’latest and greatest’ Web technologies, not Cobol or AS/400s,” he says.

In the meantime, Objectiva has done maintenance work on applications such as Nypro’s financial and sales reporting tools. MacKenty continues to send Web-based development projects to the outsourcer and could see it expanding to other application development—perhaps. “It depends on demand,” he says. “As we’ve had successful projects, more business units are starting to understand that we have more capacity now, and we’re starting to get a lot more requests for development work.”

MacKenty’s experience bears out what experts say about outsourcing to China today, that salability and value chain growth will take time. But, according to NeoIT, the overall attractiveness of China as an offshore location should grow within three to five years with the support of the Chinese government. (For more details on China’s IT services market, see “The 411 on China,”)

MacKenty expects to be there to find out if it does. His contract with Objectiva ends in 2007. At that point, MacKenty would consider buying his team of Chinese workers from Objectiva to start Nypro’s own offshore center. In fact, says Tulloch, such rent-to-own arrangements, called “build-operate-transfer” provisions, are common in offshore outsourcing contracts.

All the effort required to make the outsourcing work has been worth it, MacKenty says. Although he’s quick to point out that cost savings on salaries are reduced somewhat by internal investments made in managing the relationship, MacKenty estimates the IT workers at Objectiva get about 20 cents on the dollar compared to his U.S.-based employees.

Second, he says, it has been a great learning experience—and a necessary one. “We are a global company, and there’s some recognition that you can’t support the entire world from Clinton, Mass.,” says MacKenty, noting that Nypro has operations in 18 countries.

Based on his experience, he says, offshoring to China has the potential to work for CIOs whose companies have no presence in China at all. “If you have the resources to do the front-end requirements and design well, and are mature enough from a process standpoint, you’re a good candidate,” says MacKenty.

If an IT leader and his staff are willing to put in the effort required, China may be a viable alternative to India for certain levels and types of IT work today. And, perhaps, even more in the years to come.

Send your outsourcing experiences to Senior Editor Stephanie Overby at soverby@cio.com.