Even entrepreneurs who understand China are getting burned
By now, entrepreneurs who are considering outsourcing their manufacturing to China are aware of the risks: quality problems, postponed deliveries, and the ever-present intellectual-property theft, for starters. A big part of the problem is that U.S. entrepreneurs understand neither the language nor the way business is done in China.
Or so the story goes. But Edward Wu's experience suggests otherwise. Wu is vice-president of Aminco International USA, a 40-employee, $5 million Lake Forest (Calif.) company that makes commemorative pins and other accessories. He's fluent in Mandarin. His Taiwanese mother and his father, born in Mainland China, run the business with Wu and have broad family and social networks there.
A decade ago Aminco moved its manufacturing from Taiwan to China, decreasing production costs by about 20%. Then, about three years ago, Wu began seeing knockoffs of his products—with lower price tags—at conventions and trade shows in the U.S. He says the goods were manufactured by one of Aminco's factories (which he won't name). "We confronted them," says Wu. "They basically gave us some excuses and did not do anything about it." Wu understood that there was little he could do. The factory had simply bypassed him.
Despite efforts by the Chinese government to rein in counterfeiting, experts say manufacturers there can undercut their clients by producing similar products at cheaper prices in as little as two years. And Chinese American entrepreneurs have less of an advantage than one might expect. While they may initially get a leg up, economic factors soon trump everything else. "The Chinese American-owned business that goes to China may get to first base quicker...but the intellectual-piracy issues will not lessen," says Clarence Kwan, national managing partner of Deloitte & Touche's USA Chinese Services Group.
Sometimes a tough negotiating stance can backfire. "If the relationship is not 100% ideal to the Chinese manufacturer, and the margin the U.S. company affords them is slim, the manufacturer knows the enforcement of intellectual-property protection is not very strong," says former small business consultant Michael Chu, whose Web site, ChinaStar101.com, manages travel for entrepreneurs in China.
Piracy needn't be a deterrent to working in China. In 2000, Logic Solutions, a 45-employee, $6 million Ann Arbor (Mich.) software maker, contracted some software development to novice coders in Nanjing. By the time Logic set up its own facility in China years later, the programmers it had trained were working for a U.S. competitor. "I can tell you absolutely we understand how they work, and all of the cultural things, much better than our white-owned counterparts," says Grace Lee, the company's Chinese American CFO. She considers defections just another cost of doing business. The same thing, she says, happens in the U.S.: Think about what happened in the early '80s, when IBM hired Bill Gates to design the operating system for its new PCs.
2/17/2007
Nanjing to welcome Indian software giant
India's fourth-largest software enterprise, Satyam Computer Services Ltd., has announced it will create a branch company in Nanjing, capital city of east China's Jiangsu Province.
Operating out of Nanjing Software Park in the city's New and High Technology Industry Development Zone, the software outsourcing firm will recruit 2,500 software engineers and should see annual sales increase by over 10 billion yuan (US$1.3 billion).
Qi Lu, an administrative official in the zone, on Sunday said that the new Satyam branch would both increase competitiveness among local software firms and serve to attract more Indian and other international software giants to Nanjing.
The campus-style park provides lodging and other amenities, and is set to attract over 300 software companies, Qi added.
V. Murali, Senior Vice President of Satyam Corporate Headquarters, said: "China is destined to become the world's No.2 outsourcing base, next only to India, and we are confident about the market there."
Nanjing Software Park, approved by the Ministry of Science and Technology as a "Torch Plan" software industrial base, has so far met with encouraging success, attracting 240 software companies with over 13,000 workers.
Nanjing is Satyam's fifth foray in China, joining its branches in Shanghai, Beijing, Shenzhen and Dalian.
In 2006, Satyam generated worldwide sales revenue of over US$1.5 billion from software and IT services.
Operating out of Nanjing Software Park in the city's New and High Technology Industry Development Zone, the software outsourcing firm will recruit 2,500 software engineers and should see annual sales increase by over 10 billion yuan (US$1.3 billion).
Qi Lu, an administrative official in the zone, on Sunday said that the new Satyam branch would both increase competitiveness among local software firms and serve to attract more Indian and other international software giants to Nanjing.
The campus-style park provides lodging and other amenities, and is set to attract over 300 software companies, Qi added.
V. Murali, Senior Vice President of Satyam Corporate Headquarters, said: "China is destined to become the world's No.2 outsourcing base, next only to India, and we are confident about the market there."
Nanjing Software Park, approved by the Ministry of Science and Technology as a "Torch Plan" software industrial base, has so far met with encouraging success, attracting 240 software companies with over 13,000 workers.
Nanjing is Satyam's fifth foray in China, joining its branches in Shanghai, Beijing, Shenzhen and Dalian.
In 2006, Satyam generated worldwide sales revenue of over US$1.5 billion from software and IT services.
THOLONS announces services globalisation trends for 2007
Services globalisation is now a key strategic imperative for successful enterprises and will be the single most important factor shaping how services are developed and delivered across the globe. Globalisation has evolved from individual companies leveraging a few resources offshore to countries now vying to be the next destination for technology and business process outsourcing.
The 10 key future trends for 2007 are:
* SMEs driven by private equity investors will become significant participants in services globalisation.
Tholons report states that the year 2007 will be that of SMEs, who will play a significant role in the services globalisation arena. Anticipating the next wave, Private Equity (PE) investors, who are flush with funds, are all set to power the SMEs by investing up to $5 billion in the Indian market to fund the expansion plans of Business Process Outsourcing (BPO) and Knowledge Process Outsourcing (KPO) firms.
* Firms will adopt the “Cities of Excellence” model, sourcing services from the best location for respective ITO and BPO domains
Cities such as Prague, Halifax, Budapest, Warsaw, Pune, and Bucharest are already centers for outsourcing but they are becoming more expensive and less differentiated. As a result, other cities such as Bratislava, Ho Chi Minh City, Kolkata, Xi’an, Buenos Aires, Krakow, Colombo, Dubai and Sofia are on their way to becoming centers of outsourcing in 2007.
* Multi-sourcing will dominate as mega-deals will be sourced to a mix of Tier I and “best of breed” Tier II service providers
Many of the large contracts that are up for renewal in 2007 will be restructured considering multi-sourcing. Organisations will have a preferred set of service providers comprised of large tier I and “best of breed” tier II providers and niche tier III suppliers. The number of small to medium-sized contracts (those worth $50-$200 million) will see a significant increase when compared to previous years. The trend now is toward more contracts that are smaller in size with specific function, which will in turn lead to multiple providers.
* ITO and BPO growth will be supply constrained in an extremely strong demand market
Due to changing market dynamism service providers with predominantly onshore delivery capabilities are facing significant challenges because clients now want a significant part of their outsourcing to be handled from offshore locations. Service providers would start executing starkly different strategies to emerge as leading global service providers. Onshore service providers will continue to expand globally in their search for cost optimisation and to cater to the huge demand, while offshore service providers will grow their business both organically and inorganically. And finally, market leaders in the industry will be shaped by their execution capabilities and their ability to scale up to meet the massive demand of services globalisation.
* Globally service providers will witness a significant resource crunch
In the coming years, India, the Philippines and China will face shortage of talent pool as there would be a significant increase for ITO and BPO services globally. The emergence of more players in this arena would give rise to wage inflation and higher attrition rate.
* Engineering Services, R&D, ERP, Infrastructure Management, Product Development and Healthcare will see increased traction in 2007
In the rapidly expanding ITO and BPO industry, there are a few sectors that are expanding more rapidly than others. These are sectors that will witness growth rates beyond the industry average. Engineering and R&D services specifically will form a significant part of many service providers revenues and will also contribute significantly to the total outsourcing market. Adoption of globalisation in Europe will accelerate resulting in strong demand.
* Captives will see heightened activity in 2007, with parent companies considering spin-offs to cash out
Of the estimated 700 BPO companies in India and Philippines, 65 percent are captive and 35 percent are third-party vendors. More captives will be established in 2007 with the demand from the global SME segment increasing. This trend will continue in niche areas for reasons of skill availability, intellectual property and information security issues.
Over the years, many suppliers have developed skill sets in general processes and improved upon them. One reason for multinational companies to sell is that there are big global outsourcing firms that can now easily handle their needs, so maintaining an in-house unit simply doesn’t make sense. To cash in on the opportunities, British Airways sold its captive unit in 2002, while Capgemini bought out Unilever’s majority stake in Indigo, a captive finance and accounting services BPO. Similar deals are in pipeline.
* Offshoring of customer-facing processes will slow down, and some may move back onshore or nearshore
During 2007, Tholons foresees a trend where companies that have tasted success in moving higher end processes overseas will try to increase the speed of outsourcing for these services.
Many companies will move beyond the hype cycle that surrounded globalisation and start rationalisation of their portfolios for onshore – offshore delivery.
* Tier II and Tier III service providers will spread their global footprint acquisitions
For the last few years, most of the Tier-I offshore service providers have been rapidly expanding globally. In 2007, tier-II and tier-III service providers will aggressively scout to expand inorganically and will look at expanding their services to countries outside their home base.
2007 will see service providers undertaking M&A to acquire delivery capabilities, specifically in complimentary markets such as the Philippines, Vietnam and the emerging economies of Eastern Europe. Service providers from these economies will actively make acquisitions in India as India emerges as a must have destination for client market (US, Europe etc.) access.
India will continue to be the leading destination for ITO and BPO. Philippines will be a strong but a distant second while China will trail behind for next several years.
While 2007 will see India’s stature as the world’s back office growing, the Philippines will evolve as the preferred destination for offshoring customer-facing jobs based on the benefits of cost reduction, manpower availability, and quality that it brings to global organisations. Some important factors that might work in favor of Philippines include factors such as a committed and highly trainable workforce, strong cultural affinity with the west, and the expansion of existing BPO firms.
China has challenges with english language fluency, cultural implications and Intellectual Property Rights (IPR). They have a lot of work to do to catch up, so it will be several years before Chinese services companies make their mark on the global ITO and BPO landscape.
The 10 key future trends for 2007 are:
* SMEs driven by private equity investors will become significant participants in services globalisation.
Tholons report states that the year 2007 will be that of SMEs, who will play a significant role in the services globalisation arena. Anticipating the next wave, Private Equity (PE) investors, who are flush with funds, are all set to power the SMEs by investing up to $5 billion in the Indian market to fund the expansion plans of Business Process Outsourcing (BPO) and Knowledge Process Outsourcing (KPO) firms.
* Firms will adopt the “Cities of Excellence” model, sourcing services from the best location for respective ITO and BPO domains
Cities such as Prague, Halifax, Budapest, Warsaw, Pune, and Bucharest are already centers for outsourcing but they are becoming more expensive and less differentiated. As a result, other cities such as Bratislava, Ho Chi Minh City, Kolkata, Xi’an, Buenos Aires, Krakow, Colombo, Dubai and Sofia are on their way to becoming centers of outsourcing in 2007.
* Multi-sourcing will dominate as mega-deals will be sourced to a mix of Tier I and “best of breed” Tier II service providers
Many of the large contracts that are up for renewal in 2007 will be restructured considering multi-sourcing. Organisations will have a preferred set of service providers comprised of large tier I and “best of breed” tier II providers and niche tier III suppliers. The number of small to medium-sized contracts (those worth $50-$200 million) will see a significant increase when compared to previous years. The trend now is toward more contracts that are smaller in size with specific function, which will in turn lead to multiple providers.
* ITO and BPO growth will be supply constrained in an extremely strong demand market
Due to changing market dynamism service providers with predominantly onshore delivery capabilities are facing significant challenges because clients now want a significant part of their outsourcing to be handled from offshore locations. Service providers would start executing starkly different strategies to emerge as leading global service providers. Onshore service providers will continue to expand globally in their search for cost optimisation and to cater to the huge demand, while offshore service providers will grow their business both organically and inorganically. And finally, market leaders in the industry will be shaped by their execution capabilities and their ability to scale up to meet the massive demand of services globalisation.
* Globally service providers will witness a significant resource crunch
In the coming years, India, the Philippines and China will face shortage of talent pool as there would be a significant increase for ITO and BPO services globally. The emergence of more players in this arena would give rise to wage inflation and higher attrition rate.
* Engineering Services, R&D, ERP, Infrastructure Management, Product Development and Healthcare will see increased traction in 2007
In the rapidly expanding ITO and BPO industry, there are a few sectors that are expanding more rapidly than others. These are sectors that will witness growth rates beyond the industry average. Engineering and R&D services specifically will form a significant part of many service providers revenues and will also contribute significantly to the total outsourcing market. Adoption of globalisation in Europe will accelerate resulting in strong demand.
* Captives will see heightened activity in 2007, with parent companies considering spin-offs to cash out
Of the estimated 700 BPO companies in India and Philippines, 65 percent are captive and 35 percent are third-party vendors. More captives will be established in 2007 with the demand from the global SME segment increasing. This trend will continue in niche areas for reasons of skill availability, intellectual property and information security issues.
Over the years, many suppliers have developed skill sets in general processes and improved upon them. One reason for multinational companies to sell is that there are big global outsourcing firms that can now easily handle their needs, so maintaining an in-house unit simply doesn’t make sense. To cash in on the opportunities, British Airways sold its captive unit in 2002, while Capgemini bought out Unilever’s majority stake in Indigo, a captive finance and accounting services BPO. Similar deals are in pipeline.
* Offshoring of customer-facing processes will slow down, and some may move back onshore or nearshore
During 2007, Tholons foresees a trend where companies that have tasted success in moving higher end processes overseas will try to increase the speed of outsourcing for these services.
Many companies will move beyond the hype cycle that surrounded globalisation and start rationalisation of their portfolios for onshore – offshore delivery.
* Tier II and Tier III service providers will spread their global footprint acquisitions
For the last few years, most of the Tier-I offshore service providers have been rapidly expanding globally. In 2007, tier-II and tier-III service providers will aggressively scout to expand inorganically and will look at expanding their services to countries outside their home base.
2007 will see service providers undertaking M&A to acquire delivery capabilities, specifically in complimentary markets such as the Philippines, Vietnam and the emerging economies of Eastern Europe. Service providers from these economies will actively make acquisitions in India as India emerges as a must have destination for client market (US, Europe etc.) access.
India will continue to be the leading destination for ITO and BPO. Philippines will be a strong but a distant second while China will trail behind for next several years.
While 2007 will see India’s stature as the world’s back office growing, the Philippines will evolve as the preferred destination for offshoring customer-facing jobs based on the benefits of cost reduction, manpower availability, and quality that it brings to global organisations. Some important factors that might work in favor of Philippines include factors such as a committed and highly trainable workforce, strong cultural affinity with the west, and the expansion of existing BPO firms.
China has challenges with english language fluency, cultural implications and Intellectual Property Rights (IPR). They have a lot of work to do to catch up, so it will be several years before Chinese services companies make their mark on the global ITO and BPO landscape.
China Shakes the World: The Rise of a Hungry Nation
By James Kynge, London, Weidenfeld & Nicolson, 2006.
Decades ago after the Bolshevik Revolution, a well-known journalist visited Soviet Russia and concluded famously, "I have seen the future and it works." Now as the 21st century dawns, the leading correspondent for London’s Financial Times has visited China and returned profoundly shaken, mumbling figuratively "I’ve seen the future and it is frightening." He is fearful that China’s rise spells ill for the destiny of imperialism worldwide.
It is well, in any case, to juxtapose the former Soviet Union with China since in explicating the demise of the former, the role of the latter—particularly after the infamous journey some 35 years ago to Beijing by then President Richard M. Nixon---was critical. But, as it turns out, future historians will no doubt view the U.S. entente with China as one of the most transformative alliances since France aided the struggling rebels in North America defeat the British Empire or since London allied with Tokyo at the beginning of the previous century in order to—supposedly—guarantee British interests in Asia. For the opening of China to inward investment from the U.S., Europe and Japan has served to create what may turn out to be this century’s juggernaut with titanic consequences for white supremacy, imperialism and world socialism alike.
The author first traveled to China in 1982 as an undergraduate student where he learned to speak the language and has spent about two decades there and is, thus, well-positioned to assess its progress. His book consists mostly of striking vignettes and intriguing word pictures of contemporary China. He has concluded that "China’s ascent now mirrors that of the U.S. in the second half of the nineteenth century." As he sees it, China’s rise represents "a challenge unprecedented in the annals of global capitalism." As he sees it, "in many areas of manufacturing, European [and North American] companies cannot compete in the longer run—no matter what countermeasures they…may take." The author concludes, "it is, in fact, difficult to think of an area of technology in which China does not have credible ambitions to lead the world." China, he argues, "can drive down the average level of working wages and the prices of manufactured products worldwide, while propelling the prices of most sources of energy and commodities through the roof."
Unfortunately, the author ascribes many of the problems now befalling the working class in Europe and North America to the rise of China, as opposed to the rapaciousness of the bourgeoisie. "The McKinsey Global Institute," he says, "in a global study on outsourcing, has calculated that 9.6 million U.S. service jobs could theoretically be sent offshore today. If that was actually to happen, the U.S. unemployment rate would rise to 11.4 per cent from 5 per cent in mid 2005…..these trends taken together foreshadow a political crisis," responsibility for which he lays at China’s doorstep.
But a close reading of the author’s own words belie this questionable hypothesis. For example, he notes in passing in 2004 "participation numbers at the annual international Science and Engineering Fair run by Intel, the U.S. semiconductor company," reveal that "in the U.S., 65,000 students participated in local fairs to select finalists. In China, six million did." Now should Beijing be blamed because the U.S. ruling elite in its tax-cutting mania and its blatant racism refuses to spend wisely on public education?
Slowly but surely bourgeois commentators are coming to have increasing doubts about the rise of China and what led to it. There is an "uncomfortable paradox," says the author: "China owes its emergence in large part to the free-trade system created by America since the war, but in many ways it is still not a creature of that system. In several aspects, its economy, political system, culture, military posture and values are different from most of the other nations that have reached maturity under the Pax Americana."
Like many in Washington and Brussels, the author is concerned with China’s foreign policy, its developing ties with Russia, Venezuela, Zimbabwe, Sudan, Iran, and other regimes that the international bourgeoisie finds distasteful. He is concerned about the rising levels of Chinese investment in North America and Western Europe, as Beijing has "flipped the script." More than this, however, is the dawning realization that—unlike the recent past—world imperialism may be incapable of doing anything meaningful about China at this late date. This is so not least because of a factor that the author fails to stress: the central bank in China has accumulated a hoard of foreign currencies, worth a whopping $1 trillion at last count, and has been loaning this capital to the guardian protector of world imperialism in Washington, which has been forced to borrow because of its obscene profligacy in military spending and, again, its tax cutting mania. The financial dependence of the U.S. on China tremendously constrains the latitude of imperialism generally.
Thus, one closes this book with mixed feelings: it is well worth reading because of the colorful eyewitness descriptions of what is unfolding in the planet’s most populous nation but, like others before him, the author does not come to grips with the unavoidable fact that the long-time, long-term policy of anti-Sovietism—which drove the opening to China—may, ironically, have sealed the gloomy fate of world imperialism.
Decades ago after the Bolshevik Revolution, a well-known journalist visited Soviet Russia and concluded famously, "I have seen the future and it works." Now as the 21st century dawns, the leading correspondent for London’s Financial Times has visited China and returned profoundly shaken, mumbling figuratively "I’ve seen the future and it is frightening." He is fearful that China’s rise spells ill for the destiny of imperialism worldwide.
It is well, in any case, to juxtapose the former Soviet Union with China since in explicating the demise of the former, the role of the latter—particularly after the infamous journey some 35 years ago to Beijing by then President Richard M. Nixon---was critical. But, as it turns out, future historians will no doubt view the U.S. entente with China as one of the most transformative alliances since France aided the struggling rebels in North America defeat the British Empire or since London allied with Tokyo at the beginning of the previous century in order to—supposedly—guarantee British interests in Asia. For the opening of China to inward investment from the U.S., Europe and Japan has served to create what may turn out to be this century’s juggernaut with titanic consequences for white supremacy, imperialism and world socialism alike.
The author first traveled to China in 1982 as an undergraduate student where he learned to speak the language and has spent about two decades there and is, thus, well-positioned to assess its progress. His book consists mostly of striking vignettes and intriguing word pictures of contemporary China. He has concluded that "China’s ascent now mirrors that of the U.S. in the second half of the nineteenth century." As he sees it, China’s rise represents "a challenge unprecedented in the annals of global capitalism." As he sees it, "in many areas of manufacturing, European [and North American] companies cannot compete in the longer run—no matter what countermeasures they…may take." The author concludes, "it is, in fact, difficult to think of an area of technology in which China does not have credible ambitions to lead the world." China, he argues, "can drive down the average level of working wages and the prices of manufactured products worldwide, while propelling the prices of most sources of energy and commodities through the roof."
Unfortunately, the author ascribes many of the problems now befalling the working class in Europe and North America to the rise of China, as opposed to the rapaciousness of the bourgeoisie. "The McKinsey Global Institute," he says, "in a global study on outsourcing, has calculated that 9.6 million U.S. service jobs could theoretically be sent offshore today. If that was actually to happen, the U.S. unemployment rate would rise to 11.4 per cent from 5 per cent in mid 2005…..these trends taken together foreshadow a political crisis," responsibility for which he lays at China’s doorstep.
But a close reading of the author’s own words belie this questionable hypothesis. For example, he notes in passing in 2004 "participation numbers at the annual international Science and Engineering Fair run by Intel, the U.S. semiconductor company," reveal that "in the U.S., 65,000 students participated in local fairs to select finalists. In China, six million did." Now should Beijing be blamed because the U.S. ruling elite in its tax-cutting mania and its blatant racism refuses to spend wisely on public education?
Slowly but surely bourgeois commentators are coming to have increasing doubts about the rise of China and what led to it. There is an "uncomfortable paradox," says the author: "China owes its emergence in large part to the free-trade system created by America since the war, but in many ways it is still not a creature of that system. In several aspects, its economy, political system, culture, military posture and values are different from most of the other nations that have reached maturity under the Pax Americana."
Like many in Washington and Brussels, the author is concerned with China’s foreign policy, its developing ties with Russia, Venezuela, Zimbabwe, Sudan, Iran, and other regimes that the international bourgeoisie finds distasteful. He is concerned about the rising levels of Chinese investment in North America and Western Europe, as Beijing has "flipped the script." More than this, however, is the dawning realization that—unlike the recent past—world imperialism may be incapable of doing anything meaningful about China at this late date. This is so not least because of a factor that the author fails to stress: the central bank in China has accumulated a hoard of foreign currencies, worth a whopping $1 trillion at last count, and has been loaning this capital to the guardian protector of world imperialism in Washington, which has been forced to borrow because of its obscene profligacy in military spending and, again, its tax cutting mania. The financial dependence of the U.S. on China tremendously constrains the latitude of imperialism generally.
Thus, one closes this book with mixed feelings: it is well worth reading because of the colorful eyewitness descriptions of what is unfolding in the planet’s most populous nation but, like others before him, the author does not come to grips with the unavoidable fact that the long-time, long-term policy of anti-Sovietism—which drove the opening to China—may, ironically, have sealed the gloomy fate of world imperialism.
Tata Launches Outsourcing Group in China
India’s largest software and services outsourcer, Tata Consultancy Services (TCS), on Tuesday inaugurated its outsourcing joint venture in China, which is likely to have Microsoft as a minority investor.
The joint venture, first announced in 2005, has TCS as a majority partner holding 65 percent of the equity, and three Chinese partners, including two software parks, holding 25 percent. Microsoft is expected to pick up 10 percent of the equity in the company, TCS said.
The joint venture operates at the Beijing Zhongguancun Software Park, and will address the domestic Chinese market and global markets. The software parks investing in the joint venture are Beijing Zhongguancun Software Park Development and the Tianjin Huayuan Software Park Construction and Development Co. The third partner in the joint venture is a software company, Uniware in Beijing.
The cooperative project has been initiated and supported by China’s National Development and Reforms Commission.
TCS and its Indian competitors, such as Infosys Technologies and Satyam Computer Services, already have software development facilities in China. Indian outsourcers are expanding in China both to service the Chinese operations of multinational companies and to target the domestic market, and neighboring markets like Japan.
China has also invited Indian companies to set up operations there to help develop its own software and services outsourcing industry.
By being part of a joint venture steered by a Chinese government agency, TCS may have an edge over Indian competitors for government business. The company announced Tuesday that it bagged an order to implement a currency trading system for China Foreign Exchange Trade System, an arm of the People’s Bank of China, the country’s central bank.
The joint venture, first announced in 2005, has TCS as a majority partner holding 65 percent of the equity, and three Chinese partners, including two software parks, holding 25 percent. Microsoft is expected to pick up 10 percent of the equity in the company, TCS said.
The joint venture operates at the Beijing Zhongguancun Software Park, and will address the domestic Chinese market and global markets. The software parks investing in the joint venture are Beijing Zhongguancun Software Park Development and the Tianjin Huayuan Software Park Construction and Development Co. The third partner in the joint venture is a software company, Uniware in Beijing.
The cooperative project has been initiated and supported by China’s National Development and Reforms Commission.
TCS and its Indian competitors, such as Infosys Technologies and Satyam Computer Services, already have software development facilities in China. Indian outsourcers are expanding in China both to service the Chinese operations of multinational companies and to target the domestic market, and neighboring markets like Japan.
China has also invited Indian companies to set up operations there to help develop its own software and services outsourcing industry.
By being part of a joint venture steered by a Chinese government agency, TCS may have an edge over Indian competitors for government business. The company announced Tuesday that it bagged an order to implement a currency trading system for China Foreign Exchange Trade System, an arm of the People’s Bank of China, the country’s central bank.
Managing Risks for Rewards: The Case of Outsourcing Innovation - New Proposal Submited
Organizations face a daunting challenge in managing the risks associated with the outsourcing of innovation. Most organizations have realized that they cannot reach business goals by conducting all activities internally. Cooperating with business partners and leveraging the know-how found in an organization's midst is a salient determinant of competitive successes. Many organizations struggle to increase the intensity and success of partnerships.
When organizations outsourced only manufacturing, business partners simply assembled raw materials. Business partnerships then moved to simple knowledge work, as was the case when the outsourcing of software development and IS maintenance efforts became popular in the mid-1980s. Today, leading organizations rely on their business partners for innovation and process goals. The outsourcing of innovation involves engaging with business partners in ways that are significantly binding and have strategic implications.
In all the above cases, we notice several interesting things – (1) in innovation-based outsourcing programs both parties are engaged in developing novel products and services, (2) the chances of the two parties successfully meeting their objectives is very low as the project space is undefined and new, with a greater chance of failure, (3) these alliances are premised on the fact that both parties will gain, and if they gain will share the rents and royalties, and (4) the knowledge sharing and intellectual property issues within (and around) these alliances is emerging and sometimes indeterminate.
This research project aims to examine the issues surrounding the management of innovation outsourcing programs. In particular, we seek answers to the following questions:
1. How do organizations make decisions to engage in the outsourcing of innovation? To this end, we will seek to evaluate the various methods that are used by organizations to identify critical areas, capabilities, and spaces for outsourcing. Research into the goals and objectives of outsourcing for innovation can inform executives about potentials for alignment of goals and objectives with outsourcing partners.
2. How do organizations choose business partners for the outsourcing of innovation? This type of partnership is different from finding a business partner for traditional outsourcing efforts, e.g. the sourcing of manufacturing or well-defined knowledge work. Outsourcing of innovation requires finding business partners who have specialized knowledge in a given arena, and business partners who can work in concert with an organization to come up with new products and services.
Being able to manage risks becomes critical here. A traditional, established organization might seem to be less risky, but the value of such an engagement may not be high. Larger firms may be predisposed towards economies of scale, and may not be interested in tailoring efforts to meet the specifics of the organization. On the other hand, an upcoming firm might be riskier, but the rewards might be higher.
3. How do organizations manage issues surrounding the governance of innovation? Issues here include the development of robust knowledge sharing programs that capture all of the information needed to implement and refine innovations that emerge from outside the organization. Furthermore, what are the procedures in place to secure intellectual property during these outsourcing transactions? Finally, what are the models used to share rewards, costs and incentives with business partners?
4. How do organizations manage their portfolio of relationships? Most organizations have multiple relationships and the management of these can be quite tricky. How do organizations develop models to manage these relationships? Some organizations have created an Office of Alliance Management (e.g. Eli Lilly), while others decentralize the management of relationships to functional groups.
5. How do organizations manage the risks associated with outsourcing of innovation? While the outsourcing of innovation has many benefits, it has an equal amount of risks. For instance, what happens if an organization realizes that the business partner has not lived up to expectations? How are issues surrounding new product development managed? What about the case where a business partner acts with guile and compromises the organization’s intellectual assets?
6. What are the critical success factors and drivers behind successful management of outsourcing programs? Are any of the five issues discussed above crucial to all outsourcing for innovation programs? What differences exist in successful outsourcing for innovation, and can we explain those differences based on the data? The ability to scale innovation projects and to sustain long-term business advantages through this kind of innovation requires an understanding of management processes for outsourcing for innovation.
When organizations outsourced only manufacturing, business partners simply assembled raw materials. Business partnerships then moved to simple knowledge work, as was the case when the outsourcing of software development and IS maintenance efforts became popular in the mid-1980s. Today, leading organizations rely on their business partners for innovation and process goals. The outsourcing of innovation involves engaging with business partners in ways that are significantly binding and have strategic implications.
In all the above cases, we notice several interesting things – (1) in innovation-based outsourcing programs both parties are engaged in developing novel products and services, (2) the chances of the two parties successfully meeting their objectives is very low as the project space is undefined and new, with a greater chance of failure, (3) these alliances are premised on the fact that both parties will gain, and if they gain will share the rents and royalties, and (4) the knowledge sharing and intellectual property issues within (and around) these alliances is emerging and sometimes indeterminate.
This research project aims to examine the issues surrounding the management of innovation outsourcing programs. In particular, we seek answers to the following questions:
1. How do organizations make decisions to engage in the outsourcing of innovation? To this end, we will seek to evaluate the various methods that are used by organizations to identify critical areas, capabilities, and spaces for outsourcing. Research into the goals and objectives of outsourcing for innovation can inform executives about potentials for alignment of goals and objectives with outsourcing partners.
2. How do organizations choose business partners for the outsourcing of innovation? This type of partnership is different from finding a business partner for traditional outsourcing efforts, e.g. the sourcing of manufacturing or well-defined knowledge work. Outsourcing of innovation requires finding business partners who have specialized knowledge in a given arena, and business partners who can work in concert with an organization to come up with new products and services.
Being able to manage risks becomes critical here. A traditional, established organization might seem to be less risky, but the value of such an engagement may not be high. Larger firms may be predisposed towards economies of scale, and may not be interested in tailoring efforts to meet the specifics of the organization. On the other hand, an upcoming firm might be riskier, but the rewards might be higher.
3. How do organizations manage issues surrounding the governance of innovation? Issues here include the development of robust knowledge sharing programs that capture all of the information needed to implement and refine innovations that emerge from outside the organization. Furthermore, what are the procedures in place to secure intellectual property during these outsourcing transactions? Finally, what are the models used to share rewards, costs and incentives with business partners?
4. How do organizations manage their portfolio of relationships? Most organizations have multiple relationships and the management of these can be quite tricky. How do organizations develop models to manage these relationships? Some organizations have created an Office of Alliance Management (e.g. Eli Lilly), while others decentralize the management of relationships to functional groups.
5. How do organizations manage the risks associated with outsourcing of innovation? While the outsourcing of innovation has many benefits, it has an equal amount of risks. For instance, what happens if an organization realizes that the business partner has not lived up to expectations? How are issues surrounding new product development managed? What about the case where a business partner acts with guile and compromises the organization’s intellectual assets?
6. What are the critical success factors and drivers behind successful management of outsourcing programs? Are any of the five issues discussed above crucial to all outsourcing for innovation programs? What differences exist in successful outsourcing for innovation, and can we explain those differences based on the data? The ability to scale innovation projects and to sustain long-term business advantages through this kind of innovation requires an understanding of management processes for outsourcing for innovation.
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