4/11/2007

The Evolution of Outsourcing

Outsourcing is still growing but at a much slower rate. CIO UK investigates how the market is changing and what it means for IT leaders.

If CIOs were to believe everything they hear from vendors, they would think that outsourcing had taken over the world and there were no in-house IT departments left. While this patently is not the case, it is true to say that the market is growing steadily and evolving as maturity sets in.

According to the Department of Trade and Industrys Information Security Breaches Survey 2006, about 53 per cent of UK organizations currently outsource some element of their IT operations. In 2005, the total sector in the U.K., which includes business process outsourcing, was valued by Gartner at €14.3 billion (US$19.2 billion) and was forecast to grow at a respectable compound annual growth rate (CAGR) of 7.8 percent over the next few years to be worth €20.9 billion ($28.1 billion) by 2010. CAGR in Western Europe, meanwhile, was predicted to be slightly lower at 7.5 percent, with a market value of €43.5 billion ($58.4 billion) in 2005 rising to €62.5 billion ($84 billion) in three years time. But the 15 percent growth rates that were experienced in the market up until a few years ago are unlikely to return, says Gianluca Tramacere, a research director at Gartner.

Market Slowdown
This is due to two reasons which, on the one hand, are stimulating the continued uptake of outsourcing and, on the other, are reducing contract values. The first of these factors is the increasing use of offshore and nearshore services. These are leading to downward pressure on prices and will keep on doing so.

The second is the growing commoditization of outsourcing provision and involves suppliers coming out with less bespoke and more standardized offerings in a bid to make them simpler and more repeatable in implementation terms. This process is also referred to as the industrialization or productization of services and is expected to develop as an important trend over the years ahead.

It is likewise anticipated to make outsourcing a more affordable option for heads of IT at mid-market companies or even in small ones and so expand the current market.

What's Being Outsourced
As to who is outsourcing what, Katy Ring, research manager for IT outsourcing at analyst firm NelsonHall, indicates that just under 20 percent of UK deals last year were full-scope IT outsourcing ones, although they account for a huge 59 percent of the sector's value because of their size. These were undertaken mainly by organizations in central government and manufacturing, in a bid to cut costs.

A further 45 percent of contracts, meanwhile, covered managed IT infrastructure services, although they comprised only about 30 percent of the total value of the market.

The highest levels of activity took place among local government bodies, mid-size retailers and mid-size insurance companies as they attempted to contain costs and transform their infrastructure.

The remainder, in both volume and monetary terms, was made up of managed services in other areas such as applications and networks and this pattern has remained fairly consistent for the past five years, says Ring.

An example of an organization that sits in the latter category is Arnold Laver Timberworld (ALT), a timber merchant that services the building industry and has 16 branches across the country, employing 800 staff.

Well-Worn Road
Following a review of its business processes in 2005, the company found that to run its fleet of 160 lorries was costing an average of £2 ($3.96) per mile traveled. All too often drivers could not find their desired destination, which led to delays in deliveries. Vehicles were also being used for non-business purposes and theft was an issue. As a result, ALT opted to implement a global positioning system provided under a managed services contract by Thus Mobile Solutions. The aim was to enable transport managers to track the exact location of vehicles at any time with an on-screen map, to monitor where drivers were throughout the day and help them out if they became lost. The information could also be used to update customers as to any schedule changes.

Colin Dean, the organization's corporate systems director, explains why it opted for a managed service: "It was about expertise. We're timber merchants and want to focus on our core business, not other people's. This type of system requires a specialist skill set and is better outsourced." The move has reduced vehicle costs—including fuel, maintenance and the overtime paid to drivers—and improved customer satisfaction rates.

Wise Investment
Edmund Comber, IT security and infrastructure development manager at NM Rothschild & Sons, believes that there is a host of reasons why a large number of organizations choose to go down the managed IT infrastructure services route.

Not least among these are a lack of in-house staff resources and a desire to provide the IT department with clear fixed costs for non-core activities. The merchant investment bank runs a couple of managed services contracts, one with ScanSafe, which supplies Web filtering services to protect staff from spyware and malicious content, and the other with MessageLabs, which provides e-mail filtering. It also has a managed wide area network in place.


"It would take significantly more in-house resource to do this ourselves and there's also the issue of providing 24x7 cover. We need to focus on providing core investment banking systems, not something that is pretty much bread and butter," says Comber. "It makes sense to use other people's expertise and resources because they can probably do it better than us anyway, but at a known fixed cost and with very little risk."

Retaining Control
Nevertheless, he thinks it unlikely that the firm would ever go down the full IT outsourcing route. "For us, managed services in certain areas makes great sense but I don't believe you can simply say that all IT outsourcing is good. A lot of people thought it would make their problems go away but in many instances, it simply presented them with a different set of problems that they were equally unable to manage," he says.

One of the key challenges in this area is managing relationships, while another is specifying the contract in such a way that "things can't be wriggled out of," says Comber.

"Managed services entail signing up to a specific service to provide a specific function so it's not possible for things to go wrong simply for contractual reasons."

Comber acknowledges that there are many factors to take into consideration when evaluating whether outsourcing in its many shapes and forms is right for any given organization. "To some degree, it's a cultural issue but there are also business, financial and technical elements plus resource availability and capability components," he says. "You have to cherry-pick the systems and services that you want to outsource and that will provide a definite, realizable benefit."

The Whole Shebang
One organization that has chosen to go down the full IT outsourcing route—although, unusually, it still owns the majority of its assets—is Devon and Cornwall Constabulary (DCC).

It first made the move in 1993 when there was significant pressure on public authorities to outsource non-core activities. Paul Lea, head of IT and service management at the force, explains: "Our view was that we might as well jump before we were pushed and we had an opportunity to steer where we were going. Our IT service requirements were also going through a significant expansion and we wanted to do things 24x7 so it was easier to provide that via outsourcing rather than recruit more staff."

At the time, the organization hired McDonald Douglas, which later became Northgate Information Solutions, and renewed the contract for three years following another tender in 2001. However, by late 2002, the DCC's requirements had changed quite considerably and the organization began planning to put the contract up for grabs a third time.

It hired an outsourcing consultancy to help out and following a presentation by Aidan Lawes, the then chief executive of the IT Service Management Forum, decided to use the IT Infrastructure Library (ITIL) best practice guidelines for service delivery as a framework. It wanted to make its new contract output rather than resource-based and to run it on that basis.

Coping with Eeemand
This was not least because the original deal was starting to cause the organization budget-planning issues as and when demand changed.

"It meant that if the number of calls to the customer service desk doubled, the number of staff answering them did too so we had to pay for that," says Lea.

"But it was difficult to predict and it was starting to cause us real strain, so one of the key elements that we wanted was cost predictability." The invitation to tender, which was released in July 2004 and took a year and a half to prepare, was broken down into seven streams and the deal was finally awarded to Sungard Vivista, in January 2005. The seven-year contract, which commenced in April that year, included three single-year extensions and Sungard is the primary supplier, although it also sub-contracts some services such as hardware break-fix to other vendors such as 2e2, formerly known as Norsk Data.

The key change is that the focus is now on customer service rather than simply on managing the IT estate. This means that DCC's supplier has an incentive to reduce calls to the help desk by ensuring that the underlying services it provides are reliable, available and that it fixes any faults as quickly as possible.

Making It Work
To make contracts like this work, it is important to bear several factors in mind, says Lea. The first is that strategic control relating to day-to-day operations and future direction is retained in-house. In DCC's case, Lea heads a contract management team of three to handle this contract as well as another large network one with BT and Cable & Wireless. The second is that any relationship is based on communications and trust. For example, the force has agreed on an open-book accounting policy with its outsourcing provider, which means that it examines Sungard's accounts twice a year to ensure transparency and that it is "not making undue profits or losses" as a result of the deal.

It also has meetings to discuss the performance of each of the contract "streams" on a fortnightly basis, "So that practitioners can pick up issues and escalate them through both sides of the organization and keep communications going." If such matters are not resolved or service levels are not being met, they are dealt with at a monthly meeting of more senior personnel, with strategic meetings held every six to eight weeks to review progress.

But, as Lea says: "Its crucial to get the contract right in the first place because everything else flows out of that."

End of an Era
Nonetheless, Ring believes that the day of the IT outsourcing mega-deal is now largely done.

While the public sector may have generated a spending bubble in the U.K. over the last few years, most of these large contracts have now been let and this has taken the heat out of the market. "IT outsourcing started calming down at the end of 2005 and is slowing down quite a bit now, but a lot of contracts are being or are on the verge of being renewed. So its not so much that there's lots of new business around as about contracts coming up for renewal," says Ring. This process began last year and is likely to continue for the next couple. But many organizations have learned from past mistakes and are reducing the length of their deals from a previously typical seven to 10 years to, like the DCC, five to seven.

This is mainly due to the lack of flexibility of such contracts explains Alan Rodger, a research analyst at the Butler Group, because "it's simply impossible to know what the business is going to look like in 10 years' time."

Manageable Chunks
But rather than choosing a single large supplier to handle all of their requirements, CIOs are also increasingly breaking their contacts down into smaller chunks and opting for either a lead vendor that handles a range of smaller specialist sub-contractors on their behalf or a range of specialist providers that they manage themselves.

According to Gartner's Tramacere, heads of IT now obtain services from an average of 4.1 outsourcing providers. "These days, customers are looking for selective outsourcing with multiple providers. It's a new trend, signing a big deal with a supplier that says they can do it all isnt considered enough anymore," he says.

"In the past, it was an attractive proposition because the bigger the provider, the more money you could save, but cost savings are less important now," says Tramacere.

Instead CIOs are exploring how they can enhance their skills base and flex it up and down as required, while at the same time provide more adaptable systems and services to the business.

As Tramacere concludes: "In a world where people are looking to increase their competencies and become more flexible, service delivery excellence has simply become more crucial."


Managing the Risks When Outsourcing Offshore

In recent years, increasing numbers of businesses have chosen to outsource their development overseas, for either smaller, defined projects or through a long-term outsourcing partnership model. The main reasons cited for outsourcing include a desire to increase company productivity and efficiency, while simultaneously lowering operating costs in an increasingly competitive economy.

But with outsourcing, whether overseas or locally, comes risks. Five major risks of outsourcing have been identified in recent years:

  • Communication/cultural barriers
  • Misunderstanding of requirements
  • Quality assurance
  • Concerns about intellectual property security
  • Differences in company infrastructure and processes

In this white paper, we will discuss each risk in turn, as well as methods of mitigating the risks when outsourcing overseas.

Introduction

Offshore outsourcing has grown exponentially in recent years. Gartner, Inc., a technology services research firm, estimates that global outsourcing will become a $50 billion industry by the end of 2007. This growth in the sourcing out of either individual projects, or the development of an extensive partnership relationship between a domestic firm and one overseas, has been fueled in large part by the significant cost savings (between 20% and 50%) that are enjoyed by firms that choose to outsource.

But cost savings are only one reason that companies outsource overseas, and in recent years has become less important than other benefits. The number one benefit cited in a recent study1 by Diamond Cluster, an IT research firm, was the freeing up of internal company resources. By outsourcing, a company was able to use their on-site staff more effectively on core business processes. The second most important factor was the ability to access technological skills of a high quality that were unavailable or in insufficient supply in-house, with cost running third.

Why do companies outsource?

  1. Freeing up of company resources to concentrate on core tasks
  2. Access to quality technological talent
  3. Reduction in operating costs
  4. Reduced time-to-market

You may have considered outsourcing for any of these reasons. But you may not be able to enjoy these benefits if problems occur in the outsourcing relationship -- and they can, if risks are not identified.

Basically, risks during outsourced project development are related to three factors:

  • People
  • Processes
  • Policies

By identifying where these risks can occur, and taking steps early to mitigate them, your firm can enjoy an outsourcing relationship that is of high value to all parties involved. In the next section, we will describe what these risks are, and specific steps you can take to address them.

The Most Common Risks Encountered When Outsourcing

If you have concerns about outsourcing, you have plenty of company. When the management of several hundred companies in the U.S. were surveyed recently1, they noted that their primary concerns included:

  • Communication difficulties. This consistently came in as the #1 concern
  • Quality of the development provided
  • Lack of physical proximity to the development teams
  • Concerns about the protection of intellectual property

Many times, managing the risks involves managing the expectations on both sides, to paint a realistic picture of what the outsourcing relationship will look like. From the deliverables that are expected, to the methods used to create source code, you need to know that the firm you are outsourcing to understands clearly your expectations. This is why risk number one is critical: poor communication of project requirements is deadly to any project.

Risk One: Misunderstanding the Requirements

You may have heard managers at other firms complain about the "poor quality code" that they received when outsourcing overseas, or statements that the developers "didn't get it". But in most cases, firms that are outsourced fail to meet expectations not because of inferior ability, but because they misunderstood the project requirements.

The number one risk when outsourcing overseas is poorly defined project requirements. Your company project manager may be tempted to pull together a "quick project overview" or ask that an overseas development team develop a project "on the fly", especially if the deadline for completion is tight. But skimping on documenting the project requirements is a recipe for potential problems further down the line -- and numerous, often costly, change controls.

A development team is often only as good as the project requirements they are given and with good reason. There are many, many different ways to approach developing an application, for many different purposes. Any may be valid, but if you leave this up to chance, the developers may choose a path that you didn't want, causing the project to go "back to the drawing board".

There's a line between creating a massive, overly detailed project specification that takes months to complete, versus a one-page, completely inadequate "project concept". But in general, the more clearly defined your project specifications are from the beginning, the better the vendor project managers will be able to understand what you want done, how you want it done, and be able to implement it.

How important is this stage? A study conducted by the Software Engineering Institute discovered that poorly defined or unclear project requirements are the number one reason why software development projects fail, or are delayed.

Reducing the Risk:

Never force a software vendor to "guess" at what you want built. While engineers are often talented individuals, they are not mind readers, and as mentioned before, there are many different paths to building a product, but not all may be acceptable to you. To avoid disappointment, clearly define your requirements. To reduce the risk related to misunderstanding of the project requirements, it is important to approach the requirements development phase of a project as the most critical to complete, prior to starting development. After development begins is too late, since that "wrong path" may be taken. When you are considering a firm to outsource to, evaluate what processes they have in place for gathering project requirements, and for translating these requirements into system specifications that the developers can use.

Unclear requirements are the #1 one reason that outsourced software projects fail.

  1. Spending extra time on the requirements gathering phase always pays off
  2. Both companies should have designated company contacts throughout the project, for communication
  3. Provide vendors with specifics about the users, load, business requirements and technologies involved

The better vendors will make this as easy as possible on you (or your company's designated contact). They will have a project manager, fluent in English, who will spend time in interviews learning about your requirements, and documenting this for the overseas development team. They will know what questions to ask, and based on their experience, can capture project details and requirements relatively quickly. It will often take several discussion, either on-site (for larger projects) or by phone/teleconference. But it is well worth the time spent.

The vendor project manager will be collecting information to be used during the three steps in creating project requirements:

1) Gathering the Initial User Requirements: prior to creating the system use cases, the vendor project manager will spend time interviewing potential users about the desired features and functionality for the system being built. This includes learning about the business requirements for the completed system, and gathering from your firm the high-level system requirements and user interfaces the system will include.

Many times, the vendor engineers will use these initial requirements to create an initial "mock-up", that will be built upon later, to ensure that the requirements are accurately understood.

During this initial phase, the vendor project manager will document the system requirements and specifications, including any significant project milestones and parameters for performance. It is vital that the vendor captures and documents information about the number of users the software is to support, how quickly operations are to be performed, and how users will actually be using the software.

2) Analyzing the System Requirements: This involves determining the acceptability, ability to implement, and testability of the proposed system.

3) Inspecting Requirements: This involves a comprehensive review of the proposed requirements, with the goal of identifying any issues or errors related to ambiguities or discrepancies discovered in the requirements. Part of this documentation will include a plan for issues tracking, and how issues that occur during project development will be handled.

While the above stages require some time and effort, their importance to a successful outcome when outsourcing cannot be over-emphasized. A strong initial analysis will significantly reduce unexpected project costs. Once this phase is completed, you will have a detailed requirements document, which you and the outsourcing firm will jointly review and sign off on. This becomes the guideline for development, and will provide clearly defined parameters for project development.

Risk Two: Quality Assurance

Even the best development teams create code that has "bugs", which is why quality assurance, whether development is completed onshore or offshore, is important. A major risk when outsourcing to an unknown vendor is whether they have adequate quality assurance/testing processes in place. Waiting for product release to find out what bugs are present is not the best scenario, and taking time to check on the QA processes a vendor uses can reduce this risk.

The three main reasons that quality assurance is not done, or is done inadequately, are:

  • The company outsourced to does not have its own QA/testing team, and assumed that the client would complete this in-house.
  • The project had a very tight deadline, and so QA testing was done rapidly, or set aside to give development a priority.
  • The vendor did not understand fully the system requirements, and so testing did not cover them.

Reducing the Risk

Quality Assurance is Critical

  1. Check that the vendor has its own QA/testing team
  2. Carefully evaluate the vendor's QA processes, including tracking and documentation
  3. Are their standards compatible with your company's?
  4. Test carefully prior to beta release, no matter how "rushed" a project is

One of the first things you will want to evaluate in a possible software vendor is what quality assurance processes they have in place. The better vendors have their own quality assurance team in place that works in conjunction with the developers to implement a test plan for your software.

Things to check include:

  • Is there a system for tracking issues/bugs or system changes in place?
  • What processes are in place for fixing bugs?
  • What standards for monitoring and quality compliance are in place?
  • Do the developers use industry-standard unit tests and regression tests to test each build?
  • Is the software being tested for load, performance, integration and the real world end-user experience? (This last is key).

It is important that test cases, created based upon the carefully documented system requirements mentioned in the previous section, are developed for any software system developed. This can mean the difference between a "great beta" version, or one that is bug-filled.

Once development is completed, the quality assurance team will step in, checking that all functionality, scalability and security issues have been addressed based upon the initial test plan developed from the system requirements gathered. The test plan covers all system regression, load and volume testing, and conduct user acceptance testing, with specific performance criteria for each.

Another way to improve the quality of the completed deliverable is to conduct inspections of the work products. Inspections are detailed technical peer reviews of software designs or implementations. It has been estimated that each hour spent on quality assurance activities, such as design reviews, can save a firm from three to ten hours in downstream costs. You should ask your offshore vendor to conduct inspections at each stage of the development or the maintenance process.

By conducting regular peer review inspections, the vendor will be able to detect and correct defects rapidly in upstream work products. This allows them to better control the costs and prevent schedule delays during the project. For instance, a requirement defect that is left undetected until construction or maintenance will cost fifty to 200 times as much to fix as it would have cost to fix when the system requirements were originally being developed.

Risk Three: Intellectual Property Protection

Your intellectual property is one of your company's greatest assets, and when outsourcing, it is critical to take steps to protect it. Stories abound of unethical companies that have stolen technologies or data, and marketed them, but in most cases, these problems could have been avoided with careful vendor evaluation, and implementing measures to protect your company's intellectual property. This starts with only providing any vendor with only the minimum proprietary technology or data needed to complete the project, and carefully evaluating the confidentiality measures the vendor you have selected has in place.

Be sure to evaluate these policies carefully for both your firm, and the vendor firm. For instance, you'll want to make sure that your own employees understand what corporate information is acceptable to share -- and what is not -- with an outside vendor. This includes the internal rules for authorizing access to company data.

Protect Your IP

  1. Check that the vendor has a documented, enforceable Information Security Management policy in place
  2. Share only necessary information during projects
  3. Clarify licensing and source code ownership

Make sure that the vendor you are outsourcing to has in place clear, enforceable policies for protecting the data you share with them. At the minimum, this includes signing a nondisclosure agreement, a non-compete agreement, and a nonsolicitation agreement, as well as policies that prevent the vendor from creating unauthorized copies of your software or technology. While this may seem straightforward, it can become a bit more complex at times, such as when an outsourced firm uses their proprietary technology, or an Open Source technology, to develop a new product that will be used by your new application. In this situation, it is important to predefine what source code belongs to the vendor, and what belongs to you, the client, and to clarify any licensing issues.

Always insist on clear documentation of all source code created during your project for your software. This becomes your company's property, and is legally protected.

You will want to check with any vendors being considered to see what processes they have in place to protect your confidential data, such as customer and employee information, financial data, or proprietary market research data. If a vendor does not have a documented Information Security Management (ISM) policy in place, you should search elsewhere for a vendor that does.

The better vendors will offer to provide development on a dedicated project and data server, with audit control access for each of the project servers. Some things to check on include:

  • How physically secure is the vendor's facility? Is it secured with smart cards to control physical access?
  • Have all members of the development team signed a confidentiality agreement with your firm?

By finding answers to the above, and implementing them, you will take large steps towards protecting your firm's intellectual property.

Risk Four: Differing Internal Processes

Each vendor will have somewhat unique processes and methodologies that they follow when developing a project. It is important to evaluate how this differs from your in-house processes, and how the two differing approaches can best be "meshed" together during a development project.

It is best if a development project is guided by a well-defined, common software development and project management methodology. The best vendors follow industry standards, such as CMMI and ISO 9001 QMS. This common methodology should cover libraries, tools used, version control and quality assurance processes, as well as security metrics for each project.

Painless Merging of Methodologies

  1. Agree upon a consistent methodology based upon industry "best practices" that your firm and the vendor will follow prior to starting the project
  2. Monitor compliance with the agreed-upon standard
  3. Set up specific times to clarify and answer questions, especially at the outset of any project or outsourcing relationship

Once the process is agreed upon and established, it is equally important that monitoring is in place, to ensure that these processes are being properly followed. Clients should have each project milestone clearly defined, including what deliverables are planned during each phase, with specific deadlines for the completion of each. The client should also have a clear understanding of what their obligations are in regards to reviewing and approving each delivered product, including the requirements documentation, the system design, test cases, and any test issues that arise.

In general, the more involved your company is with the project, the more smoothly the project will go. This is why it is important to have a designated contact within your firm, whose role is to communicate with the vendor project manager and/or development teams. This person, as well as key stakeholders in the project, should be available to review progress reports, review finished deliverables, and be available for telephone conference. If the vendor has questions related to your firm's products and applications, which require answers in order to continue development, your designated company contact is responsible for arranging for the proper technical resources to provide answers.

Your company's project manager or designated contact will need to review the status of any deliverables as well as any testing done, and be available to communicate frequently with the vendor project manager. Most project problems occur to infrequent or poor communication between the firm outsourcing, and the vendor. But the "no news is good news" approach is rarely true; in fact, the opposite will often occur. One of the easiest ways to reduce this risk, and to catch problems early on, is to initiate frequent communication, with regular times specified for project reviews.

Differences in development methodology can occur, if one firm prefers an RUP approach with exacting specifications, while another firm prefers agile methodologies. One firm may have a preferred tool in place for source code control, or for coding standards, or for testing builds. These issues can often be worked out by communicating the reason for each approach, and then choosing a consistent methodology. Most frequently, you will ask the offshore team to adopt your in-house methodologies, but you may be surprised to discover that they have methodologies or tools that equal yours, especially if they have significant experience in a technology. This is where teamwork, and communication between the project and development team managers is critical.

Related to methodologies are evaluating how the firm being outsourced to handles sudden requests for large volumes or rapid delivery. Check on how flexible and scalable your vendor is, and whether they have processes in place for hiring additional staff as required for larger projects. This includes having sufficient project management staff in place to ensure adequate monitoring and communication with your firm. Ask them: "What is the smallest project you have worked on? The largest project?" to help determine whether they can scale to meet your needs. You will also want to check references for projects that are similar to yours.

Risk Five: Communication Barriers

Almost every significant study of outsourcing risks in the past decade has brought up the issue of communication, and the risks associated.

Communication when outsourcing can be a concern because of:

  • English fluency: not all overseas vendors have staff who are native speakers of English
  • Time zone differences: when its 11:00 am in New York City, it's 7 pm in India. This can make it difficult to communicate with overseas vendors, due to time zone differences, unless they have a project manager onshore. Of course, this can also become an advantage: while your company sleeps, an overseas developer can be creating code for your project, enabling "around the clock" coding when coordinated with in-house staff.
  • Cultural differences: In the United States, we tend to be an "ethnocentric" culture, believing that our management and work styles are adopted around the world. In reality, overseas vendors may operate in a very different cultural context, which can lead to misunderstandings.

Reducing the Risk:

When selecting a vendor for outsourcing, it is important to evaluate whether the vendor has in place sufficient onshore staff to facilitate project and relationship management. This includes English fluency, and a strong company commitment to bridge cultural differences.

The better overseas vendors provide services through a best shore methodology, or one that combines a local presence with access to overseas talent. This offers the best of both worlds: clear communication locally from an individual dedicated to understanding your requirements and the ability to discuss these with the "back and forth" that is only possible through face-to-face communication, with the cost savings possible through using offshore talent. This model is the best for overcoming many of the problems often associated with outsourcing.

This domestic office provides a local point of contact for more rapid communication of and resolution of issues that might arise, and demonstrates a higher level of commitment to a personalized relationship when working with clients.

Communication with an overseas development team by phone or teleconference is much easier nowadays, with technologies such as VoIP or online conferencing, that allow you to call overseas at no or minimal cost. Again, your company's designated contacts will want to hold regular review sessions with not only the company project managers, but key members of the development team. This can help establish common ground, and improved understanding of what you hope to accomplish through project development. It also provides the developers with an opportunity to ask question and clarify important points.

The minutes of any teleconference meeting should be recorded, and distributed to all team members after the meeting.

The vendor you select to outsource to should have an established communication plan as part of each project. This will include the following:

  • Regular (minimum, bi-weekly) staff meetings with key project managers and project stakeholders.
  • A weekly project status report (by phone, supplemented by email documentation of the project status). This report should clearly identify any issues or roadblocks encountered, as well as the measures taken. Any questions or points that require clarification by the development team should also be raised in the report.
  • Ad hoc communications by email, chat or phone with your company's designated contact for the project, to ask questions, clarify points, or to notify the contact of any important milestones or issues that have developed.

Open, frequent communication to discover and discuss the risks related to the project and jointly come up with a plan for addressing and constantly monitoring these risks is something that goes a long towards establishing a long-term successful outsourcing partnership.

Summary

Offshore outsourcing provides numerous benefits to firms that choose this option, from improved productivity, to reduced costs. But any outsourcing relationship will have some risks. The major risks identified are related to people, process and communication, as defined within this paper.

The best approach is to acknowledge the risks, and to communicate openly about them in order to create a plan to mitigate potential risks. With careful planning, and evaluation of vendors, you can enjoy an outsourcing experience that is superior, maximizing the benefits and return for your company.

References

1. Weakland, Tom, "2005 Global IT Outsourcing Study," © 2005 DiamondCluster International, Inc.

About the Author

Anil Singh is Founder & CEO of Hanu Software. Anil founded Hanu Software after completing his Master of Science in Information Systems from New York University. Anil has over ten years of experience as a software developer and technical lead at companies including Fujitsu ICIM, and Infosys. He completed his bachelor's degree in Electronics from the Institute of Technology, Banaras Hindu University.

Anil is involved in all facets of Hanu's operations from Business Development to Project Delivery, from Sales & Marketing to Customer Accounts management. Anil is an expert in the Offshore Delivery Model, and he is also author of various software processes used at Hanu Software.

About Hanu Software:

Hanu Software is a global IT consulting and services provider, with corporate business offices located in Princeton, New Jersey and engineering campuses located in Gurgaon, India. Founded in 2002, our firm is dedicated to developing effective outsourcing partnerships with clients in order to reduce their IT costs, improve process management and reduce time-to-market for new product ideas. We provide end-to-end software solutions in a variety of industry verticals, including publishing, finance, real estate, insurance, retail and others.

For more information, please visit our company website at www.HanuSoftware.com.

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JIM PUPLAVA : My guest this week is George Zhibin Gu, author of two new books : 1. China’s global reach ; markets, multinationals, and globalization ; 2. China and the new world order : how entrepreneurship, globalization and borderless business are reshaping China and the world.

George, you grew up in China during a very difficult time, especially during the Cultural Revolution. How has this impacted your thinking today in terms of how you view China ?

GEORGE ZHIBIN GU, PHD : Well, while I was growing up in China, China experienced a cultural revolution, as well as people’s communes in the countryside. It was chaotic, it was characterized by abusive government power which was expanding into everybody’s lives. What is more, it was an entirely closed society. In other words, every citizen had to work for the government to make a living. So the government exactly demanded the servitude of citizens, but today everything has changed fundamentally. So, in my mind two things are most crucial for modern society and progress, that is, having an open society is a must ; secondly, private initiatives - people must rely upon their own efforts for progress and prosperity. That is exactly what has been happening for the last 25 years. This makes all the difference. The third one is that international participation in any country’s development is a necessity, otherwise development slows down tremendously. So, the situation in China and India shows [this is] the case. [3:05]

JIM : You know that was one of the points that you made in your book, that the grand lesson of China is that no nation can truly develop without making itself open to the rest of the world.

GEORGE : That is very true. 500 years ago, Europe became an open society expanding globally. Especially the US, it depended on talents, capital, and technology from the rest of the world. That’s why the US has become a dominating power globally for the last 100 years. Today, China is doing the same thing, relying upon all the resources from around the globe. [3:46]

JIM : You know, one of the great paradoxes as you look at China today is this vast economic progress, but it does not have a new political-economic system in place. Can you explain that ?

GEORGE : Basically, this current reform at an institutional level was initiated by the government. The government wanted to try something different from the previous 30 years. In Mao’s era the government dominated all economic and political spheres - everybody had to work for the government. On the other hand this political structure created a lot of burdens for the government. Therefore the government wanted to shift the burdensome aspects of the business to the society and people. At the same time, government does not like to give up on its traditional power hold on the society, therefore at the institutional level you [will] still see that traditional political framework is still at work. For example, about 70% of China’s business assets are still in government hands. So, this is one fundamental aspect of China’s current reform. However, you see the other trend which is overpowering the government and promoting its political and economic reform, reluctantly or not. [5:24]

JIM : George, in your mind what are the key driving forces behind China’s economic development today ?

GEORGE : Number one, opening up. During the Cultural Revolution, China’s economy was shutdown. It had no economic ties to the outside world whatsoever. So, opening up China has brought new ideas - technical and technology - as well as results, for growth. So, this is the most crucial aspect behind the growth.

Number two is the domestic consumption explosion. For example, 25 years ago China did not have any mobile phones, but today China has about 400 million mobile phone subscribers. Also, 20 years ago China had few television sets, but today almost every urban family has at least one television set, and in the countryside about 50% do. So, therefore China has become the biggest home appliances market really.

Number three is international involvement in 3 areas. The first area is foreign direct investment (FDI). In the last 26 years China has received more than 600 billion US dollars in FDI. This FDI has prompted new growth, especially in the manufacturing area. Number three is international trade. So far, China’s international trade has grown tremendously from next to nothing 25 years ago to one of the top three trading nations today. So, this international trade is another area of growth, but overall the domestic consumption explosion is the foundation. Without it China could not attract foreign capital or international trade. [7:33]

JIM : Now, you state in your book one of the ultimate goals for your country is to become a modern nation ruled by law.

GEORGE : That is true.

JIM : How does that happen given the government structure you have today ?

GEORGE : It’s actually slowly changing. The government has found out that it does not need to apply traditional power to rule over society. Actually, being without the law also brings burdens to the government. For example, in the economic field there are all kinds of disputes among different interest[ed] parties, therefore to resolve such disputes they must apply law, legal procedures in a new way. Therefore we have a lot of legal progress in the economic and business field. Even in the political sphere some new political measures have been introduced. For example, direct vote at the village level has been introduced. That is, at the village level the village leaders are directly elected by their villagers - that’s a new change. And if this trend grows you will see more political changes, especially in the legal and power structure. [8:56]

JIM : Most people would be surprised, even though China is referred to as a developing nation, throughout most of history China has been more advanced in technology, the arts, and social harmony. I wonder if you would give us a little historical background of just exactly how developed China was. I think most people would be really surprised.

GEORGE : For example, about 150 years ago China was the most advanced nation in terms of wealth. At that time, China contributed about 30% of world economic output. 1000 years ago China already had 50 of the biggest cities on a global basis. The biggest city in China at that time was Xian, which already at that time had a population of about 3 million. Also, about 50,000 foreign nationals lived in the city, mostly from Japan, Korea, and the Middle East. Xian was the beginning point for the Silk Road, international trade had Xian as its center. This was about 1000 years ago. [10:27]

JIM : You know, the old China was based around government and agriculture. You’re moving away from that, especially away from government domination. But, you know, the one thing that seems to me that China does, which you don’t see too much, when you think of planning in the future, your government and people there tend to think in decades. Is that how you see this unfolding, it’s something that’s going to take decades before we see a completely open market, a completely open financial system, and less government dominance ?

GEORGE : It’s happening faster than previously thought. For example, even now, international banks are allowed to buy major stakes in Chinese banks. Therefore we have seen a couple of big transactions already happen : one is Bank of America ; another is HSBC buying serious stakes in the top five Chinese banks. This has prompted what I would call a revolution in the Chinese banking system. That is, not only is international capital injected into Chinese banks, but also a lot of managers - we’re talking hundreds of international managers appointed by Bank of America and HSBC - managing Chinese banks on a daily basis. That’s a huge change.

Also, another tremendous change is the emergence of 40 million private entrepreneurs. 25 years ago it was a completely state sector, now we are talking about the state sector retreating to about 50% or less in terms of economic output. The state sector now only contributes about 30%, the rest is from the private sector and the international sector. In terms of industrial output, 2 years ago, International Inc. - as a group - contributed about 31%. That’s a huge market share, we’re talking about a 1/3 market share. So, this international presence, as well as the private sector in China, are altering the Chinese political and economic map - that’s something nobody expected before. [12:56]

JIM : It’s rather ironic as the West moves to more government control, and less freedom, China is moving in the opposite direction.

GEORGE : Right now, China is quickly adopting international practice and standards in all kinds of ways. The only problem is this old government structure which still tries to dominate in the traditional sense. So, institutional progress is [slow]. Other than that the society, the business community and international parties are changing the Chinese traditional life in big ways. So, that is happening really in big ways here. For example, in coastal China in many regions such as Zhejian province, and Jiangsu province neighboring Shanghai, the private sector takes over up to 70% of the local economies. So, government power is [receding] tremendously. [14:06]

JIM : Now, in your book you talk about what makes a lot of this possible today is the emergence of multinationals, which you describe as the modern-day Columbus’ and Magellans. And China, to the multinational company is really the world’s last frontier.

GEORGE : That is true. Right now, we have basically everybody in China from the multinational group. They are active in all aspects of the business sphere, especially autos. They dominate China’s auto market. They are also major players in the mobile phone business, in high tech, in semiconductors. For example, right now, about 20% of the global semiconductor market is in China. So, regardless of which US semiconductor shares you hold, you are investing in China already because 20% of the sales are to China. [15:13]

JIM : George, what makes China attractive to multinationals ?

GEORGE : Basically, there are several reasons. Number one, there is tremendous consumption growth, also better profit margins. Number three, there is a relaxed business environment and sometimes in very odd ways. For example, China does not have Western type labor unions, so employers have plenty of choices in terms of their power over their employee body. And employees don’t have any bargaining chips. That is also a factor. Another factor is the many incentives given by the government such as tax incentives and other privileges. And number three is quick growth for the multinationals which are already playing here, therefore they force their competition to come. For example, all the telecom manufacturing operators are in China. Last year, Nokia did about US$6.9 billion in business in China ; FedEx did even more, about $9 billion in sales in China. Then you also have a lot of other guys - their competition - also the new players coming in, especially in high tech. Therefore, all of them have become the most significant players in China. They have to be here, because right now up to 30% of their sales come from China, directly or indirectly. [17:06]

JIM : Now, in May of 2003 the Chinese government allowed 2 investment banks, Nomura and UBS to trade in the Chinese stock market. George is this a sign of things to come, and initially why only two companies ?

GEORGE : Basically, the Chinese government has a law qualifying foreign institutional investors to play in the domestic market. Initially, they gave about a US$4 billion allowance and you have to go through the selection process. So, in order to attract competition from foreign money managers so every month they gave permits to a couple of players, that’s how Nomura and UBS got the first tickets, but we’re seeing during the last year and a half about 27 UBS competitors such as Morgan Stanley, Goldman Sachs and JP Morgan all got [permission]. So far, they have invested about $4 billion, now they’re putting an additional $6 billion (US) into China’s domestic stock market. So, that’s what’s happening. [18:26]

JIM : I wonder if you might explain how the development of China has become the global manufacturing center has been more of, let’s say, a move by demand than by design.

GEORGE : Yes, that is one of the biggest Chinese growth stories, and nobody expected this to happen 25 years ago. It has come to life more by accident than by design. The initial stage was really a shift to meeting consumer demand for home appliances and electronics. At that time China did not have anything to manufacture on its own. It shared a lot of TV sets from Europe, Japan, and South Korea directly. But those TV sets had high price tags on them. You’re talking about the average Chinese family having to spend up to 10 years of their savings to buy a TV set. This huge profit margin prompted tremendous domestic investment. Immediately, we’re talking about several hundred Chinese TV manufacturers emerging by the mid 1980s. The same thing can be said of other areas of consumer products. The demand was tremendous, that’s because for most of the time China had a tremendous goods shortage for about 3 decades. There was nothing on the shelves. If you wanted to buy a pair of shoes you might have to wait or if you bought a bicycle you needed to find a friend to help you get one. So, there was a tremendous shortage meeting this huge consumer demand which therefore gave birth to the initial setting up of new manufacturing. Once this new manufacturing was set up, then they had to buy all sorts of components and chips. At that time, China couldn’t manufacture them itself, therefore it had to buy them from the overseas market, such as from Intel, Texas Instruments, and IBM, and Motorola. Therefore those international multinationals made huge profits sending their components and chips to China. Later they found out that they had better set up manufacturing facilities within China in order to make better profits. That’s initially how they came 25 years ago. So they were brought by the tremendous profit picture, and immediate business transactions.

Later on, Intel and Texas Instruments’ competition all rushed in. The same thing is true for all other economic sectors. So competition brought more and more multinationals to China. Of course, these multinationals have more economic muscle, they can manufacture almost anything, therefore they have helped to directly expand the growth of China as a manufacturing center. Later on, the Chinese [had] learned a lot from these multinationals, they started manufacturing key components and software and also chips. So, more competition was arriving from every party, but the market is still expanding, therefore the bigger pie is attracting more players to rush in. Therefore we see the emergence of China as a manufacturing center.

We’re also talking about other areas of improvement to facilitate this growth as a manufacturing center. Number one is infrastructure. So, China has become the number two energy market on a global basis. It has built the most power stations over the last 25 years, also roads, ports, as well as the service sector. For example, all the major global shipping companies and express companies are all in China. For example, Federal Express, UPS, and all their competitors are in China. Therefore, China through all such activities has gained all the key elements to build a major global manufacturing center. It came as an accident but by now, it has brought on a rush by everyone else behind. So we might expect a quicker development for services to add to this new manufacturing center. At this time, this manufacturing center is able to produce at low cost as well as efficiently almost all sorts of products, this is the biggest change for China’s economy, as well as for the global economy. [23:50]

JIM : George, there are other places in the world where the labor pool is much cheaper. For example, India and there are other countries. Is it China’s sense of business or its entrepreneurial shift which distinguishes China from the other places in the world ?

GEORGE : Yes, I would say that it’s China’s overall strength that makes China a new business center. If you compare India and China you will see that India’s labor market is cheaper - about 50% cheaper - than China’s. But India’s development is more in the service sector, especially for software consulting and outsourcing. But China’s manufacturing [has advantages over the] Indian one in many aspects. This is because China has built up a complete business chain, for example, India does not have an effective manufacturing base at all. It lacks key component suppliers, it does not have the logistics, it does not have the infrastructure, but China, over the last 26 years has gotten all of them in one place. For example, in consumer electronics you can set up your shop in Guangdong, then you get more than 10,000 component makers. For example, Sony alone has more than [3,000] China based component makers. Here, you need to know that these component makers come from both Chinese companies and multinationals. So, Sony’s 3,000 come from the Chinese, the Japanese, Koreans and Europeans, and American suppliers, always in China - actually, in one province. That’s the kind of effectiveness and efficiency China has, but in India, and even in Europe you don’t have that kind of advantage.

Another advantage is the low price [gap]. These companies rely on cheap labor as well as mass production which can give you the best price, and also delivery at the best time, or any time. Therefore it gives Chinese manufacturing a lot of advantages. This is something India, and many other countries, don’t have. To build up this we are talking maybe about a trillion dollar investment plus all the key players - we’re talking about tens of thousands there from all business sectors. That’s difficult to attract all the elements into one place, within such a short time. Therefore, I call this Chinese manufacturing center an accident rather design. But it is now entering a new phase - with a lot of powerful players and a lot of design coming into play.

Successful 3PL Outsourcing in China


The Challenge of Managing Multiple 3PLs
Outsourcing to 3PLs in China is not a simple exercise. Companies may find that their outsourcing arrangements are not meeting their expectations. Effectively developing and managing 3PL outsourcing relationships in China requires having the capabilities to identify, evaluate, select, and manage multiple 3PL relationships.

The need for outsourcing as a core competency is particularly evident in China since there are no 3PLs offering a true nationwide service. There are more than 700,000 logistics enterprises registered in China. Most of these are small and medium-sized operators. The largest providers have less than a 2% market share and tend to operate on a local or regional level. According to the China Economic Review, Wal-mart China requires 15,000 suppliers to service ~60 stores as compared with Wal-mart US which services 3,800 stores with only 61,000 logistics suppliers.

In order to avoid outsourcing problems companies in China need to work with their partners to:
  • Gather relevant data
  • Clearly identify business objectives, desired outcomes, and potential risks
  • Agree on business principles and roles and responsibilities early during discussions
  • Agree on business outcomes and link service level agreements to outcomes

Outsourcing to China

The Nigerian scammers are selling out, apparently. Michael Leydon wrote me a rather lengthy email that starts:

I am Mr. Michael Leyden, the principal accounting officer of Private Banking Services at the Bank of China (BOC). I am
contacting you concerning our customer and, an investment placed under our banks management 4 years ago.

I would respectfully request that you keep the contents of this mail confidential and respect the integrity of the
information you come by as a result of this mail. I contacted you independently of our investigation and no one is
informed of this communication. I would like to intimate you with certain facts that I believe would be of interest to
you.

In 2002, the subject matter; ref: bb/boc/bank/0012 came to our bank to engage in business discussions with our Private
Banking Services Department. He informed us that he had a financial portfolio of eight million three hundred and fifty
thousand United States Dollars, which he wished to have us turn over (invest) on his behalf.

And it goes on, and on, and on. It’s nice to see the Nigerians are doing so well that they can build 419 factories in China.

China IT Outsourcing Leader, Longtop International, Continues North American Expansion With Acquisition Of Seattle-Based Minecode LLC

Longtop's rapid growth in North America continues with the west-coast acquisition of Minecode. Longtop's focus now extends from coast to coast in North America and to its multiple delivery centers in China including Beijing, Shanghai and Xiamen.

For Immediate Release

TORONTO, Canada/EWORLDWIRE/March 16, 2007 --- Longtop International (LTI), part of Longtop Group, today announced the acquisition of Minecode LLC of Seattle. Longtop International is a leader in global software and information technology outsourcing combining a North American front-end and China back-end. With the addition of over 150 North-American based employees, this merger represents Longtop's initial acquisition in North America and positions Longtop as a clear leader amongst the China-based IT and software outsourcing firms.

Minecode provides software development and IT services to North American companies in a dual onshore and offshore mode. Minecode has extensive expertise in the Microsoft technology platform and provides a range of services including application development, QA and testing, knowledge management and data warehousing to its customers across the Pacific North West. This acquisition complements Longtop’s existing delivery capability in North America and extends Longtop's client base through Minecode's established marquee relationships. The
Longtop International management team will also be extended with the addition of the existing Minecode CFO, Rakesh Garg and Minecode COO, Manish Samadarshi. Both Mr. Garg and Mr. Samadarshi have extensive experience in the global sourcing market having helped establish the success of some of the initial Indian providers in this space. A portion of the original MineCode LLC business has also been spun off into a separate new entity - MineCode USA LLC, that will be run separately by the Minecode CEO, PK Samal.

"The combination of our mature China-based delivery infrastructure and existing North American team with the breadth and depth of skills in Minecode provides Longtop with a step up on the competition in our ability to properly service clients," said Eric Liang, Longtop International's chief executive officer. "As the offshore outsourcing market accelerates its expansion outside of India, China is increasingly becoming the choice of 'smart-sourcers' across verticals and domains. Having a strong North American presence to support client needs and to minimize the often hidden challenges of a global sourcing strategy is a key success factor
and one that Longtop International takes very seriously. The Minecode team provides us with a strong step in that direction."

"The Minecode merger complements our existing organic growth in North America and provides us with an increased west-coast presence," said Neil FitzGerald, Longtop International's chief operations officer. "With our Seattle office complimenting our existing eastern offices in Princeton and Toronto, we are increasingly able to provide onshore and onsite client support services from the local IT community. Longtop's North American team will now be one of the largest of any of the China pure-play IT outsourcing providers and this team will greatly complement our back-end development offices in Beijing, Shanghai, Chengdu, Guangzhou, and Xiamen, China. We are very excited about the enthusiasm in the marketplace for our services and we are moving aggressively to optimally service our increasing client base."

About Longtop Group

Longtop Group, established in 1996, is the leading China-based integrated IT service provider in the banking and financial services vertical. Operating in this and other verticals, Longtop provides globally sourced software development, QA and testing, enterprise application implementation and maintenance, and system integration services to companies across China and North America. According to recent data from IDC, Longtop is one of the top three integrated banking IT service providers in China and according to CCID, ranks first in overall competitiveness in ATM and foreign exchange solutions. Longtop has offices in the United States, Canada and China. For information on the company and its services, visit 'http://www.longtopinternational.com'.

About Minecode

Minecode was founded in 2001. With an executive team grounded in the experience of Indian and
North American IT environments, Minecode has cultivated an impressive list of clients on the west coast of the United States. For information on the company and its services, visit 'http://www.minecode.com'.

For more information contact:
Paul Siu
Director of Public Relations
Longtop International
416.322.2925
psiu@longtopinternational.com

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Longtop International
120 Eglinton Ave E
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Toronto, Canada M4P 1E2
PHONE. 416-322-2925
EMAIL: psiu@longtopinternational.com
http://www.longtopinternational.com

SOURCE: Longtop International

WuXi PharmaTech Honored with 2006 Merck & Co., Inc. Outstanding Strategic Collaboration Award

SHANGHAI, China, March 19, 2007 /Xinhua-PRNewswire/ -- WuXi PharmaTech, China's leading provider of pharmaceutical R&D outsourcing services announced today that it is a recipient of the 2006 Merck & Co., Inc. "Outstanding Strategic Collaboration Award" for its contribution to Merck's custom medicinal chemistry and process research chemistry and commitment to develop and grow capabilities to meet Merck's business needs. The award was presented to WuXi PharmaTech by Dr. John J. King, Senior Vice President, Research Planning and Integration, at Merck's New Jersey corporate headquarters on February 13, 2007.


Merck's Supplier Recognition Forum is an annual event that recognizes suppliers that provide outstanding services to Merck. This year's award, with the theme, "Recognizing Supplier Contributions, Revealing Strategic Business Opportunities", seeks to recognize a select number of suppliers who have demonstrated unique and exemplary performance in support of Merck.

WuXi PharmaTech was one of the twelve companies selected from thousands of suppliers to be honored at this year's supplier recognition forum. "I am honored to, on behalf of WuXi PharmaTech's nearly 2,000 dedicated employees, accept this award. This award is symbolic of our tireless commitment to quality and value," commented Dr. Ge Li, Chairman and CEO of WuXi PharmaTech. "We are greatly benefited from the relationship with Merck & Co, Inc., and we have learned so much from Merck to set very high internal standard and compete in a very competitive industry," continued Dr. Li.

About WuXi PharmaTech Co., Ltd.

Founded in 2001, Shanghai-based WuXi PharmaTech is China's leading drug R&D service company. As a research-driven and customer-focused company, WuXi PharmaTech offers global pharmaceutical and biopharmaceutical companies a diverse, value-added, and fully integrated portfolio of outsourcing services ranging from discovery chemistry, and process chemistry to service biology, bioanalytical chemistry, and large scale GMP manufacturing. WuXi PharmaTech assists its global partners in shortening the cycle and lowering the cost of drug discovery and development by providing cost-effective and efficient outsourcing solutions that save our clients both time and money. Currently, our client list consists of 19 of the top 20 pharmaceutical, and 8 of the top 10 biopharmaceutical companies. For more information, please visit http://www.pharmatechs.com .

About Merck & Co., Inc.

Merck & Co., Inc. is a global research-driven pharmaceutical company dedicated to putting patients first. Established in 1891, Merck currently discovers, develops, manufactures and markets vaccines and medicines to address unmet medical needs. The Company devotes extensive efforts to increase access to medicines through far-reaching programs that not only donate Merck medicines but help deliver them to the people who need them. Merck also publishes unbiased health information as a not-for-profit service. For more information, visit http://www.merck.com .


For more information, please contact:

Sherry Shao
Tel: +86-21-5046-4002
Email:
PR@pharmatechs.com

CONTACT: Sherry Shao of WuXi, +86-21-5046-4002, or PR@pharmatechs.com

Web site: http://www.pharmatechs.com/http://www.merck.com/

Neusoft's listing plan on target

BEIJING, March 15 -- Neusoft Group Ltd, China's largest outsourcing company, Wednesday said it will accomplish its ambitious plan to list the entire entity via share swap with its listing arm, Neusoft Co Ltd, before July.

Neusoft Group Ltd, China's largest outsourcing company, Wednesday said it will accomplish its ambitious plan to list the entire entity via share swap with its listing arm, Neusoft Co Ltd, before July.

Neusoft Group Ltd will be listed in Shanghai before the end of July. Inset: Chairman and CEO Liu Jiren. (Photo: China Daily)
Photo Gallery>>>

"We are proceeding with the paperwork with related government departments such as the Ministry of Commerce and China Securities Regulatory Commission to finalize our listing plan," Liu Jiren, chairman and CEO of Neusoft Group Ltd, told China Daily yesterday in an exclusive interview on the sidelines of the annual session of the National Committee of the CPPCC.

"We are expected to get the permission from the government before July," he said.

Neusoft Group Ltd announced in January that it would go public by swapping shares with those of its listed arm. Each share in Neusoft Co Ltd will be swapped with 3.5 shares of Neusoft Group Ltd. The swapped shares are not allowed to trade within three years in the stock market.

"It has long been our strategy to get listed and we are happy to see its progress," Liu said.

"The plan will contribute to integrate our businesses and improve our transparency and management as well as help us raise more funds."

According to him, the new Neusoft Co Ltd will continue to focus on the development of three main businesses: software and services; education and training; and digital medical products.

After the takeover, the new Neusoft Co Ltd will reportedly be capable of realizing more than 3.7 billion yuan of its main businesses and a net profit of over 376 million yuan this year.

"We'll take advantage of the rapid development of the outsourcing market, both domestically and overseas, to improve our competitiveness," Liu said.

According to CCID Consulting Co Ltd, a leading Chinese IT market survey consulting company, the country's software outsourcing service market reached 1.43 billion U.S. dollars in 2006, up 55.4 percent from the previous year.

Neusoft Group Ltd continued to top offshore outsourcing in China with its outsourcing revenue of 101 million U.S. dollars, growing at 61.1 percent, with a market share of 7.1 percent.

Neusoft Group Ltd has established many software and service outsourcing bases in Shenyang, Dalian, Shanghai, Chengdu, and Nanjing.

Liu pointed out that overseas expansion would be an important part of the company's major strategies in the years to come.

"We are going to set up a new branch in Hungary this year," he said. With the cooperation of German SAP, the branch will provide ERP (enterprise resource planning) solutions to European countries, especially Hungary and Germany.

Philippines: Most Corrupt Country in Asia

Popular Asian outsourcing destinations are also known for their increasing corruption level. In a recent survey, Philippines — one of the major outsourcing locations — ranks as the most corrupted Asian country
by Imrana Khan Global Services

Major outsourcing Asian countries, including Philippines , India , China , Vietnam and Malaysia have been recently tagged as the most corrupted countries in Asia . A new report by Hong Kong-based Political and Economic Risk Consultancy (PBRC) finds that the Philippines is the most corrupted Asian country with 9.4 points on the scale of zero to ten, with zero as the best possible score and 10 the worst. While countries like Vietnam , India , China and Malaysia stood third (with 7.54 points), fourth (with 6.67 points), sixth (with 6.26 points) and seventh (with 6.25 points) respectively.

PBRC is a consulting firm focused on strategic business information and analysis for companies doing business in the countries in East and Southeast Asia . The study examines how corruption affects different parts of the government, key national institutions and the private sector. The study is based on the analysis of 1,500 expatriate business executives in 13 countries and territories across the region in January and February.

This year's most corrupted country, the Philippines registered a rise in the corruption level from 7.80 points in 2006 to 9.40 points in 2007, according to the study. Last year Indonesia was ranked as Asia 's most corrupted country. According to the survey, Singapore is the cleanest country in Asia with 1.20 points while Hong Kong and Japan are the second and the third cleanest locations in the region.

Another survey by Transparency International — the civil society organizations leading the fight against corruption — in 2006 unveiled the risings corruptions level worldwide in its annual Corruption Perceptions Index. The study based on analysis of 163 countries around the world found that corruption level in most Asian outsourcing countries, including Philippines , Vietnam , India and China score between 2.5 to 3.3. points on a ten point scale where low scores indicate higher corruption level.

Offshore cost-advantage to last for 20 years

India and China to dominate...

By Andy McCue

Published: Monday 19 March 2007

India and China will retain their low-cost labour advantage and dominate the offshore IT and business process outsourcing services market for another 20 years.

The annual Global Services Location List, by management consultancy AT Kearney, says that while wages in offshore locations have started to rise they will remain cheaper than 'onshore' alternatives for the "foreseeable future" - even taking into account the most aggressive projections of wage inflation in developing economies.

The Top 5 offshore outsourcing locations

1. India
2. China
3. Malaysia
4. Thailand
5. Brazil

Click here for the full Top 50

The AT Kearney study lists the top 50 global outsourcing destinations based on cost, people skills and availability, and business environment.

In this year's list India again comes top, with a diminishing but still large lead over China in second place.

The report says India's dominance is due to an "unbeatable mix" of low costs, deep technical and language skills, mature vendors and supportive government policies. It adds that wage inflation has been matched by corresponding increases in the supply and quality of skills.

Other southeast Asian countries also remain the primary alternative to India and China, with Indonesia, the Philippines, Singapore, Thailand and Vietnam all in the top 20. Significant declines in telecoms costs are cited as being one of the key drivers for the rise of those countries.

Brazil, Chile and Mexico in Latin America have also grown in importance as 'near-shore' outsourcing locations to North America.

Bulgaria and Romania are the rising stars of the Eastern European 'near-shore' bloc of countries but a weak business environment is responsible for Russia and the Ukraine featuring low down in the rankings of outsourcing locations.

African countries such as Mauritius, Morocco, Senegal and Tunisia are also rising up the ranks, utilising their French-speaking population to provide services for Francophone markets.

Paul Laudicina, managing officer and chairman of AT Kearney, said in the study: "These findings reinforce the message that corporations making global location decisions should focus less on short-term cost considerations, and more on long-term projections of talent supply and operating conditions."

Suning To Establish Administrative Head Office In Southern China

Chinese home appliance retailer Suning has disclosed during its spring work meeting that its new administrative head office in southern China will be set up in Guangzhou, Guangdong Province.

The new office will be responsible for the administrative issues of three provinces including Guangdong, Guangxi and Hainan. Zhou Xiaozhang, the president's assistant at Suning, will take the position of executive president of Suning's administrative head office in southern China.

Following the success of Suning's other two administrative head offices in northern China and Shanghai, respectively, the new head office in Guangzhou will take some responsibilities of administration from the headquarters of Suning and focus on the function of southern China on the production of home appliances.

Zhou says that the key objective of the new Guangzhou head office is to complete the network of chain stores in Guangdong, Guangxi and Hainan to further expand its business. Suning plans to have more than 100 chain stores in these three provinces by the end of this year.

IBM Says Multinationals Must Develop New China Strategies


A recent report from IBM (IBM) concludes that multinational companies will need to develop strategies that focus more on China's mass markets, and increasingly less on top-tier cities where the competition is fierce and the market potential is maturing.

IBM's Institute for Business Value, in conjunction with the Economist Intelligence Unit, surveyed senior-level executives at more than 180 multinational companies in China in four industries (electronics, automotive, consumer packaged goods and retail) for the study. Additionally, IBM interviewed 50 international and Chinese executives with front-line China operations experience, and segmented more than 650 cities in China into six tiers based on a number of key demographic and economic variables including population, average annual salary and per capita Gross Domestic Product. The study, titled "Winning in China's Mass Markets: New Business Models, New Operations for Profitable Growth," underscores the need for multinational companies to transform their business models and operations to tap China's mass market opportunities and effectively compete with domestic firms which typically excel in this segment.

The study defines "mass markets" as a combination of smaller, emerging cities with fast growth, such as Fuzhou and Hefei, that represent nearly 40% of China's urban population, and the rapidly growing consumer segment with household incomes between US$3,000-$6,000 annually.

According to the study these "emerging" cities contribute up to 43% of China's Gross Domestic Product, and more than 80% of them have household income levels falling within the US$3,000-$6,000 mass market range, compared to only 50% of larger top-tier cities. Furthermore the Gross Domestic Product of these emerging cities is growing significantly. For example, the top 10 emerging cities are growing at 28% per year compared to only 18% for the top 10 prosperous cities.

The study also found that the need to re-examine business models is not directly related to the length of time a company has been doing business in China. For instance, the study found that companies with more than five years of experience in China enjoyed 47% higher profitability compared to newcomers, but surprisingly, companies with over a decade of experience in China were actually slightly less profitable than those with five to ten years.

"The rapid increase of consumer spending power combined with the current rate of deregulation in China is cause for all companies — both newcomers coming up the learning curve and early entrants struggling to adapt their legacy operations — to revisit how they go after the mass market consumers," said George Pohle, Global Leader, Institute for Business Value, IBM Global Business Services.

The study shows that multinational companies trying to expand into emerging cities must transform their legacy sales and distribution channels to succeed in China. According to the study, up to 42% of foreign companies' sales are still going through three or more layers of distributors and only 10% have point of sale visibility, leading to high cost structures and limited understanding of customers.

Survey respondents acknowledged that while special relationships will remain an important part of doing business in China, as deregulation lowers barriers and companies target mass consumers, customer insight and sales capabilities will become increasingly critical priorities. Distribution roles are also changing — market leading multinationals are gradually outsourcing physical distribution to logistics specialists while grooming distributors to focus on sales development and penetration into smaller cities.

According to the study, winning in mass markets requires creating quality products that satisfy the need for more simple and functional offerings at lower prices, which typically requires using more local suppliers. Thirty-four% of respondents indicate their number one challenge is finding local Chinese suppliers. Nonetheless, the survey states that multinational companies are currently sourcing 9% of their global revenues from China and plan to significantly increase this to 14% within three years — a 57% increase. Multinational companies are transforming their procurement strategies not only for savings but to create strategic advantage, such as local market insight and control over critical resources.

The study emphasizes that multinational companies must execute in four key areas of R&D and procurement to develop products at the right price points to tap China's mass markets. These include: establishing local R&D and product specifications to meet local market needs; improving identification and qualification of local suppliers; protecting intellectual property while increasing collaboration with local suppliers; and increasing procurement organization capabilities.

The study also revealed that multinationals face a severe and growing talent shortage in China. This is a bottleneck to growth that will only worsen as they compete with each other and domestic companies for employees with critical skill sets needed for the mass market. Candidates lacking English language skills and "soft" skills, such as communications and managerial capabilities, were the top two reasons cited by multinational recruiters for the current talent shortage for multinational positions.

Africa becomes a service outsourcing location

March - More and more Western companies discover Africa as a cheap and reliable location for the outsourcing of their services; typically IT, business processes and call centres. While India and China still are the dominant "offshore" locations for such services, wage costs there are rapidly rising, opening up possibilities for African skilled labour.

A secret for insiders until now, it is now "official" that seven African countries are amongst the world's most competitive locations for outsourcing company services abroad. These seven countries - Egypt, Mauritius, Tunisia, Ghana, South Africa, Morocco and Senegal - figure on the latest annual survey by the Washington-based global management consulting firm AT Kearney, which has ranked the world's top-50 "offshore locations".

Kearney's Global Services Location Index still ranks India as the top location, closely followed by China. But both countries are registering rapid wage increases. These "declines in cost advantage" are however "offset by further improvements in talent supply and business environment," meaning that India and China will remain dominant on the outsourcing market for years to come.

One of the most interesting developments of the index is the steady rise of African nations in the ranking and the ever-increasing number of African states entering the top-50 list, pushing out countries from Eastern Europe and Latin America. While labour costs are getting too high in those regions, African states improve their education, skills, infrastructure and business climate.

"Contrary to the perceived challenges" in the two regions growing fastest, "Middle Eastern and African countries are increasing their visibility as remote services locations," the Kearney report notes. The Middle East is the only region other than Africa that makes its presence more and more felt on the annual ranking.

Egypt, Jordan and the United Arab Emirates maintain roughly the same positions in the top 20 as last year's ranking, "reflecting the increasing number of US, European and Asian companies choosing these locations as centres for regional or global support activities," the report notes. Egypt is ranked number 13 on the index, being the highest placed African country.

The Kearney index also notes a novelty this year, as French speaking countries seem to get deeper involved in the outsourcing of their company services. "The rise of Mauritius, Tunisia, Morocco and Senegal reflects growing interest in locations with the ability to serve francophone markets," the report notes. "Stronger business environments in Mauritius and Tunisia contend with lower costs and larger populations in Morocco and Senegal."

Meanwhile, Ghana maintains its position as a low-cost English language location in Africa, while South Africa, Israel and Turkey all see their rankings improve, "largely as a result of improvements in the policy environment and infrastructure quality," according to the analysis.

The most striking about the results of this year's index was "how the relative cost advantage of the leading offshore destinations declined almost universally, while their scores for people skills and business environment rose significantly," said Paul Laudicina of AT Kearney. "These findings reinforce the message that corporations making global location decisions should focus less on short- term cost considerations, and more on long-term projections of talent supply and operating conditions."

The ranking is encouraging news for Africa, indicating that the continent has real possibilities of following the successful development paths of India and China. However, to become a strong "offshore" location, many factors are needed: regional peace and security, political stability, a good business climate, great investments in educating citizen and stable and cheap IT and electricity supply. Low labour costs are not enough, as the report clearly shows.

One of the countries to take this most seriously is South Africa, where several provinces actively market their locations for outsourced services worldwide. In Gauteng province, which includes Johannesburg, the local Economic Development Agency (GEDA) is trying to position the province "to become one of the world’s leading players in call centre provision." The South African call centre industry is already twice the size of Ireland's and employs around 100,000 skilled workers.