Innovation, skills to drive outsourcing industry

China's outsourcing industry is likely to double in volume by 2016 on account of a fast growing domestic market, with innovation rather than low costs being the leading driving force, industry insiders said.

Although for many, an Indian call center is still the first image that comes to mind when mentioning outsourcing, "China has the opportunity to develop an outsourcing industry much more robust than India ever will", Mike Corbett, chairman of the International Association of Outsourcing Professionals, said in Beijing last week.

India is still the top global outsourcing service provider, but China is catching up rapidly because it combines the development of offshore business with the support of a rapidly growing domestic market, Corbett said.

Corbett predicted that China's outsourcing market will be among the world's top three in the next five years along with the United States and Europe, and customers from the technology, automobile, logistics and healthcare sectors will be the key drivers of development.

As a result, "I would be surprised if the industry (in China) does not at least double in the next four years", Corbett said.

"More multinational companies select China not only because of its low costs, but also to cash in on the fast-growing Chinese consumer market," said Angela Wang, chair of IAOP's Beijing chapter and senior vice-president of Neusoft Corp, the largest IT solution and service provider in China.

With a profound understanding of the local market, Chinese providers have more resources and advantages, Wang said.

"That is why multinational companies would like to establish partnerships with Chinese providers," she said.

"Such partnerships are not only about outsourcing, but winning the China market."

According to statistics from the Ministry of Commerce, the revenue of China's outsourcing industry in 2011 totaled $32.4 billion, of which $23.8 billion came from offshore business. The industry grew more than 60 percent year-on-year.

Outsourcing contracts carried out by Chinese companies currently account for 23 percent of the global total, coming second after India.

According to Wang, the general costs of outsourcing in China are still 20 to 30 percent lower than in India.

"But China's cost advantage compared with developed countries will disappear in a few years, because of a diminishing demographic bonus and the continued appreciation of the renminbi," Wang said.

Corbett considered a closing cost gap in wages between China and the West to be a good thing for the industry, "because the real competition will eventually come down to business models, talent and technologies, which would trigger an 'explosion' of innovation in the economy".

Meanwhile, "it will bring an end to complaints about 'outsourcing causing job losses due to cheap labor', "Wang added.

Nevertheless, offshore business will continue to grow rapidly, not at the lower end of the market, but from creating new opportunities in the higher end of the market through technical innovation.

Neusoft aims to expand the total revenue of its cross-border services over the next 10 years to 60 percent of its total income from the current level of about 30 percent, Wang said.

"An often asked question in the outsourcing industry a few years ago was 'When will China have super-big companies such as Infosys and Tata?' The question is no longer meaningful for Chinese providers," Wang said.

"A large group of employees keeping down the human cost is not the growth model for Chinese companies," she said.

According to Wang, China will be the driving force in the next round of development of the outsourcing industry through innovation and skills, and it will change the stereotypical image of the industry as a low-value added business.

"It's like in a hockey game," Corbett said. "The key to success is to have the ability to go where the puck is going to be, not where it is."