A new business model for China off-shoring

People have been talking up China as an IT off-shoring location for years, but, so far, not much has happened. I'm not sure why. The shortage of English language skills is probably a factor. Also, the fact that India is so advanced and so well known makes it harder for another location to grow rapidly. Ultimately, though, I believe China will become an outsourcing powerhouse. The talent pool is just too attractive to pass up. China's education system produces 350,000 engineering grads per year. When China blossoms, it's possible that the successful approach will be the one pioneered by Achievo, a four-year-old outsourcing firm with its headquarters in Silicon Valley and most of its programmers in China.

Even though Achievo is only four years old, it already has a global footprint. It has offices in 14 cities in the US, Canada, Germany, China, Taiwan, and Japan. About 1,000 service delivery people are in China--not just in the big cities but in second-tier burgs such as Jinan and Dalian. "We say we're a US corporation, a global company, and a China back end," says Robert Lee, the chief executive, who has 30 years of experience in the software industry.

The other thing that's notable about Achievo is what it calls its "local front end." While most Indian outsourcers have a ratio of 20% of their service delivery people on site in customers' offices and most of the rest off-shore, Achievo puts 30% to 35% of its delivery people close to the customer. It also hires local people in the countries where it serves clients rather than sending employees from low-cost countries on temporary assignments to work directly with clients.

That means Achievo can't match the top Indians' operating margins of 25% to 35%. But Lee figures the investment will pay off longer term by gaining the trust and confidence of clients.

Over the long haul, Lee believes China will become more and more attractive to clients because it has a vast pool of engineering talent in its second- and third-tier cities, so it will be able to keep a lid on salaries and turnover rates. "We can maintain a quality service at a sustainable cost. India won't be able to do that," he says.

I wouldn't bet on that. India also has second- and third-tier cities and tech services outfits are quickly expanding there to take the pressure off of Bangalore and Gurgaon. It seems to me the crucial factor will be the abilities of these countries to educate a large number of people with excellent software skills. India already has a viable software economy. China, by tolerating software piracy, has stifled the development of a home-grown software industry. Until China deals with its piracy problem, I don't believe it will become a major factor in tech services.

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