I am not going to repeat the reasons why and how important to expand your business across global regions with the goals of innovation, resource scalability, round-the-clock services, cost effectiveness, among others. In this discussion, I would like to explore some possible options, with their pros and cons, when you need to tap into the largest talent pool of IT human resources in China. Contrary to the huge success global companies have been experiencing in manufacturing and commercial packaged goods from China, Chinese IT human resources have never been well utilized in a scale that matches their tremendous potentials. Key barriers such as culture understanding, communication ability, stereotyped perception, traditional view of job security, intellectual property (IP) protection and political agenda, all contribute to the ineffectiveness of this process. Although the potential benefits are significant, the risk of failures is undoubtedly high. Companies need to have a strategic planning when considering the ways that best fit into your expansion strategy, short / long term goals as well as the resources you can invest.
1. Finding a Service Provider in China (on-site/off-shore model)Some people say it is the quickest and may be the easiest way to start your IT project offshore. The good news is, many Chinese IT companies are eager to partner with you, with many of them asking for very attractive service fees. (The cost from Chinese service providers are usually 20% to 30% lower than those from Indian providers, with equal service expertise). The initial cost may be the lowest, but it is certainly the hardest to manage and with highest risk in terms of on-time/on-budget/on-quality delivery, IP protection, contract enforcement, among others. If this is the first time you ever work with these service providers, start with only small, simple and non-strategic project. These pilot project(s) can be a water tester to get to know your potential partners, build trusts and familiar yourself with this new business process. My advice is to look for vendors with US legal entities. Contracting and outsourcing projects to vendors with a US company is favorable, because:
1. With the economic downturn, offshore outsourcing has been experiencing increasing pressure not only from unions but more importantly has become a political hotspot. Outsourcing to an American registered company certainly helps;
2. With the contractor located within your jurisdiction area, issues such as contract enforcement, legal contention, IP protection, SLA violation, etc. can be easily resolved compared with cross nation litigation;
3. By adopting an on-site/off-shore model, you will have less communication barriers by working with vendor’s onsite experts face to face on a daily basis. Vendor’s onsite personnel should be armed with excellent bilingual communication skills, technical expertise as well as the capability to work across different time zones;
In my past experiences, it was never easy to begin with a new provider. Among many potential pitfalls are: lack of great amount of control (resource/quality/scope/knowledge transition), vendor’s lack of domain knowledge or skill sets, communication gaps, company culture difference, lack of trust in areas of contract enforcement and IP protection, etc. Therefore, a dedicated person or a team with adequate management, technical and communication skills are needed to ensure a smoother process.
2. Finding a Service Provider in China (off-site/off-shore model)The dare reality is: it is extremely hard to find a qualified service provider with a local legal entity and also meet all your requirements. Working directly and remotely with an offshore vendor has been long proven as unsuccessful or at least inefficient. To take advantage of broader choices from a much larger pool of vendors in China, an “off-site/off-shore” model is worth trying. This entails your company to establish a tiny legally registered entity in China. China allows foreign company to register a liaison office with very easy procedure. But this type of office is not allowed to engage in any legal activity. In order to protect your IP, sign / enforce contract and deal with other legal issues, a solely owned limited liability corporation is needed. The service contract should be better signed between your Chinese subsidiary company with Chinese vendors. But the burden of providing “interfacing” person(s) will most likely be shoulder by your company. With a small team and small office space, the cost can be offset by the much lower service costs coming with a much larger pool of vendor choices. The good news is, this model provides your company with the ability to explore into potentially huge market in China if this falls into one of your bigger strategies.
3. Create a Joint Venture with Chinese Service Provider (JV Model)One of the key disadvantages from above two models is lack of total control in areas of project budget, delivery, quality and human resources. This model should only be based on the fact that you have already established enough trust to your Chinese partner. Without it, all the other benefits – quick start, relatively more resource controls, easier access to local market, etc. will eventually be wiped out with unbearable consequences. It is definitely not for the small or medium sized companies unless you are powerful enough in technologies, marketing and financing to be able to acquire your partner or at least be safe after the breakup. Many big companies started with this model to get around of Chinese regulatory rules with a large portion of them eventually acquired a bigger share from the initial partners.
4. Establish your own subsidiary company in ChinaUndoubtedly, this is the most expensive option, which requires you to put in a bigger investment upfront in areas like company setup, office renting, employee hiring, logistics, legal, local connection/PR, etc. But the best thing you will have with it is the ultimate control of your resources and costs, better quality and project delivery. With many cities, districts and software parks competing for the companies like yours, you may be able to find a good deal. With my recent visits to Beijing and Chengdu (western region), some middle sized cities can offer you much better logistic support, tax benefits as well as more stable labor pool. My advice is: this should be your ultimate goal if you have a long term strategic plan for offshore development in China. You don’t have to get to this point in one jump. The three models above can all possibly lead you to this destination by merging and acquisition.
There, of cause, may be some other choices.
5. Managing Local Developer TeamBesides all these structural/legal/cost issues, one of the most critical tasks for success is how to manage the developers to ensure an on-time, on-budget and on-quality delivery. The first project or two will be the most difficult especially when the dev team does not have enough domain knowledge and skill sets for your project. A dedicated person or persons with these skills, plus language/cultural understanding is needed to manage both sides with some travels or even a longer stay for a period of time in China to ensure a better training and quicker knowledge transitioning. The offshore team should be in a better footing after one or two projects with a trusted and capable management team in place. The better ROI will surely follow.
In future articles, I will share my views on some other issues: IP protection, team building, or even some Chinese unique cultures and customs. Stay tuned …
Please also visit my blog at:
http://alanhongoffshoreoutsourcing.blogspot.com/
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