The top four Indian IT outsourcing firms are now taking in around 5,000 new hires in India each quarter, even as the industry is faced with a 30 percent growth in customer demand. This is placing huge demands on the pool of high-quality talent, which is already stretched thin due to the hundreds of R&D labs Silicon Valley companies have started in India in recent years. Talk to any CEO at the top Indian outsourcing firms, and they will tell you that this is visibly hurting their business: current projects are slipping; some existing clients are concerned about giving them more work; and costs are escalating from higher staff turnover and training costs.

Indian firms are now having to innovate once again, looking for other deep pools of IT talent outside India. And almost unanimously, the top firms have concluded that a large part of the solution lies in China, with it’s 1.3 billion population, 2,000 universities, and over 10 million enrolled university students. According to Nandan Nilekani, the CEO if Infosys, perhaps India’s most famous IT firm: “We need a deep reservoir of talent as well as an alternative low-cost center like India as we continue to grow… and only China can match up.”

Echoing Nilekani’s words, Chandra Sekaran, Managing Director of Cognizant states that they view China as a “potential global delivery center to provide offshore services to the U.S., Europe and Japan.” Of the top Indian firms, TCS, Infosys, Satyam, Wipro, Cognizant, iGate, Mphasis and Zensar are already in China, with i-flex recently announcing its decision to setup operations there. Among the majors, only HCL is missing, and an announcement from them is expected. Apart from Wipro and Cognizant, which are both at very early stages of entry, all currently have development centers in the country. While their headcounts are currently all under 300, some have plans in place to grow that number to around 5000 within the next three years.

However China is no panacea for India’s growing pains. As Indian firms begin to expand in China they face numerous issues spanning from talent shortcomings and cost pressures, to internal cultural dissonance. Increasingly they are realizing that a different operating model and locally-customized strategy is required to succeed in China.
Of China’s ten government-designated software bases—all of which boast software parks, nearby universities, and a host of tax breaks and incentives to promote an export-focused outsourcing industry—each may roughly be categorized as a tier 1, 2 or 3 city. Tier 1 cities include Shanghai, Beijing and Guangzhou, and have attracted the head offices of players such as Infosys, Wipro, Satyam, Bearingpoint and Cap Gemini. Tier 2 cities include Dalian, Hangzhou, Nanjing and Xian. While Dalian has become a major centre of offshoring to Japan, and attracted firms including Accenture, IBM, GE, HP (call center), and Dell (call center), Hangzhou benefits from its proximity to Shanghai, China’s largest and most prosperous city. Tier 3 cities include Chengdu, Jinan and Changsha, and are expected to become more important as costs continue to rise in the more developed cities.

While operating costs in tier 1 cities typically exceed those in India, costs in tier 2 and 3 cities are much lower and present a more commercially-viable option for outsourcing firms. And while India suffers from a lack of infrastructure, China’s public infrastructure is far superior, even in second a third tier cities. Prakash Menon, CEO of NIIT China, which operates 120 franchised IT training centers with over 20,000 students, opines: “China has done exceedingly well in being able to quickly build its general infrastructure, be it roads, power, water etc. The country will now need to closely focus and build its human infrastructure, especially in IT. The key question really is how fast this can be done—building of the human mind.” The shortcomings of available local talent is just the first among the list of China’s weaknesses relative to India.

Talent Availability
While China has greater numbers of fresh graduates, in terms of experienced talent, India is at a clear advantage over China. India can boast legions of IT veterans spawned from an IT industry 25 years in development. And while coding and testing resources in the popular programming languages are plentiful in China, employees with significant experience in ERP or the latest technologies such as J2EE are rare and can command high salaries.
According to Rao Talasila, General Manager of iGate in China: “The biggest challenge is finding the right human talent to power our growth needs. We have often had to turn away projects because we couldn’t find the proper talent. The recruitment supply chain for IT professionals in China is still in its infancy.” Furthermore, IT talent fluent in English or client languages such as Japanese are also in limited supply.

IP Protection
One of the most inhibitive hurdles is the lack of a rigorous intellectual property rights protection regime in China. Ensuring copyright protection and intellectual property through contractual means may not be adequate or effective. This deters firms from outsourcing critical projects, and may force them to utilize multiple providers for a single project. Although the government is taking some steps towards more stringent enforcement of intellectual property rights, the country still has a long way to go.

Cultural Differences
Compared to other markets such as Europe and the U.S., where Indian companies have achieved success, China presents a more culturally remote destination. This greatly affects everything from the Indian managers’ ability to sell in China, to their ability to get the most out of Chinese staff, and navigate the minefields of government approvals and commercial practices. “Indian companies find it difficult to deal with local companies,” notes Ashish Rahinj, CEO of Zensar China, which entered the country via a joint venture with a local partner.

Variable Service Levels
Perhaps China’s biggest disadvantage is one of perception. “At present there are no reputable outsourcing providers in China and the industry has just started growing, while India’s outsourcing industry is mature,” comments, Herbert Schroeder, head of Business Services at German chemical giant Bayer. At present, the lack of certification standards such as CMM, and the variability in service levels currently increases the perceived risk of all outsourcing to China.
However, China also comes armed with some clear advantages over India. Bayer’s Herbert Schroeder continues: “China scores over India in terms of infrastructure, central location, employee working morale and languages - Mandarin, Japanese, Cantonese and Korean.”

China’s superior infrastructure allows outsourcing firms to exploit the much lower costs in China’s inland cities. It’s geographic and cultural proximity to Japan has allowed its outsourcing firms to achieve inroads into the world’s second-largest economy relative to the very limited success Indian firms have enjoyed to date. Workers in China place much higher value on education and personal advancement than purely monetary compensation. Also, unlike India, the best and brightest talent has not already been recruited into lucrative R&D or U.S.-based positions, and is still available for recruitment by outsourcing providers.

Furthermore, many multinationals view India only as an offshoring destination for cost-centers, while China is currently viewed as the world’s most attractive market, encouraging billions in FDI and making Chinese providers the natural partners to support the IT needs of their burgeoning businesses there.
While China is at a much earlier stage of development than India, and has major hurdles to overcome if it is to compete on an equal footing with the best Indian providers, it also has some inherent advantages. And with major investments being made by the top Indian providers, China is certain to become the largest delivery location for Indian firms outside India itself.
This alone would make China an important outsourcing location. However, with the emergence of local Chinese leaders such as Achievo—headquartered in the U.S., they are copying and attempting to improve upon the marketing and operating practices of the best Indian providers—it may be only a matter of time before some providers catch up with the Indian players. With the Indian providers busily setting up development centers in China and Chinese entrepreneurs hungry to bridge the gap with their Indian counterparts, for U.S. CIOs this all means more low-cost outsourcing options. In particular it means more opportunities to spread the geopolitical risks of their work already being done in India, and more opportunities to support their growing businesses in North Asia.

It also heralds in the emergence of a truly global delivery model that will combine various capabilities at multiple onshore, nearshore and offshore locations, to most effectively meet all of a client’s business-linked strategic IT requirements.