On April 19, Microsoft Chairman Bill Gates visited China for the 10th time, bringing a surprise for Chinese outsourcing service companies with him.

Timothy Chen, Vice President and CEO of Microsoft’s Greater China Region, disclosed that the surprise from the world’s richest man was a promise to bring Microsoft service orders worth $100 million to China. Besides these orders, Chen said Microsoft is committed to helping local Chinese companies promote their competitiveness.

With these service orders, many Chinese outsourcing providers will have the chance to get a fresh start, with companies ready to fill orders having the early advantage. Other companies not yet up to speed will have the ability to tap into training offered by Microsoft.

In recent years, the Chinese outsourcing industry has developed at a faster rate. In 2006, China’s software outsourcing market reached $1.43 billion, up 55.4 percent from a year earlier, according to a report from CCID Consulting. The report predicted that by 2010, China’s software outsourcing market will exceed $7.03 billion, or 8.4 percent of the world’s total.

Despite these developments, China still needs another five to 10 years to catch up with India, the most favored nation for outsourcing. The U.S.-based Diamond Management & Technology Consultants Inc. issued a report in 2006 showing that 80 percent of the world’s outsourcing businesses currently flow to India. Thanks to its large population of computer literate English speakers and quality service, India has garnered the largest share of the global outsourcing market.

While China has the strength of a cheap labor force, it lags behind India in terms of service quality and qualified employees. The lack of a highly qualified human resource pool is one of the major obstacles China must surmount if it wants to develop an outsourcing industry to rival its southwestern neighbor.

Outsourcing 101

Outsourcing can be defined as the transfer of an organization’s entire non-core, though critical, business process functions to an external vendor that uses IT-based service delivery. By doing so, business process outsourcing (BPO) helps an organization concentrate on its core competencies, improve efficiency, reduce cost and improve shareholder value.

Large companies have long begun outsourcing their non-core businesses to cut costs. For example, Oracle has long outsourced its personal taxation functions to PricewaterhouseCoopers, one of the four major global auditing firms.

In 2006, the UK’s National Outsourcing Association found that outsourcing saves companies around 9 percent, while at the same time raises competitiveness and quality by 15 percent. Last year, 80 percent of Fortune 500 companies outsourced all or part of their information management functions. Presently, most companies would prefer to outsource their IT, human resources, and financing and accounting functions if possible.

Research from the United Nations Conference on Trade and Development (UNCTD) showed that of the 1,000 largest global companies, about 70 percent haven’t tried to outsource part of their business process to low-cost countries. The UNCTD estimated that the global outsourcing market was worth $300-$500 billion, and in 2007, the total market value would exceed $1.2 trillion, growing at a rate of 20-30 percent year on year over the next few years.

Due to the cost differences, developed countries like the United States, Japan and Western European countries prefer to outsource their business processes to low-cost countries like India, the Philippines and China.

China becomes a player

In the world of globalization, China has increasingly been favored due to its relatively cheap cost of labor. Although the Chinese outsourcing industry lags behind that of India, the Diamond Consultants report showed that China is becoming more popular, especially for international IT companies.

The report said that in 2004, of the companies surveyed, none outsourced to China. Yet in 2006, 6 percent of those surveyed began outsourcing to China and 40 percent stated that they planned to outsource to China in the future.

Tom Weakland, who directed the survey for Diamond Consultants, said China has competitive advantages, including its cheap labor, its large number of university graduates, and its government’s commitment to improving infrastructure. He also pointed out that north China could be an outsourcing hub for Japanese and South Korean companies.

Li Zhiqun, a senior official with the Ministry of Commerce, stated that along with 20 government departments, the Ministry of Commerce is devising relevant policies to stimulate the development of outsourcing business.

In 2006, the Ministry of Commerce listed outsourcing as one of China’s key future industries and announced that each year it would commit 100 million yuan to support Chinese outsourcing service providers. The China Development Bank will also provide loans totaling 5 billion yuan for outsourcing business infrastructure construction. Though full details of these investments in the industry have not yet been released, outsourcing service providers can currently enjoy a 10 percent lower than normal corporate income tax.

The talent gap

The Chinese Government’s positive attitude and policy supports are being welcomed by many outsourcing service providers in China-though the biggest problem for the industry here is not restrictive regulation or a lack of funding.

“The favorable policies are very helpful indeed,” said Sun Zhihao, an IT outsourcing service provider in Dongguan, Guangzhou Province. “But the problem is it’s very difficult to find qualified people.”

An example of how the talent gap is affecting businesses in China is the IBM Solution and Services Co. Ltd. in Dalian. The company was supposed to have 20,000 staff by now, but is still struggling along with only 2,000 people due to a lack of qualified employees.

Liu Jiren, Chairman of Neusoft Group, said that the Chinese Government must construct long-term training plans and policies in order to bridge the gap with India in the BPO industry. Liu said the government should encourage training institutions to educate more people capable of providing outsourcing services.

Li agreed with Liu, arguing that human resources are the key to developing the industry. Li disclosed that the Ministry of Commerce is planning to establish a special fund to support the training of outsourcing workers, and that local governments will be encouraged to develop these projects in a joint effort to strengthen China’s outsourcing industry.

At present, the Ministry of Commerce and the Ministry of Science and Technology are co-drafting a human resources training plan for Chinese outsourcing service providers. The plan outlines the development of 100 qualified outsourcing service providers in 10 outsourcing base cities in the next five years in an effort to attract around 100 well-known transnational companies to outsource to China.

Even with the favorable government policies, Sun Zhihao said it doesn’t necessarily mean all the troubles will vanish. Sun stressed that many outsourcing service providers haven’t scaled up their operations to the point where they can compete with outsourcing powers like India.

Statistics show that even the largest outsourcing service providers in China only have 1,000-2,000 employees, compared to India, where some have as many as 40,000 employees. The yearly target of the Indian outsourcing service industry is $200 billion. China has a long way to go in order to catch up. Sun suggested that domestic companies should unite and focus on a specific area of competency in order to grab a greater share of the international outsourcing market.

Weakland holds a slightly different point of view. He believes the biggest obstacles are the cultural differences and communication difficulties, and that fragile intellectual property rights protections in China worry many foreign companies shopping for places to outsource to.

Weakland said there are more fluent English speakers in India and the Philippines compared to China, which makes it difficult for call center services to establish bases in China. He did, however, say that China has the ability to make inroads in BPO services including development, technology support and maintenance of application software, as well as data input.