WHITEPAPER

CHOOSING CHINA
Three Reasons to
Re-think Your
IT Outsourcing
Strategy
Cyrill Eltschinger, Strategic Advisor, and Author
“Source Code China: The New Global Hub of IT Outsourcing”

Mike Keating, Senior Executive, Freeborders

WHITEPAPER

CHOOSING CHINA
Three Reasons to Re-think Your IT Outsourcing Strategy
Cyrill Eltschinger, Strategic Advisor, and Author “Source Code China: The New Global Hub of IT Outsourcing”
Mike Keating, Senior Executive, Freeborders

Executive Summary
Information technology (IT) provides critical competitive differentiation for companies operating
in today’s global wired marketplace. The effective use of IT is essential for winning customers,
capturing marketshare, managing supply chains, optimizing profitability, making informed
decisions, and maintaining regulatory compliance.

While there are countless ways companies can potentially use IT to their advantage, the harsh
reality is that they only have finite resources to devote to it. So a key factor in the bottom-line
performance of any company is how intelligently it leverages those limited resources to get the
maximum business value “bang” for its IT “buck.”

One popular way to leverage limited resources is outsourcing—in particular, offshore outsourcing.
IT outsourcing enables companies to flexibly access human and technical resources as required to
achieve their business objectives, at less cost and without driving up internal headcount. That’s
why the global IT outsourcing market is projected to grow to US$1.2 trillion by 2012.1 It’s also
why many companies that have never previously considered outsourcing are doing so now.

In fact, given current pressures to reduce costs while still using IT to achieve competitive
advantages, outsourcing is probably a more compelling business strategy than ever.

Simply deciding to engage in outsourcing, however, is not enough. Corporate decision-

makers also have to determine where to outsource. In today’s global economy, there are many
such choices. In fact, because the different regions of the world each have their own specific
characteristics, such a decision can have a significant impact on the success of any outsourcing
initiative—and therefore, by extension, on the business as a whole.

This paper presents three compelling reasons to choose China for offshore IT outsourcing:

1 Its superior resources 2 Its unique cultural fit 3 Its proven record of
with the requirements exceptional success
of U.S. businesses

These three reasons are driving the ascendancy of China as the country-of-choice for all types
of IT outsourcing, from legacy application maintenance to the development of aggressively
innovative web-based services. Combined, these reasons also make China highly attractive to
decision-makers who are thinking in terms of long-term strategic advantages—rather than just
how to get the next project out the door as quickly and cheaply as possible.

1
Gartner: Forecast: IT services,
Worldwide, 2008-2012
IT will become more and more central to business performance in the coming years. And it
is unlikely that budgets for IT will suddenly grow by an order of magnitude during this time.
It is therefore prudent for corporate decision-makers to start cultivating access to China’s
high-value IT outsourcing capabilities right away.

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Reason 1: China’s superior resources

China is booming. The collective pent-up energies of the world’s most populous nation are
now being channeled into what is probably the most intensive period of economic development
in the history of humankind. And all expert observers agree that this is not just some short-term,
unsustainable boom cycle. It is instead an epochal shift in the global balance of power.

Three factors in particular characterize China’s dramatic growth from a relatively undeveloped
nation to one whose resources are rapidly dwarfing its erstwhile competitors:

People
With a population of more than 1.3 billion, China boasts greater human resources than any
other country in the world. And, increasingly, this population is highly educated. The number
of people in China with a college education quadrupled from 2001 to 2005 and continues to
rise sharply. China currently boasts 600,000 engineering graduates—more than India (400,000)
and the United States (70,000) combined.2 China also produced 3,000 computer science PhDs
in 2007.3

As that number continues to climb upwards, China will have the world’s greatest supply of
trained IT professionals. This will allow China’s outsourcing industry to scale up to meet
demand and develop necessary expertise in key vertical markets—while at the same time
maintaining the downward pressure on pricing that accompanies an abundance of supply.

There is also rich anecdotal evidence of the ascendancy of China’s IT talent. At this year’s
NSA-sponsored TopCoder Open challenge, for example, China dominated—racking up twice
as many finalists (20) as any other country. The first place winner was also Chinese.4

The number of English

speakers in China is Boom in education millions
Tertiary education in China
also growing rapidly, as
6
the country focuses on
education as a competitive 5
requirement. There are 4
now more people learning
3
English in China than there
are native English speakers 2
in the United States. And 1
Gordon Brown has estimated
that by the year 2025 there 0
1985 1989 1993 1997 2001 2005
may be more English learners
2
China’s National Academy of in China than there are Graduates Enrollments
Sciences, 2005
native English speakers in Basis: Tertiary education below master’s degree • Source: China Statistical Yearbook, 2007
3
National Bureau of Statistics
of China, 2007 the rest of the world.
4
Network World, June 2009

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Infrastructure
China’s investment in infrastructure is unprecedented. The Chinese government is currently
embarked on what may be the largest infrastructure initiative in the history of the world. These
infrastructure efforts include US$590 billion allocated for build-outs of telecommunications,
energy, roadways, and ports.5 It has been estimated that Shanghai alone has been home
to more than a quarter of the world’s construction cranes. And a consortium of U.S. and
Chinese companies have embarked on the construction of a one-gigawatt solar power plant in
northwest China—the largest of its kind in history.

These efforts place China significantly ahead of potential outsourcing destinations where
transportation, communications, and power resources are not being developed with sufficient
diligence to mitigate the risks associated with infrastructure-related service interruptions. They
also bode well for China’s ability to continue scaling up its capacity to support growing global
outsourcing demand.

Government
The intensive growth of China’s infrastructure and the aggressive education of its workforce
are being championed by a government that is fully committed to ensuring the ascendancy
of China as an economic power. This is being done through the creation of special economic
development zones and programs such as the 1,000-100-10 Project, which was launched in
2006 to pursue three key goals:

• Establishing 10 internationally competitive cities for service outsourcing

(since expanded to 20)
Daqing
Haerbin • Inducing 100 well-known global corporations to bring their outsourcing
businesses to China

Beijing • Developing 1,000 large and medium-sized service outsourcing enterprises

Tianjin
Dalian with international qualifications
Jinan
Xi’an Dalian is a prime example of a Chinese city that has become an important
Nanjing Wuxi outsourcing center. The former mayor of Dalian, Bo Xilai, actively recruited leading
Hefei Suzhou
Chengdu
outsourcing service providers to the city during the 1990s. As a result, Dalian now
Wuhan Shanghai
has a technology university that graduates 14,000 students per year—in addition to a
Chongqing Hangzhou
Changsha
Nanchang highly active and well-equipped outsourcing center.

The Chinese government is also encouraging its outsourcing industry by taxing

Guangzhou Taiwan outsourcers at a 15% rate, rather than the standard 25%, and by subsidizing every
Shenzhen new college graduate they hire to the tune of 4,500 Yuan (US$658).6 These measures
Hainan and others make it clear that outsourcing service providers in China are receiving
the government support they need to continue growing and evolving their technical
capabilities.
5
KPMG, A New Dawn: China’s Emerging
Role in Global Outsourcing, 2009
6
Gartner, Analysis of China as an
Offshore Services Location. 2009

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Reason 2: China’s unique cultural fit with

the requirements of U.S. businesses

Every country has its own social, cultural, and political idiosyncrasies. So, to
obtain the considerable benefits that offshore IT outsourcing offers, company managers have to
invest time and effort into learning a country’s social conventions, business culture, regulatory
constraints, and banking system. They even need to learn a bit about the local cuisine so that
they can eat sustaining meals when they’re in-country.

The question, of course, is whether that learning curve is going to wind up being worthwhile. It
doesn’t make much sense to spend months or years learning about a culture—only to discover
that the culture doesn’t place a strong value on timeliness, innovation, quality, hard work, or
any of the other attributes that IT organizations look for in an outsourcing partner.

This is another area where China shines. In fact, at this stage in their cultural development,
the Chinese people may have a work ethic that is even greater than that of the U.S. Unlike the
West, where economic pessimism has become increasingly pervasive, the younger generation
of educated Chinese has a strong and realistic sense that hard work on their part will result
in positive financial outcomes. This sense of opportunity is underscored by the words of the
renowned former leader of the Chinese Communist Party, Deng Xiaoping, which still resonate
throughout the country today: “To get rich is glorious!”

This strong business culture is validated by many contemporary

market observers. KPMG, for example, wrote in a recent report
that “China’s demographic strength includes a strong culture
of entrepreneurship and inventiveness.” 7

An ongoing upsurge in English proficiency further enhances

the cultural fit China offers:

English proficiency in China is exploding. The Chinese school

system has been placing increasing emphasis on learning
English, and the 2008 Olympics held in Beijing further fueled
this trend. Since the 1990s, English is mandatory starting in the
third year of primary school, but many children start earlier…

“By contrast, as late as 2005 the government of the Indian state

Karnataka still held on to its 15-year-old ban on English in
primary schools despite huge popular pressure. It would seem
that a state whose capital is Bangalore–the symbol of India’s
success in the global economy–and which derives its competitive
advantage from its mastery of the English language should be
more progressive in embracing English as a way of enhancing
its competitiveness.” 8

KPMG, A New Dawn: China’s Emerging

7

Role in Global Outsourcing, 2009

Source Code China, Cyrill Eltschinger
8

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Problems with corporate

governance in China are
now evoking swift and
decisive responses.

The high value that China puts on corporate integrity is another important consideration when
it comes to choosing an outsourcing destination. Problems with corporate governance in China
are now evoking swift and decisive responses. This is in stark contrast with other outsourcing
geographies where substandard management practices seem to be institutionalized

It is also worthwhile noting that even issues such as poor IP protection that have historically
been problematic in China are now yielding to its intensive development as a global business
powerhouse. Software piracy is decreasing significantly as China’s economy develops and as its
government aggressively attacks this potential obstacle to its ascendancy with measures such as
financial incentives that promote the installation of licensed software at enterprises.9 China’s
entry into the World Trade Organization also bodes well on this front. The Chinese business
community clearly recognizes how much it has at stake in the protection of IP, and economic
development is making it easier for Chinese computer users to pay for the software they need.

All of these factors combined make China a strong cultural fit for global companies looking for
reliable outsourcing partners who understand the importance of reliability, fair value, and the
use of IT to achieve competitive advantage.

Deutsche Bank Research,

9

Offshoring to China, 2009

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Reason 3: China’s proven record of success

China’s unique combination of vast human resources, extensive
infrastructure, and strong business culture are already resulting in highly positive
outcomes for companies seeking to gain competitive advantage through IT. In fact, unlike other
countries known for outsourcing, China’s IT industry is not entirely driven by the exporting of
services. China’s meteoric internal growth is being directly supported by its native IT capacity.
This is itself a testimony of its ability to effectively deliver IT solutions and services.

GE Capital, for example, is now sending approximately 20% of its offshore IT outsourcing to China—up from 5%
just a few years ago as they shift work from other outsourcing locations.

China’s IT outsourcing capacity is also being tapped extensively by other countries in Asia, such
as Japan and Korea—further underscoring its growing desirability as an outsourcing location.

Western countries have started to embrace Chinese outsourcing partners. GE Capital, for
example, is now sending approximately 20% of its offshore IT outsourcing to China—up
from 5% just a few years ago as they shift work from other outsourcing locations. And China
maintains its rank as the world’s second most desirable outsourcing locations, while gaining
ground on first-place India in several key considerations.10

The growing appeal of Chinese outsourcers is further highlighted by the annual growth of
30 percent projected for its offshore contracts—a growth rate that outpaces the 19 percent
projected for the rest of the world.11

But perhaps the best proof of China’s ability to fulfill the requirements of corporate customers
on a timely and cost-effective basis can be found in the specific examples of project successes.

One global financial institution, for example, started off dealing with a Shenzhen-based
Chinese outsourcer through its IT facility in Hong Kong, which was facing some specific
challenges regarding the development of a cash management system. That engagement was so
successful that the company the outsourcing-augmented capacity of the Hong Kong facility
as a primary “center of excellence” for other strategic IT deliverables—including systems for
country risk management and the administration of access rights.

2009 A.T. Kearney Global

10
While delivering these enterprise solutions, the Hong Kong facility and its
Services Location Index
Chinese outsourcing partner are operating at costs 15%-30% lower than the
KPMG, A New Dawn: China’s
11

Emerging Role in Global company’s other IT locations. The hybrid Hong Kong/Shenzhen operation
Outsourcing, 2009 was also assessed by the Software Engineering Institute and earned its highest
rating: Level 5 CMMI certification.

One global financial ...the Hong Kong facility and its Chinese outsourcing partner are operating
institution, for example... at costs 15%-30% lower than the company’s other IT locations.

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...expansion is the ultimate proof-point that Chinese outsourcers are able to deliver differentiated value to their customers

Another global financial services company engaged its Chinese outsourcing partner to build a
unified global system for managing its outstanding HR compensation liabilities. In this case,
strong PeopleSoft implementation skills were of particularly critical importance—as was the
ability to manage a complex project lifecycle that would convert multiple desktop solutions
dispersed across the organization into a single corporate-wide reporting environment. The
result of this successful project was vastly improved visibility into compensation liabilities
across the enterprise and a 15% reduction in total application support costs.

In still another case, a Chinese outsourcer helped another global financial institution
leverage incident tracking software that it had already purchased—combined with voice
communications and supplementary reporting tools—to create an enterprise “one call” IT
service-and-support environment that reduced costs, accelerated problem resolution, and
provided high-value feedback to the IT organization so that it could discover and address
issues that were undermining the user-experience.

These are just a few examples that highlight the ability of today’s Chinese outsourcing
organizations to deliver enterprise-class IT solutions and manage sophisticated business
requirements, while offering both lower development costs and lower long-term costs of
application ownership. In all cases, companies that initially engaged with an outsourcer for a
specific assignment were so completely satisfied with the results from both a quality and cost
perspective that they expanded the scope of their outsourcing engagement. That expansion is
the ultimate proof-point that Chinese outsourcers are able to deliver differentiated value to
their customers.

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Should you choose China?

The choice of China has simply become too lucrative to ignore.

For companies that have yet to take full advantage

of the benefits offered by outsourcing, these three
reasons should provide sufficient incentive to
explore the possibility of engaging with the right
China-based services provider. For companies
that are already actively engaged in outsourcing,
these reasons should give cause to evaluate China
as a possible alternative to any current or planned
engagements.

Freeborders can help you take the first concrete steps

towards realization of the tremendous business value
that an outsourcing relationship with a Chinese partner
can offer through our proprietary ProfIT Workshop
The ProfIT Workshop
methodology. The ProfIT Workshop brings together business
managers and IT decision-makers to identify and quantify
brings together business
genuine opportunities to gain substantial business value managers and IT
from technology—and, if appropriate, to prepare a game plan decision-makers to
for achieving that value. The methodology thus takes IT identify and quantify
outsourcing beyond mere labor arbitrage to a truly strategic genuine opportunities to
partnership that has optimal positive impact on bottom-line
gain substantial business
performance.
value from technology.
Globalization is presenting companies with new
opportunities to capture markets and optimize their supply
chains. IT supply chains are particularly important as the
ability to effectively use information technology becomes
an increasingly critical success factor. In this context,
no company can afford to neglect the compelling value
proposition offered by China’s burgeoning IT outsourcing
industry. The choice of China has simply become too
lucrative to ignore.

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About Freeborders
Founded in 1999, Freeborders helps financial services and Internet based businesses
solve the most complex business challenges. The company provides global consulting,
technology and outsourcing services through an integrated China to US delivery model.
Freeborders enables clients to cost-effectively adapt their business infrastructure to
market opportunities and changes, offering deep domain expertise, innovative thinking
and strategic execution. Headquartered in San Francisco, the company has offices in
London, Hong Kong, Shenzhen and Wuxi.

To learn more, visit www.freeborders.com.

About the Authors

Mike Keating, Senior Executive, Freeborders

Mike Keating is a senior executive at Freeborders, a leading provider of
management consulting, technology, and outsourcing. Keating joined
Freeborders in 2000 with unique IT, technical, projects and executive
management talent spanning over 20 years. Since then, his leadership and
passion have become hallmarks of his tenure at the company and he is
currently leading global business development.
Keating is a highly experienced executive, top echelon consultant,
seasoned technology, and business professional who founded the
Freeborders’ Value Engineering Institute (VEI) and ProfIT methodology
that delivers value innovation for clients. ProfIT targets with C-level
executives to emphasize the return-on-investment aspect of decision-
making in terms of lifecycle costs to maintain or improve on desired levels
of capability and performance.
Under Keating’s leadership, Freeborders won the Forbes and Everest
Group Global Outsourcing Excellence award for innovation in global
delivery from China. Additionally, Keating led the team to close the largest
software development services contract ever awarded to a Chinese delivery
firm from a Fortune 500 company.

Cyrill Eltschinger, Strategic Advisor, and Author

“Source Code China: The New Global Hub of IT Outsourcing”

A multi-cultural entrepreneur educated in Switzerland and the United
States, Cyrill Eltschinger has over 15 years of experience working in the
China market. He currently acts as strategic advisor to both commercial
and government sectors on China market and various industry focused
projects. Before that he was leading Softtek China (formerly I.T. UNITED)
for over 10 years. He spent eight years with Electronic Data Systems (EDS)
on various assignments in Europe, the United States, and Asia-Pacific. He
was later posted to China as Head of Technical Infrastructure to establish
and lead the nationwide information and communications systems and
automation of General Motors.
Anticipating the trend towards global IT outsourcing, he identified early
China as an emerging major player. In 1998, he and a group of former
EDS colleagues started I.T. UNITED, which became Softtek China in
August 2007. The company today is one of the most trusted China-based
outsourcing services providers with a reputation for delivering cost-
effective IT solutions that make technology smarter, easier, and more
productive.
With his unique expertise in the IT field and experience in China, Cyrill
acts as a strategy advisor for the TORCH Center, the technology-focused
agency of China’s Ministry of Science & Technology (MOST); IT strategy
advisor for the Tianjin Economic-Technological Development Area
(TEDA); Senior Consultant for Service Outsourcing Industry of Zhenjiang
New Area; and is a subject matter expert at the Gerson Lehrman Group
(GLG) Technology Council, briefing executives both on the technology
industry and the China market. He holds a Bachelor of Arts in Finance
from Texas A&M University and a certificate in Systems Engineering
Development from EDS. In March 2008, he was presented by the honorable
Mayor of Beijing Mr. Guo Jinlong with the Great Wall Friendship Award,
the People’s Government of Beijing Municipality’s highest honor for
foreign experts, for his outstanding contributions to Beijing’s economic
development. He was further recognized to run with the Olympian flame in
China during the 2008 Beijing Olympics Torch Relay.
Away from the office, Cyrill is the author of “Source Code China: The
New Global Hub of IT Outsourcing” (© 2007 by John Wiley & Sons),
the first book to address China’s growing technology boom for software
development and high-tech services. Cyrill serves on the Board of
Governors at the Capital Club, Beijing’s premier private business club; he
is also the Founding President of SwissCham Beijing (the Swiss Chamber
of Commerce in China) and the Founding President of the Texas A&M
University China Club. Before entering the private sector, Cyrill was an
Officer in an elite unit of the Swiss Special Forces. He is also an enthusiastic
aviator and holds the first private pilot’s license issued to a foreigner in
China since 1949.

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