“Growth patterns relying on price advantage or massive labor resources don’t work any more,” said Wang Xiaoyan, outsourcing business director of Accenture China. Peng Qiang believes the key to higher profitability for outsourcing companies is first of all a change in mentality: reversing the priority order for service supplier evaluation to “good first, fast second and cheap last.”

The wager is customers won’t feel averse to this transformation. “Our clients often look forward to end-to-end services, services that cover the complete course of a product, from positioning of the need to development of the solution to implementation and management. Solution consulting is across-board and all-sided instead of being confined to particular phases of the entire process,” specifies Wang Xiaoliang, general manager of Capgemini China’s Accelerated Delivery Center.

According to Mr. Wang, Capgemini, one of the world’s largest information technology, management consulting, outsourcing and professional services companies, has modified its relationship with customers from the arms-length, party-A- and-party B model to a virtual teammate relationship, eliminating the segregation between them and building awareness that the two sides can jointly create greater value for a business.

Offshore Outsourcing Grows in China

Service outsourcing didn’t save its own skin during the global economic crisis, reporting the lowest annual growth in five years in 2009. Of all the sub-sectors IT services took the hardest hit, plunging into negative growth. And BPO edged up 2.42 percent, the slimmest gain in its history.

China stands out as an exceptionally bright spot in this gloomy picture. According to the 2009 Report on China’s Service Outsourcing Development, the industry expanded by a nifty 20 percent in 2009. The value of implemented contracts involving offshore service outsourcing reached US $10.09 billion, up 151.9 percent over the previous year, and it is expected to further soar by 40 percent in 2010 to US $14 billion. Software and information service outsourcing have become new propellers of China’s IT industry.

“China is in a good position for service outsourcing,” said Zhang Tianbing, vice president and partner of international management consultants A.T. Kearney. “It has a big reserve of well-educated people, remarkable labor cost advantages over the U.S. and Japan, and it’s an early starter among Asia-Pacific countries. Besides, it sits in a region with huge potential for local outsourcing demands.”

Government support is a factor not to be overlooked. In 2009 alone 11 regulations were released encouraging the outsourcing industry, administered by different government departments and ministries and covering a broad range of issues like taxation, investment, financing and human resources. The result was to double the number of Chinese outsourcing providers: the business ranks swelled to 8,950 by the end of 2009, with 4,175 being founded in that year.

The swift and decisive response of the government draws admiration among executives of transnational corporations like Eni. S.P.A. Group. Its CIO, Gianluigi Castelli, admitted that in Europe decision-making by the government takes so much time and so many compromises that, when the agreement is eventually reached, it actually yields weak results.

Despite all the compliments, insiders are aware of weaknesses in China’s outsourcing industry that could cause its development to stumble if not addressed. Among them are language (English) incompetence, feeble protection of intellectual property rights, and a manufacturing-dominated economy. Taking all the elements into account, Zhang Tianbing concludes that India will remain the front runner in global outsourcing for the time being. India systematically secured its position in this sector over the past decade. It entered the field by offering low-cost conventional outsourcing services to American IT companies and gradually moved vertically up the chain toward more complicated realms like knowledge management and legal services.

“Indian companies are suffering an erosion in their reputation in the wake of a number of disputes over delivery and contracting issues. More and more companies are diverting their orders to China,” comments Wang Xiaoliang. His opinion is that with China now more seasoned and better manned in outsourcing, a reshuffle in the global outsourcing industry is almost certain.