Microsoft is teaming with Indian software services provider Tata Consultancy Services Ltd. to launch an IT-outsourcing company in China. TCS will hold a majority stake in the firm, expected to launch in early 2006 in Beijing, and Microsoft will have a minority interest. Three Chinese companies also are participating in the venture. Financial details weren't released.

Microsoft CEO Steve Ballmer (left) with TCS VP Jayant Pendharkar.?

The new business will focus on providing software-development services to Chinese companies and multinationals, according to TCS. It will provide services and support for all major types of software and won't limit itself to Microsoft's .Net environment. The company will offer specialty services for the financial-services, manufacturing, and telecommunications industries, as well as several other vertical markets.

Microsoft's investment marks the latest in a series of moves to build its presence in China, which eventually could become the world's biggest software market. Microsoft entered the country in 1992 with a sales office, and six years later it opened a research lab in Beijing. In 2003, the company signed a memorandum of understanding with Beijing municipal authorities to work with local software providers to develop E-government systems. Microsoft also is working with a number of major Chinese companies, including Petro China and China United Telecommunications Corp., to help them build systems based on its software.

The move could also signal growing interest by Microsoft in services. "They're starting to realize the importance of services, and how they are going to leverage them" to grow revenue, Gartner analyst Frances Karamouzis says. Microsoft holds a minority position in IT-services firm Avanade Inc., which Accenture mostly owns. Of late, it has been toying with the idea of entering the market for managed desktop services.

Infosys Technologies Ltd. is one of several Indian vendors looking to provide outsourcing services from China. Infosys sees the country as a hedge against rising costs in India and a lucrative market in its own right. Infosys, Satyam Computer Services, and Wipro Technologies all have operations in China. Earlier this year, high-level Indian and Chinese government officials declared their intent to work more closely on cross-border IT initiatives. Major Western vendors that have already opened service centers in China include Accenture, Affiliated Computer Services, and IBM.

The Chinese government is following the Indian model to ensure that a steady supply of IT talent is available to service providers setting up shop in the country. The government has established 35 national schools to provide software training, especially in technologies such as .Net, Linux, Java, and Web services. Its goal is to have 800,000 trained software professionals by the end of this year, compared with 600,000 in India.

The government also is promoting the use of widely recognized quality-control standards. To date, 11 outsourcing companies with operations in China have attained Capability Maturity Model Level 5 certification, the highest ranking from Carnegie Mellon University's Software Engineering Institute. Among those, seven are indigenous Chinese companies.

The Chinese companies forming the venture with Microsoft and TCS are Beijing Zhongguancun Software Park Development, Tianjin Huayuan Software Park Construction and Development, and Uniware. The Chinese government also is participating.