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Outsourcing to gain boost from domestic demand

The development of China's services outsourcing industry doesn't have to be similar to that of its Indian counterpart, said Frances Karamouzis, vice-president and IT services analyst at Gartner Group, an information technology research and advisory company.

Unlike India, where the services outsourcing industry took off due to interest from buyers in the West, China's services outsourcing potential will stand on its huge domestic and near-shore market.

According to Gartner, the growth rate of China's domestic IT services sector will be four to six times that of the offshore IT services sector in the next five to 10 years, making the domestic market the dominant part of the sourcing market.

At present, the "China for China" market - as Karamouzis calls it - only accounts for 41 percent of domestic services outsourcing companies' order books, according to a report by the China Council for International Investment Promotion.

China's IT industry is still developing.

For example, a manufacturing company with many locations across China will have different IT systems in each location.

Implementing a unified and standardized IT processing system would greatly improve the efficiency and effectiveness of the companies. Eyeing this huge opportunity, many software companies are flocking to China to sell standardized software and related services, Karamouzis said.

"There are many scenarios and examples, not just in manufacturing, but also in consumer goods, retail, pharmaceutical companies, and banks, where software as a service is needed," Karamouzis said.

The SaaS, or software as a service concept, is a new Cloud Computing Enabled Service model in which software and associated data are centrally hosted on the Internet.

With a thin client terminal via a Web browser, users can access applications without managing or maintaining the servers and operating system.

And once a domestic company, such as a bank, adopts the system in its headquarters, it has to implement it in all of its branches, creating a significant market, according to Karamouzis.

The "China for China" market will not only include Chinese domestic companies, but also the units of multinationals in the country.

The greatest opportunity brought by the current economic turmoil in the West, according to Karamouzis, is not that multinationals will become more cost conscious and outsource more of their operations abroad. It's that more companies will realize that their biggest growth potential is in China and will set up operations in the country.

China's services outsourcing firms, as latecomers, have to be known not for their lower prices but for the value that they provide to their customers, she said.

"Companies in Beijing and Shanghai can't offer customers better prices because it's actually cheaper to do those services in house," Karamouzis said. "To get orders, they have to bring best practices for implementing SAP, an integrated software solution that incorporates the key business functions of the organization, for work flow and sheer service."

But it will take time for domestic companies to shift from a "price strategy", which for the moment is still the predominant strategy, to a "value strategy".

Understanding the value proposition, and how the organization can work jointly with the client, is still a "very new idea" for both vendors and buyers.

So how can vendors and buyers understand the value proposition? In other words, what exactly are vendors selling, and what are buyers paying for?

Karamouzis illustrates this with a pyramid model: Labor lies at the bottom with the largest stake, while higher up are other factors such as methods and tools and intellectual property.

"In the coming years, intellectual property will be the largest portion in a buyer's bid price and the biggest cost of vendors," Karamouzis said. "In the future many vendors have to invest in intellectual property rights. The reason is that clients want to buy something really integrated."

An example Karamouzis cited are the "smart city" programs that many local governments are adopting. Previously, the governments would seek solutions internally. They would get some hardware, software and head count, and they would be responsible for bringing all of them together.

In the new scenario, vendors have already invested in solutions, have proprietary intellectual property rights, or IPR, and have automated the processes, so they are able to offer complete solutions.

Buyers used to pay a specific price for a specific item. Now vendors are selling subscription-based models, so the more people use the systems, the more the vendors get paid.

"Companies used to rely on cheap local employees and compete with the lowest price. But now they come and say: Let's show you how to make this more efficient. This is better, faster, but not necessarily cheaper," Karamouzis said.

For numerous small and medium-sized enterprises, still, the silver lining lies in the unique value they provide, Karamouzis said. They can't compete with other large companies on scale, so they have to invest more on IPR, be agile and spot their niche markets.

Today's digital innovation scenario may mean a leap-frog opportunity for China's services outsourcing industry, if it can find ways to cope with the constant changes.

But it also requires a change of mentality for Chinese buyers, according to Karamouzis.

"Traditionally in China, everything is done internally, so to work externally in a collaborative way is all new learning," Karamouzis said.

Digitalization and globalization will eventually push domestic companies to learn to "outsource smartly", thus creating a huge domestic market, Karamouzis said.

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