Over the past few years, there has been a significant increase in multinationals outsourcing their IT and other support functions. In 2002, only 10% of multinationals outsourced IT work offshore, but by 2008 this figure had surged to 70%. By 2012, the worldwide IT market, the largest segment within the outsourcing industry as a whole, is expected to top US$1 trillion.
The global economic downturn has directed even more attention to the role that outsourcing can play. In many markets, there is growing political pressure to safeguard domestic jobs, but organisations are also looking for new ways to reduce operational costs and improve efficiency. Companies have started to partner with service providers across a wider range of geographical locations.
A new KPMG study, A New Dawn: China's Emerging Role in Global Outsourcing, examines China's increasing involvement in global outsourcing."China's central and local authorities have shown great determination to promote IT and other business services industries," says Ning Wright, Partner in charge of Sourcing Advisory, KPMG China. "We have seen the Chinese government's eleventh five-year plan (2006-2010) shifting more focus towards IT services. The broader strategy from now until 2020 calls for the development of an IT economy, driven by science and home-grown innovation. The long term development of a robust domestic outsourcing business is a major goal."
The new KPMG report argues that cost is just one factor for companies to outsource their services elsewhere. Companies are increasingly looking for a flexible approach that blends the capabilities of a range of service providers in diverse locations. This often creates an effective mix of resources that help meet their IT, business process needs.
"We have found that many companies globally and in Asia are increasingly turning to China for their outsourcing needs," says Egidio Zarrella, Global Partner in charge of IT Advisory, KPMG China. "This, combined with the untapped potential of China's large domestic market, means that China's outsourcing companies are well-placed to weather the current economic turmoil. Many global outsourcing companies are now setting up operations in China to target regional markets, including Japan.
China's emergence as a centre for IT and other service industries is the result of the government's investment in these areas. However, the share of IT and IT-based services in China's export revenues at this stage barely surpasses 3%, extremely low compared to over 26% in India. China's outsourcing market is currently in its infancy, accounting for a fraction of the US$1 trillion-plus global market for offshoring and outsourcing, but it is quickly evolving.
The growth potential of China's outsourcing position does not only come from foreign enterprises, but also from home-grown domestic companies. Compared to India as an outsourcing location, China's strength is in its domestic market, as it can create a wide services base and has already a track record serving companies in other parts of Asia.
The Ministry of Commerce has crafted a number of initiatives for developing such a home-grown outsourcing business in China. The dubbed "1,000-100-10 project" aims to double China's service exports by establishing 10 Chinese cities as outsourcing bases, attracting 100 international companies to offshore in these cities, and assisting in developing 1,000 outsourcing vendors that can meet the demands of multinational customers. Since these details were announced, the government has identified 20 cities as service outsourcing hubs. In addition to these 20 locations, a number of other cities have strong capabilities in outsourcing.
Edwin Fung, Partner in charge of Information, Communications & Entertainment at KPMG China comments, "Despite the global recession, IT continues to be a critical factor to the success of many enterprises. With today's economic conditions providing severe challenges for businesses, more companies are evaluating the effective use of external providers to help them support and expand their IT organizations in order to position themselves for the eventual recovery."
Ning concludes that "China has made major strides in laying the groundwork for a successful outsourcing market. However, there is still a perception in many overseas markets that China remains a risky place to do business. Intellectual property rights issues and market fragmentation are two major concerns at present. While there are risks, a competitive advantage can be achieved by those who understand and manage those risks effectively."
Intellectual property rights (IPR) protection is a particularly important issue in outsourcing where vendors have access to sensitive data. Due to past incidences of software piracy in China, there is still a negative image of the treatment of IPR. Government efforts, such as promoting the installation of licensed software at enterprises, have contributed to resolve the problem and so led to a drastic reduction in piracy. More work is required in order to tackle the issue and change perceptions.
Another issue for China is market fragmentation. Currently, the market is highly fragmented with many small enterprises all wanting their share of outsourcing business. Opportunities exist for the large players to consolidate and gain economies of scale to compete for significant contracts.
To read KPMG China's new report, please visit www.kpmg.com.hk.
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Notes to the editors:
KPMG China has signed a Memorandum of Understanding (MOU) on the cooperation to promote development of the service outsourcing industry in China with the Chinese Ministry of Commerce (MOFCOM) as part of the "Thousand-Hundred-Ten Project". KPMG is the first and the only Big Four accounting firm to have signed this MOU.
The "Thousand-Hundred-Ten Project" is the largest official government outsourcing initiative, and is aimed at promoting the development of the service outsourcing industry, expediting the coordinated development of the regional economy, and improving the international competitiveness of the Chinese economy. This project, together with other more recent initiatives such as tax breaks, financial support, subsidies and intellectual property rights protection from the government are some one of the many schemes to expand the outsourcing industry and to ensure economic growth, industry restructuring and creation of job opportunities, especially for university graduates.
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KPMG China has 12 offices (including KPMG Advisory (China) Limited) in Beijing, Shenyang, Qingdao, Shanghai, Nanjing, Chengdu, Hangzhou, Guangzhou, Fuzhou, Shenzhen, Hong Kong and Macau, with more than 8,500 professionals.