Devott Insight: The Challenges of China’s Service Outsourcing Industry in the 3.0 Age
Source: View: 203 Date: 2014-01-28

With the popularity, application and revolution of new technologies such as “big data & internet of things & mobile internet and cloud computing”, the current service outsourcing and service industries will be subverted greatly in the 3.0 age. The modes of trade, payment, services and pricing will be changed also; while there are several opportunities brought by the development of service outsourcing industry in the 3.0 age. Meanwhile the layout of global service outsourcing market will be changed hugely that is the chance for China’s service outsourcing industry to surpass and also is a challenge to transform.

——Haitao Qi, CEO of Devott

With the revolution of information technology from IT to ICT to ICD, the service outsourcing industry has transformed from the 1.0 age to the 3.0 age. There are greatly subversions for current service outsourcing and service industries brought by the 3.0 age that is driven by new technologies of cloud computing, internet of things, mobile internet and big data. The comings of new service mode, operating mode and business form will also bring the industry new chances. Under the circumstances of allocation of global resources, the service outsourcing market will face a new period for rapid development with constantly releasing offshore outsourcing businesses of informatively developing countries. Driven by technology revolution, the scale of global service and commercial business will develop explosively in next decade; and IP, cloud computing and remote service outsourcing will be the key elements to lead the development of global service and commercial businesses. Meanwhile, the distances between originally industrial leaders and followers will be shorten by technology revolution; and companies/industries that are in the different developing stages will restart at the same line.

Therefore, from industrial angle we can see that as the chances brought by “millennium bug” for outsourcing enterprise in India in 1990s, the 3.0 age is also a lifetime of industrial subversion for China’s outsourcing industry and a great chance to catch up with international giants for service outsourcing industry and companies in China. However the age also will bring transforming challenge for China’s service outsourcing industry and developing challenges for current service outsourcing companies. Let us to discuss what challenges will be faced in the 3.0 age through the five-mode of competitive analysis of Potter.

1. Dimensions of Supplier----The Constantly Weaker Bargaining Abilities

The relation of suppliers is also a problem of people actually. Talent is the most important supplying element for the development of service outsourcing industry and also is the core for China’s service outsourcing industry transforming to the 3.0 age. In the 3.0 age, the demands of inter-disciplinary talents and experts for new technologies (mobile internet, cloud computing), the discovery and application of big data, vertical industry and “technology + industry”/”languages + services” have become restrictions of further development for industry.  

2. Dimensions of Replacers-----Starting in New Technology Revolution Is Backward

No.1 The strength of China’s cloud computing is fourth from bottom. “The BSA—global cloud computing scorecard” published by global business software alliance shows the result that the national cloud computing strength of 24 countries accounting for 80 % of total economy has been evaluated by alliance. The new service outsourcing enterprises born from new technology revolution and new outsourcing companies produced by product servicizing, integration of hardware and software and cross-integration must have more chances in leading countries in technology revolution while bring threats of new replacers for China’s service outsourcing companies.

No.2 The Phenomenon of Service Return. With the application and population of cloud computing, big data and mobile internet, the cost of outsourcing services provide in USA or Europe is closer to offshore; meanwhile relative abilities of services , technology abilities and labor qualities also have obvious advantages, so the phenomenon of service return is worthy to alert for contract-awarding countries.

3. Dimension of Customers----Cautious Buyers and the Rise of Trade Protectionism

No.1 Cautious Buyers

If outsourcing buyers decides slowly, the outsourcing decisions will be delayed. The research data of HfsReaserch shows that risks of the recession will hinder a quarter of buyers to contract until the elimination of unsure elements in economy. And the unsure element also will make buyers hesitating when they decide; three quarters of buyers will change their center of outsourcing decision or have no ideas about how to continue. However, some customers who are choosing the outsourcing services will invest their capital to such businesses that have less quality and easy price mode.

No.2 Not Clear Boom of Global Service Outsourcing Industry

Recently, because of the global economy downturn, the boom of global service outsourcing industry is also not clear. According to the report of HY Group, the quantity of contract in the second quarter (2013) has descended 20% compare with last year; while in the third quarter (2013) has reduced from 472 contracts last year to 381 contracts this year, and the value of contracts also descended. The condition of contracts quantity in the third quarter shows that the boom of global service outsourcing industry is not clear causing it was the busiest time for outsourcing industry in the third quarter usually. With the data from IDC, compared with 2011, the growth of output of global IT services and business outsourcing in 2012 also had decreased greatly.

No.3 The Conservative Policy of the Out-contracting Countries

Although the core competitiveness and profit abilities of companies in out-contracting companies have been increased by contract mode, the quantities of jobs also has been reduced relatively. Of course the total quantity also can be balanced by providing more high-end jobs, but the quantity of low-end jobs has been reduced exactly. In order to maintain the employment rate, the policies of outsourcing in developing countries such as USA, Japan have transformed conservatively then bringing the negative influences to market; and the companies in China will also be impacted.

4. The Dimension of Replacers: Guard against the barbarians at the gate

The cross-integration of service outsourcing industry has brought some companies in other industries into outsourcing industry. So, in the 3.0 age, the definition of service outsourcing industry has been changed, the competitors of outsourcing companies are no longer the traditional service outsourcing enterprises. With the deep cross-integration, the layout of competition in service outsourcing industry will be more and more serious. The selling modes of some companies such as Microsoft, SPA and Yonyou have been transformed from traditional software products to software services like SaaS then have threatened many software outsourcing companies. In addition, the cloud platform and cloud services provided by Google, Amazon have eaten the market share of IT service companies.

5.  The Dimension of Competition

No.1 Enlarge the Distance

The total trend of China’s service outsourcing industry has developed with the mode of the 1.0 age in the age of 2.0, so the cost is still the key point for competitions of China’s companies. The distance between us and global competitors has enlarged when the we enter the 3.0 age.

No.2 Loss of the Bargaining Power in International Market

The China’s service outsourcing companies has developed in middle and low area with the advantages of cost and also gained the ticket and qualification of bargaining to compete in global market in the 2.0 age. With many different area and different creative companies entering into the 3.0 age, we may lost the bargaining power or even lost the tickets if we do not change the mode of services, technology and businesses.

6. Our Characteristics: Existing of Cost Pressure and Market Pressure

No.1 The Change of Exchange Rate

According to the data measured by the Export-Import Bank of China, each 1% appreciation of the RMB, the profit of outsourcing industry will be reduced 0.7%. Because the average profit rate of China’s outsourcing businesses is about 10%-20% while there are many companies within 10%. The driven power of cost for offshore outsourcing will be smaller and smaller if the RMB continuously revalues; then the price advantage relied by the majority of China’s outsourcing companies will be weaken and even dismissed.

No.2 The Increasing Cost of People

The cost of people is the main element for service outsourcing companies accounting for 60%-70% of the total cost commonly. Based on the situation of increasing wage, taking the first-tier cities as example, the raise of increasing wage for primary technology talents in big enterprises has reached between 10% and 15%, while the raise for senior talents has reached 20%-30%; however, the currently common net profit is 10%-20%. The raise of increasing wage will eat the total profit of enterprises based on the data that cost of people is accounting for 60% of total cost within 3 years, if the trend of increasing keeps constantly while other things not changes. So it will be one of the biggest challenges for outsourcing companies to control the raise of people cost in the future.

No.3 Avoiding the Phenomenon of Foxconn in Service

Compared with India, the price of China’s service outsourcing industry had obvious advantages five years ago; however, there has been no difference between China and India in the cost of people since the raise of people cost and appreciation of RMB in recent years, especially in the first-tier cities in China. The demand trend of labor has emerged in short supply, and then the wage must be raised constantly. If we do not change the mode of “sale people”, the profit of service outsourcing companies will continuously descend, so it is necessary for companies to seek a new developing way of delaying on services that will repeat the “Foxconn path” of big scale & low profit in manufacture.

No.4 More and More Serious Price War

With rapid development of contract market in China, the outsourcing demand has been strong to leading majority of new outsourcing enterprises into the market. The competitions of these companies have been fiercer based on price in the process of obtaining orders, and declined the industrial profit rate continuously, because these companies do not have core competitiveness.

7. Lengthening the Theoretical Growth Period of China’s Service Outsourcing Companies with Talents, Market, Merge and Development.

Generally speaking, most China’s service outsourcing companies has still been in the 1.0 age of outsourcing industry currently that they gain the profit with the labor price difference. That means if we can hold the time of industrial subversion brought by new technology revolution, the China’s outsourcing industry will enter into the 3.0 age of outsourcing industry that has higher profit ability crossing the 2.0 age. That is also the opportunity for China’s outsourcing industry to catch up with global market.

With the coming of new technology revolution, the growing speed of China’s leading service outsourcing companies has been obviously slow then the growth is challenge. Only grasp the opportunity of new technology revolution, the high growth of China’s service outsourcing companies and industries will be achieved in the future. So Devott believes that there are 4 key elements for development of China’s service outsourcing industry in the 3.0 age, including supporting research, development and creation, subsidizing high-level talents, promoting demands of domestic market and encouraging overseas mergers and acquisitions.

Supporting Research & Development and Creation--------Encouraging the companies in the new technology application area to research, develop and create. The element of cost has been less important for industrial development; and the knowledge gained by service outsourcing companies and the transformation from self-services to CM have become the more important elements for industrial development. The focus of policies and financial supports should be leaning to the research & development and creation, with the circumstances of declining profit rate and increasing cost of China’s service outsourcing companies.

Subsidizing Top Talent-----Providing the top talents to meet the demands of company transforming. The new technology talents, service talents and industrial experts are keys for the growth of outsourcing companies in the 3.0 age. So it will be the next point of talent policy to support the introduction and hiring of compound industrial talents and technology talents with transformation in service outsourcing industry.

Promoting the Demands of Domestic Market------The new technology revolution will bring a new informative and service wave of development for China’s companies. Different from the Indian outsourcing services that entered into American market with the millennium bug; the service outsourcing industry in China has been started by transforming services of multinational service providers, so the offshore market ability of domestic enterprises is congenitally deficient, but the domestic market is also congenital advantage. By leading the ability of domestic market to improve service abilities of China’s companies and by encouraging the cooperation of China’s companies and overseas companies to gain overseas outsourcing orders and technology abilities that supports the transforming development of service outsourcing companies efficiently. The OBC of Sofmit is an example of this thinking.

Encouraging overseas mergers and acquisitions-----------Mergers and acquisitions is the only way for companies. In order to improve the expansion ability of offshore market, the outsourcing enterprises will have to improve the ability of CIF in destination. However, the relatively small scale of domestic companies and weak ability of CIF hinder the growth of offshore businesses. It wastes time and resources to enter into the outsourcing provides circle of strategic customers successfully, so the best way of gaining an excellent team is to merger. The more important is that company can gain core technology and service ability by mergers and acquisitions to support transformation of companies.

“Not to advance is to go back”-----The companies will exit from the industry if they are not fit to the cloud under the industrial principle of natural selection; however, others will gain better opportunities to develop with grasping the wave. The China’s outsourcing industry will enter into the 3.0 age of higher profit ability crossing the 2.0 age, if we grasp the chances of industrial subversion brought by new technology revolution. That is also a historical chance for China’s outsourcing industry to catch up with global market.

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