China's emergence in sourcing realm

There has been a lot of talk about how China can, and perhaps will, impact the entire sourcing industry. I would like to offer some potentially provocative views on this.

When one thinks of the sourcing industry as a whole, one has to consider supply and demand, outsourcing and internal shared service delivery as well as corporate and individual aspects.

Within China, there is clearly a strong focus on the supply side from a corporate perspective--just look at how many companies there are competing to deliver services from China. These players compete in the labor arbitrage business, that is still the foundation of the offshore industry (in spite of the rhetoric), but they do so with some significant constraints including:

• Many executives feel that working for Indian service providers is the "I won't get fired for that" option;


• The perception that outsourcing to China is risky, for example, in terms of intellectual property (IP) protection, regulatory compliance, etc;


• The language challenge of doing business in English, Spanish and even Japanese, to a certain degree;


• The question as to whether the total cost of doing business in China (not just wages) is really that much lower than other countries;


• The competition from other industries for the relatively small number of appropriately trained and experienced people; and


• The confusion that arises in buyers minds because of the myriad of smaller service providers, each based in different cities.

Given those constraints, it is not surprising that internal delivery centers (eg. captive centers) are a common choice for the larger multinationals. Such models help address the risks and challenges, and are typically undertaken when the multinational perceives additional benefits for doing business in China.

Outsourcing companies, however, tend to struggle more as many of these constraints are not easily solved by the service providers themselves. Whereas some constraints, such as unreliable infrastructure faced by many Indian service provider, can be resolved by the individual companies, other challenges such as the enforcement of IP protection between companies and a robust education system that will provide appropriately trained graduates, are more easily influenced by governments than by individual companies--though, as the Indian service providers grew in scale, they have taken on some educational responsibilities.

From a corporate demand perspective, while it will undoubtedly be the case that the larger Chinese enterprises--often state-owned enterprises--will gradually increase their demand, one has to wonder how the acceleration of such demand can benefit the supply side of the sourcing industry within China.

Thinking of the individual perspective, one can see how the advantages that China enjoys including a higher degree of government influence, could be used to establish more focus on training in the areas that are emerging as the future competitive advantage in the sourcing industry.

So, while sourcing services from China is somewhat inevitable, I wonder if we might see some fine-tuning across all the dimensions as a means to accelerate China's emergence in the sourcing industry.

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Michael Rehkopf

Michael has more than 20 years of experience in operations, strategy and sourcing covering all major parts of the globe. He has also worked for Australian, Canadian, German and Japanese companies in both business process outsourcing and IT outsourcing.
Michael's industry experience includes the financial services, manufacturing, telecommunications and travel sectors. He leverages this diverse industry experience and his university background in accounting, IT and his Master of Dispute Resolution, to assist clients in the development of business strategies and the implementation of sourcing strategies. These include the associated evaluation, negotiation and organizational change.
Michael is currently a partner at TPI, the world's oldest and largest sourcing advisory firm. Prior to joining TPI, Michael held leadership positions with Siemens Business Services, OpenPlus International, Mitsubishi Electric and Netron.