Last month, we reviewed the importance of organizations developing a Service Delivery Model (SDM) to help guide them through their outsourcing and subsequent management efforts. To briefly recap, an outsourcing buyer’s SDM should embody the following elements:

• A process to determine which business and/or IT processes and functions are suitable for and should be outsourced.
• Identification of the key decision makers and stakeholders in the sourcing process for a particular process area 
• A business case, including expected benefits and defined processes to measure achievements for a specific outsourcing scenario
• A process to identify, vet, assess and select candidate service providers, service locations and geographies
• A retained organization and an outsourcing management and governance model with the processes.

The specifics of an SDM will vary, often significantly, depending on the organization and its outsourcing sophistication level, the processes being outsourced, the service providers considered and employed and the global reach of the outsourcing effort. As buyers invest more in offshore services, their SDMs must evolve to reflect the nuances and additional challenges of global outsourcing.

The mandate for outsourcing buyers today is to develop and deploy global SDMs that are tailored to the specific regions and countries from which they are obtaining services. The choice of outsourcing service providers will increasingly drive the location from which services are provisioned, particularly as both multinational and India-based outsourcing service providers expand their global footprint. Many buyers today, however, still desire to obtain services from a specific country. Even when and if buyers cede some of the decision-making as to country of origin for sourced services to the service provider, they still should have a role in determining the country of choice. This means buyers must possess their own capabilities and models to assess the pros and cons and risks and rewards of utilizing various markets.

The premier offshore location of choice today for outsourced services — particular ITO, but increasingly BPO — remains India. Yet, China is emerging — from a topical standpoint in the short term and from a true competitive standpoint in the long term — as both a source and destination for services outsourcing. Gartner, for example, estimates the Chinese IT-services market to grow to nine billion dollars in 2006, while IDC estimates the market will approach $12 billion by 2009. EquaTerra estimates, however, that less than one billion dollars of that total today is in exports.

While many of the lessons buyers have learned about India as an outsourcing destination will hold true when outsourcing to China, there are many differences between the two markets. Thus, buyers considering China as a source or destiny for business and IT services must tailor their global SDM to the Chinese market and not re-use a model deployed for India.

Chinese Services: A Market Overview

China’s software and services export market is still very much emerging. A huge domestic market and significant technology skills will make China a future outsourcing competitor to India. Today, however, it lags behind India in several respects:

Buyers also face greater legal and intellectual property risk operating in China. Although there have been increased crackdowns on software piracy, it still is a significant problem. Chinese officials need to do much more in terms of both enforcement and legal recourse. But there have been some recent positive steps in this direction. For example, in late 2004, Chinese courts announced an intent to interpret more strictly interpret existing intellectual property laws. One way of doing this is by lowering the threshold for punishable offenses to under $10,000. Using the Internet to distribute pirated software was also official prohibited. Consistent and adequate enforcement of these rules, though, is the key issue. In a related move that could also help the Chinese software market, the government in 2005 also reduced to zero the duty level on a broad range of IT products.