China’s fast-growing and fast-evolving markets are challenging foreign and local companies to keep up with shifting demands for their products and services. As a consequence, we are starting to see outsourcing used in ways that go far beyond cost and quality—suggesting how outsourcing can strategically assist expansion into new markets, introduction of new products, and development of new business models.

The thesis that emerges—where outsourcing permits one to conserve resources, maintain flexibility, and define scale in concert with demand—is intuitive, powerful, and likely to be useful to companies outside of China.

New Markets

Many companies are moving into China to capitalize on growing domestic demand for industrial and consumer products. Most of these firms have little or no experience in China and are thus vulnerable to various mistakes. Instinctively, these firms have tried to insure against problems by simplifying their operations during the initial entry phase. This minimalist approach to survival has prompted increased use of outsourcing for both essential and non-essential capabilities.

Take the example of Dan, who runs the operations of a medium-sized American company in China. When his CEO asked him to take charge of globalizing the firm’s production, Dan knew little about China. After his team informed him of the advantages likely to be gained from setting up several plants in China, Dan was persuaded. He still needed to decide how much of his current operation to bring to China. Should he bring the entire model or just a portion? He had heard friends say, “Keep it simple at first—you can always add more functions later.”

As Dan reviewed the business case, he noticed that 35% of the entry costs were attributed to support functions like finance and human resources, which were populated by expatriates. More critically, he became concerned about the processes these expats would bring with them. He already knew that there was too much bureaucracy at the U.S. plants, and bringing even a portion of that overseas would kill any hope of profit from a new operation.

After careful review, he made a decision to bring slightly more than half of the typical operational model. Of the remaining portion, he arranged to outsource the back-office functions to a provider in China—at least temporarily until the operation grew in sophistication and need. The final portion of the model was simply discarded—a radical move that he had long hoped to make but never had the freedom to accomplish until now.

During his first year in China, Dan learned that flexibility meant everything. Although the sales team had built decent momentum, demand was anything but smooth. By avoiding fixed investment in the support functions, Dan found that he was able to invest in more flexible production equipment in the main plant. His strategy of using outsourcing to allow him to bend and flex with the market paid off. He eventually renewed his services contract for another three years.

While hypermarket applications cannot tell us exactly how the same techniques would work if applied to more conventional markets, they do suggest what benefits might accrue under somewhat similar conditions. In Dan’s case, market variables could not be predicted with any accuracy because of the emerging nature of the situation, and flexibility was a key to profitability. By concentrating his resources on operations rather than support functions, Dan was able to multiply his chances for success. By expanding into new markets, even outside China, managers would be well advised to consider more aggressive use of “lean expansion,” made possible by outsourcing of selected requirements.

New Products

The use of outsourcing in China is not limited to foreign companies. Domestic companies are experimenting with the use of outside services as a way to minimize risk of product launch and evolution. Some of these decisions are a matter of necessity, while others are a matter of choice. With consumer preferences fomenting and incomes rising, new product needs are emerging daily. Most firms still try to manage design, production, distribution, and support internally, but more are now realizing that attacking the opening is more critical than controlling all aspects of the business.

Ba Lin, a marketing manager with a Beijing firm, faced just such a challenge. The management committee of her company had recently approved a new line of small appliances geared toward new property buyers. With spring fast approaching, Ba Lin knew that she had to act fast to get product into the channel. As a result, she could not follow the conventional approach of using in-house resources for all aspects of the effort. In particular, she knew that the new products were likely to be complicated for consumers to use and that calls to the help center would increase.

To speed the process, she carved out the marketing and customer-support components—including direct-mail campaign management and help-desk support—into a set of needs that outside companies could now provide. After vetting numerous offers, she settled on one firm for marketing communications creation and program management and another for operating the help-desk and customer-service aspects. Her company’s existing capabilities in both areas were already stretched to the limit. Additionally, this new line would require different experience, making outsourcing the only option.

Six months after the launch, the line was still not meeting targets, and Ba Lin recommended that her company substantially reduce its commitment to going forward. As she pulled back, she realized that the decision to outsource support functions had been wise. She simply exercised her contractual right to terminate the services with two months’ notice—which limited her exposure to further losses in the new line and enabled her to consider an alternative line for the fall season. Being able to switch out of one approach and into another with little friction meant that she would still have a chance to optimize her product portfolio for the year.

New Business Models

The chaotic conditions of China’s markets are leading firms to create new approaches to doing business—new business models, to some extent. Some models are the outcome of sharp demand colliding with scarce supply, and others simply are the result of piecing together a process to satisfy an attractive, even if temporary, opportunity.

Operating in Shanghai, John faced the unusual difficulty of replacing something in his business model that he had taken for granted in the U.S.—the ability to use a credit card to pay for his products. Still emerging, China’s credit-card system is not yet a mainstream payment method. John’s consumer-electronics business, although operating in just one city at this point, was based on internet orders and quick delivery. Without a payment method with immediate clearance, his entire business plan would be undermined.

Recognizing that the delivery companies might be able to help, John arranged for a company to pick up checks from customers one day prior to the delivery of their orders. The extra time was an inconvenience for the customers, but tolerable given the excellent pricing that John was able to provide. The service provided by the delivery company seemed to work fairly well. John concluded that the early trial would suffice until China regulators approved a more permanent approach.

Outsourcing—or the borrowing of capabilities for a particular purpose—is becoming more sophisticated in application and can clearly play an important role in growth strategies in emerging markets and elsewhere. From the Petri dish that is China, it is possible to see how the sourcing of capabilities can supplement or complement one’s own skills in fast-changing situations where flexibility and adaptation are paramount.

Tom Manning, a former partner of Bain & Company, is now a board director and investor, who frequently comments on globalization, technology, and China. He can be reached at Tom.Manning@ChinaBoardDirectors.com.