In our current economic climate, enterprises are vigorously looking at ways to retain their core talent and processes while containing costs on routine, tactical functions, for example administrative finance, HR, customer management and procurement processes.
The industry for Business Process Outsourcing (BPO) – the transfer of management responsibility of these routine business processes over to a third party – has been enjoying steady growth over the last decade and we anticipate this to accelerate with current economic conditions. BPO is a logical direction for many enterprises to take, where enterprises can drive cost-efficiencies and improved process-rigor through service provider offerings that appropriate low-cost offshore talent and standardized processes underpinned by the latest technology tools and platforms.
The Asia/Pacific region has been crying out for more comprehensive shared services and outsourcing structures for years. Singapore and Hong Kong have traditionally assumed the role of "regional hubs" for most multinationals since more than 20 years, but are now far too costly for running shared services, or outsourced operations. Many Pan-Asian businesses, or regional hubs of global multinationals, have shied away from shared services or outsourced models as they didn't have low-cost options available, and the Asian business culture has traditionally centered on inhouse models for its administrative support functions like HR, finance and procurement.
Is China, with its unprecedented base on cheap labor, low-cost product manufacturing, de-regulated banking sector, booming domestic economy and developing infrastructure, poised to challenge India, the Philippines, Central and Eastern Europe and Latin America, as a powerful deliver center for global BPO services? We believe it will perform well in the medium term delivering knowledge-based services to Chinese speaking businesses – and some Japanese and Korean – but will struggle to break into the global market to deliver services to Western enterprises for the following reasons:
1) China is in a time-crunch. China is already touting its tier-2 cities, such as Xi'an and Chengdu, as its mainstays of Beijing and Shanghai are already suffering from chronic job attrition (30%) and wage inflation. India, and other offshore locales such as the Philippines and Eastern Europe, have enjoyed a stable period of several years to develop their BPO infrastructures before these issues crept in. China is moving into BPO with little breathing space to establish its infrastructure and build critical mass. It is easier for BPO firms to combat attrition and wage inflation once there is critical mass of staff and infrastructure available.
2) Wages and attrition for knowledge workers in China are already high. Wages in the China for knowledge workers are not much lower than in India, which has more experience in BPO and much better English language skills. Moreover, we are seeing attrition rates as high as 30% in the major cities of Beijing, Guangzhou and Shanghai.
3) Providers wary of the “India experience” all over again. With all the initial teething problems firms ensured sending out BPO services to India, why would they want to go through all this again with China? Some outsourcing giants such as Infosys and TCS have only established a token foothold in the region – in the hundreds of employees as opposed to the multiple thousands in India, this seems to indicate that these firms are still hedging their bets on China. Only IBM has surpassed 1000 employees in China for BPO services.
4) Latin America is offering a compelling alternative for delivering BPO services to US businesses. We are already seeing a strong competition for BPO services from the Latin American countries such as Brazil, Argentina or Mexico for the following reasons:
- Wages rates are comparable
- Little need to relocate staff into the US
- No need for "bridge teams" which spend their time overlapping development work with both onshore and offshore teams
- Staff travel costs are far lower for nearshore
- English competency is strong
- Staff attrition is lower in Latin American countries than in India or China.
The strong competency for Latin American workers to deliver both English and Hispanic voice-based services and their ability to administer routine business services makes the region an attractive location for services providers to develop BPO service delivery centers. For example, enterprises can now source administrative accounting tasks for comparable rates in Mexico, than they can in China or India.
5) China's core competency is engineering. China is more of a manufacturing/industrial powerhouse and we do view it being so adept at performing administrative business services. R&D services are in the Chinese DNA, rather than BPO services, which is the direction we see China taking, for example industrial design work, contract manufacturing, biotech services, etc.
6) Movement away from mere labor arbitrage. BPO services are increasingly moving away from the "body shopping" game, and more towards the provision of value-added business services and innovative offerings. Moreover, most of the offshore BPO providers increasingly prefer to price their services by transactions, for example invoices produced per day, or reports per month, as opposed to cost-savings per employee salary. Pricing services by employees provided as opposed to services delivered expose the service provider to increase its wage and currency appreciation, which is threatening to erode the offshore service models of today’s BPO providers. With China’s prime attraction for BPO services being low-cost workers, moving work over here could be a regressive step for many enterprises, with the current wage appreciation and employee attrition dynamics. Having said that, experienced outsourcing providers delivering Chinese-based BPO services can claim to have learned from past mistakes and seek to rectify these.
7) China's English-competency is a major minus for BPO. Whereby Singapore and Hong Kong adopted English as their mother tongue many years' ago, China is still a good decade away from being able to boast good English-speaking competency. Beyond the Chinese-speaking languages, and some surrounding Asian languages such as Japanese and Taiwanese, it is difficult to see China becoming more than a local hub for its domestic economy and some of the Asian-speaking countries. To run truly pan Asia/pacific services, not having a strong English-speaking competency is a major issue with BPO. When running the vast majority of BPO services, there needs to be elements of close interaction between the outsourcer, or offshore worker, and the mother company outsourcing the services.
8) China’s legal system’s policies and enforcement of data privacy and patent protection is extremely poor. BPO services rely on sensitive employee, customer and financial data being sent to remote locations and adhering to a multitude of industry regulations, data privacy and compliance standards.
9) China's “Great Firewall” could inhibit its knowledge services industry. Just last month, there were 868 arrests made of people providing "unhealthy" content over the Internet. Google reports that the most searched for words in China are related to "money" and "technology", which indicates that this "unhealthy" content probably wasn't all pornography. People talk a lot about how “China will be changed more by the Internet than the Internet will change China”, but if the Chinese government manages to keep most Western sites from being accessed, and persists with stepping up attempts to block this "unhealthy" content, will there surely be a limit to the level with which China can become "changed"? One of the key reasons for the success of India and the Philippines, for example, for delivering outsourced services such as application development, insurance services and accounting services, is the ability for their workers to learn and assimilate with Western business culture. Interaction with Western staff is vital, and so is the ability for offshore workers to research information from the Web. If the Chinese middle-classes are continually blocked from integrating their online culture with the rest of the world, won't this impact their ability to assimilate, understand Western business culture and deliver knowledge services for customers outside of the Great Firewall? The constant attempts by the Chinese government to keep China sectioned off from the rest of the world over the Web could substantially hold back the country from delivering knowledge-based business services, such as BPO services, for Western companies. If their development is stifled through restricted access to information and people outside of China, they could be left performing knowledge tasks that require very limited "critical business thinking”, for example data-cleansing services digitization, data entry and forms processing.
To conclude, China has potential to develop a compelling BPO industry, but there are many obstacles the country needs to combat, in order to develop this beyond an industry that is merely serving a sub-region. Even though, it is tempting for people to get over-excited at anything "China-related" these days, it is important to look beneath the surface to get a dose of reality.
Phil is Research Director, Global Services and Outsourcing, for leading industry analyst AMR Research, Inc. He also authors the popular blog “Horses for Sources” which can be accessed at http://www.fersht.typepad.com
