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A call for IT to consider writing a SWITCH — to China

Indian software development companies, which are world leaders today, will face challenges in sustaining their growth levels.

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Software outsourcing companies’ growth hinges on such a strategy, says Paul Denlinger

HONG KONG: Indian software development companies, which are world leaders today, will face challenges in sustaining their growth levels unless they formulate an aggressive strategy to expand development capabilities in China, says a Beijing-based market strategy consultant with intimate knowledge of China’s emerging potential in this space.

In particular, the six biggies — Satyam, Wipro, Infosys, TCS, Cognizant and HCL (or SWITCH) - “don’t have the luxury of being able to grow organically at the pace they’ve been used to,” says Paul Denlinger, who has been involved with Sina.com, chinadotcom and Shanda, among other internet start-ups in China.
 
“They need extra technical talent and infrastructure, and they need it now. And there’s no country - other than China - with the population and the depth of service-providing capability.”

The demand for Indian IT personnel, notes Denlinger, “has challenged the depth of the Indian talent tool almost to the breaking point… Strains are already showing, with some smaller US and European clients complaining that the level of service… does not match with the quality of service they had previously received.”

This, he adds, has forced Indian software outsourcing companies to look outside the country for talent.

Although China is relatively unknown as a software outsourcing development source, this is changing rapidly, says Denlinger.

“When it comes to size and scale of market, China is the last frontier for IT talent and is the only market that can come anywhere near the size of India’s IT pool of talent.”

While the Indian IT talent pool “is almost completely tapped out by strong demand,” the talent pool in China’s Tier-II cities “has just begun to be tapped.”

Since 2003, Indian software companies have woken up to the need to have a presence in china, but their strategy of ‘going it alone’ and targeting Tier 1 cities - principally Beijing and Shanghai - didn’t quite work for a variety of reasons, observes Denlinger.
 
But now, “with all the pressure to deliver more software outsourcing from their companies, the Indian companies are taking a second look at the Chinese market.”

And they are now aware that the best way to enter China is through Tier-II cities such as Shenzhen, Guangzhou, Hangzhou, Tianjin, Xi’an, Chengdu and Nanjing. Indian companies were partnering with governments in Tier-II cities, and in return for investment incentives, they guarantee the creation of a specified number of jobs for graduates.
 
Indian firms  were also identifying leading Chinese software outsourcing firms, and forming a BOT (build, operate and transfer) operation “where the Indian company commits a certain value of contracts and the Chinese company a certain number of technical persons devoted to contract delivery,” notes Denlinger.  

Along side this trend of Indian companies expanding their China operations for delivery, Denlinger notices another trend: of leading Chinese software outsourcing firms all hiring top-notch sales, marketing and business development personnel with North American, European and Japanese experience "so that they can establish direct sales relationships with firms in those major markets.

As they expand their presence in these markets, it is conceivable that they will compete with their Indian competitors and partners on the same projects. In addition, Chinese companies are stepping up expansion in the Chinese domestic market." So far, he observes, Indian companies have not been able to rapidly build up their Chinese market sales and business development teams.

Precisely, how the India-Chinese relationship will evolve is unclear, says Denlinger.

"It's likely that each company will develop its own best model based on how much trust they develop in their individual relationships and how well their business cultures mesh. In the short term, the main beneficiary will be buyers of software outsourcing services; they will be able to tap into a larger pool of technology talent and will have a wider range of available services at competitive prices."

But Denlinger foresees that, on high-value contracts of more than $50 million, "it will be virtually impossible for Indian companies to hide their North American/European customers from their Chinese technical personnel, if their projects are done in China. Some will continue to buy from the Indian outsourcing firms they have dealt with in the past; others will choose to work directly with the Chinese software outsourcing firms."

But whichever way you look at it, says Denlinger, "software outsourcing isn't just about India anymore."

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