Software outsourcing comes to China

Can China rival India in IT outsourcing? Eric Rongley, founder and CEO of Bleum Software Outsourcing makes his case.

FinanceAsia: Why China?

Eric Rongley: China has many of the advantages that attracted foreign companies to India: a highly-skilled, low-cost workforce. China churns out 250,000 science and engineering graduates per year. There is a language barrier, but then that's where a company like us comes in. We know the local market while having our top managers trained in the US.

As for India, it's already getting mature and we are seeing profit margins pushed down to around 20% from much higher levels previously. I estimate China is around five years behind India.

Outsourcing, on a global basis, is a massive trend. That's the basis of my move to China. With the labour market in India already stretched, a move to China with its huge talent pool is the next obvious move.

Are you satisfied with the skills you can find in China? China isn't renowned for its software expertise.

Yes, we are. At the moment, we can cherry pick the best resources. We carry out extensive training and recruiting at top campuses - currently, mainly along the coast and in Beijing. It's not like India, where the best guys are in the US, and it's the less skilled worker that are left behind.

In fact, you'd be surprised at how much software outsourcing is already taking place in China on the back of the extensive Japanese presence here. There are thousands of small Chinese software firms that outsource for the likes of NEC and other long-implanted Japanese companies.

Are you cheaper than India?

No, we are roughly the same. However, the cost advantage relative to the US is the same, so we're essentially providing more options to companies. Not every company wants to depend on one outsourcing location! China has one very important advantage in the sense that it is logical for companies focussing on Asia Pacific expansion to do their outsourcing locally. And while costs in Shanghai are amongst the highest in China, we are moving into the interior to leverage the cheaper talent pool there. Places like Chengdu, which has a good educational base, and even north-eastern Dalian city, which has a long history of providing outsourcing services to the clusters of Japanese and Korean companies located there. Chengdu would probably be more suitable for less complex operations

One thing we are preparing for, however, is a possible upward revaluation of the Yuan!

What kind of outsourcing do you take on?

We outsource full lifecycle software development as well as just the testing activities. Because most software organizations do not pay enough attention to this, this is often where customers would like us to help them first. Currently Bleum tends to develop applications, but we see a growing opportunity to get into embedded systems, especially with Japanese customers. Our core expertise is banking and credit cards

What kind of clients do you have and what would be a typical project?

Our clients are engaged in the credit card business and also software. A typical project would be to re-engineer mainframe and client-server architecture to web-based equivalents. At the moment, you can be a generalist service provider in China, with perhaps one area where you are more focussed. That's different to India, where the market is now so competitive for outsourcing companies you have to be very strong in a particular niche.

Is Shanghai a good city to do what you do?

Shanghai is internationalized, comfortable and relatively efficient. However, we recruit from all over China. To a certain extent, Shanghainese are spoilt - they have numerous opportunities compared to say, a Hunanese, for whom a chance to work in Shanghai for a foreign firm is chance in a lifetime and who will respond to that with perhaps a greater work ethic and loyalty.

What is the composition of your workforce?

Many of the top managers are western or western trained. Of course, we have many Chinese software engineers - 35 in number. However, we also have four senior Indians whom we prize for their experience in outsourcing they gained for top companies there such as Infosys, Tata and others.

What was the 'light bulb' moment, which led you to consider China?

Before coming to China, I was the General Manager for IVR's (International Voice Register) software development centre in India. I then founded Navion (Shanghai) Software Development Company for Capital One Financial of Virginia. Capital had decided to get ahead of the curve and come over to China in 2000 - unfortunately, just as the tech bubble was deflating! The company pulled out in 2002, but not until we had picked up a CMM level 3 qualification - one of the very few companies at the time in China to have such a rating. CMM is a seal of quality in the software industry and is an important criteria for persuading a foreign company to work with you. We are currently level 4 and plan to be level 5 by the end of the year. Very few companies have that.

It was clear to me, having worked with some excellent local engineers, that China had potential in this area. So I decided to set up on my own.

What client base are you targeting?

Initially, it seemed natural to target units of local multinationals in China. However, our real aim is to work on a larger scale with MNCs in the US. In fact, we are about to open a sales and marketing office in the US in order to raise awareness of our service. The fact is, it's not yet worth offering top quality local services to the local market.

Why not?

Local customers aren't willing to pay for quality. In a way, that's natural. India was the same, and the US the same before that. But as China's economy get more complex, quality becomes so important. Imagine if China Union Pay, the national credit card and banking clearing organization, goes wrong: chaos. Imagine a $10 million discrepancy at one of the clearing centres. And it's not a matter of 'if' but 'when'. When that happens, managers are going to wish they had paid an extra 100,000 for a fail-safe system rather than cutting corners. And that they respected intellectual property.

What's the profile of your company and what is your growth trajectory?

The holding company is a registered BVI with a wholly owned foreign enterprise in Shanghai. I founded the company two years ago. We had 25 people last year and should have 100 by the end of this year. Revenue is up four to five times up on last year at around $3 million per year. We are currently a small company, but we foresee rapid growth in the next few years. The company is largely self-funded, although one of the clients we work for has also taken an equity stake. In any case, this is not a capital intensive business compared to a software product company, since we have no R&D costs.

Our real target is to be an overseas development centre with genuine overseas clients, working with MNC headquarters rather than with local units. We just signed up one such client and have two more in the pipeline. The contracts are around the $3 million to $5 million range. The client we just signed up will require a dedicated team of 100 people for that project alone. So you can see we're growing fast.

How does China figure in your future plans?

The interesting thing about China is that in a few years time it's likely to have a huge domestic market. But we don't want to compete against local companies here at this stage. Our aim is to grow the company via outsourcing in the US, then come back to China as the 500-pound gorilla with top of the range qualifications and take the market by storm!