Stan Lepeak, Director of Global Research, KPMG Shared Services and Outsourcing Advisory

KPMG’s Shared Services and Outsourcing Advisory (SSOA) practice’s global leadership team recently completed a tour of Asia Pacific during which it examined sourcing trends into and out of that market.  This is the first in series of blogs that will share these findings and insights.

There has been much talk in the outsourcing market over the past several years around how and when China will become the premier source of services for global sourcing, potentially overtaking even India as the top destination for offshore outsourcing.  The rough logic of the premise is extrapolated from the following factors: the size of China and its economy overall, the number of (mostly) skilled graduates it turns out yearly, the prowess of its offshore manufacturing base, the quality of its rapidly expanding infrastructure build-out, and its “managed” economic model which enables it to make better (and more forcible) direct investments in the most opportune areas.

All of these positive points about the China market are true.  None of them necessarily means that China will become anytime soon, or ever, the premier global source of exported business and IT services.  It is not that it cannot do so as much as it will not, or more practically, has other better things to focus on and do.

The key counter to these positive points on China’s service potential is the first point itself: the size of the country and its economy overall.  The internal market in China for alternative service delivery models (e.g., shared services centers, information technology and business process outsourcing) is huge, both among commercial as well as state-owned enterprises (SOE).  Some SOEs have hundreds of thousands of employees.  Clearly, building and managing a shared services environment to support an employee base of this size is a lucrative opportunity.

Equally or more important is the pressing need among many SOEs to improve internal operational efficiencies of bloated operations.  Layoffs are not a practical option so process improvement efforts, typically including investments in enterprise systems and deployment or expansion of SSCs, are preferred methods.   There are similar opportunities available to China’s commercial firms, most of which have aggressive global expansion plans (as do many SOEs) that require developing more streamlined and competitive internal operating environments and models.

Finally, the many western firms entering the lucrative China market have a need for local back office support operations.  These typically initially serve the local market but are more often being expanded as a hub to support broader Asia Pac operations, often replacing hubs in more expensive and talent short (relatively speaking) markets such as Hong Kong, Singapore and Australia.  These western owned SSCs are generally not, however, delivering back-office services back to home market.

Besides the lure of the local market, there are challenges facing the China business and IT services export market.   Most local firms are small (often by government plan to grow the individual supplier base) and lack the scale and brand awareness to penetrate western markets.  There are issues with language, at least when dealing with English speaking markets, a lack of western business acumen, a shortage of skilled middle managers with any western business experience, in the medium term likely wage inflation issues and longer term potential skilled labor shortages as population levels peak and many skilled candidates are drawn to other industries and career paths.  Stress to the political system is an ongoing macro issue, especially as a leadership change approaches.

Overall the Chinese market has great opportunity to grow its potential to deliver business and IT services into the market.  The majority of these services will be delivered locally either to commercial firms, state owned enterprises or western multinationals with local or regional operations.  Any organization in these categories should clearly include China in their service delivery and extended global enterprise strategies.  Pundits looking for the next India in terms of delivery outsourcing services to the west should revise their models.

Click here to  learn more about sourcing trends in the China market.

Filed under: Market Trends and News, Outsourcing, Shared Services by EquaTerra