Many environmentalists, economists and labor advocates are pleased with the changes that have been implemented by the Chinese government.  Some experts feel though, that China’s moves may put a financial strain on smaller U.S. businesses that have been outsourcing to this country.

An article posted on CNNMoney.com titled, In China, Outsourcing is No Longer Cheap, examined these recent movements.  Some of the key points of the article are summarized below.

New Labor Laws
A strict labor regulation went into effect on January 1, 2008 in China, which mandated employers to offer employment contracts, overtime pay and a social security program.  It is believed that this law was the direct result of internal political dynamics.  There had been a growing public outcry regarding low wages, insufficient labor rights and economic inequality.  Recent studies have shown that the wages in China are increasing by 10 to 15 percent each year.  That statistic, along with the tough labor law, has made many businesses nervous.

Auret van Heerden, President of the Fair Labor Association, was quoted in the article as saying, “There’s a feeling that this law might be too much, too soon.  HR is a recent discipline and the courts are starting to get overwhelmed.”

Environmental Reform
China has been making great efforts at environmental reforms.  In 2006, the Chinese government started a 5-year plan to increase the country’s energy efficiency by 20 percent between 2006 and 2010.  China anticipates that by 2020, renewable energy will account for 15 percent of its national consumption.  There has also been a greater enforcement of safety and cleanliness rules that had been in China’s plans for a while.

Last summer, China took emergency measures to address air pollution due to the Olympic Games.  As a result, many factories were forced to stop or slow production.  Some of the factories were later re-opened, but many were not. 

Eliminating Tax Rebates
China had been allowing tax rebates for exporters since 1985, but recently these rebates were cut.  Over the last few years, Beijing has drastically cut rebates on thousands of goods across a range of industries as a way to reduce China’s trade surplus.  China charges a 17 percent value-added tax (VAT), which is placed on added value of goods and services that is incurred in any exchange.  Exporters were usually given a full rebate on this tax, but that has changed.  China will now only offer VAT refunds ranging from 5 to 17 percent.  For goods that are considered to cause high pollution during the manufacturing process, the tax rebate has been cut all together.

Rising Chinese Yuan
The weakening U.S. dollar has also been compounding problems for many U.S. companies outsourcing to China.  In 2007, the Chinese Yuan rose more than 10 percent against the dollar.  Chinese vendors are typically paid in Yuan, which has placed a large financial strain on profits for many businesses in the United States.

Despite all of these changes, China still has a lot to offer a company looking to outsource.  A&E Consulting offers valuable insight into the outsourcing industry and helps businesses in choosing the right location and vendor.  The consulting firm will also oversee the first outsourced project to ensure a smooth transition.

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Global sourcing is a powerful strategic tool that when used at the appropriate time, can help businesses increase productivity, reduce costs and focus on core competencies.  It can make an organization more productive and profitable.  When deciding whether to outsource IT development, there are some important considerations to keep in mind.  For example:

• Would outsourcing a particular IT project cause the company to lose business knowledge? 
• Is the IT project something that is routine? 
• Are there enough internal IT employees to complete the project?
• Would it be cost effective to send the work to a global sourcing provider versus keeping the project in house? 
• By outsourcing, would resources be better allocated to strategic business matters? 

These are essential questions that should be addressed before making the decision to outsource to a vendor.  Once the decision is made to pursue outsourcing there are some ways to ensure that the right global sourcing provider is chosen. 

Before signing any contracts, research should be conducted.  Some of the key criteria in choosing a vendor include the vendor’s size, industry expertise, employee qualifications, communication capabilities and security measures.  The location of the vendor is also a significant issue and each country boasts its own advantages and disadvantages.  Language, government support and education are among the many factors that should be analyzed when deciding on a destination for the IT project.  Finding the right vendor is crucial in the success of an IT project and a vendor that fits well with one organization, may not align with another.

Companies looking to outsource should also have an established plan to handle the relationship with the global sourcing provider.  A manager should be assigned the task of overseeing the outsourced project to ensure its successful competition. 

A&E Consulting offers valuable insight regarding outsourcing decisions.  The consulting firm assists companies with assessing whether global sourcing makes sense and what processes should be outsourced.  A&E Consulting will also oversee the first outsourced project.

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The top six Indian global sourcing providers, which include Satyam, Wipro, Infosys, Tata Consultancy Services, Congizant and HCL Technologies, made up approximately 2.4 percent of the total global IT services market in 2007.  There was a 0.5 percent increase in market share from 2006 and there has been exponential growth over the last few years.  Many experts speculate that India’s market share will continue to grow.

India has become a top destination for global IT sourcing for many reasons.  The country boasts low labor costs, highly skilled professionals and strong government support.  Indian suppliers have continued to provide buyers with high quality work at reasonable prices.  A large majority of IT employees in India are fluent in the English language, which makes communication easier between the buyer and supplier.

India’s growth in market share has also been the result of the vendors’ strength in application development and maintenance.  Global IT sourcing providers have been able to obtain larger orders for application development and maintenance and it is estimated that they have about 40 percent of the market.

Some challenges exist for Indian service providers, such as growing staff expenses, staff attrition, the weakening dollar against the Indian rupee and the country’s dependence on the U.S. market, which makes up approximately 60 percent of their sales.  Also, large companies like IBM and Accenture have set up offices in India to benefit from the country’s lower labor costs.

Many of the Indian global IT sourcing providers are looking to buyers in other countries as possible sources of revenue.  These suppliers are trying to lessen the dependency on the United States.  Attempts to tap other markets have already been successful as the Indian service providers’ share of the total Western European IT services market has increased.   The top Indian global sourcing providers have also been adding services to boost revenue, such as remote infrastructure management.

While India is a great destination for global IT sourcing, there are many other countries that offer benefits to buyers.  A&E Consulting offers insight into choosing the right location for global outsourcing and will oversee the first outsourced project.

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