The BPO market

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 such as administrative finance, HR, customer management, and procurement processes.

The industry for BPO (the transfer of management responsibility of these routine business processes to a third party) has been enjoying steady growth the past decade and we anticipate this will accelerate with current economic conditions. BPO is a logical direction for many. Service providers can offer companies cost efficiencies and improved process rigor using 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 been the regional hubs for most multinationals the past 20-plus years, but are now far too costly for running shared services or outsourced operations. And many Pan-Asian businesses, or regional hubs of global multinationals, have shied away from shared services or outsourced models because they didn't have low-cost options available. The Asian business culture has also favored in-house models for its administrative support functions like HR, finance, and procurement.

Enter China?

Chinese BPO firms can perform well in the medium term, delivering knowledge-based services to Chinese speaking, and some Japanese and Korean speaking businesses, but breaking into the global market to deliver services to Western enterprises will be much more difficult. Consider the following:

China is in a time-crunch. China is already touting its Tier 2 cities, such as Xi'an and Chengdu, as the mainstays Beijing and Shanghai already suffer 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 a critical mass of staff and infrastructure available.

Wages and attrition for knowledge workers in China are already high and are not much lower than in India, which has more experience in BPO and much better English language skills. We are also seeing attrition rates as high as 30% in the major cities of Beijing, Guangzhou, and Shanghai.

Vendors wary of the 'India experience' all over again

With all the initial teething problems firms endured 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 Tata Consultancy Services (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 these firms are still hedging their bets on China. Only IBM has surpassed 1,000 employees in China for BPO services.

Latin America is a compelling alternative for US businesses. We are already seeing strong competition for BPO services from Latin American countries such as Brazil, Argentina, and Mexico for the following reasons:

* Wages rates are comparable.

* There is little need to relocate staff into the United States

* There is no need for bridge teams, which spend their time overlapping development work with 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 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, companies can now source administrative accounting tasks for comparable rates in Mexico as compared to China or India. See “Time Zones Do Matter: Rediscovering the Americas and Nearshore Delivery” for a more detailed discussion of Latin America as a nearshore location for North American operations.

China's core competency is engineering

China is more of a manufacturing/industrial powerhouse and it is adept at performing administrative business services. Rather than BPO, R&D services are much more in the Chinese DNA and a direction it will likely go. China could do very well pursuing outsourced industrial design work, contract manufacturing, biotech services, etc.

The trend is away from mere labor arbitrage. BPO services are increasingly moving away from the body-shopping game and more toward the provision of value-added business services and innovative products. 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 increases in 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 them.

China's English competency is a major minus for BPO. While 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 decent 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 neighbors.

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.

A shaky legal system, lax data privacy, and patent protection remain a problem. 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. China does not have a good track record on these issues.

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. However, if the Chinese government manages to keep most Western sites from being accessed and persists with stepping up attempts to block this unhealthy content, then surely there will be a limit to the level with which China can be changed.

One of the reasons India and the Philippines, for example, have been so successful 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 affect 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 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, like data-cleansing services, digitization, data entry, and forms processing.

Reality check

China has potential to develop a compelling BPO industry, but many obstacles stand in the way before it can offer anything beyond serving a sub-region.

It’s tempting to get overexcited about anything China-related these days, but a look beneath the surface may offer a reality check of what you’re really getting.