Hong Kong underlines outsource role.

The Chinese mainland will increasingly become a major destination for knowledge process outsourcing as India tries to maintain its number one position as the country most favoured by the West, while Hong Kong is seen as further marketing its role of providing added value skills, according to speakers at OutsourceWorld London 2005.

Mike Taylor, UK sales director of global research organisation Evalueserve, was one of the speakers at the event, which closed on 30th June, and told his audience that the drivers for outsourcing were companies looking to decrease their costs and increase competitiveness, with China a top potential outsourcing destination.

Hong Kong companies were well represented at the event, with the message that the SAR continues to enhance its established capability as a conduit for outsourcing, while China continues to develop its goods and services sourcing skills.

The pace of technological change is seen as imperative in the outsourcing sector. Taylor of Evalueserve said: "technology has changed dramatically. The kind of work that is being done now is possible to do offshore. People are looking for the best solutions without compromising on quality and control."

Taylor: job shortages coming.

"We think that there is a huge imperative for countries to offshore: there are massive job shortages expected in the UK and US by 2010," Taylor added.

According to Taylor, the UK is going to be short of about 700,000 knowledge professionals in the next five years. "Unless countries do manage this shortfall by offshoring, by importing staff from other countries, and by looking for temporary staff, there is going to be a huge economic impact on the US and [the] UK."

Taylor said there is a "big opportunity" for companies in the BPO (business process outsourcing) and KPO (knowledge process outsourcing) space because there are not the companies in place now with resources to meet the demand.

Offshoring services are constantly evolving and KPO - meaning business expertise rather than process expertise - is growing at a rate of nearly 50% compared to IT, and BPO at 26%.

Evalueserve, with operations in India, is in the process of opening an office in China to try to attract some Chinese-speaking and Japanese and Korean language expertise to offer to clients in the UK.

Taylor believes that India is losing its cost advantage due to pressure on wages, and China, the Philippines and Eastern Europe are well positioned to tap into the KPO opportunity.

"India is ahead at the moment, but it's got a big challenge to maintain its advantage. China is going to be huge in KPO: it has an enormous number of graduates every year," Taylor commented.

Drive for better standards, China/India connections

Focusing on best practice outsourcing, the two-day event attracted more than 60 exhibitors and up to a thousand visitors to the Royal Horticultural Halls in Victoria.

Before telling the conference about emerging international standards, Vivek Mahendra, a senior process consultant with QPrime, a consulting practice, gave a personal view on the prospects of outsourcing in Hong Kong and the Chinese mainland for services from Indian companies interested in leveraging the China market.

Mahendra said: "today Indian markets, primarily, are catering to the North American and European continents.

"We have limited success in the [Asian] and Pacific Rim markets and one of the things we are trying to leverage by partnering with some organisations in China - or for that matter setting up our own centres there - is to be able to cater for those non-English speaking countries in that side of the region.

"Because Hong Kong has a predominantly English-speaking - plus Japanese-speaking - population, that helps us in trying to leverage that place for offering services to the Pacific Rim, because not only is the infrastructure good there, but also they have the right kind of competencies that we are seeking for people in those markets," said Mahendra.

His organisation already has relationships with the region's technology parks and some of the large IT players: "we are talking more in terms [of] back-office finance or record keeping or receivables management."

While Mahendra thinks that some western companies actually view outsourcing as adding to costs, he believes that it is "a case of setting the nuts and bolts in place for the machine to function properly" over the longer term of a deal, if problems are to be solved.

Addressing the conference, Mahendra said that the magnitude of outsourcing is growing significantly.

In 1999 a US$10 million deal was big. "Today we are talking of a US$750 million or US$1 billion, which means that organisations that are planning outsourcing are moving into a highly strategic realm," Mahendra added. He said companies are looking for partners for long-term relationships and these partnerships have to be managed.

"What is best today may not be best tomorrow. Every buyer sitting in this room would have experience that every six months you are looking for something different from your provider. Therefore, how can the provider keep on innovating, keep on working on getting that difference - that's what the international emerging standards aim to bring, some structure."

The story is in the services, not the technology

Dr Richard Sykes, chairman of the outsourcing group of Intellect, the UK trade association for the IT, telecoms and electronics industries, said: "we now have very effective ways for ensuring that the great information and technology engine room can be made to work effectively and keep getting better and better".

However, he believed that the technology industry has been allowed to set the agenda.

"The real value-add are the services that you go out and buy to help you make your businesses work better or the services you provide," Sykes pointed out. "When you begin looking at that you discover a very much bigger marketplace, which at one end is people who provide the services of running computers for you or running telecoms for you, but at the other end are accountancy services, architectural services, research services, advertising services."

Said Sykes: "the issue, then, if you look at countries like India, or Hong Kong or [the Chinese mainland] is not this term 'offshoring' - which is a very 'techie' term about 'can we get cheaper people to write codes somewhere else?' When you begin to looking at it from the services side, you say: 'are there companies in India, in Hong Kong, on [the Chinese mainland], that for particular reasons are particularly good at delivering the services that you need?'"

Sykes continued: "it may well be that it's about the fact that they've got a lot of engineers who are slightly lower cost, but more importantly it will be how well do they really know the global marketplace, how oriented are they are to provide you with the kind of services you want to support your business -manufacturing services, marketing services, distribution services, whatever - all of which are quite technology-rich. But what you are really buying is the service and not the technology."

In the UK there is still "this slightly paranoid debate" about jobs going overseas with offshoring.

"When you actually look at the this broader picture you find that the UK economy is vibrant - we export far, far more than we import; our imports are growing very fast but our exports are growing even faster, so it's a very good news story," Sykes commented.

"And you then say: 'this is an example of an industry globalising'. And if you are a CEO of a major company, if you're a service provider, you look at the global marketplace and say: 'where are my strengths, where is my competitive edge, how do I flourish?'"

Hong Kong and the Chinese mainland have crucial role

Corbett: Hong Kong's important role.

Michael Corbett, executive director and founder of the International Association of Outsourcing Professionals (IAOP), believed that Hong Kong and China are playing a number of very important roles.

"I think it would be fair to say that they are both emerging in terms of their participation in the global market for outsourcing," he said.

"The interesting thing that I see going on in China is multi-dimensional - Chinese companies are beginning to look to each other to outsource within China: you have multi-nationals operating in China that are looking for outsourcing partners to come and help them be more successful within China, and China is also providing a lot of back-office support for Asia-Pacific companies in the region outside China."

For example, said Corbett, a lot of Japanese firms are beginning to look at China as a place to put their back offices in order to get out of the highest cost locations of Japan into some lower cost operation centres in China.

"I think Hong Kong is very much playing the role it has traditionally had in business: it is setting itself up as a high-skill area, and as a conduit and point of entry, and as a point of management support for companies that are trying to reach into that market, whether they are customers or providers," he added.

While India is the major player - especially in IT and BPO activities - it is, in many cases, outsourcing parts of its work into China, according to Corbett. "They are setting up centres that are part of their operations in order to capture the unique skills there, so it's very much becoming a very global economy around outsourcing and each country, each company, is beginning to develop its own unique position in terms of where it provides value."

Corbett, moderator for the roundtable discussion "Outsourcing in the Real World", said that because of cancellations, major outsourcing contracts had hit the headlines. He posed the question: are companies outsourcing more and enjoying it less?

"Focusing on the outsource success rate is the critical issue," said Corbett. "One element of that - and this is the work we are doing with the IAOP - is to recognise that establishing professional standards, training and certification for both the individuals and the executives who are involved in outsourcing will come to create the kind of professionalism and professional standards within this industry that will be an important contributor to enable outsourcing to grow."

Peter Brudenall, partner with law firm Simmons & Simmons, commented: "what we are seeing from the legal and contractual side is a lot more flexibility being built into outsourcing relationships - that seems to be one of the things that buyers are looking for. The days where they were motivated solely by cost savings may well have gone, as now they are looking for that added value but also adding into that the flexibility for an outsourcing service provider to provide a service that shifts with the customer's business."

Chris Disher, vice-president with Booz Allen Hamilton, said the global management consulting firm has many companies that are responding to opportunities in India, China and elsewhere and are re-examining their global footprint, re-examining how they ought to be organised, what they should do internally and what they should do externally - and what should be done nearshore and offshore.

"The other big trend we are seeing is that there are an awful lot of companies [which] have signed what the papers call 'mega deals', and many of these are in deep trouble. We are assisting those clients in thinking through these relationships and, given the growth in outsourcing and sourcing in general, how a company better positions itself so that it can make these relationships work much more effectively."

Adding that the reason clients want flexibility is because they cannot predict the future, Disher continued: "people fall in love with the deals and forget about what's the basis for this. Fundamentally the economics were never there and that's why I believe that most of these relationships are quite troubled."

According to Disher, "as we talk about flexibility you have to change the structure of the contract - smaller, shorter-term project-oriented type of things. We see this out of India, for example, and China: the value is actually there. We have, at Booz Allen, contracts with our outsourcers that are renewable on a yearly basis: we don't sign long-term relationships. Projects can be brought one at a time. Have your vendors deliver quality levels that exceed your expectations and you will continue buying from them."

Panellists were asked what they thought would be major industry topics in a year's time. Brudenall believed that outsourcing is moving towards a position where customers pay only for the IT services that they receive: if demand is low in one month they pay less, and when it is higher they pay more.

This degree of flexibility will be reflected in deals and while it may not be called 'utility' - the term now being used - it is often combined with grid computing. "Twelve months from now this whole concept is going to be getting a lot more attention."

Brudenall also thought more will be heard about regulation and legislation in the area of outsourcing. "The US direction is certainly more legislation and more regulation around security. There may well be more European legislation around sending data offshore and controlling data in a way that you minimise the risk of breaches. That may well impact on the whole outsourcing industry."

Discussing a lack of service providers, Corbett said that people from companies who have gone into the outsourcing industry "because they viewed services as the next level of value-added for their customers" - and are now telling him in private conversations that "the margins aren't there".

"Yet the movement over this industry in the past few years has been toward commoditisation of the deals, commoditisation of the deal processes - squeezing of profit margins to the point where we may find ourselves wondering why VCs [venture capitalists] aren't interested in helping to fund outsourcing companies any more, or why companies that are in the industry are beginning not to do the kinds of deals they were willing to do a couple of years ago," Corbett commented.

After the debate, Brudenall said: "I think one of the things we are going to see is the rise and rise of the Chinese service providers because there are now incentives being put in place by the Chinese government to encourage the outsourcing industry within China to go out and market to the US, Europe and so on. The Chinese mainland is not necessarily a competitor to India at the moment in the offshore outsourcing market, but I think it will be."

"In terms of Hong Kong, the IT market has been established for many years - there are some very well known companies there, which are massive in their own right doing IT and outsourcing," Brudenall believed.

Hong Kong companies with outsourcing opportunities

Mok: gateway concept remains.

Charles Mok, ex-officio member and immediate past president of the Hong Kong Information Technology Federation, said: "the stories that we have to tell have a lot to do with China. We are already a gateway to China in many ways, and we want to be a gateway to China in terms of outsourcing."

Several companies were exhibiting on the HKTDC pavilion, under the title, 'Hong Kong: the world's trusted outsourcing partner with China'.

Mok continued: "what we are trying to do is very similar to what Hong Kong has been doing for many industries, including giftware, toys and textiles. Hong Kong is the conduit. Hong Kong is the place where you sign the contract; Hong Kong is the place where you deal with the product design, quality control, product management, delivery and legal requirements."

"I think we have a great opportunity of working with international companies interested in getting into the [Chinese mainland] market to establish their own businesses, their own branches - and obviously when they do that they need IT support and we hope that Hong Kong will be their project manager," said Mok.

There is a great deal of talent, expertise and technical knowledge in the relatively low cost labour pool inside China, Mok explained. "They need to be managed - they don't yet understand the international requirements; they don't yet understand how to fulfil companies' requirements and their quality standards and so on. But Hong Kong can help them to do that."

He stressed: "we are not necessarily talking about competing with India. The Hong Kong companies are very confident that they can handle projects in much the same way as any Indian company, but are aware that many western users have outsourced to India for years."

Chiu: achieved aims.

Patrick Chiu, COO of EPRO Systems, one of the longest established IT companies in Hong Kong, was enthusiastic about his visit to OutsourceWorld.

Chiu's aims are to find out if there is an opportunity to work with the end-user, and to establish if there is anyone in the UK who is seeking a reliable partner in Hong Kong with whom to work "and see what the landscape is in this part of the world".

He declared: "I have achieved both of them. I am very pleased to be here. I have had contact with some end-users, and some agents interested as a partner, so we can continue to explore these opportunities, work together and proceed to the next stage."

Albert Chung, chief market evangelist for Sun Wah-PearL Linux in Kowloon, said the company, which is in a niche market, has received a specification which was drafted at the show by a visitor. "We will go back to Hong Kong and sit down with our development team and investigate how we can organise this."

"This exhibition has been worthwhile. It is the first time we have come to the UK and it has given us a chance to know a little bit about the market."

Chung: received specification at the show.

Marsden: beachhead to the sector.

David Marsden, UK & Ireland director of the HKTDC, summed up the participation of Hong Kong companies: "this is their beachhead into the outsourcing sector in the UK. I think it's been a useful start because it has enabled us to meet a whole raft of companies, not only the multinational corporations, but some smaller companies as well, which are looking to outsource not just their IT but their whole back-office operations."

Al Naqi: researched countries.

One of the most eye-catching stands at the show was that of the Dubai Outsource Zone, which is aiming to provide a comprehensive infrastructure and environment for outsourcing companies to set up global or regional hubs servicing a worldwide market. The first phase is due to be ready by 2006 and there is a mandate to attract 120,000 knowledge workers to Dubai.

Director Ismail Al Naqi said: "we researched countries like Poland, India and the Philippines, Ireland and South America and we tried to understand the problems companies faced there because we didn't want to repeat those mistakes."

"We are not trying to compete with India, we are trying to complement it. There is a huge difference for a European going to live in India - the infrastructure of the country in general; the attrition rate - the employee turnover - is very high; it's not a very well connected location; and wage inflation is a very big problem nowadays." Al Naqi added.

"Dubai has eliminated tax for 50 years; the intellectual property law is in place and enforced; inflation is controlled; and it is a very strategic location, with 130 airlines landing at its airport," he said.

Ahmed of Aventech: novel sale approach.

Elsewhere, UK IT services and solutions company Aventech used the exhibition to pioneer a novel sale or return approach to in-house offshore IT development.

For the duration of the show, companies were able to contact Aventech's offshore consultants to work for them free-of-charge for a month. If they weren't satisfied with the quality of the service they could walk away with no obligations and without paying Aventech a penny.

The Philippines, looking to grab a bigger slice of the outsourcing market, was well represented at OutsourceWorld.

Rosemarie Tingzon-Kwan, OIC for the IT services & electronics division and industrial goods and services division, said the Philippines had a very robust growth in the BPO industry within the ICT sector.

"In 2002, from less than 10,000 seats at that time, we now have 45,000 seats for contact centres. We are here, primarily, to promote the Philippines BPO capability to the BPO market. The fastest growing outsourcing activity for business in Europe is in the UK - not only for contact centres per se. But our purpose is to promote our capability in business process outsourcing."

Rosemarie Tingzon-Kwan: robust growth of BPO.

Opportunities for growth.

To provide the most specialised form of leading-edge industry insight and best practice knowledge, this year's conference was a paid attendance event.

Show director Tim McLucas said that outsourcing has become more sophisticated since the event was first held four years ago. The new format of OutsourceWorld aimed to deliver the most current industry thinking, tailored specifically to address the needs of large and small companies, "from introductory level through to experienced multinational, multi-discipline outsourcers".

from special correspondent Alan Monahan, London