India’s Outsourcing Headstart

China has three major strikes against it when it comes to software outsourcing.

The first — and biggest — is that India has already sewn up the industry. It’s got the contracts, the customers, the experience, the employees, the facilities, and the certifications.

Home-grown Chinese companies start out far, far behind. But even US and Indian outsourcing firms who come to China have to grapple with the lack of experienced personnel.

Typically, China dominates industry by coming in at a lower price point, and with more people. But India is at about the same price as China when it comes to wages — at least, on the coasts.

In Central and Western China, Chinese firms could have a price advantage, and I know of a couple of domestic firms that are hard at work setting up branches inland in order to capitalize on just that. But, unfortunately, the lack of language skills and experience gets progressively more pronounced in the interior of the country.

In addition, India has plenty of engineers to go around. In fact, Indian colleges and universities are well suited to producing masses of engineers who can go to work for outsourcing companies — again, because of India’s track record. Established outsourcing firms have partnerships with universities, consult on curriculum, and produce veterans who can go back and teach. There are also plenty of internship opportunities. It’s easy for an Indian student to find out what skills are needed in a software development job.

None of this is the case in China. Without a track record, without a critical mass of established firms, without collaboration between companies and educational institutions, the software engineers who graduate in China are less likely to have the skills needed by a world-class development house.

Related to the problem of track record is the issue of trust. Indian outsourcing firms have a long history of working for the world’s top financial institutions, and, for the most part, doing a decent job protecting intellectual property and customer data. When a problem does happen, the industry reacts quickly, setting up security measures and procedures. For example, after Citibank had a problem with an outsourced call center employee stealing customer data, the Indian outsourcing industry put a process in place for tracking the history of each employee in the outsourcing industry and for checking the backgrounds of new hires.

In addition, India’s justice system is reasonably fair and transparent. For India, the outsourcing industry its one of the main drivers of the economy. If anything happens to threaten that, the entire country can mobilize.

In China, the outsourcing industry is an afterthought to the country’s main business, which is manufacturing. Intellectual property rights and other issues of critical importance to software developers don’t get the degree of attention that they could. Even Microsoft backed down on its battle to protect Windows and issued a low-cost version for the Chinese market.

The last issue is not necessarily the most significant, but the one that comes first to mind of potential US customers: the language gap. Sure, Indian programmers have accents, but their knowledge of the English language itself is superb and they are generally easily understood. To make the language gap even smaller, many Indian outsourcing firms run “accent amelioration” programs for their employees.

In China, the problem isn’t the accent as much as basic language skills. English just isn’t as widespread in China as it is in India. For manufacturing firms, this is not a significant barrier. But for call centers, for data processors, and for programmers who have to work on projects with partners around the globe this is a major problem.

Today, the bulk of software development in China is localization projects — producing Chinese-language versions of software and websites for foreign clients. There is also some domestic work, especially for Chinese financial firms looking to modernize their systems.

I predict that, in the next few years, China might become a regional outsourcing hub, producing software for Japanese and Korean companies, for example, as well as small, specialized projects for international firms. Other companies might outsource software development here because they already outsource of their manufacturing, or are interested in getting a foothold in China’s domestic market by first playing nice with the Chinese government and creating white-collar jobs.

But, barring a significant catastrophe in India, it is not likely to catch up with that outsourcing giant anytime soon.