Historically, there have been two ways for a software outsourcing industry to develop in a country: through domestic demand, and through foreign demand.
The US, Japan, and other developed countries are prime examples of the first option. Large domestic customers – financial services firms, manufacturers, retailers, government organizations, the military – slowly turn to outside vendors to fulfill steadily more comprehensive technological functions. At first, outsourcing firms are brought in as consultants for specific projects, such as the roll-out of a new software system. Or they come in to handle a specific task, such as email management.
Some outsourcing companies started out as primarily hardware vendors, and initially their technicians only visited customers to help them set up new equipment. Other outsourcing companies were business or accounting consultants that moved into providing technology services as well. Others handled paper-based processes, such as payroll, and became technology companies when those processes were automated.
The biggest of these firms took the expertise they developed in the domestic markets and went global with it. The major examples are American companies – Accenture, BearingPoint, EDS, IBM, HP.
Then there’s the export-oriented approach. A large customer based, say, in New York, needs some short-term programming help. One of the programmers already on staff knows just the guy – a friend back in the programmer-s country of origin. The staff programmer serves as a liaison, bridging language and cultural gaps between his employer and the growing team of outside programmers in India, Russia, or Israel.
When global companies were hit with the Y2K problem, hiring new programmers just to do that one fix didn’t seem practical to many. In any case, there was a shortage of people in the United States who were willing to do the boring work of changing date formats in applications written in ancient computer languages. India was the best positioned to scale up to meet demand, with a large number of English-speaking programmers who knew the old languages and who were happy with the work. The small teams composed of friends and brothers-in-law morphed into real companies – companies that now had insight into the software development processes of major American firms.
When the Y2K crisis was over, these firms turned to other low-end programming tasks. Using their connections with customers in the US and elsewhere in the developed world, they offered to take on software testing, maintaining legacy systems, and rewriting old software to work on new computer platforms.
Today, of course, Indian outsourcing firms do extremely high-level software development, to some of the highest quality standards in the world.
China is not following either of these paths. Instead, it is feeling its way along in a completely new direction – outsourcing with Chinese characteristics. This includes localizing international software and websites to work in the Chinese market, serving domestic firms, and outsourcing projects for Japanese companies and some work for international clients.
It’s not an easy path, however. Chinese firms have to compete with the American and Indian giants for both large domestic accounts and for the localization business. All of the world’s major outsourcing firms are scaling up in China, and are bringing in their expertise and finely-tuned, world-classes development processes.
It’s hard to imagine how, without government intervention, Chinese firms will be able to compete.
If they do then the Chinese path might become a realistic model for other developing nations to follow, the same way that its economic transformation has become a classic case of a peaceful – and profitable – transition to a free market economy.