Visitors to software outsourcer Augmentum would be wise to secure an invitation first. Security devices at the company's base in the Shanghai Pudong Software Park control who goes in, and a high-tech system monitors all personnel – and information – going out.
"We have access controllers for every door," said Augmentum chairman and CEO Dr Leonard Liu.
"Then there are cameras, no removable discs and the USB drives are disabled. You cannot download or upload to the internet without express approval. We have no fax machines, no printers."
This is how China-based software outsourcing firms overcome one of the principal concerns of their foreign clients: theft of intellectual property.
"The number one thing to do is ask clients to come and visit – it's all about being able to demonstrate that security is a religion in the company," said John Cestar, CEO of US-owned but China-based Freeborders, which has a facility in Shenzhen as well protected as Augmentum's HQ.
Large not lucrative
According to Wang Tao of Analysys International, China's software outsourcing market was worth US$1.09 billion in 2005 and will maintain an average annual growth rate of 36.1% through to 2009, at which point it will be valued at US$3.87 billion.
However, most of the foreign outsourcing work is low-end programming and localization to tailor new products for Chinese consumers. Japan is the largest customer – with 40% of the market – but lucrative design contracts remain on the other side of the East China Sea.
Several thousand small providers deliver services to domestic companies and compete heavily on price. Further up the scale, several hundred firms are employed to repackage Western products for sale locally. A few hundred more focus on Japan.
The top end players develop original software products more or less exclusively for US and European customers, drawing on large pools of well-educated, English-speaking staff. They are the likes of Augmentum and Freeborders and they are in very short supply.
Founded in 2000, Freeborders built its reputation by serving US retailers but Cestar always had his eye on financial services. Partnerships with finance giants like Citigroup and Credit Suisse allowed the company to double in size last year. Freeborders plans to boost its 700-strong China workforce to 2,000 by the end of 2007.
For Liu, a veteran of IBM, Acer and Advanced Semiconductor Manufacturing who started Augmentum in 2003, the target clients for his 1,000 or so employees were always the blue blood of the US IT industry – Microsoft, Intel and Motorola.
"We are establishing a reputation at the highest level so we can go out and sell ourselves," he said. "Rather than start at the bottom and climb the mountain, we want to be airlifted to the top of the mountain and then climb down."
Both companies have won the trust of big name clients with more than locks and security cameras.
The US model is not only replicated in security systems, it is grafted into the companies' foundations – "I bring the US environment into China, I create an island," said Liu – and this allows them to circumvent other barriers holding back the domestic outsourcing industry.
Education is a cornerstone. Not only are new recruits taught to understand and value intellectual property, they are also thrust into an English-language-only environment to polish their conversational skills to be able to deal directly with Western customers.
While China's 400,000 new computer science graduates per year mean there is no shortage of job applicants, they need comprehensive training.
"If you try to hire fresh graduates, they are not quite right," said Liu.
"But given the right environment they can blossom and we have 52 classes run as simulated lifecycle projects taught by technical leaders we have trained."
Hiring more experienced hands remains a problem, though, and Freeborders prefers recruits trained by multinationals as opposed to those raised in the overly-bureaucratic state technology structure.
Cestar says the toughest challenge to the domestic outsourcing industry is a lack of product managers who can deliver on time and under pressure. The Chinese government is keen to see domestic software outsourcing challenge the might of world leader India.
The gap between the two countries is sufficiently large that this may remain a pipedream but Liu is "reasonably confident" that China will become one of the world's top three outsourcing locations within 15-20 years.
To achieve this, though, Cestar is adamant that China must learn two key lessons. The first is placing people close to the customers to guide them through the process. Freeborders and Augmentum have teams of 100 and 50 respectively in the US but they're the exception not the rule.
The second lesson is scale.
"The world is full of 200-person IT shops," said Cestar. "But what matters most is scale. Most of our clients want to work with a company that has the scale the Indian firms have achieved."
"How do you develop a process that can enable a very large team to do software development – that is what China needs to learn," echoed Liu.
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