I have been running a software outsourcing business for the past 6 years (time flies!), and involved as a client of software outsourcing for many more years. Our offshore resources were originally all located in China, but as our business expands, we have been acquiring resources in Mexico, Argentina, and now Eastern Europe.

Quite naturally, I built over the years my own opinion on the pros and cons of each of these countries, but could hardly justify why we would favor China over India as an offshore destination; or why we would now favor Argentina over Mexico, as a nearshore destination, although Mexico is geographically much closer to the USA.

The work of Geert Hofstede (see references at the end of the post) has shed light on all this, and I was puzzled by how close Hofstede’s conclusions were to my own observations regarding outsourcing destinations relative to a US company.

Hofstede has spent most of his career studying the interactions between national and organizational cultures. He defined 5 dimensions of culture in his study of national work related values:

1. Small vs. large power distance. The Power Distance measures the way people from one country perceive power differences between them (in regard to institutions, family, etc.)

2. Individualism vs. collectivism, or how much members of the country define themselves apart from their group memberships
3. Masculinity vs. femininity, or the value placed on traditionally male values (competitiveness, assertiveness, ambition) or female ones (relationships, quality of life)
4. Weak vs. strong uncertainty avoidance, or how much members of a country are anxious about the unknown, and as a consequence, attempt to cope with anxiety by minimizing uncertainty
5. Long vs. short term orientation. Society’s “time horizon” or the importance attached to the future versus the past and present.

Natural cultural affinities (different from similarities) indicate why on most cases, a US company is better off choosing Argentina or Brazil over Mexico, India or China.

Of course, Hofstede’s theory can be debated endlessly. For us however, his findings have been proven very helpful in deciding (i) where to open our future offshore centers, and (ii) which destination to suggest to our customer based on their own environment. Altogether, the Power Distance is a tool that helps us increase customer satisfaction while reducing risk.

To learn more on Geert Hofstede and his work:

Clearly Cultural, Power Distance Index
Clearly Cultural, individualism
Clearly Cultural, masculinity
Clearly Cultural, uncertainty avoidance
Clearly Cultural, long-term orientation
Geert Hofstede, Wikipedia page
Geert Hofstede, his personal WEB site

Business, China | 7 Comments »

Many in the software industry are reluctant to outsource the design of their applications, and by design I mean the overall usability (look-and-feel, navigation, user experience, etc.).

I do not have a definite answer, but I have learned one thing: BEWARE! While it makes total sense to have the back-end of the application developed offshore (whether outsourced or not), it is critical to carefully double check, when not triple check what the real design capabilities of your potential offshore provider are, if you do not want to end up with applications that are just unusable !

SMBs usually call existing references before selecting an outsourcing provider. Make sure design capability is one of your “must ask” questions. The reference certainly knows whether your provider has decent design capabilities or not.

You do not necessarily have to write off a potential provider that does not have such experience, but if you choose to keep the design inshore and develop the back-end offshore, do not take for granted that the communication between the teams will go smoothly. In fact, it is unlikely to be the case, unless you spend a fair amount of time making sure communication flows.

According to the Korean Institute of Design Promotion, China has globally better design capabilities than other popular offshore destinations, like India or Brazil. That is another hint for picking a Chinese offshore partner.

The study is not specifically about software design, but I see no reason why their findings would not apply to software too.

Their latest report is available for download here.

Remi
www.vsisoft.com

Business, China | No Comments »

Fortune corporations have been using outsourcing companies for a long time. GE, American Express and the likes have enabled the creation of a giant industry, led today by India followed by China.

Outsourcing agreements between American industry leaders and their suppliers, often Indian companies, generally span over several years and are worth dozens when not hundreds of millions of dollars.

Over the years, tier-1 Indian suppliers have mastered the art of maximizing their profit on these agreements, thus enabling their rapid expansion and wealth.

It was not too much of a problem as long as they were dealing with industry giants, which have the capability to closely oversee their offshore contracts and operations. The situation is totally different with SMBs, which cannot afford to see their monthly bills go through the roof, or witness considerable decrease in the quality of the deliverables.

Below are some suggestions that SMBs should follow when selecting their supplier:

• US agreement: Make sure the agreement is between two US companies. If anything goes wrong with a foreign entity, it will be much harder to take any legal action: your Bangalore or Dalian based provider might not care much having an agreement governed by US laws, since losing there would not really impact their global business. They would care much more with a contract governed by their local laws; however in this case, do you have the financial breadth to go defend your case in India or China?

• US management: The same goes with the management. Make sure your provider’s senior executives live in the USA. If there is a major crisis, there is no time to travel to Mumbai, Omsk or Beijing, hire a translator and have to deal with different business practices. Ideally all business and technical decisions should be made in the USA, without requiring any green light coming from the offshore base

• Work methodology: Do not let your supplier embark you in complex processes, like CMM for instance. Like most SMBs, you are certainly under intense market pressure, and unlikely to dedicate the amount of time and resources required by these heavy approaches. It is critical that your provider master Agile methodologies. Agile provides with the highest level of flexibility, and allows for a truly incremental approach. In addition, progress can be better monitored, and problems detected as soon as possible

• Moving resources around: it is unfortunate, but many outsourcing companies would rapidly replace the senior resources originally assigned to their client by very junior ones. This is how they maximize their profit. The good news for SMBs is that the average development / support team is small enough that you can make sure resources are not reallocated without your permission

• Fixed price: If possible, go for fixed price contracts. Your provider might be reluctant to commit, especially when the specifications and workload are unclear, but it is usually possible to segment the work in such a way that fixed-price contracts become possible

• Experience: Work with people who have a proven experience in your field of expertise; I am talking about technical expertise and domain expertise. When signing a contract, offshore companies will assign in priority their “on-the-bench” resources, even if they are not totally qualified for the job. Make sure your provider will assign the right resources, and if not available hire them

• Attrition rate (employee turnover) is a major problem for many offshore companies, especially in cities like Bangalore. Ask your provider about their employee retention program, or even better about the preventive steps they take to avoid any loss of productivity / knowledge when employees resign

• IP protection: if you have an extremely sensitive IP, think twice before sending the work abroad. And if you need or want to go offshore anyway, split the knowledge between several providers, or ask your provider to assign the work to different teams located in different regions or countries

• Do not be greedy: You can be sure of one thing: you will get what you are paying for. Know the limits of your supplier. If you go over the limit, they might still take the contract, but will assign less resources, or less qualified resources, and pay less attention to your account overall.

I hope it will help prevent some deadly mistakes. Do not hesitate to contact me if you have any question or comment.

Remi
www.vsisoft.com

Business, China | 4 Comments »

That’s it. The dark years of the Bush Administration are getting to an end. In January, we will finally have a driver in the driver’s seat!

First and foremost, it is good news for US small businesses. What we need is a wealthy economy, not an economy geared exclusively towards the wealthy. President-elect Obama’s vision goes beyond tax cuts to stimulate the economy, and that is good.

Regarding the impact on outsourcing, it is important to differentiate between the various industries. As NASSCOM rightfully noted, “when Obama was referring to outsourcing in context of migration of jobs, he was mostly referring to the manufacturing sector. Information Technology is different, since there is a shortage of talents in the USA. By providing US companies with much needed resources at affordable cost, offshore destinations can contribute to the growth of US economy.”

Yes, we can!

Business, China | 7 Comments »

Could a falling dollar and pricey oil make manufacturing goods in the USA an economically viable solution again?

Not too sure, says Pete Engardio in the June 30 issue of Business Week.

The main reason it that it would cost too much to revitalize some heavy industries. James Turk, CEMCO’s CFO notes, “American foundries now can compete head-to-head on cost, but there are not many foundries, welders, machinists, and quality-control engineers. What we had 10 years ago is gone.”

Some industries are lost, and won’t come back, no matter how low the dollar goes. It would just require too much up-front investment to recreate the conditions for success. In addition, China’s productivity is climbing quite rapidly, a factor that compensate partially for local increasing wages and soaring shipping costs.

In fact, operating a high-cost manufacturing plant takes much more than just building the plant. An entire surrounding infrastructure, human, material and financial is required.

China has patiently built its own for the past 30 years.

One interviewee suggests applying to the USA some of the same formulas that worked wonders for China.

While certainly an excellent suggestion, I am no too sure about the feasibility and the potential results in the USA, a country with different cultural, political and economical backgrounds.

Einstein once said: “We cannot solve problems by using the same kind of thinking we used when we created them.”

We just need to follow his advice and look at the situation with a creative mind. If the industry has already gone offshore, what can we do in the USA to create jobs? And if the industry has not gone offshore yet, what can we do to make it flourish home?

I will close with an example. A friend of mine has been looking for a US supplier of computer monitors. His company has special requirements that prevent them to use just any basic monitor. They have been looking for months at possible US suppliers, just unsuccessfully. It seems like they are all gone. How many companies have been in a similar situation? I bet thousands, more than enough for a local industry to flourish.

Read the Business Week article online.

Remi
www.outsourcing-vsc.com

Business, China | 13 Comments »

The May issue of INC. magazine features Mitch Free, the founder and CEO of www.mfg.com, an Atlanta-based company, whose business skyrocketed after Free established a presence in China.

I would recognize a lot of my own story in his account. When I started doing business with Mainland China, I was a little concerned. As many Westerners, I was raised in an environment that would see China as a threat, almost similar to the USSR’s. And even today, years after China opened to International trade, many negative rumors are still floating around about doing business in China: “you will never get paid”, “it takes forever to establish a profitable operation”, “IP will be stolen”, “not a good place for a Westerner”, “nobody speaks English”, etc.

It has been years now, and none of these things ever happen to me in China. My business partners there are reliable, and my bills always paid in time and in full. Although I do not speak or read a word of Chinese, I never had any problem communicating with people, nor finding my way back to the hotel or the office; while everything is so different than in the USA, I feel pretty much at home in a city like Shanghai.

Large Chinese cities have infrastructure similar to most US ones; plenty of ATMs, free wireless access in airports and most hotels, and a lot of Internet cafes. Modern US cell phones are likely to work beautifully, and of not, cheap GSM phones are available everywhere, and rechargeable SIM cards are available at most newsstands.

In addition to Chinese food, many restaurants offer all sorts of cuisine: Japanese, Italian, Brazilian, etc. There are several Starbucks in Shanghai (the espresso is more expensive than in the USA, go figure).

Visitors to Shanghai or Beijing, to only name these 2 cities, will certainly “feel” the many business opportunities this booming economy offers (Free talks about feeling the energy). Even better, Chinese people are genuinely interested in doing business with Westerners.

For those contemplating expanding their business in China or simply willing to understand China better, a good way to start is to attend one of the major trade shows. It is a great opportunity first to check the variety and quality of the various local products, and also to establish a good number of quality business contacts.

The beginning of the article reads: “When Mitch Free first went to China, he did not know a thing about the place. He listened. He learned. He was respectful and polite. Now he gets it, and his business is booming.”

Access the full article online.

Mitch Free’s story shows that it does not take a PhD in Asian history and fluency in Mandarin to take advantage of the many opportunities the resurgence of China is creating for us all.

Inc. magazine is a great resource for small to mid-size businesses. Their tagline “the daily resource for entrepreneurs” says it all.

Remi
www.outsourcing-vsc.com

Business, China | 5 Comments »

The McKinsey Quarterly recently conducted an interesting survey on “Competition from China.”

With 41% of the answers, China is widely seen as the country where major competition comes from and is likely to continue to come from in the future. China tops by far India 22%, South East Asia 11%, and Eastern Europe 6%.

What are the reasons that make China such a strong contender?

According to the survey, while higher wages are driving up production costs in China, executives around the world see low-cost production as the primary competitive advantage of Chinese companies and expect little change in the next three years.

The two other key advantages of Chinese companies are support from the Chinese government, and the fact that they are “not being subject to stringent enforcement of patent and copyright regulations”.

That said, a surprising and somewhat conflicting 41% of executives around the world consider Chinese companies as weaker competitors than companies from other countries. They say that, besides lower prices, Chinese companies have little to offer global markets, and particularly dismiss their product quality, marketing skills, and brand strength.

A perception that seems to be changing rapidly, for four out of five of the executives also say that they expect to see rising competition from Chinese companies in the next three years, as superior quality of services and brand attractiveness are expected to become part of China’s competitive advantage.

And what do Chinese managers think of that?

Almost three out of five respondents say their long-term goal is to become a global competitor in their industries.

44% of Chinese leaders recognize that their major impediment is by far the lack of managerial talents, a finding that those of us who do business with China would certainly support.

Think of these last 2 factors. Aren’t they the evidence that the rise of China opens a lot of great job / business opportunities for Westerners?

The whole study is available at http://www.mckinseyquarterly.com/home.aspx.

Remi
www.outsourcing-vsc.com

Business, China | 1 Comment »

On May 14, I posted an email I received from a friend of mine who moved last year from San Francisco to Chengdu. His message was about the earthquake “seen” from Chengdu. In a new email I just received, he describes his actions as a volunteer for the rescue campaign. I am sharing for all the wonderful synchronicities that happen in life!

I am but an instrument in life.

I decided to live in Chengdu because of the good vibes I got.
I was leading a mundane life when the quake happened.
Soon after that, I was contacted by Beijing Rotary and Shelter Box for advice.
They said I am the only known Rotarian in the area.
I said yes, but they did not tell me what to do.
In the ensuing 3 days I realized the enormity of the request – site visits, logistics, storage, transportation…
I panicked. I am a one-man Rotary club here.

On the 3rd day, a friend from Chongqing showed up in town with no prior notice,
She said she would only be in town for a few hours.
So I dropped everything and had lunch with her.
There I got re-acquainted with a magazine editor Wendy.
I had not seen her for two years.
Wendy said her boss Jason, in his late 30′s, might be willing to help.
Jason is a software developer turned magazine and nightclubs owner.
Jason is now paying for the hotel bills of 4 Shelter Box members from UK and Australia (note: Shelter Box is a UK based charity that provides emergency aid for victims of natural and other disasters anywhere in the world.)
Shelter Box has run into incredibly huge red tapes.

With a history of at least 1,000 years in civil service examinations, the Chinese bureaucracy is the mother of all bureaucracies.
It’s an amalgamation of all the phone companies in the world… multiplied by 1,000 times.
Jason was at the airport today problem solving and negotiating with the officials of at least 3 agencies on behalf of Shelter Box. He was there from 11 am to 10 pm, with no lunch.
Without Jason, the negotiation would have surely failed and the project detrimentally impacted.
The issues are so unnecessarily complex I am sure I could win an award if I write the story out.

At my request, two English language students from Chongqing are up here to volunteer for Shelter Box.
I became their trusted friend after they volunteered for Interplast (non profit providing free reconstructive surgery in developing nations) in Chongqing.
One of them, Tony, is staying in my apartment.
It’s a new experience for me.
He got up this morning and promptly consumed one extra-large packet of instant noodle.
He then asked me if he could have another one.

Tomorrow I am going into the disaster area again.
I am responsible for finding a site for rebuilding a school.
A Shanghai Rotarian friend wants to start a new project: building a pre-fab steel school in two months, something that has never been done before in China.

I am but an instrument in life and I am grateful for that.

Bill

P.S. WE ARE TOGETHER- the mantra of this rescue and relief campaign. It’s everywhere; on T-shirts, billboards, and large banners on buildings…there is even a song.

Remi
www.outsourcing-vsc.com

China | 4 Comments »