Choosing the Right Offshore Outsourcing Model

Companies that are looking to only develop or outsource their IT work to China have fewer risks than firms that are looking to sell or distribute products in China. There are usually no issues with trademarks or patents, but these firms do need to protect their source code and technology from IP infringement. Western companies may choose from three models when off-shoring; 'Captive Center', 'Joint Venture', or '3rd Party”'. Each model offers various levels of IP protection and overall development control.

The 'Captive Center' is a Wholly Foreign Owned Enterprise (WFOE) that a firm could establish in China. Most multinational firms now entering the China market choose this model. However, establishing a captive in China is an expensive, difficult and a lengthy process. In effect, the company is forming a legal entity in China. The captive model allows the firm to manage, hire, and control the entire organization. There are still risks that individual employees may abuse the IP that the 'Captive Center' develops, but careful hiring and strict employee handbooks combined with well written employee contracts will go a long way in keeping technological secrets safe.

The 'Joint Venture' (JV) was a very popular business model in the 1990's before the liberalization of the Chinese market. Today this model is not nearly as prevalent although it is typically less expensive than establishing a WFOE, depending on the size of the investment. The critical difference to a WFOE is level of control over management and staff. This is directly correlated to the JV ownership structure. Choosing a JV partner that has no (potential) conflict of interest is crucial. Unless a firm is looking to enter the China market, or to create a software development company in China, a JV is not the best model to offshore.

The “3rd party” or “Outsourcing” has grown in popularity over the last few years.  Today there are hundreds of software outsourcing firms in China. Although this is the least expensive model to leverage, it presents the highest potential IP risk. They key to protecting your IP in a 3rd party model is to do thorough due diligence on the vendors. A number of outsourcing companies have been CMM Level 5 certified and utilize ISO 27001 security systems.  In addition, companies should look for solid references from the vendors that are from outside of China. The next section goes into detail about how to select a safe vendor in China.