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 'Outsource'. 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. It is however expensive, difficult and a lengthy process; in effect, the company forms a legal entity in China. This 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.

'Outsource' has become the most popular model of off-shoring IT work in China. Today there are hundreds of software outsourcing firms in China. This is the least expensive model to leverage but it does present the highest potential IP risk. A number of outsourcing companies have been CMM Level 5 Certified (the highest standard in software development), and utilize ISO 27001 security systems. Companies should be very careful when choosing their software outsourcing vendor and select well established firms that have references outside China.