Challenges for China

Language
Lack of English language skills is the most frequently cited challenge to China's offshore outsourcing industry. However, China is making substantial progress in bridging the English gap. In most major Chinese cities, elementary school students are required to learn English. At the university level, undergraduates are required to pass the Chinese English Testing Level (CETL) 4 and graduate students are required to pass CETL 5. It is very easy to find IT workers in China's major cities who have passed the even more rigorous CETL 6 exam. To prepare itself for the 2008 Olympics in Beijing, the government is leading an intense effort to increase the population's proficiency in English, which is already yielding positive results.

One leading China-based outsourcing firm has taken the English language problem head on, enforcing an "English only" rule within its walls. This strategy has helped the firm to create and immersion culture where every developer is forced to exercise not just their casual language skills, but also their technical conversation skills. To support their staff, a full-time English teacher has been employed, teaching classes everyday, and hosting fun events such as "movie nights".

The sole purpose of the English only environment is to improve communication between all levels of the firm and its clients. Inevitably, during the execution of a project questions and issues arise. The firm realizes that developers need to be able to communicate directly with the client's technical staff minimizing misunderstandings and wasted time. The firm believes that total English immersion will provide the best platform for client communication.

Capability
While China's IT industry is growing quickly, it does not have a pool of resources with deep experience in software development standards. It is hard to find skilled project managers or developers with ten years experience, and few companies have attained Capability Maturity Model (CMM) Level 5 certification. Once again the Chinese government is playing a key role in closing this perceived quality gap with India. Most major Chinese cities see knowledge workers as a benefit to their societies and have programs subsidizing companies focused on achieving high levels of maturity such as CMM Level 5. As a result, there are now companies emerging in China that are every bit as good as the best software outsourcing companies globally.

There are numerous indicators of the rapidly improving capability of China's software companies. Between 2000 and 2004 the number of project managers who had achieved the Project Management Professional (PMP) certification in the city of Shanghai grew from 80 to over 5,000(6). By 2004, 150 Chinese companies had achieved CMM certification of Level 2 or higher. To date, 12 outsourcing companies with operations in China have attained Capability Maturity Model Level 5, the highest ranking from Carnegie Mellon University's Software Engineering Institute. Among those, seven are local Chinese companies.

Security
Another common concern with outsourcing to China is the country's negative image for protecting intellectual property. Although warranted based on historical business practices, China recognizes the importance of protecting intellectual property and is rapidly improving its enforcement of IP. As part of its entry into the World Trade Organization (WTO), China adoped laws and enforcement practices conforming to the WTO's Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). In Beijing and Shanghai, dedicated IP courts have been set up with judges trained in the US and Europe. These courts are active now and monetary judgments have been won in favor of IP holders, including foreign firms. For the first time there is finally a competent enforcement mechanism to provide the protection in practice that the earlier legislation provided in theory.

To boost enforcement in the face of growing international pressure, in Dec, 2004, China's highest courts announced stricter interpretation of China's existing IPR laws. According to the courts, China has lowered the threshold for punishable offenses to US$6,000 from US$12,000-$24,000 and has increased prison sentences from three to seven years. Now, for the first time, dissemination of pirated goods or software over the Internet is explicitly forbidden.

As McKinsey Company recently pointed out in their quarterly report on IP protection in China, litigation is no substitute for strategy. Firms are recommended to find professional partners with high ethical standards, focusing on suppliers with both physical and technological security measures. Some firms may want to choose vendors that are pure services companies, eliminating the risk of their IP being used in a competitive product.

Note: For detailed information about Bleum's IP protection strategy, please refer to Bleum's whitepaper on IP protection in China.