China will make it easier for foreign investors and entrepreneurs to start businesses in the country, especially in its western provinces, the government said in a statement released after the latest State Council meeting on Wednesday.

It said China would open a wider range of sectors such IT, software outsourcing to foreign investors and entrepreneurs and would encourage them to establish labor-intensive businesses in the west, the State Council, or cabinet, decided at a routine meeting.

The cabinet’s decision will serve as a guideline for local governments to develop specific policies for implementation.

China drew $77.9 billion in foreign direct investment (FDI) in the first 11 months of 2009, 9.9% less than in the same period of 2008.

Inflows, which surged in the years after the country joined the World Trade Organization in 2001, are in the midst of recovering after being hit hard late last year by the global economic slowdown.

According to China’s Ministry of Information and Industry (MII), China ’s IT & information outsourcing service industry expects to hit 200B RBM ($28B) mark in 2009. Globally, outsourcing market is about $405B with a 3-4 % yoy growth.

In the past three quarters of 2009, software and information outsourcing revenue reaches 146.4 B RBM, representing a 24.5% yoy growth.

Domestic markets grew to 125.5B RBM in the past three quarters, a 25.7% yoy growth; international offshore market reaches 13.2B RBM, an equally impressive 18% yoy growth.

In 2009, the number of outsourcing firms in China has exceeded 4000, employing 470,000.

In 2009, the software testing and QA client industry user survey investigated over 800 contracts held by 2,400 of the top spending banking corporations and organizations globally.

Key findings include:

• Top honored firms included more Chinese suppliers in the last 12 months. In 2008, six of the top 10 software testing and QA firms were located in Russia and Eastern Europe. In 2009, several Chinese firms skyrocketed to the top ranks, surpassing both Indian and Russian competitors.
• Vendor dissatisfaction is uncommon in the software testing and QA services industry among top ranked suppliers, in particularly, strong dissatisfaction is uncommon in information technology outsourcing (ITO) sector, occurring in only 8.1% of technology-related industry’s client types, 16.3% in software and high tech company clients directly, and 21.3% of non-tech industry clients globally.
• Russian software testing and QA outsourcers surpassed Indian and other offshore firms in client experience.
• US clients are among the most satisfied with offshore software testing and QA services delivery from India and increasingly China (satisfaction with Chinese suppliers up 87.5% since 2007).
• Strong dissatisfaction with offshore outsourcing vendors was less than 8.8% of all surveyed clients with 2009 projects involving testing, QA and related outsourced software functionalities.
• Comprehensive services vendor arrangements from a comprehensive/end-to-end software testing vendor produce the highest satisfaction rates.
• Single vendors offering comprehensive QA services to software testing clients ranked highest in the overall survey by clients.

Innovation, trust, reliability and customization are the most important attributes influencing software testing and QA client’s satisfaction with their 2009 outsourcing providers.

Black Book uses 18 key performance indicators (KPIs) or criteria are employed, scored on each respective vendor by client type and ranked on a 0–10 scale per KPI.

As businesses begin to host their IT systems in the cloud - instead of hiring outsourcers to maintain and integrate their systems - outsourcers could start to feel the pain, according to author and technology thinker Nicholas Carr.

Demand for corporate systems integration work - the bread and butter of some outsourcing companies - will dwindle in a world dominated by cloud computing Carr told the Google Atmosphere event in London last month.

Carr rose to prominence with the release of his book IT Doesn’t Matter in 2003, in which he argued IT is destined to be delivered as a commodity service that is invisible to its users, similar to the way that homes and businesses receive electricity today. His latest book is the The Big Switch.

Cloud computing allows businesses to ditch internal IT systems and access IT services over the internet from remote systems hosted in the cloud, resulting in far fewer incompatible IT systems that need outsourcers to integrate them he said.

“If cloud computing does not reduce the need for consultants then it has failed because one of the points is to get a much simpler IT infrastructure out there,” Carr said.

“Over the long term a lot of difficult challenges in IT data integration will be addressed automatically through standardisation of systems in the cloud.

“A lot of their [outsourcers] business is built on the complexity of maintaining internal systems so the more we get out from under that, the more their business will be eroded.

“The result is that some areas of the consultation business will disappear, such as the whole area of systems integration.

“In the longer term then, my guess is that you will see a major realignment of the IT industry and some of the traditional consulting and hardware firms will make that successful transition and some won’t.

“There will probably be a lot of consolidation, particularly of small and medium-sized companies getting rolled into larger ones. Overall there will be fewer consulting firms.”

Increasing numbers of businesses are moving their systems onto cloud computing platforms: analyst house Gartner says worldwide revenues from cloud services will pass $56.3bn this year and are on track to grow to $150bn by 2013.

However Carr said following the shift to cloud computing - which he believes is as inevitable as the move from localised to centralised power generation - businesses should not expect the same big players to dominate the outsourcing and software markets.

“I think you will see the software companies face big new competitors, such as Salesforce.com, these are the companies that have been built in the cloud and are already beginning to challenge the Oracles of the world.”

In the short term, however, Carr believes that outsourcing firms will benefit from businesses need for consultants to help them transition their IT systems into the cloud.

At the same Google Atmosphere event, Jeremy Vincent, CIO of car manufacturer Jaguar Land Rover, said cloud computing had the potential to end a perpetual battle against system complexity faced by IT directors.

“After 20 years the issues of integrating technology and information have not changed despite the billions of pounds that businesses have spent trying to address them,” he said.

And speaking at the Sourcing Summit, hosted by the National Outsourcing Association (NOA) in London yesterday Adrian Quayle, VP of strategic sourcing with analyst house Gartner, said cloud services would eat away at the traditional outsourcing business because so many services deals fail to provide the level of systems integration promised.

“The challenge to outsourcers is that there has not been enough end-to-end service integration and as a consequence a lot of outsourcing deals have not worked well,” he said.

“People are keen to move to cloud services as a result of that.”

But these predictions were met with scepticism from Martyn Hart, chairman of the NOA.

Hart said there will still be a role for systems integrators for the foreseeable future, predicting it will be a long time before a majority of businesses move their IT systems into the cloud.

One of the major obstacles he foresees is the number of bespoke IT applications used by companies.

“If everyone in a company only used MS Word on desktops then it could be done but companies use specialist applications for their business,” he said.

“The more unique the organisation, the bigger the problem is.”

Hart added that a shift to the cloud would not hit outsourcers too hard as managing technology is only a part of what suppliers do. He gave the example of business process outsourcing deals where a vendor runs an entire part of a company’s business, such as the HR department or a call centre, where people management is an equally important role.

Even if most businesses do eventually place their systems in the cloud, Hart believes it will be the established outsourcing companies, the IBMs and HPs of the world, that will be running those cloud platforms.

“Companies looking for potential suppliers are still going to choose someone they trust to run their business and not someone just because they have some whizz bang piece of technology,” he said.

China’s importance as an outsourcing location is rising fast, but a fragmented local vendor landscape and a domestic market dominated by Wholly Foreign-Owned Enterprise customers means that it will be the major Western and Indian outsourcing vendors that will reap the rewards, according to a new report from analyst and consulting firm Ovum.

The Chinese government is anticipating the need to migrate its economy from manufacturing to a services base in the long term, and has put in place a strategy to ensure that China will eventually rise to challenge India in the outsourcing sector. The Chinese government has designated 20 cities for outsourcing business and the investment in infrastructure, education, training and tax incentives at these locations is extremely impressive.

Software parks are being built rapidly and on a large scale with transportation links to match and the university education system has ballooned to create 6.1 million graduates this year. It is clear that the Chinese government is intent on providing first-class infrastructure in which IT services and BPO vendors can flourish.

Low costs and access to a superpower economy is enticing outsourcing customers, and China’s huge labor pool and expanded education system means that salaries for graduates are lower than in India. China is the fastest growing major economy in the world and Western companies, many of which have fully embraced the concept of global sourcing, are setting up Chinese subsidiaries to target a relatively untapped market. These subsidiaries will be an entry point for vendors to use China for delivery, and will lead to multinationals to consider Chinese delivery for its businesses in other locations.

No sign of domestic giants emerging

Chinese companies are mainly state owned, and are not as yet, major users of outsourcing services. Unless the government encourages this to change, the domestic market will be mainly made up of Wholly Foreign-Owned Enterprise (WFOE) customers. These firms are more likely to choose to be served by the international vendors with which they have already built up relationships rather than sign with domestic vendors. The domestic vendor market is highly fragmented and while there has been some consolidation, the market needs this to be much more rapid for some strong leaders to emerge. In the meantime, Western providers have invested in Chinese delivery centers having learned their lesson from the procrastination many showed when India emerged, which effectively allowed India’s domestic vendors to build themselves into global players.

There are no signs of a Chinese equivalent of a Tata Consultancy Services or an Infosys emerging, capable of challenging the Western major vendors for the foreseeable future.

China needs to deliver promotional punch

Possibly the biggest barrier to China achieving its full potential is its lack of marketing skills. This is amplified by the lack of an industry organization such as NASSCOM to promote China’s impressive abilities to the international market. Currently there are two government ministries working on the outsourcing industry – the Ministry of Commerce and the Ministry of Industry and Information Technology – which have, confusingly, both begun separate attempts to develop a “China Sourcing” brand. Vendors with a presence in China agree that a NASSCOM style organization would be beneficial, but as yet there seems to be no push to make it happen. Any such organization would have to work in tandem with the government rather than as a lobbying group.

Reflecting a growing trend for Indian outsourcers to expand and hire locally in the U.S. market, Wipro, India’s third largest outsourcer, is expanding its development center in Atlanta from 350 to 1,000 staff.

The company said that 80 percent of its current 350 employees were hired locally, and includes recent graduates from reputable academic institutions in Atlanta, experienced professionals and retired army personnel.

India’s largest outsourcer Tata Consultancy Services (TCS) said earlier this month that it was expanding its business alliance with The Dow Chemical Company, including setting up a services facility near the site of Dow’s global headquarters in Midland, Michigan.

TCS also announced that it was expanding a software services delivery center in the Cincinnati suburb of Milford, Ohio.

Infosys BPO, the business process outsourcing subsidiary of outsourcer Infosys Technologies also said this month that it would acquire McCamish Systems, a BPO company in Atlanta focused on the insurance and financial services market.

Indian outsourcing companies are expanding both in India, and in the U.S., their key market, in anticipation of a pick up in business. Employing staff in the U.S. is expected to go over well with the local community and politicians because of resentment in the U.S. about companies moving jobs to India and other countries, analysts said.

U.S. Senators Bernie Sanders, an Independent from Vermont, and Chuck Grassley, an Iowa Republican, last week introduced legislation, called the Employ America Act that would prohibit firms that lay off 50 or more workers from hiring guest workers.

Political considerations are evidently a factor for Indian outsourcers to expand in the U.S., said Siddharth Pai, a partner at outsourcing consultancy firm Technology Partners International (TPI) in Houston. U.S. companies do not also want to be seen sending jobs abroad, he added.

But there are also strong business considerations that require Indian companies to set up operations in the U.S., according to Pai. Certain types of work even in BPO, such as development of technology platforms for services delivery, and analytical work, require proximity to customers, he added.

Indian outsourcers have to start looking like global players, Pai said. Japanese car makers, for example, manufacture all over the world, because some customers would like to buy locally produced goods, he added.

The YouGov survey commissioned by IT assurance specialist NCC Group showed that 20% of IT managers working in large businesses believe that their outsourced systems and processes have less IT security than those based in-house, showing lack of confidence in the IT security of outsourcing providers.

Currently, 89 per cent of large companiesoutsource at least one IT system or business process.

John Redeyoff, Head of 365 Assured at NCC Group said: “The security industry and IT managers are calling for suppliers to prove they are secure, yet companies choosing to outsource business critical systems simply aren’t asking the right questions, and are putting business critical functions at risk as a result. Businesses that fail to check their suppliers’ credentials, choosing cost and convenience over security, are investing in false economy.

“Suppliers, particularly to highly regulated industries such as banking or the public sector, need to demonstrate their commitment to security, giving reassurance to existing or potential customers that they take these issues seriously. As fast as technology develops, so does the potential for data compromises, and businesses need to be prepared to answer serious questions about their IT systems. Proving you are secure is simply good business.”

Almost a quarter of IT managers (22 percent) at large companies have the same low expectation of their suppliers. A third of IT managers (64 percent) at medium sized businesses expect some of their suppliers not to have formal security procedures in place.

According to NCC Group, this suggests that despite IT managers’ concerns that their suppliers are not secure, companies are opting for low-cost providers that cannot prove their security credentials.

John Redeyoff, head of 365, a new security and performance certification program from NCC Group said, “The security industry and IT managers are calling for suppliers to prove they are secure, yet companies choosing to outsource business critical systems simply aren’t asking the right questions, and are putting business critical functions at risk as a result. “