China's information technology outsourcing industry, overshadowed by the success of India-based companies such as Infosys and Tata Consultancy Services, has carved out a competitive niche. Chinese IT outsourcing companies such as iSoftStone Information Service are enjoying rapid growth. The Beijing-based firm has doubled its headcount every year since it was founded in 2001 to the present 2,000, vice-president Charles Yen said. The company's revenue has been growing at a similar rate. ISoftStone's customers include multinationals such as IBM and Volvo, as well as Haier, Minsheng Bank and other domestic companies. The IT services iSoftStone provide include managing the client's supply chain and helping clients develop software applications. Companies prefer to outsource some IT functions because it is not their core competence, and it is more cost-effective for external providers to develop and maintain such functions as ensuring the servers run at the required reliability, he explained. 'We see a trend where multinationals like to allocate a certain percentage of their outsourcing to China,' Mr Yen said. Large multinationals prefer to diversify their outsourcing base, enabling them to leverage the unique competencies offered by different providers, he added. An estimated 56 per cent of organisations use more than one IT outsourcing provider, said Frances Karamouzis, a vice-president at Gartner, a US-based research firm. IT outsourcing took off in China about two years ago, when multinationals started seeking alternatives to India, whose IT outsourcing costs have been rising over the past decade, said Mr Yen. 'Customers wanted to outsource their China business to Chinese providers.' India's offshore IT outsourcing industry is much more mature than that of China, as US firms started outsourcing their IT functions to India during the mid-1990s, he said. 'We are not always competing with the Indian companies directly,' Mr Yen said. 'Indian companies are good at doing global rollouts, but Chinese companies have huge room to fill a gap in the China market. 'Large multinationals want local outsourcing firms to help them grow their business in China. In terms of culture and language, it is better to outsource to a Chinese provider in China.' ISoftStone focuses on China, Japan and South Korea, three countries that share similarities in language and culture. 'The most important advice I have for Chinese outsourcing providers is not to compete with India, as Indian companies like Infosys are already doing a good job,' said Gartner vice-president Rolf Jester. 'Chinese providers should find niches where they can do something better, for example in the Japan market. Indian outsourcing companies are struggling in Japan because of language problems.' India dominates the provision of IT services to clients sourcing work outside their home country, with a 70 per cent share of the world market, Gartner vice-president Partha Iyengar said. India's offshore IT outsourcing revenue could be worth as much as US$36 billion this year, according to India's National Association of Software and Services Companies (Nasscom), an industry body. China's offshore IT outsourcing revenue is worth about US$4 billion to US$5 billion, Mr Iyengar said. However, he said, 'India's share of the global IT outsourcing market has been declining slowly over the last few years, as other countries start to take portions of this pie.' In contrast, China's offshore IT outsourcing revenue is growing 20 per cent to 25 per cent every year, Mr Iyengar estimated. However, the growth of China's IT outsourcing industry will be hampered by the lack of homegrown talent, said Mr Jester. Although China has three million university graduates each year, most of them lack management skills, and only 10 per cent are suitable for work in global firms, he said, adding that the lack of English proficiency among China's workforce is also a drawback. Mr Iyengar agreed: 'Our sense is that there is a tremendous amount of latent interest in the English-speaking markets to start sending work to China, but the realisation of this potential is not happening on the ground.' China's market for IT outsourcing services, like its IT outsourcing industry, is small but fast-growing. In 2005, China's domestic IT services market, of which IT outsourcing forms a fraction, was US$4.55 billion with a compound annual growth rate of 15.3 per cent, according to Gartner. Tapping China's IT outsourcing market are foreign providers like NCS, the IT services arm of Singapore Telecom, the city state's leading telecommunications company. NCS has 1,000 staff in China and Hong Kong. Its outsourcing business in China is growing at a double-digit pace, with revenue from Chinese firms outpacing that from multinationals in China, said NCS chief executive Chong Yoke Sin. Mr Jester said: 'The idea that Chinese customers will not pay for IT services is a myth. They will buy services where they see a value proposition. Chinese firms are buying IT services not to save money, but to scale quickly to seize global opportunities. The drivers are globalisation and China's booming domestic economy.' For example, a Chinese bank that wants to grow its business quickly will probably find difficulty increasing its IT department to support its expansion, and would be better off outsourcing some IT functions, he said. As China's outsourcing market grows, so will the attendant problems already plaguing developed IT outsourcing markets. One such problem is 'under-scoping', where the client expects a larger scope of IT services while the provider assumes a smaller scope, said Ms Chong. 'Under-scoping is definitely a problem in many countries with fixed-price contracts. In China, under-scoping is less of a problem compared with advanced outsourcing markets like Hong Kong, Singapore, Australia, South Korea and Japan. The only reason is there are fewer contracts in China than the matured markets. However, the rate of projects in China is rising rapidly, which makes it a growing problem.'