Tuesday, March 30, 2004

Offshoring. Do you know how many articles are published each day on offshoring? Talk about information overload!! So many articles, so little time ... I will focus on newsworthy events that have not been rehashed ad nauseum in the press. I will also alert readers to new, significant reports (three are cited in this blog). Finally, since I will be working with Chinese SIs and ISVs, I will devote some space to strategies they should/must consider and a lot of space with advice for American CIOs in helping develop their offshoring options. Frankly, American CIOs are the primary target market for this blog -- and they're also who the Chinese SIs want to reach!!

Something that you may not have caught in the press is that Cognizant is opening a development center in Shanghai. If you don't think this is news, think again. Yes, other Indian SIs have opened development centers in China. Snooze. And, of course, American SIs and ISVs are opening development centers in China. But Cognizant is a different animal. Bottom line: Well, there are probably several trends hidden in this announcement. For one, Chinese SIs, especially smaller SIs and those not in mainstream locales, may find it increasingly difficult to find good talent as many of China's best and brightest head off to Shanghai to work for American and Indian SIs. OTOH, I also believe that there are opportunities for aggressive Software Parks to recruit foreign firms, especially as Shanghai becomes too pricey. I also think this signals the recognition that after India, China will be THE place to be in Asia for software development over the next several years, i.e., China wins against the Philippines and other Asian countries. BTW, did you read the CMGI announcement?

The Cognizant piece provides a transition to two other recently published articles. One quoted Wipro's Vivek Paul. Mr. Paul stated that offshoring assignments from Indian SIs to their Chinese systems integration centers won't fly. Amen ... and I applaud Mr. Paul for his frankness. (Unfortunately, I can't retrieve the original article, but I'm almost 100% positive it was a quote from Mr. Paul. I met Mr. Paul at Wipro's Santa Clara/Silicon Valley office when I was The META Group's analyst -- and, at that time, the only analyst among the top tier IT advisory services -- covering offshoring. His name definitely "clicked" when I read it.) I do believe, however, that this strategy is sound and valid for IGS (IBM Global Services), EDS, Accenture, BearingPoint, et al, but that a Sino-Indian connection may create way too much panic for an American CIO. (Note to Chinese officials: Go after contracts like the gazillion dollar deal IBM recently did with an Indian firm.) For an American CIO, knowing that his/her projects are not only being offshored to India, but further offshored to China is like volunteering to head up a simultaneous ERP and SCM implementation: Professional suicide!! (After all, how many CIOs have survived EITHER an ERP or SCM implementation!! ) Bottom line: For an American CIO, if work is going to be done in China, choose a Chinese SI or work with an American SI with a significant presence in China.

Another article pointed out that many firms are setting up their own software development centers in China. Not surprisingly, ethnic Chinese firms are leaping first, but I believe this will be an accelerating trend, good for Software Parks trying to recruit foreign direct investment. OTOH, it might make the competition for good programmers more intense, perhaps even raising the salaries for local talent. I had this trend confirmed last Tuesday by one of the world's most-respected venture capitalists. S/he is seeing a lot of venture-backed portfolio companies, not to mention more established U.S. ISVs, offshore their development work to China. Yet, systems integration work is a different animal than software product development, so I suspect that the most vulnerable victims will be the Chinese contract software developers and NOT SIs per se. Bottom line: It's implicit ... and I'd rather not overstate it for "political" reasons. However, there is some additional good news for Chinese SIs, too. Even smaller U.S. firms are looking at offshoring options!!

Quality: In your face. An item on Asia Pulse noted that, " WIPRO BPO UNIT LOSES CAPITAL ONE PROJECT DUE TO QUALITY SLIPS." Hey, it's not just BPO, but also SI projects that need attention to quality. CMM is nice, but world-class firms will differentiate themselves with meeting broader "quality" standards -- and I use the term "quality" in a generic sense. Bottom line: Think beyond CMM. And read the hyperlinked article in Computerworld. Also, check out the following sites from CIO Insight, too.

Should I comment on the HP-Linux-Microsoft-China link? Nah, you've probably read a lot about this. Here's a far-out bottom line: What if Microsoft, especially in developing countries, focuses on selling servers rather than licenses for Windows OS and Office? Buy Microsoft servers and you get free Windows OS and Office licenses. Deja vu all over again: Guess what, choose Oracle for your database apps and get your app server for free -- maybe even CRM (if you dare to take it!). May 31st: The BEST day to do a deal with Oracle!! NEVER discount Microsoft!! A top Microsoft executive told me last month that they have 100% market share and zero revenues in China. Of course, he was exaggerating. But expect Microsoft to make their China strategy work.

From XINHAU online, China Computer World Research touted hypergrowth in the Chinese domestic software market. Blah, blah, blah. Yeah, but what are the margins? (Does anybody ever think about making a profit?) Bottom line (especially for Chinese SIs): Hone your skills, as best you can, in the domestic market and leverage your knowledge base for projects in the much more lucrative U.S. market. (BTW, how are your margins doing work for Koreans, or even the Japanese?) And stick to your core competencies!! (More on this in a future blog.)

In an article which appeared on the 25th on XINHAU online, it is noted that "Kingsoft is tailoring its structure to fit IPO requirements." Gee, what does this mean? I suspect this means that Kingsoft is (being) structured like most American companies. Well, I want to get on my soapbox and make a comment about aesthetics (although I doubt this is what was meant by the Kingsoft statement). I've noticed that PPE needs to be updated and upgraded, although this may be solved in large part by Software Parks. Word of advice to Software Park execs: Make sure you build (or upgrade) a facility which is on par with American standards. I'm not saying that each Software Park has to look like Oracle's headquarters, perhaps the nicest in Silicon Valley (and maybe in the whole world!). But at least the buildings should look like "real" buildings. Evidently, many Indian firms have been good at this ... and the Chinese need to take notice. Don't downplay aesthetics. Bottom line: If a Chinese firm is trying to sell to an American exec (CIO or otherwise), their company should look like a "real" company. I can rant about this for pages/hours, but I'll get off my soapbox. Enough said: Please heed my advice!! In general, be open to "guidance" from Americans, as SMIC was when they raised US$1.8 billion last week. Be open to all sorts of guidance ...

Speaking of SMIC, I heard a speech from the head of SMIC's U.S. operations a few days ago. Fascinating company: 70+% of those at the Director-level and above are Christians and the Chinese government gave SMIC permission to build their own church, with 1,500 seats, near their facility outside of Shanghai. Their employees live in a Christian/SMIC village, of sorts. Very low turnover, lots of loyalty -- by the employees TO SMIC and BY SMIC to their employees. Lots of family events, lots of family time. The presentation ended with a quote, in print, from the Gospel of Matthew. Bottom line: You can draw your own conclusion ... (I was impressed, to say the least.) Mel Gibson should make a guest appearance.

Opportunities: IBM has a slogan: "Middleware is everywhere." Sun counters with their own slogan: "Middleware is dead." Okay, I'll bet on IBM. Perhaps the real issue is middleware complexity, kind of like regular glue versus superglue. Hey, but we still need glue!! IDC expects the mobile middleware market to reach a compound annual growth rate of 36.5 percent through 2007, reaching a total of $1.58 billion. I'd also bet on moving to a service-oriented architecture (SOA). From XNA to NetWeaver, everyone is playing the middleware game -- and IBM is right: Middleware is everywhere.

Games, anyone? Besides Microsoft attempting to take over the gaming market (okay, so what's new), PalmSource announced that Cobalt (i.e., PalmSource's replacement for OS 5) will be better enabled for gaming. General advice: Look to smartphones for new apps, even for the domestic Chinese market. (Hmmm ... perhaps Microsoft would prefer that I say, "Smartphones" instead of "smartphones. But my point is obvious.) Listen in on Microsoft's mobile enterprise solutions (on April 15th) and don't forget that there is a chat on Microsoft mobile developments on the fourth Thursday of every month, at 3 p.m. Redmond time. (Did you know that Dave Coursey has three clocks in his office? The clocks display the times for "New York," "London" and "Redmond." Dave is a funny -- and perceptive -- guy. I still have a refrigerator magnet which says, "Welcome to Planet Earth, a subsidiary of Microsoft." Alas, those were the good 'ol days!! I was fortunate enough to be at Microsoft when they reached their highest market cap and at Oracle when they reached their highest market cap.)

Check out IBM's latest annual report. It's worth the time. Never discount IBM. When I was with Microsoft, the company which we feared the most was IBM. And when I was with Oracle, the company which we feared the most was -- you guessed it -- IBM. I'll have more to say about this in a future posting. Bottom line: Take heed -- close heed -- of IBM. And unless you're fully committed to the .NET camp, think IBM day and night.

Parting comments on offshoring. See the latest AeA report. And don't miss an article which appears in the current issue of Foreign Affairs. Financial services as the next big market? Take a look, although the article isn't particularly clear whether this is really BPO work. Finally, DiamondCluster published an excellent 16-page report on the 26th. Take a look at their press release (which summarizes the report) or simply download the report.

Advice to China-at-large: Win by being good capitalists!! The goofy regulatory plays are asking for trouble. And for a software engineer in the U.S. scared of losing his/her job, think business processes, not mere coding. Embrace China, don't fear it!!

BTW, since I'm moving to China later this week, expect the next blog posting in about two or so weeks.


David Scott Lewis
President & Principal Analyst
IT E-Strategies, Inc.

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