Gain a Business Foothold in China With the ‘Build – Operate – Transfer’ Model of Outsourcing

China offers appealing business opportunities because of a highly skilled workforce, attractive wage levels, reliable IT and telecom infrastructure and government support for foreign ventures. Most attractive of all, of course, is the world’s largest and fastest-growing market.

Domestic demand for consumer products and services expands annually in China, and did so even during 2008-09 global economic slowdowns. In turn, there’s a strong need for Western expertise to design, market and administer insurance, banking, investment and credit services.

North American and European companies that have business process, R&D or manufacturing operations in India or Southeast Asia increasingly recognize that prudent risk management means diversifying with a second location in a separate region with a large, well-educated labor supply.

China provides an inviting commercial arena that meets all requirements to assure uninterrupted operations, although it has entry hurdles for foreign-based newcomers. They include:

o Extensive location choices: National and provincial governments support numerous High-Technology Industries Development Zones and software parks in regions with lower labor and facility costs than in the business centers of Beijing and Hong Kong.

o Navigating the bureaucracy: While China welcomes foreign enterprises and encourages private ventures, an elaborate series of permits, licenses and other paperwork are required by municipal, provincial and central government agencies.

o Site development: Leasing, remodeling, equipping and maintaining workplaces for international business requires prescreening local vendors, soliciting and evaluating bids, negotiating contracts and overseeing installation of work stations, electronic networks, telecommunications, backup capabilities and other logistics.

o Recruiting and training: Reliable, well-educated managers and qualified production employees are widely available — and in demand by Western firms. An experienced business process outsouricng (BPO) company can provide industry knowledge and local contacts that are essential to recruit, hire, orient, train and retain skilled workers who can perform back-office functions reliably — services a general employment agency clearly cannot provide.

This White Paper illustrates how the Build – Operate – Transfer approach lets foreign-based providers in the BPO industry or other fields develop an efficient production center in China through a limited-time startup relationship with an experienced local partner.

The Build-Operate-Transfer Model

As the name indicates, B-O-T is a three-stage process that lets companies outsource the logistics of establishing offshore capacity to deliver services, develop products or perform manufacturing. To gain a secure foothold in China at minimal risk, software developers and other Information Technology Outsourcing companies currently rely on this proven business model — which is especially well-suited to the BPO industry.

The business owner forms a strategic alliance with an experienced local partner already established in the same industry who plans and manages every aspect of opening and running one or more work centers in the first two stages — Build and Operate. (“Build” refers to constructing a client-dedicated operation, not a physical location.)

The final stage — which arrives after a contractually specified time, productivity/quality level or a combination of factors — brings a Transfer of all tangible and intangible business assets to the owner.

During each of the first two phases, the local partner’s industry experience and host country familiarity are applied to:

• Achieve the foreign owner’s business objectives
• Transfer knowledge from the client to managers and workers it will inherit
• Uphold the owner’s best practices, quality levels and other requirements
• Maximize short-term and long-range profitability for the owner

This model can be applied to a variety of industries and to small, mid-size or large MNCs, and has proven to be effective in China.

BOT also provides powerful advantages for business process service providers.Benefits for new and existing BPO companies expanding to China are evident from the following look at services furnished between the first steps and the final business transfer.

Services at Each Stage

A detailed contract specifies the work production, space, staffing, wage rates, English proficiency, productivity, quality levels and other metrics that the client wants in exchange for a management fee and reimbursement of actual costs. After this needs assessment and planning stage, the local partner then assigns a setup team exclusively to the project.

That team conducts a site selection review of real estate matching the client’s requirements for size, location, cost, capabilities, amenities and other factors. Reports, diagrams and photos are furnished so that the client’s project team can analyze options and the local partner’s recommendation.

Next, lease terms are negotiated and site preparation begins. Work spaces are configured, furnishings and production equipment are procured, and services are arranged (telecommunications, high-speed Internet with backup, etc.) In this Build stage, the local partner also secures required permits, licenses and other registrations from the Ministry of Commerce and regional government departments.

While workplace development is under way, the Operate phase starts with staffing (labor arbitrage). Qualified personnel are invited to apply, are pre-screened, are interviewed and are hired for work only on the client’s business.

Knowledge transfer is the next step — and one that continues throughout the Operate stage. Managers, supervisors and employees are given orientation and training to become well-prepared for handling the client’s work processes at an expected pace.

Maintaining and expanding skills is a vital part of the operating agreement. Clients should look for a service partner who recognizes the importance of continuous, adaptable training to prepare employees for:

• Progressive advancement
• New client projects
• Next-generation software and hardware

Continuing education — combined with on-site English-improvement classes, if wanted — helps increase staff reliability, retention and value to the client. Human resources groomed by the local partner, after all, are among assets the client inherits at Transfer.

The Operate portion involves work supervision, quality assurance, record-keeping, purchasing, facility maintenance, government liaison and administrative support services (invoicing, payment processing and other accounting tasks, if requested).

At the Transfer to client ownership and management, after perhaps one to three years (based on a pre-determined scale), the local partner arranges a transition of leases, vendor contracts, utilities, personnel, administrative services and other functions during an orderly process of joint supervision.

The client inherits all training and procedure manuals, proprietary software, work product templates, business records and other intellectual property generated on its behalf.

–> Key points

• Client-stipulated quality assured from the start and at each step of growth
• New operation is a seamless extension of client’s work environment
• Client inherits a smoothly functioning team familiar with its processes
• Client captures valuable support documents and proprietary software
• Fixed-fee arrangement eliminates startup risks and assures budget control

Ideal Fit for BPO

Unlike software or electronic product suppliers, who use small technical teams to conduct R&D at offshore testing and development centers, BPO providers typically rely on hundreds of multiple-shift employees to enter data, process forms, convert records, verify claims, perform coding and handle other back-office services.

BPO also has a critical need for absolutely reliable infrastructure — power, telecommunications, high-speed Internet access — to deliver deadline-sensitive work without interruption.

China’s size and sophistication assure that it can meet all labor and infrastructure demands.

Companies can achieve significant gains in costs, time and productivity through a BOT alliance with an established partner in China who has a working knowledge of Western business methods — knowledge that is transferred swiftly and seamlessly.

In addition to needing a large, skilled labor pool, BPO players depend on advanced, reliable infrastructure. broadband Internet access from redundant service providers, multiple international telecom lines, top-level data security and separate servers for each client.

Moreover, the nature of project-driven BPO accounts means that workflow can expand abruptly — again requiring readily available personnel with data processing experience. Scalable growth may require facility expansion or secondary site setup.

While IT Outsourcing may allow flexible project schedules and adjustable delivery targets at times, BPO providers cannot afford delays or workflow interruptions. Speed and dependability are essential for back-office service providers, whose own clients rely on timeliness in the same way that automotive manufacturers in China, Japan and the United States rely on Just-in-Time deliveries from parts suppliers.

Internal Perspective

Providers with deep cultural and business roots in China are well-positioned to pave an obstacle-free BOT path for newcomers who currently operate in India or in their home bases of Europe or North America. These indigenous Chinese entrepreneurs already have an inside perspective of Business Process Outsourcing — as well as of China itself.

They have well-refined recruiting networks, training procedures, operating methods and quality standards. Relationships with vendors, landlords, universities and government regulators all pay immediate dividends for their foreign BOT partners. As London-based

HSBC Bank says in advertisements: “Never underestimate the importance of local knowledge.”

–> Key points

• Local BPO veterans have significant host country relationships
• Established partner assures continuity of operations at new site
• Reliable recruiting and training from a large workforce shorten startup time
• Client avoids infrastructure investments during startup
• Client can focus on marketing and core business, not support functions at new site
• Strategic alliance maximizes ROI

Why a China Site Makes Sense

China is widely recognized as one of the lowest-cost producers in the world. But that’s just one reason why it is the base for a growing share of BPO for clients from North America, Europe and Asia.

Equally important are government support, social-political stability, technical skills, a large and highly educated workforce, Internet and telecommunications networks that meet international standards, cost advantages and entry into the World Trade Organization.

Since joining the WTO in 2001, China has rapidly become a global economic force. Thirty-seven Chinese companies are on the latest Fortune 500 list.

As more multinational corporations participate in China’s dramatic transformation, they and their local partners adapt Western best practices to Chinese cultural and economic conditions.

In addition to those attractions for BPO providers and other industries, a presence in China provides another huge opportunity — access to a country with 1.3 billion people and rapidly expanding markets for business services, consumer services and consumer products. China’s GDP grew by 9 percent in 2008 and 7.7 percent during the first three-quarters of 2009.

Outsourcing can strategically assist expansion into Asian markets, product launches and development of new business models.

As more companies move into China to capitalize on growing demand for industrial and consumer products, firms with little or no experience in China and are vulnerable to various mistakes.

Backup Capacity = Risk Management

The same principles behind business insurance, duplicate records storage, IT security safeguards and disaster recovery plans also apply to BPO operations overseas. Because quick turnaround and continuity are critical, BPO providers with sites in India increasingly recognize that maintaining backup capability at a second site within that country does not provide sufficient safeguards.

A study from AMR Research in Boston warns: “Companies with offshore experience should mitigate offshore outsourcing risk by moving beyond India. High worker attrition rates, the danger of natural disasters, a hostile relationship with Pakistan and religious strains as reasons why many companies are looking to non-India locations in order to minimize the risk of geo-political destabilization.”

Climbing wages, rising worker turnover rates, labor shortage forecasts and sometimes-unreliable infrastructure are among reasons why Western companies with support operations in India now also have partnerships with service providers in China. Corporations such as Whirlpool, United Technologies, Danaher and Sweetheart Consumer Products have diversified this way.

Even Indian-owned companies such as Infosys and Wipro now develop software in China, where labor costs are lower and a well-trained workforce is much more plentiful.

Government Addresses Concerns

Chinese leaders, eager to solidify and extend their republic’s major role in international commerce, are responding to concerns about legal protections, financial safeguards and communication skills. The government is committed to enhancing trust and confidence in China’s market economy, which has evolved significantly since reforms

began during the 1980s.

As part of the current Five-Year Plan, the State Council Information Office has drafted legislation regulating governing digital signatures and is working on methods to improve the security of information and communications systems. It prepared China’s first personal data protection law in 2005.

New privacy and intellectual property safeguards emerged from a year-long study into best practices in Europe, North America and Australasia. The legislation is seen as essential in the furtherance of both the ITO and BPO industries.

Education improvements to expand technical proficiency and English language abilities also are a priority.

–> Key Points

o Outsourcing to China diversifies risks for India-based operators

o China presence provides foothold in world’s fastest-growing market

o Government is responding effectively to legal protection and language education needs

For all reasons outlined, BPO providers with operations in India or Southeast Asia increasingly recognize that prudent risk management to assure continuity means diversifying with a location in a separate region that offers a large, well-educated labor supply with attractive costs.