As wages for information technology specialists in India continued to rise, some companies were looking to China for their offshore software applications, said the chief executive of a U.S.-based IT outsourcing company.

“China’s structural cost advantage over India is massive, and I think it’s long term,” said Freeboarders chief executive John Cestar.

“We don’t have any wage inflation in China and we haven’t for the last year and a half, and the number of really high-quality graduates coming out of this system is stunning.”

Freeborders China, one of the largest foreign-owned IT outsourcing centers in South China, has 225 employees in their development laboratory in Shenzhen working for more than 400 companies. While this number pales in comparison with some Indian firms with thousands of employees, Cestar sees potential for growth.

“There’s about US$10 billion a year spent by U.S. companies in software applications development from the United States to India,” he said. “For reasons of risk mitigation and diversification our customers are saying we’re going to move 5 percent or 10 percent of that into China in the next 15 months. They’re saying: we can’t afford to be all India.”

But cost advantage did not matter if the outsourcing company could not deliver a quality product, Cestar said. That is why he likes to bring his clients to the company’s lab in Shenzhen, which he said looked as if it could be located in San Jose, California.

 “The whole game comes down to process maturity,” he said. “You’re not outsourcing to a country, you’re outsourcing to a company. We happen to have a software company in China, but it’s a world-class operation.”

One concern companies have about outsourcing to China is piracy. To combat such problems, Freeborders enforced strict security rules and insists on a unified system of documentation and process, Cestar said.

 Another concern is lack of management skills among Chinese employees. Freeborders often hired Chinese managers who had been trained in the United States or at U.S. companies such as Microsoft, Cestar said. They also employ people he calls “process police,” who go across projects to ensure high standards.

Freeborders China started three years ago on specialty projects for U.S. retailers such as Target and DuPont. Retailers were natural customers as they were used to working in China and trusted the market.

Since then, Freeborders has picked up business from technology companies wanting to diversify.

But the motherlode of business, Cestar believes, is targeting the “low-hanging fruit” in IT applications at Wall Street firms. The difficulty is getting them to trust the Chinese market.

“If you go into a Wall Street firm and say we’ll do anything you want...they’ll say it’s not credible and won’t trust you,” he said. “They need specialty expertise.”

One area in which Freeborders specializes is automated testing. The company can take millions of lines of code, change 15 lines of it, and test it for success. Financial service companies could outsource such projects to China at low risk and for less cost than in the United States, Cestar said.

Another area is consolidating data from disparate systems within a company. Freeborders can integrate information into a single Web portal so employees can view data from various systems on a single screen.

Despite the advantages of outsourcing IT and software management to China, Cestar admits the market has to endure some growing pains before reaching full potential.

“The key to success in this business is not saying we’ll do everything,” he said. “You’ve got to say no to a lot of work to keep credibility.”

(Shenzhen Daily November 10, 2004)