Outsourcing's trials and tribulations

End of linear growth

By May this year, there were nearly 17,000 outsourcing companies in China employing about 3.5 million staff, among which 70 percent had an educational background of junior college level or above.

The boom in both the revenue and the number of employees, as well as the profits, used to be directly related in that if the staff doubled in size, the revenue and profits would also double accordingly.

The phenomenon was a result of a staffing model widely adopted in the outsourcing industry typical of which were the lower-paid workers sent to the client company by Yang's former employer.

Under this model, employees of outsourcing companies would work on-site with their clients, with their employer being paid monthly on a head-count basis. It is supported by millions of graduates from second- and third-tier colleges hungry for work. Many outsourcing companies exploited their need, hiring more employees because "the more people you send out, the more money would come in."

Those times now appear to be over as increasing labor costs and tougher competition squeeze profits.

"Over the past 10 years, the cost of a software engineer has risen four-fold but the clients' bid price has less than tripled," said Liu Jiren, chairman and chief executive officer of Neusoft Corp, another key player in China's outsourcing industry.

Chinese IT solution and service supplier Neusoft shows its company logo at a technology fair in Beijing. The annual revenue from offshore-outsourcing businesses for Chinese vendors has been growing at more than 50 percent annually over the last three years, according to data released by the Ministry of Commerce.

As the number of companies increase, vendors' bargaining positions weaken because everyone is offering lower rates. "It is difficult for them to pass on the rising labor costs to the clients so the vendors' margins drop," Liu said.

Although the number of employees and the size of revenues continue to expand, outsourcing companies now face lower profit margins from a peak of 30 to 50 percent to less than 10 percent.One consequence is an increase in the number of people changing jobs, as Yang did. In recent years, China's outsourcing companies have had to deal with losing more than 30 percent of their employees a year. In some companies the proportion is higher than 50 percent, although new faces can quickly fill the vacancies.

"At least half of the enterprises still rely on the head-count model. They will probably be eliminated by the reshuffle within the industry if they don't adapt to the changes," Liu said, adding that his company is shifting its focus from the expansion of its business scale to the pursuit of a sustainable business model.

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  Source: China Daily  2012-11-12

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