Study On The Competitiveness Of China's Offshore Software Outsourcing Industry Based On The Diamond Model

As global division of labor according to comparative advantage is strengthened incessantly, outsourcing has become the first choice for corporations to lower their cost and concentrate on their key technologies. Outsourcing is often regarded as a management decision that aims to reduce labor costs and concentrate on their competency. For an enterprise, outsourcing often refers to the operation of parts of business functions by other specialized service providers. Purchasing products or services from other enterprises is not outsourcing, but only a buyer-seller relationship. Outsourcing refers to a great extent of mutual information exchange, collaboration and confidence.Many companies have discarded their diversified strategic decisions but to focus on R&D on key technologies. On one hand, a large number of companies consider the IT service as non-core businesses, and they are not willing to spend a great deal of time and capitals on this kind of services. On the other hand, the service providers have scale economies advantages and professional technology to supply the services more efficient and effectively. Generally speaking, corporations can outsource any businesses to IT service suppliers based on their requirements. The most common businesses outsourced involve personal computer, software, hardware, after services and information process. Among the businesses outsourced, the growth rate of software outsourcing has exceeded other outsourced services. According to IDC research report, "Offshore software outsourcing will increase 25% to 35% in the next three years, and the market scale will reach 89.5 billion dollars by the end of 2012".In the past, companies would either develop the software applications on their own or outsource the software applications to the domestic providers. Nevertheless, as the great development of telecom technologies, more and more companies would like to choose overseas software services providers to reduce labor costs. During the past decades, China's offshore software outsourcing industry has experienced rapid growth. China's software enterprises continually strive to enter into the global software outsourcing services market as Chinese government has issued many preferential policies. Grasping the opportunity for development in the worldwide scale will be of great importance for maintaining sustained economic growth and achieving economic restructuring in China. With rich human resources and huge cost advantages, China has played an increasingly significant role in global software outsourcing market. According to CCID Consulting report, China offshore software outsourcing market scale in 2004 is 3.6 billion yuan, the 200715.2 billion yuan, while the 2009 31.2 billion yuan. Similarly, IDC latest report says that Chinese offshore software outsourcing market scale would increase to 54.9 billion yuan by the end of 2012. At present, China software companies have gained a lot of industry experience and gradually established good reputation and brand image in the world.In this paper, the theory of Michael Porter's diamond model is introduced, combined with present situations to analyze Chinese offshore software outsourcing industry. It analyzes the industry based on diamond model's six factors, Michael Porter's diamond model is an effective tool to analyze an industry or company's working environments. The diamond model emphasizes that the strategic management decision should not only be an arrangement of company's resources and framework, but also an adjustment of the constraint conditions of the institution system. Institution study is increasingly significant when corporations enter into a new working environment and institution system. Finally, the paper provides some suggestions for how to improve the competitiveness of China's software industry in the global market.This paper is divided into five parts. Part one introduce the background and significance of the research, Then a brief literature review is made on its developments, which is made on the basis of the researches of many typical experts in this field. At last, it point out the structure and content of this paper.Part two introduces many related definitions such as outsourcing, service outsourcing, software outsourcing and offshore software outsourcing. Then it looks back to its development history. Finally, it introduces the theory of Michael Porter's diamond model, including its backgrounds and a brief analysis of the six factors.Part three presents global software outsourcing industry current situation. The global software outsourcing markets mainly involve North America, Western Europe and Japan. Among these markets, U.S. is both the biggest software producing country and consumption country, which occupies more than half of the total outsourcing spending in the world. Among the total spending, big companies occupied more than half. Among the large companies in America, those who have offshore outsourcing projects include Microsoft, Oracle, SAP, IBM, and Motorola. With a huge amount of competent developers with low pay, Mexico, Israel, India, Ireland, and China are the selections of outsourcing countries. Among these countries, different countries have different strategic decisions, which depend on salary levels, key technologies, legal policies as well as local culture. The main target market of India is U.S., and Ireland mainly provides outsourcing service to European software markets. However, as India achieve great success, more and more countries and areas adopt positive and strong measures to improve their offshore software outsourcing service quality, including China, Israel, Philippines, Canada and Russia. These countries lay special stress on the development of their software outsourcing industry, and raise it to higher level as national policy now. On one hand, among the outsourcing markets, due to the fact that software outsourcing is closely related to local software basis and economic environment, it will not change too much. It is estimated that U.S. may retain the dominant position, and the market share of Europe will increase while that of Japan will drop. On the other hand, among the outsourcing service providers, since the barriers to entry for software outsourcing service market is very low, a lot of developing countries are going to enter this market. As a result, there are more uncertainties. Currently, in the global software outsourcing industrial pattern, India and Ireland are the first-tier countries; Israel, China, Philippines and Russia are the second echelon with rapid pace of development; While Malaysia, New Zealand and Australia are the last echelon.Also, it analyzes the favorable factors and negative factors of offshore software outsourcing. Since software technology and its application are changed with each passing day, it is rather difficult for corporations to meet the fast changing software demands with their own internal resources. Despite the growing popularity of offshore software outsourcing, a number of corporations still do not think that they can profit through outsourcing their projects to overseas service providers. According to an investigation to a large number of business information experts made by IDC, more than 30% of the respondents point out that the offshore software outsourcing works generate worse results than expected, and more than 15% indicated that these outsourcing works are a backset to the project. Only less than 12% of respondents indicated that the outcomes are better than if the software outsourcing works are undertaken by themselves. As a matter of fact, the concerns with the software quality and unimaginable costs in software outsourcing works are the most concerned factors that influence their decision-making.Part Four is the analysis of Chinese offshore software outsourcing industry. According to the current situation, the paper analyzes Chinese offshore software outsourcing industry from the six factors and the practical situations. First, it analyzes from factor conditions. China is a developing country with advanced telecommunication public constructions. In the past ten years, China's telecommunication public constructions have experienced an enormous restructuring. In addition, like other developing countries, China also has a large number of low cost and good quality software professionals. However, China is still lack of experienced and competent software project managers. Finally, as software products may take a long time of R&D before the software products are available, sufficient financial resources is extraordinarily important for software firms'daily operations.Second, it analyzes great demands in China's domestic market as well as the biggest client of China——Japan. On one hand, according to the statistics of Information Industry Ministry, the amount of China's internet users reached 360 million, and China has become the largest country in terms of the amount of Internet users. Owing to the current increasingly competitive market circumstances, the IT costs by China's government and companies are growing continuously during the last few years in order to catch up with the latest technology. One the other hand, most offshore software outsourcing works undertaken by China's software corporations are from Japan, which is the second biggest software outsourcing market. It has a great deal of software demands yearly, about 15% of the global software outsourcing market.Third, it analyzes from the context for firm strategy and rivalry. China is considered as one of the countries with the highest piracy rates. According to the report by American Software Association, more than 80% of the operational software in China has not been lawfully authorized, about 39% higher than the global average software piracy rate. Moreover, in past few years, the home software market becomes much more drastic than before. According to the statistic of Ministry of Commerce, there were about 14347 software enterprises and 5.8 million software professionals by the end of 2008. Finally, China was the second largest foreign direct investment recipient in the world after the United States in 2009, and its total FDI reached 95 billion dollars. Such great amounts of foreign direct investments will bring not only capitals and facilities to China, but also high end management skills as well as advanced techniques.Fourth, it analyzes China's hardware market and IT outsourcing service. Compared with China's software industry, its hardware industry is much more developed, and a few companies with international competitiveness have appeared. However, as for IT outsourcing service industry, China's industry is undeveloped compared with other emerging outsourcing service countries.Fifth, it analyzes from the role of Chinese government. In order to promote the growth of China's software industry, Chinese government builds a few important development software parks in some cities. According to the new program, the picked ones will obtain further policy and capital supports from Chinese government. Shanghai, Beijing, Shenzhen, Dalian, Xi'an, Chengdu, Guangzhou, Jinan, Hangzhou, Nanjing are the latest top 10 national software parks. With government's preferential policies and help, software companies can not only grow rapidly, but efficient communication between them is of great significance for the developments of China's software industry. Also, Chinese government has adopted other preferential IT policies to promote the development of China's software industry, such as "Software Industry Development Promotion Policy".Last, it analyzes the chance for China, especially the global economy is in the great depression and there are many uncertainties. China will be confronted with uncommon opportunities to develop its software industry.Part Five is the conclusions and suggestions part of the paper, summarizing the main contents and providing some suggestions. By analyzing the development of offshore software outsourcing industry and the global software outsourcing industry present situation, the paper figure out there is still a long way for China to go. Then the paper provides some suggestions for how to improve the competitiveness of China's software industry in the global market.