Offshore Service Outsourcing: A SWOT Analysis of SMEs in Jiangsu Province

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1 Offshore Service Outsourcing: A SWOT Analysis of SMEs in Jiangsu Province FENG Yue, HAN Yu Economics and Management Department, Nanjing Institute of Technology, P.R.China, fengyue@njit.edu.cn Abstract: It is a global trend to go to offshore service solution providers for most enterprises in developed countries. Whether small and medium-size enterprises (SMEs) in Jiangsu, a southeast coastal Province in China, are potential to develop offshore service outsourcing industry is demonstrated by using a SWOT technique in this paper. The analysis shows that even there exits weaknesses and threats, the strengths and opportunities indicate that there are considerable potential for SMEs to act as outsourcing providers. Of course, some measures, involving investment environment, finance system and professional personnel training, should be taken to further optimize the business climate for service outsourcing industry in Jiangsu. Keywords: Offshore Service Outsourcing, SWOT Analysis, Small and Medium-size Enterprises 1 Introduction Outsourcing is a means to achieve competitive advantage for many western companies. Global trends indicate that more and more non-score activities will go to offshore solutions providers. Offshore outsourcing offers large potential benefits for countries at both ends of the process: the receiving countries gain jobs, skills, access to foreign markets and other benefits while the sending ones improve their competitiveness and can move into higher value activities (UNCTAD, 2004). From the view of most developing countries, it is potential and important to act as a provider of offshore service outsourcing to integrate into the global production and service system. In fact, more and more developing countries are confronting fierce competition in this area. India, for example, is the most successful country in providing ITO (Information Technology Outsourcing). A lot of literatures argue that service outsourcing plays an important role for both ends of the process. Lu (2005) thinks it is a proper way to combine developing domestic IT industry with participating international IT outsourcing after his comparison of the IT strategy of China and India. Gong Sukang and Zhou Wei (2006) find it is an effective route to develop IT industry through IT industry internationalization. And Zhu Xiaoming et al. (2006) focus on the provide end and put forward some suggestions. But how the sending countries make outsourcing location-decision? An empirical research has been done by Song Lili to implore which factors influence MNC service outsourcing location decision-making, and the result shows that labor cost, labor quality, host country infrastructure and economic development level of host country have positive significant effect on MNC service outsourcing location decision, while culture gap between two countries has no significant effect on location-decision (Song Lili, 2008). K.G.K. Nair and P.N. Prasad (2004) argued that the factors include business conditions, physical infrastructure, IT infrastructure, financial institution and government support and various labor characteristics. 2 SWOT Analysis Methodology In order to improve their industry structure and move to the upper stage of the industry value chain, a This research is financially supported by the Department of Education of Jiangsu Province, Project No. : 2010S JB790018,09SJB

2 large number of countries, especially developing countries, have been promoting their service industry as a strategic sector. In China, most provinces or cities, especially economic developed areas, are eager to promote themselves as offshore outsourcing locations. The promotion of a specific offshore outsourcing location cannot be viewed in isolation, as its viability is linked to many business environment factors that are specific to a region, the internal and external environment factors including social, economy, political structures and even individual lifestyles put a profound impact on location decision-making. To examine the long-term sustainability of a offshore outsourcing location, it is first necessary to identify the factors that would provide a differential advantage vis-à-vis potential competitors in the years to come (Nair and Prasad, 2004). A SWOT analysis can be an excellent and fast tool to identify the present situation and explore the future possibilities. To identify whether an area is a potential offshore outsourcing location, a comprehensive SWOT analysis is one of the effective approaches. SWOT analysis can be simply understood as the examination of an organization's or an area s internal strengths and weaknesses, and its environments, opportunities, and threats. It is a general tool designed to be used in the preliminary stages of decision- making and as a precursor to strategic planning in various kinds of applications (Johnson et al., 1989; Bartol et al., 1991). When correctly applied, it is possible for an area to get an overall picture of its present situation in relation to other areas. The analysis also looks at future possibilities for the area through a systematic approach of introspection into both positive and negative concerns. It can help administrators to quickly expand their vision and then make correct decision. Probably the strongest message from a SWOT analysis is that, whatever strategy of development is decided, decision making should contain each of the following elements: building on strengths, minimizing weaknesses, seizing opportunities, and counteracting threats. In order to be most effectively used, a SWOT analysis needs to be of flexible. Situations change with the passage of time and an updated analysis should be made frequently. SWOT is neither cumbersome nor time-consuming and is effective because of its simplicity. Used creatively, SWOT can form a foundation upon which to construct numerous strategic plans for an organization or an area. 3 A SWOT Analysis of SMEs in Jiangsu 3.1 Strengths On the aspect of developing service outsourcing as a supplier, Jiangsu shows its specific characteristics: unordinary geography location and low start-up cost, solid base of modern manufacturing industry with a long history, rapid macro-economy growth and comprehensive infrastructure, a large number of universities and educational institutions, positive attitudes of local government and its incentives Location Advantage Jiangsu, located in the east coastal China, is one of the important parts of Yangtze River Delta. With its sound economic indicators, the adjustment of economic structure proceeded stably and the gross output value of service industry achieved more than 10% annual growth in the past years. The three economic clusters, i.e. SuXiChang (Suzhou, Wuxi and Changzhou), Nanjing and Xuzhou, being famous for their sound capacities in service industry, are showing the best potentials to become one of the offshore service outsourcing locations. Economic radiation from Shanghai is another location advantage of Jiangsu Province. Shanghai is the most developed and international city in China, while commerce cost increasing, some outsourcing demand will shift from Shanghai to its nearby cities, such as Suzhou, Wuxi, Nanjing and so on, which are all in Jiangsu Porvince. According to the Ministry of Commerce of the People s Republic of China, even in the shadow of global finance crisis, the contract value of service outsourcing achieved USD billion in 2009, up by 185.6%, and the contract value of offshore service outsourcing amounted to USD billion, up by 153.9%. In Jiangsu Province, the corresponding value achieved USD 3.72 billion in 2009, up by 145%, and it take a share of 18.6% to the whole country. 304

3 3.1.2 Service Outsourcing Industry Cluster There are 3 national service outsourcing demonstration cities (Nanjing, Suzhou and Wuxi) in Jiangsu out of 21 in China, 6 provincial service outsourcing base cities (Suzhou, Wuxi, Changzhou, Jiangyin, Kunshan and Taicang), and provincial service outsourcing demonstration zones amount to 15 ones (Wuxi High-tech Development Zone, Wuxi Industry Design Park, Changzhou Software Park, Changzhou Cartoon Animation Industry Base, Kunshan Huaqiao Economic Development Zone, Suzhou High-tech Development Zone, Nantong Economic and Technical Development Zone, Lianyungang Economic and Technical Development Zone, Wuzhong Economic Development Zone, Zhangjiagang Economic Development Zone, Changshu Southeast Economic Development Zone, Wujiang Fenhu Economic Development Zone, Xishan Economic Development Zone, Zhengjiang Software Park and Nantong Congchuan Area). In 2009 more than 20 thousand square meter service outsourcing supporters were constructed, various software parks, logistic parks, creating parks, biological and medical parks, R&D and design centers and commercial centers were put into use, and some of them become famous brands. Obviously, concentrating effect of Jiangsu service outsourcing clusters has become evident, and innovation capacities have been enhanced, ranking among the top in outsourcing centers in the country and has become one of the pillar of provincial economic development. In these development zones there are more than 1000 service outsourcing suppliers, among them only less than 10% are big size enterprises, and the rest of them are SMEs High Quality of Human Resources Both the number of higher education institutions and the enrollment rank the first place among all provinces in China. There are 49 national high-tech industry bases, 93 science parks, and 457 technical service organizations. The number of both patent application and patent authorization also rank top among provinces. Owing to high quality human resources, the service industrial structure has being optimizing. In service outsourcing industry, the number of enterprises of ITO (Information Technology Outsourcing), BPO (Business Process Outsourcing) and KPO (Knowledge Process Outsourcing) accounted for 55%, 25% and 20% respectively. Large number of service outsourcing suppliers are concentrating in advanced service industry, such as software, animation and creation, industry design, medical research and development, supply chain management, finance service and so on Positive Attitude of Provincial Government With open and practice view, the local government is ready to supply series services in connection with service industry, especially in service outsourcing industry. Preferential measures are taken to ensure an excellent business climate for service outsourcing, such policies as Promotions to software industry, supporting policies to promoting offshore service outsourcing industry are implemented in Jiangsu, and they are the first policies among the country. 3.2 Weaknesses Financing Problem Most service outsourcing suppliers are confronting financing problems. On one hand, due to the shortage of fixed assets or assets which can be mortgaged or guaranteed, it is very difficult to obtain loans form banks; on the other hand, there is a large demand for capital because the outsourcing suppliers must invest a lot to R&D before holding a contract, and the return period is relatively long. Financing problem exists, but there is not yet a sound system of risk investment to give a solution Structural Conflicts of Human Resources Although there are lots of graduates from higher education, most of them can not exactly meet the needs of service outsourcing enterprises, thus the enterprises have to train their new employees at a higher cost. Meanwhile, there always exists a certain degree of job-jumping, especially among the skilled employees and this usually makes the enterprises in a dilemma situation. Despite there is a large number of high quality human resources, the special talents, such as 305

4 compounded talents, senior technicians and senior managerial talents are still in shortage Lack of Intellectual Property Protection Offshore service outsourcing industry is Knowledge-intensive industry, whether the protection of intellectual property is strong or not will be taken into consideration when the service buyers make their decision to choose the suppliers. Although the protection of intellectual property has improved a lot in recent years in Jiangsu, there is still much work to do to enhance the legal and judicial environment. Only when the buyers, especially the transnational corporations who are the big buyers of offshore service outsourcing, are satisfied with the legal protection system, can service outsourcing make rapid development in Jiangsu. 3.3 Opportunities A Huge developing room for SMEs The opportunities for SMEs to act as suppliers of offshore service outsourcing are increasing in recent years and it will be a long-term trend. In 2004, only 44% of the global outsourcing contract is hold by the biggest six outsourcing companies, whereas, the number is 71% in During the same period, their market share in European market decreased from 73% to 36%. Researches show that more and more small and middle sized IT companies are participating in the competition although IBM is also the top one for its 10.7% market share. The British Datamonitor argued that some clients start outsourcing their IT and other inner affairs to certain service companies instead of outsourcing the whole IT section to a single supplier. Michel Janssen, the president of Everest Group, said that the biggest six traditional service outsourcing suppliers are confronting the competition with SMEs and this indicates a tendency, in a certain degree, that is, there are more opportunities for SMEs in service outsourcing market Outsourcing Strategy Changed by TNC According to Gartner Corporation, the market scale of service outsourcing suppliers increased from USD 4.55 billion in 2005 to USD 7.95 billion in 2009 in China, the average annual growth rate achieved 18.3% and ITO has developed best. India took 80% of the global market, but now, more and more transnational corporations shift their outsourcing strategy from concentrating in India to scattering to different countries. The change of TNC s outsourcing strategy provides an opportunity to Chinese offshore service outsourcing suppliers to get more market share. Estimated by Huaxia Consultant Company, Japanese software industry will offer 20% of their outsourcing to Chinese companies in 2010, and the proposition in 2009 is 3.5% Positive Attitude of Central Government The positive attitude of Provincial government comes from and strongly supported by the central government. In recent years, a lot of preferential policies and incentives are promulgated by the central government, such as National Strategy for Information Industry Development( ), Opinions on Accelerating the Development of Service Industry and Opinions on further Supporting the Development of Information Industry and so on. All these opinions and supports guide service outsourcing industry to a sustainable development way. 3.4 Threats Risk of Exchange Rate The continuing revaluation of RMB lays much pressure to service outsourcing suppliers. This revaluation tendency of exchange rate crowds out the original low profits, some suppliers even loss their profits. Offshore service outsourcing suppliers, especially those SMEs, are not capable to avoid the risk of exchange rate Both Domestic and Foreign Competition Domestic competition mainly comes from other top cities in service outsourcing industry, including Beijing, Dalian, Tianjin, Shanghai and Hangzhou. Cluster effects, high quality of human resources, the 1 Data source: 306

5 excellent environment of software service, together with preferential policies in these cities composed large pressure to Jiangsu Province. Foreign competition mainly comes from both old developed countries, such as India and Singapore, and newly developed Southeast Asian countries, such as Indonesia and Vietnam. Their advantages lie in either advanced service industry, or skilled talents, or low cost. While the demand sides scattering their offshore service outsourcing, these countries mentioned above become strong competitors to Jiangsu Province. 3.5 Result After analyzing the four aspects of strengths, weaknesses, opportunities and threats, we get the overall situation of offshore service outsourcing in Jiangsu as shown in table 1. Tab.1 SWOT Matrix for SMEs in Jiangsu Porvince Strengths Weaknesses Location Advantage Financing Problem Service Industry Cluster Structural Conflicts of Human Resources High Quality of Human Resources Lack of Intellectual Property Protection Positive Attitude of Provincial Government Opportunities Threats A Huge Developing Room for SMEs Risk of Exchange Rate Outsourcing Strategy Changed by TNC Positive Both Domestic and Foreign Competition Attitude of Central Government 4 Conclusion A SWOT analysis can play an important role in the assessment of offshore service outsourcing locations. The result of the SWOT analysis applied to potential offshore outsourcing industry in Jiangsu shows that this province has all the critical basic factors: Location advantage, Service Industry Cluster, High Quality of Human Resources and Positive Attitude of Provincial Government, and this Province also faces huge opportunities to develop outsourcing: A Large Room for SMEs, Outsourcing Strategy Change by TNC and Positive Attitude of Central Government. Nevertheless, there are also weaknesses and threats which hinder SMEs to develope offshore outsourcing industry in Jiangsu Province. In order to building on strengths, minimizing weaknesses, seizing opportunities, and counteracting threats, some measures should be taken by the government and enterprises. The most important measures include enlarging the advantage of cluster, improving investment environment, optimizing finance system, and so on. And first of all, enhancing the training professional personnel is crucial. However the analysis, due to data limitations, is not completely done to reveal the entire situation of Jiangsu s SMEs in offshore service outsourcing industry, case study and empirical test should be the future research works. References [1]. United Nations Conference on Trade and Development (UNCTAD), World Investment Report 2004: The shift towards service, United Nations publication, Sales No. E.04.II.D.33, p148~149 [2]. K.G.K. Nair, P.N. Prasad. Offshore Outsourcing: a SWOT Analysis of a State in India. Information system Management, summer 2004, 21(3):34-40 [3]. Radha Balamuralikrishna, John C. Dugger. SWOT Analysis: a Management Tool for Initiating New Programs in Vocational Schools. [4]. Lu Feng. Study on China s Participation of International Service Outsourcing. Economic Research 307

6 Journal, 2007 (9):49-61 (in Chinese) [5]. Gene M. Grossman, Elhanan Helpman. Outsourcing in a Global Economy. Review of Economics Studies, 2005(72): [6]. Hui Huaihai et al. The New Vigorous Economic Model of China--Study on Outsourcing. Soft Science, 2008(12):18-22 (in Chinese) 308