- your competitive edge - china the new global technology outsourcing hub

© 2006 I.T. UNITED Proprietary September 22, 2006

- Your Competitive Edge -CHINA The New Global

Technology Outsourcing HUBCyrill Eltschinger

CEO, I.T. UNITEDOutsourceWorld New York

-- Metropolitan Pavilion October 17, 2006 --

3© 2006 I.T. UNITED Proprietary

Table of Contents

1. Global Trends

2. China: Your Essential Shore

3. Case Study


1.Global Trends


Industry Forecast -

• Worldwide end users spending on IT in 2005 was $625 billion, to increase at 6% CAGR and reach $828 billion by 2010

• Global BPO market$135 billion in 2006, at an 8% CAGR to$182 billion by 2009

• Global ITO market: $50 billion by 2008, at a 20% CAGR

Source: Gartner and Nelson Hall (2006); IDC and The Economic Times (2005)


Offshoring – ITO Leads Growth

0

2

4

6

8

10

12

14

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Source: The McKinsey Quarterly, July 2006

Offshoring Market Spending$ billion

% of Total Offshoring Market (estimated)

35% in 2006

5% in 2006

3% in 2007

Infrastructure

BPO

Application Development

An estimated 1 million programmers needed!


Offshore ITO & BPO Outlook

Source: Gartner Research, 2005

IT Services

BPO Services

Offshore Spending

US$50 billion

US$24 billion

By 2008


Top 10 Barriers

1. Competing resources (48%)

2. Functional boundaries (44%)

3. Change Skills (43%)

4. Middle Management (38%)

5. Long IT lead times (35%)

6. Communication (35%)

7. Employee opposition (33%)

8. HR (people/training) issues (33%)

9. Initiative fatigue (32%)

10. Unrealistic timetables (31%)

Top 10 Success Factors

1. Ensuring top sponsorship (82%)

2. Treating people fairly (82%)

3. Involving employees (75%)

4. Giving quality communications (70%)

5. Providing sufficient training (68%)

6. Using clear performance measures (65%)

7. Building teams after change (62%)

8. Focusing on culture / skill changes (62%)

9. Rewarding success (60%)

10. Using internal champions (60%)

9 out of 10 factors are people related.

Source: IBM Survey of Global 500

Successful Outsourcing Transactions


Most Attractive Global Business Locations

Source: UNCTAD World Investment Report 2005


China Market Gaining Attractiveness

• By 2007: Chinese #1 Internet language

• By 2010: China to be largest… − Cell phone market− Beer market− Worldwide I.T. market− Advertisement− Automotive car park− Commercial aviation− Chemicals− Waste & recycling treatment, etc.

(Accenture 1999)


Top 3 Languages on the Web

2006Users

by Language Language as % of

Total Users

English 312,757,646 30.6 %

Chinese 132,301,513 13.0 %

Japanese 86,300,000 8.5 %

Spanish 80,593,698 7.9 %

German 56,853,104 5.6 %

Source: www.internetworldstats.com, March 31, 2006

1

2

3

China*: users, incl. other Chinese speaking regions


Top 3 World Internet User Groups

2006 Population2006 est.

UsersLatest Data

Penetration% of Population

European Union

462,371,237 230,396,996 49.8 %

USA 299,093,237 205,326,680 68.4 %

China* 1,306,724,067 111,000,000 8.5 %

India 1,112,225,812 50,600,000 4.5 %

Source: www.internetworldstats.com March 31, 2006

1

2

3

China*: Internet users in mainland. Not including Taiwan.


Asia-Pacific Cross-Border M&A

Source: UNCTAD World Investment Report 2005


Asia-Pacific HQ Relocation

• 1970s: Australia

• 1980s: Singapore

• 1990s: HK & Japan

• 2000 onwards: Mainland China› Shanghai› Beijing› Other Cities


Outsourcing Global Play @2006

• India

• China

• Brazil

• Russia

Many other destinations, but without volume ability to scale up tech talents & professionals


2.China: Your

Essential Shore


AChina Focus:

“Understanding The Market”


China Basics

• Slightly larger thanUS, incl. AlaskaPRC area: 9,596,960sq km

• 1.3 billion people

China about twice the

population of EU

• 90+% literacy

• Government focus on English language development

Source: www.worl-gazetteer.com and http://www.cafediverso.com

China = 4 xUS population


China FDI

$84.75

$115.07

$153.48$167.21

$52.74 $53.51 $60.63 $60.33

$0.00

$20.00

$40.00

$60.00

$80.00

$100.00

$120.00

$140.00

$160.00

$180.00

2002 2003 2004 2005

US

D (

in B

illio

n)

Contracted FDI

Actual FDI

Source: Beijing Municipal Bureau of Commerce, 2006


FDI – Geographic Allocation• Eastern Region captures nearly all FDI

• 65% in Fujian, Jiangsu, Guangdong, Shandong, and Shanghai

ADB, FDI Survey 2005

93.0% 86.5% 86.1%

11.0%8.9%3.5%3.5% 4.6% 2.9%

0

0.2

0.4

0.6

0.8

1

1990 2000 2004

Western

Central

Eastern

$11.69bil $40.77bil $60.63bil


China Investor Friendliness

Source: The US-China Business Council: An Investor’s Guide, 2003


China – Economic Performance 2005

• GDP +10.2% to $2,305.28 billion

− 2006 Q1: + 10.2% to $1,314.5 bil

• FDI, reaching $60.33 billion (-0.5%)

- 2006 Q1: +6.4% to $14.2 billion

• Investment in fixed assets +25.7%

• Retail sales +13.8% to $76.52 billion (2004)

Source: Various, September 2006


2020 – Economic Targets

• GDP overall: $4 trillion (4x higher)

• GDP growth: 7.2% annual

• GDP per capita: $3’000, up from $1’000

China Development Research Institute, www.china.org.cn, 2005


R&D and Innovation Stages in China

Source: Gartner Research ID Number: G00138506, May 2006

Effort Dedicated to

R&D and Innovation

Business ValueLOW

HIGH

HIGH

1980

2006+

1990

2000

Basic ProductionTrain workers in essential production and technical skills required for efficient production – quality management, procurement and inventory management systems.

Significant AdaptationChange products and processes to adapt technology to local or export market – in-house experimentation and R&D.

Technology ImprovementsImprove products, processes and skills to raise productivity and competitiveness, in-house R&D.

Frontier InnovationCreate new technologies.


050

100150200

250300350400

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Mill

ions

of

Use

rs

Fixed Mobile

Sources: MII, May. 2006; China National Bureau of Statistics, 2006Forecasts – MII * Fixed includes PHS/Xiaolingtong subscribers

Fixed*:06-2006360 M

Mobile:06-2006435 M

Decade of Unprecedented Growth of Telecom Infrastructure

Into Market Innovation

Drive Era

435 mil


Mobile coverage extensive in developed areas, lagging in rural areas

Source: GSM World, 2006


China Internet Snapshot

• June 2006: 123 mil users

− 64mil broadband users, 2nd largest high-speed after US

• Only 9.4% of China’s total population

• 12+％ of total Internet users worldwide

• 3rd largest user group, after the EU & US

Sources: CNNIC, Internetworldstats.com, November 2005


China Internet UsersTotal Number of Internet Users in Million

0.62 1.175 2.1 48.9

16.922.5 26.5

33.7

45.8

59.168

79.587

94103

111

123

0

20

40

60

80

100

120

140

97.1

098

.799

.199

.700

.100

.701

.101

.702

.102

.703

.103

.704

.104

.705

.105

.706

.106

.7

Source: CNNIC, June 2006

123 mil

9.4% population penetration

(8.5% 2005 and 7.2% in 2004)

Internet users refers to Chinese mainland citizen who use the Internet at least one (1) hour per week. Not including: 1) Hong Kong; 2) Macau; and 3) Taiwan


Web International Bandwidth

143 241 351 1,234 2,799 3,257 7,598 10,577 9,38018,599

27,216

53,941

74,42982,617

136,106

214,175

0

50,000

100,000

150,000

200,000

250,000

214.2 Gbp/s

Sensational speed of growth

Not including: 1) Hong Kong; 2) Macau; and 2) Taiwan)

Source: CNNIC, June 30, 2006

1999 06/20062003


BTechnology Outsourcing

Industry Focus


Keep in House

From Manufacturing

Outsource Gradually

•Cheap labor•Low skill sets•Factory workers

Technical Knowledge

BusinessKnowledge

To Services

A Matured Marketplace – New EraBooming: Engineering Services

•High value•High-end skill sets•Engineering services

2003-2004:Key Turnaround


China: Eastbound – JP/ USA

Depart BeijingAt 1:00pm, Any Day…

Land in the US Before Departure

Same Day


China: Westbound - Europe

200 flights a week To EU

Depart BeijingAt 11:30am, Any Day…

Land in the UK 3:15pm

Same Day


Outsourcing Industry Forecasts• Global IT outsourcing market will grow at a

compound annual growth rate (CAGR) of 20%• China's outsourcing market is expected to grow

at 36.5% ACGR through 2008/1010• Rapidly “Moving” China outsourcing software

industry size and tech talents availability

Sources: IDC Group 2005, Global Outsourcing Report 2005

0

5

10

15

20

2008 OutsourcingMarket $US Billion

0

10

20

30

40

Annual Growth Rate %

China

Global


China SW & IT Services Exports Revenues Outlook

Source: Sino-India Cooperative Office, Beijing 2005

In Million USD$

$4.6bil


0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

1998 1999 2000 2001 2002 2003 2004 2005 2006

Source: China National Statistics Bureau 2005; and China Ministry of Education 2005

China - Annual Computer Science & Software Graduates

140k

89k62k

189k

33k29k 41k

400k E.

250k

E.

Not including Hong Kong & Taiwan


Beijing #1

Source: TORCH Center 2005

Xi’an #3

Shanghai #2

Top-3 Higher

Education Cities

53 High-tech parks

29 National software parks

Software Technology Parks-TORCH Program-


China – Software Export Markets

Source: Analysis International, April 2006

Japan 59.2%

Hong Kong 10.9%

USA & EU 22.5%

Others 7.4%


China Outsourcing Hotspots

1. Beijing, Shanghai, Shenzhen [First tier cities]

2. Chengdu, Dalian, Xi’an, Tianjin, Suzhou [Second tier cities]

53 High-Tech National-level Economic Zones− Which includes 29 software parks, incubators and

R&D centers**

Source: TORCH Center 2005


China Tech Services Critical to Global Competitiveness

2006

(-5%)

China New Era: Booming Engineering Services Sector to China

2003-2004: Turnaround

(-15%)

(-25%)

2006

2007 2008 2009 2010

ChinaTier-1

ChinaTier-2

India

Widening GapIncreasing Hourly

RatesHourly Rates


Beijing’s Play in Outsourcing

Ranked 6 times #1 in national rankings:

1. Software (SW) exports (~40% of China)

2. Number of SW products delivered / year

3. Technology exports

4. Number of software enterprises

5. Highest reimbursement for SW-related VAT

6. Highest concentration of SW professionals

Source: Beijing Municipal Bureau of Commerce 2005


Software Export – Beijing

$45$70

$93

$138

$227

$303

$450

0

50

100

150

200

250

300

350

400

450

500

2000 2001 2002 2003 2004 2005 2006

US

D (

in M

illio

n)

Software Export

Outlook: $2bil by 2010


E.

Data reported to customs software exports bureau. Actual figure much larger.


Top-5 Overseas Concerns in Considering Offshoring & Services to China

1. English Language Capabilities?!2. Intellectual Property Rights ?!3. Information Security ?! 4. Tech Talents Quality ?!5. Staff Loyalty/ Turnover ?!


China’s Outsourcing Challenge

• Overseas Marketing! Too many conferences inside China, little/no participation at overseas trade shows

• International Internet controls• International Standards. Number of certifications

as of 2005, i.e.:− QMS: 7’754 (BJ) / 138’042 (Total) − CMM3/CMMI3: 38 (BJ) / 112 (Total)− CMM5/CMMI5: 5 (BJ) / 17 (Total)

• Communications, rapidly improving• India’s 25years head start


3.Case Study


– Smooth Project Migration – Successfully Growing Your

Offshore PartnershipDoug Rosenthal, I/T Development Manager, Dell

Cyrill Eltschinger, CEO, I.T. UNITED

– Gartner Outsourcing Summit, Orlando, FL –

April 3, 2006


Partners at a Glance


Dell Profile

• Founded in 1984

• Diverse technology and service provider

• No. 28 on Fortune 500

• 65,200 employees globally

• Publicly traded (NASDAQ)

• Revenue of $56 billion


Dell and Offshoring

• Global organization encompassing offshore employees and partnerships

• Offshore facilities for engineering, manufacturing, and customer service

• I/T development centers in Asia, Europe, LA

• Global network of suppliers


Dell Master Data Management (MDM)

• System of record for global product data

• Product attributes related to sales, marketing, and order management

• Support variety of customer-facing and internal applications

• Scalable, reliable data management environment


I.T. UNITED Profile

• China - Since 1998

• 200+ team - ITO & BPO

• 85%+ from Chinese top universities

• Privately held -Operating in China as a wholly-owned foreign enterprise (WOFE)

• Leading China-based outsourcing provider

• Multinational client portfolio


I.T. UNITED Offices

N. America: • San Francisco, USA• Toronto, Canada

Asia: • Beijing, China (Global HQ)• Shanghai, China

• Xi’an, China• Hong Kong, China• Chengdu Q1’07, China• Tokyo, Japan

Europe:• Brussels,

Belgium


I.T. UNITED Acknowledgements 2006

• ‘Global Services 100’ - Recognized in the top 5 leading China-based outsourcing services provider (01-06)

• ‘Global Outsourcing 100’ - Selected by the International Association of Outsourcing Professionals (IAOP) as a rising star (04-06)

• ‘Outstanding IT Outsourcing Services’- Supported by the Chinese Ministry of Commerce, second year in a row (06-06)


Case Study:Engagement for Data Migration


Background

• Dell undergoing a MDM globalization and consolidation process that includes Oracle, .NET

• Dell continues to leverage global partnerships

• Dell interested in working with a China partner to leverage cost advantages and supplier flexibility (scalability, ramp-up time, etc.)

• Dell evaluated and retained I.T. UNITED


Why China?

• Diversification of global sourcing risk

• Strategic market across industry sectors with sustained economic growth 10 yrs outlook

• Largest pool of tech talent

• Exploding English language command

• Tech industry: #1 focus by China Gov.

• State-of-the-art infrastructure

• Lowest rates, globally


Project Engagement


Engagement Model

• Fixed-fee project vs. staff augmentation

• Initially fixed-fee project to determine suitability

• Move to staff augmentation: target self-contained development work− Longer-term commitment of resources− Grow domain knowledge and familiarity with technology− Gain productivity efficiency− Absorb company culture and work style


Project Scope

• DBMS migration (SQL Server 2000 to Oracle 10G)

• Data model consolidation

• PL/SQL generation

• Automated tools in C# / .NET− Team of Oracle developers supporting Dell’s efforts to

migrate MDM applications from SQL Server to Oracle− CMMI-inspired, incremental project management

approach with high flexibility


The Offshore Team Structure

• Offshore team− Lead Developer + Developers + Testers− Part-time Project Manager (25% allocation)− Part-time Account Manager

• Metrics− Approx. 5:1 offshore to local (onshore) resources ratio− Local FTE 20%-25% part-time allocation− 2-3 month project cycles


DellManager

Developers

TechnicalLead

AccountManager

Developers

ProjectManager

TechnicalLead

Project Team

Project Planning & Status

Relationship Management / Oversight

Day-to-day coordination / mgt

Project Team Structure


Work Process

• Iterative approach between offshore resources and local (senior) developers

• Define functional requirements and design guidelines

• Frequent deliverables and regular feedback

• Offshore team to test each deliverable, then local resource also validates; local code review


Success Factors


Success Factors

• Security

• Communication

• Quality Assurance

• On-Time Delivery

• Response Time


Security

• Offshore staff working on segregated network

• File transfer via secure FTP

• Restricted access to dev/test environment

• CCTV protected work premises

• No external data-recording devices permitted

• Clean desk policy


Communication

• English proficiency of key staff members in China

• Establish team spirit

• Ensure that work is on track− Meet deadlines (I.T. UNITED)− Timely decisions & feedback (Dell)

• Weekly conference calls and status reports

• Onsite progress meetings as appropriate


Quality Assurance

• Iterative two-step QA process based on CMMI

• Cross-validation by team members and technical lead prior to delivery

• Cross-validation of offshore deliverables by local teams

• Routine technical training for offshore developers

• Performance-based incentives


On-Time Delivery

• Clear requirement specifications

• Weekly status reports− Project schedule reviews− Issue/Resolution tracking

• Smooth project implementation: faster problem solving with combined technical skills

• Effective time zone management− I.T. UNITED gets the work done overnight

(follow-the-sun)


Results


Partnership Results

• Complementary development skills between both Dell and I.T. UNITED teams

• Successful DB migration and consolidation

• Automated SQL generation tools

• Validated engagement model

• 65% cost savings per FTE


Next Steps

• Growth of existing support teams

• Implement concurrent projects

• Evolve partnership to other development areas, including consulting services

• Expand partnership opportunities within Dell


China Offshoring Advantages

• Largest pool of tech talents

• Sustained economic growth 10 yrs outlook

• World class infrastructure and networks

• Exploding English language command

• Government commitment to tech industry

• Steady expansion into China as strategic market

• Lowest rates, globally


Q&ACome and see us at our

Booth downstairs OSW#10


Enter your Business Card into our Lucky Draw box at the booth and Win the official Beijing Olympics 2008 Games Mascots…

Draw:1:45pmOct.18Wed.


Keep in Touch

Cyrill Eltschinger

e-mail: [email protected]

phone: +86-10-6599 2288 ext.-800

China cell: +86-139-0109-5212

USA cell: +1 (310) 801 0598


End


BACKUP


China-US Specific Success Factors

IPR

Time-zone

Language skills

Local holidaysCultural

understanding

Export control issues


China IPR In The Spotlight

• Highest awareness – China brands arte taking off− Beijing is home to 70% of Chinese software brands

• Ongoing focus on enforcing protection measures• Focus on short legal proceeding for IPR lawsuits• Continued government campaigning to raise

awareness & training• Ongoing media coverage to fight illicit use fake

products



Indian IT Firms China Rush?

• Tag-along its client base going to China• Tap into China’s domestic software sales• Tap into largest industries across sectors• Re-position closer to the Japanese market• Tap into most attractive China talents rates• Tap into special skills to face own shortages


Battle of the Titans: CHINA INDIA

Population

Literacy rate

Foreign exchange reserves

GDP

Avg. Ann. Growth of IT Sector

Software exports

Internet bandwidth

Installed PC base

Fixed phone lines

Mobile connections

Number of software companies

Domestic software sales

Hourly rate for developer (2yrs)

Sources: Gartner Research May 2002; ADP May 2004, MII 2006; US-China Business Council 2005, IMF, 2005; Indiainfoline 2004; CISA 2004, TIMES NEWS NETWORK 2003, ITU World Telecommunication Indicators Database, 2005/6

1.3bil

90%

$412bil

$2,228bil

42% (97-03)

$2bil

136Gbps

40mil

360mil

420mil

10,000+

$22.3bil

$12-25

1.09bil

59%

$102bil

$719bil

2.4% (97-03)

$10bil

10Gbps

8mil

67mil

69mil

3,000+

$3bil

$24

$167bil $>6bilContracted FDI ‘05:


Offshore – Rapidly Increasing

• Offshore will more than double in 3 years− 2005: 3% of overall IT services spending, while − 2008: 6-7% (Gartner and IDC)

• By 2008, nearly 1/4 of U.S. spending on applications development (ADM), integration and management services will go to offshore providers (IDC)

Source: The Economic Times, 2005


Global Outsourcing Projections

• 2000: < US $5.5 billion

• 2005: > US $17.6 billion

• 2008: > US $50 billion

Source: Various

0

10

20

30

40

50

60

2000 2001 2002 2003 2004 2005 2006 2007 2008

US

$ B

illio

n

Pro

ject

ion

• Total worldwide tech outsourcing volume, today: India ~2% ; China ~1%

An estimated 1 million programmers needed!


Global BPO Market• Global BPO market is expected to reach $134.7 billion

in 2006, an increase of 8.3% over 2005

• It is predicted for the global BPO market to grow at an average rate of 8% per annum, reaching $182 billion by 2009

Source: Gartner and Nelson Hall, September 2006

134.7

182

0

50

100

150

200

$U

S B

illi

on

2006 2009

Predi ctedBPO Market

8% increase per annum


International Client Base


Recognition, Awards and Rankings• I.T. UNITED is an internationally recognized Top 100

offshore player and a “Class A” IT company in China. • International Association of Outsourcing Professionals

(IAOP) - one of ‘The Global Outsourcing 100’.• Selected as an outstanding IT outsourcing (ITO) and

business process outsourcing (BPO) service provider by ‘Global Services 100’.

• Ranked in ‘Global Services 100’s China Top 5 list.• Received the 1st China Outsourcing Award by the Ministry

of Commerce & Dalian Municipal Government.• Ranked in CIO INSIGHT magazine’s Global Outsourcing

Report 2005 as one of China’s Top 10 “Major Players”.• Top 100 Offshore Global Players and one of China’s Top

10 IT Companies by Managing Offshore and neoIT.


China –A Rapidly Changing

Market Place ?


First foreigner to receive Private Pilot’s License in China…

Cyrill EltschingerCEO, I.T. UNITED

- your competitive edge - china the new global technology outsourcing hub

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