DiligenceChina

Approaches to Due Diligence in China Part IV: BPOs

Using China-Based BPO’s to enter the market & expand incrementally

When most China investors or managers hear BPO or Business Process Outsourcing, they immediately think of US jobs being exported to places like China or India. It is primarily a strategy for obtaining lower labor prices for fairly basic job functions, which translates into higher profits for US based companies. That model has its strengths and weaknesses (ChinaLawBlog writes about some simple but vital due diligence measures for those looking to outsource in China).

There is, however, a second application of the BPO model that international managers in China can benefit from. In this model, managers can farm out critical – but non-core – tasks and operations to specialists. Instead of Dell contracting with a Chinese factory to produce thousands of PCs, the newly registered China branch of ABC Software Inc might hire consultants and freelancers to perform vital management functions.

New(ish) name for an old model.

You probably already use this business model in a very limited way. Few mid-sized companies go out and hire an in-house legal team when they need a contract reviewed – they hire a lawyer on an hourly or retainer basis. Likewise, you may have a tax specialist that you work with a few times a year, but don’t keep on staff.

What’s new in China-based BPO is the range of services and specialties that are becoming available for hire. Many ex-pats, overseas Chinese, returning Chinese and experienced locals have set up their own consulting companies in fields that they have established specialties in. And China has become a specialty in-and-of itself, as many consultants are now available to help with cultural, management, language and regulatory issues.

In short, the world of BPO has been growing in both breadth and depth. Major Chinese business centers like Shanghai, Beijing and Shenzhen are home to companies that offer a wide range of services and abilities. Legal and accounting services are key, of course, and there are options in every conceivable specialty. You can also hire firms to help with a variety of HR concerns, including hiring, recruiting, testing, appraising, training coaching and counseling. There are marketing firms to help with research, brand building, trend spotting, media buying and promotion. Value added sourcers can stand in for your purchasing department. Conference planners, coordinators, events planners and caterers are working in a variety of languages and specialties. International companies no longer have to settle for sub-standard business services – though often the prices are as high as the standards.

What does this mean to the China manager or investor?

The development of a sophisticated business service sector offers new and expanding businesses a creative solution to some traditional China challenges.

Available expertise. You are an expert at developing software or designing machine parts – not in Chinese business culture. Well, until recently, you didn’t have much choice but to become a China expert. Now you can find consultants who will help you bridge the culture gap or manage your operation. A variety of business entry consultants can help you set up your ops, and HR outsourcers can find people to manage your human assets. China-based BPOs may not be cheap, but they allow you to buy needed expertise that frees you up to focus on your core business activities.

Systematize networking. One of the biggest problems with Chinese networking is that you never know who you will meet or what they can accomplish. Networking was always very hit-or-miss and random. DiligenceChina advices you to start your business networking with professional service providers, and be specific about what kinds of contacts you are looking for. Sure you’ll have to pay for their services, but you’ll be saving countless hours and getting specific results. If you are new to China (or entering a new market within China), professional service providers should make up the backbone of your network of business contacts.

Incremental market entry. Another practical way to employ professional service providers is to help you enter the China market in measured, predictable steps. There was a time when businessmen showed up with a suitcase full of cash, a vague business plan and a prayer. Nowadays, you no longer have to jump in with both feet and hope for the best. Business entry consultants, HR specialists and a market research firm can do all the heavy lifting for you while you are still back home earning money in you primary market. Your professional team of consultants will cost you more up-front, but often the savings in time more than justifies the investment. This method can also prevent you from committing serious blunders while trying to set up your new office from scratch before you even know your real market.

Market tests. If you are considering entering the market, you now have the option of assembling a “virtual presence” to test the market. You can set up shop in service office and put together temporary team of professionals to help you get a better understanding of the market and test the waters with a new product or service. It’s pricey – but a lot cheaper than signing on with a bad JV partner.

Exit strategy. Of course, one of the strongest arguments for working with consultants and freelancers is the ease in which you can unwind the relationships. Anyone who has tried to shut down a China operation can tell you that it may be VERY difficult to extricate yourself in a way that leaves the door open for future business opportunities.

So – the talent is here, the fees are predictable, the quality is high and the range of services fills your needs. Sounds great. Is there a downside? Of course there is.

First of all, there’s the expense. A Shanghai consultant or freelancer with international experience may not be much cheaper than his counterpart in NY or London. In some cases, they are more expensive.

You also have to check out who is really doing the work. That smooth-talking MBA from Manhattan is impressive – but is he the one putting in the hours on your project? Make sure you talk about his operation – not just yours. Find out who does the heavy lifting, and what his role is. If he is closely supervising a local team, it may be fine. If he is all sales and no management, you might have an expensive problem on your hands.

Does that international firm have any real experience? Don’t take too much comfort from familiar faces – westerners can be just as sleazy, incompetent and lazy as anyone else. Plenty of young adventurers have decided that their art-history degree and 6 months teaching business English in Nanjing qualify them for the title “International Management Consultant”. Get references, check references, and then check them again.

Don’t train the competition. Make sure you know the full extent of your consultant’s activities. Be very careful about hiring your own competitor – or potential competition – to do sensitive assignments. How long have they been consulting? How did they get into the field? If it turns out they are freelancing for you because their own operation is still struggling, you may be consorting with the enemy. Remember – ask basic questions, and assume nothing.

Weak confidentiality agreements and IP protection. Non-disclosure agreements and IP protection have been improving in China, but common sense is still your best protection. If you are talking to marketing company about promoting your brand and seeing a lawyer about securing your IP in China – see the lawyer first. That SEEMS so obvious that you might be laughing to yourself. Uh huh. Remember – Lawyers first, then accountants, then business entry people. Ops, HR, marketing, sales, and all the others come later.