LISA Interviews

When Michael Anobile (LISA’s Managing Director) originally interviewed VanceInfo Technologies in late summer last year, its English trade name was Worksoft Creative Software Tech. A lot has happened since then, including VanceInfo’s IPO listing of its ADRs (American Depository Receipts) on the New York Stock Exchange in December.

Editor’s Note: For an analysis of how China’s software development outsourcing sector and globalization services companies are transforming the country into a global product development center, read The New Breed of Chinese Outsourcers: Building Global Champions. It will introduce you to the players through their own words, and through the perspective of top Western companies who are working with them, based on face-to-face interviews.

According to IDC, the company is now ranked among the top three Chinese offshore software development service providers. It has grown over the last decade from providing localization services to offering a full range of globalization services, R&D, enterprise solutions, ADM (application development and maintenance) and QA and testing. David Chen (COO) and Junbo Liu (EVP) share below what is driving them in their dream to build a world-class IT services company based in China. Along the way, they share details on how their team has carefully leveraged pureplay localization into a comprehensive IT services offering. They also describe how their own customers have purposely helped them grow their company by increasing their skillbase.

On VanceInfo’s dream to build a world-class IT services company based in China:

Back in the beginning of our company, we always had the dream that we could build a world-class IT service company in China. We already had the vision to implement a combinational model, based on Accenture/Wipro. Because you see this everywhere in the whole world … in Europe, they have their own world-class IT service companies; the U.S. definitely has quite a few – Accenture, IBM, right? Japan also has quite a few. Even India has produced several world-class IT service companies. So, why not China?

On the global delivery model for offshore software development:

The current assumption for producing translation is that it must be done by native speakers in the local countries. So, that means the bulk of the production needs to be done locally. The global delivery model cannot be leveraged in that scenario.

The global delivery model means that things will be done in the location where they can be done best and most cost efficiently

How we manage our collaborative service offering with regards to globalization/localization – this is not a non-trivial issue. You face the challenge, sometimes, that people like to have a pure player and sometimes, they like to have a streamlined, combined service. There is a balance to be maintained here by companies like ours.

We need to interact with customers, since maybe there is not just one answer. We need to understand how they want to combine and leverage pureplay localization with a comprehensive service offering. They need to really think about these issues, and so do we, given the new scenario that people like us are now offering.

On IP protection in China:

Initially, Chinese vendors were not so well known as comprehensive service providers in IT. People were very suspicious and doubtful about their capabilities and about IP protection. Nowadays, all of these issues (process questions, language questions, cultural questions, etc.) are at least being addressed and managed with the help of overseas returnees to China.

It’s no longer "mission impossible." It’s "mission possible!"

With a lot of effort and the improvements in IP protection, people outside of China are at least becoming aware that no globalization – or partial globalization – is a very serious issue for them. If they don’t do a good job, they’re not going to get any business. So, Chinese service providers have grown naturally into offering more comprehensive services that are attracting more companies to move into China for R&D services.

For us, we have never encountered any problems concerning IP with customers.

On collaborating with customers:

Our work with TIBCO Software is an example of how a service provider and a customer can grow together. We did the low-end work for TIBCO at first, and they helped us to grow our company by increasing our skillbase.

What really motivated us was the need of our customers

One very strong business reason that motivated us to develop a more comprehensive business, rather than to remain a pure player, was the need of our customers. We have so many cases where localization is the initial engagement, but the customer wants to expand into other areas. Because by its nature, localization is a part of the lifecycle of software development. So, it’s natural for customers, after an initial success in a particular market, that they want to expand beyond the original low-cost outsourcing option. And, maybe even realize more productivity gains through working with localization services.

Customers can also start at the other end and proceed to localization over time

But, more and more, there are other trends that make it even more attractive for a company to grow to offer more comprehensive services. Namely, people starting from the other end and then going to localization. In other words, we start off doing globalization/localization – the tasks that people are traditionally looking for from a Chinese service provider. We then provide them with R&D services. This gives them a stronger presence in China, which facilitates their sales team to have a better penetration because a stronger presence means a stronger team supporting sales.

And then this same customer sees the local market as probably being more attractive than originally thought. They are then motivated to provide better support and to maintain an even stronger presence. This leads them to wanting to do more localization to be able to offer more technology and more products to local customers.

On globalization best practice:

Localization services day-to-day, for us, is really helping the customers make their product ready for a specific local market with all locale information and customization implemented. This, of course, includes translation, but also a lot of other things related to engineering and the best practices for localization that we have developed for the Chinese market.

Globalization best practice means leveraging your global resources with a global delivery model

Globalization, for us, is different. There are basically two issues here. One is leveraging the resources globally – maybe that’s a non-technical issue, but it’s very important to know how to best apply our global delivery model to a particular project. In other words, how to leverage our global resources with our global delivery model.

Another is ensuring at all levels that your product and your technology are ready for any local market – in a systematic way. Of course, internationalization is one part of this.

Make your product more ready for my language, for my culture

There are also customers looking for more consulting support, even though they are successful, since today’s global market means more competition and more demands on their technology.

Today’s consumers are demanding, “Make your product more ready for my language, for my culture.” And if you don’t do that, other people may do it. Consumers now really are more aware and have a much better understanding of what options are available in terms of new technology.

The rules have changed here in China over the last ten years. It used to be that English was OK for many in China. People would tolerate it, even find it trendy for new technology. But today, it can be troublesome for you because your competitor is not only providing a similar product, but also providing it in Chinese.

On attracting skilled people and employee turnover:

Attracting and retaining the best talent is always a challenge. We think it’s a relative issue, though, compared to the United States, Europe and India. The real question is, how hard is it for us to find a certain type of resource, how hard is it to grow them, and how hard is it to retain them?

From the financial perspective for the most experienced resource, they will become productive right away. But for the real productivity – meaning that they produce meaningful results for the client – it probably takes from one to two months for the knowledge transfer.

For a non-experienced person (degree-trained, usually in computer sciences or engineering), typically, they need to go through orientation and boot camp at our company, which usually takes from two to three months.

Many of our customers are now coming to China because of the resourcing issue

It’s a challenge, but so far, with so many interesting projects, we are still in a much better position than India. That’s why the business is so attractive for us. We are, as VanceInfo, a leading service provider, so we are engaged with customers who have already had successful engagements in India. They are experienced in outsourcing. Why are they coming to China? I think many of them are coming because of the resourcing issue.

The above only applies to software outsourcing, though. It’s a very different breed on the localization side. There, we don’t have a clear path because of the nature of the business. On the localization side, it’s more of a continuous training issue. We have to train people proactively through on-the-job training until they become productive.

Employee turnover is now about a 10% turnover on an annual basis, so that means that we just need to replace 13 people within a year.

We’re up to 3,500 employees now, with 150 people working in-house in pure localization (European and other languages are done by our partner network). Our in-house people only do proofreading for Chinese, Japanese and Korean. We also have a lot of people doing localization testing as part of the rest of the 3,500.

On “dirty outsourcing” and the evolutionary path for Chinese software outsourcers:

We have moved from offering only localization services to offering outsourced engineering and software internationalization. Why? This also happened to companies like Tata and Wipro before us. A lot of people, when they start with low-end outsourcing, are not really satisfied because they are very intelligent and very talented people. For example, low-end outsourcing or just localization is definitely not going to satisfy our PhD’s in computer science for very long!

On VanceInfo’s current financials and acquisition strategy:

We broke USD 30 million last year, and we’ll more than double it this year. We’ve had an angel and two VC rounds of financing.

NOTE: VanceInfo went public on the New York Stock Exchange in December 2007.

We’ve made five acquisitions already this year, small to large. All Chinese software services companies.

We’re adopting the Wipro method for revenue categorization

Based on this year’s forecast, 80% of our business will come from U.S. or European-based companies. We do have quite a few large European customers. Currently, 7% of our business is pure localization. Testing is about 30 to 40% of the pie. Software development and IT services (ITS) represent the rest.

Revenue per head for our employees is USD 20,000 per year

We’re adapting a different category right now – R&D Outsourcing Services. That’s around 50 to 60% of what we do. The rest is application development and maintenance, and testing. We reforecasted our revenue recently. So, pure testing (according to our new categorization) is at 10%. Testing will be part of ITS, and ITS is at 40. ITS is mainly for the different verticals. R&D also has testing, but it’s under the umbrella of R&D outsourcing.

India in the cross-hairs

This new revenue categorization is based on Wipro’s, and it’s different from the way we’ve categorized our revenues before. Wipro’s way of categorizing revenue is based on this: no matter what you do for R&D, whether it’s software development or testing, it’s all classified as R&D revenue. Testing is purely for the verticals. This will make it easier for people to benchmark us against Wipro.

On what the future holds for VanceInfo and the offshore software development sector in China:

So today, all of the companies in our sector have the goal to position themselves as an end-to-end outsourcing company – all the way from very primitive outsourcing to the very high-end outsourcing, including IT consulting.

The evolutionary path for Chinese software outsourcers: localization to R&D to IT outsourcing

The roadmap we have created for ourselves is taking us from localization to offering R&D outsourcing services and onto 360 degree IT outsourcing. All along the way, we are leveraging the competency we’re building during the previous stages and applying them to different verticals. Our path is clear: localization to R&D to IT outsourcing.

Even within IT, we will move from a very technical oriented approach, like application development testing, up to enterprise solutions, and then onto IT consulting. So today, actually, we are providing IT consulting all the way down to testing. The only component that we don’t offer yet is the strategic consulting piece.

So for example, we are now set to be the prime contractor to create a very important IT system, called Retail Channel Management System for Motorola. In the whole world, except for China, Motorola can almost always redial a carrier to sell their product lines through mobile devices. But in China, they have to deal with different scenarios because the carriers don’t bundle services with mobile phones. That means that Motorola has to rely on retailers, so they have to build a brand new system for China. That’s where we come in.

On why China is like New York City a hundred years ago:

The goal now for the Municipal Government of Shanghai is to have 15% of its residents be people from overseas. 15%. China has done a good job attracting money, but now it’s time to attract people from all over the world.

Like New York a hundred years ago …

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David Lifeng Chen has been VanceInfo’s Chief Operating Officer since 2001. He co-founded Heteng Software in 2001. Prior to that, Chen held management positions at IBM, Oracle, KPMG Consulting and Asera. He has an M.S. in Computer Engineering from the University of California and a B.S. in Electrical Engineering from Tongji University.

Dr. Junbo Liu has been VanceInfo’s Executive Vice-President since 2005 and is in charge of its R&D service business. He served on the California NGI Selection Committee in 2002 and received a U.S. Air Force software award for his outstanding work in building a high-performance resource allocation system in 1999. Liu has a Ph.D. in Computer Science from University of Bremen.