Western businesses are waking up to China's potential to challenge India in  IT outsourcing. And so too are western venture capitalists.

DarwinSuzsoft, a US outsourcing firm with most of its staff in China,has closed a $48m round of financing led by Francisco Partners, a US private equity firm. This is the first round of outside funding in the company's 20-year history and DarwinSuzsoft says it is one of the largest investments ever for a US IT outsourcing firm in China.

DarwinSuzsoft was formed in April 2006, when US firm Darwin Partners, which had been
operating in China for many years, bought Chinese software developer
Suzsoft.

While  India's IT outsourcers have largely gone it alone in drumming up business overseas and growing organically,  Chinese outsourcing companies are smaller and less well known, so they are more likely to grow through  alliances, mergers or acquisitions with western firms, analysts say.

DarwinSuzsoft is  the first in what could be series of similar Sino-foreign marriages in IT outsourcing, though let's hope the next ones at the altar can come up with a more imaginative name.

While DarwinSuzsoft is headquartered near Boston, 800 of DarwinSuzsoft's 1,000 staff are based in China, where it has facilities in Shanghai, Beijing, Hong Kong, Suzhou and Dalian. Its customers include US businesses and multinationals in the financial services, insurance, healthcare and hi-tech sectors.

Why China? DarwinSuzsoft argues that one of the biggest benefits of Chinese IT workers is that they are still cheap — 30% to 40% lower than equivalent workers in India. And more western companies are apparently prepared to consider China as they grow frustrated with India's high staff turnover rates.

DarwinSuzsoft says it has a big advantage over bigger and better-known Indian outsourcers because of “dramatically lower employee turnover” than most Indian firms. It also says China offers “world-class” IP protection, which is certainly not a claim often put forward for China.

Nevertheless, the company says legal process in China for protecting IP has improved dramatically in recent years. Besides, since DarwinSuzsoft is a US company, any IP issues can be handled in US courts.

Neil Garfinkel, a founding partner of Francisco Partners, said:

China's large pool of technical talent, its modern infrastructure and its tremendous cost position make it a compelling choice as a technology outsourcing destination for US and multinational companies. DarwinSuzsoft is well positioned to capitalise on this opportunity through an established presence across China, a strong global management team and a proven model for bridging processes, cultures, language and distance.”

Nevertheless, those cultural and language barriers are what make western businesses reluctant to consider offshoring. Failings in these areas rather than in tangible aspects like technical skills or quality are the main cause of offshore engagements failing to live up to expectations.

If businesses in the west continue to have doubts about outsourcing to India, which is a well-trodden path and where workers speak good English, then DarwinSuzsoft must have big challenges trying to sell them on China.

More on DarwinSuzsoft in this InformationWeek story. See this BusinessWeek story for more on the challenges facing Indian outsourcers.


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