Visitors at the eighth China International Software and Information Services Trading Fair held in Dalian last month. The Ministry of Commerce said that the nation's onshore and offshore outsourcing market hit $20 billion last year.

KPMG survey shows low labor costs top reason behind location selection

BEIJING - China has replaced India as the primary destination of outsourcing and shared services for Asia-Pacific companies, accounting firm KPMG revealed on Wednesday.

The KPMG survey, which covered 280 senior company executives across Asia, showed that China's outsourcing and shared services are rapidly expanding and winning market share over India and other regional destinations.

"Though at the moment the country has still not reached the level of maturity seen in India, the growth of China's outsourcing market is significant. Many Western companies may still see India as their location of choice, but for executives within Asia Pacific the message is clear - China is now leading the way," said Edge Zarrella, global head, IT Advisory, KPMG China.

According to the survey, 42 percent of the respondents said their companies have set up one of their shared services centers in China. With regard to outsourcing, 41 percent said they have a third-party outsourcing provider in China.

Singapore stands second as a popular location for shared services at 29 percent, followed by India at 25 percent.

Figures from KPMG show that in 2007, China's onshore and offshore outsourcing market stood at only $7.5 billion. That amount nearly tripled to $20 billion last year, according to the Ministry of Commerce. By 2014, KPMG predicts that China's total outsourcing market will stand at $43.9 billion.

Moreover, shared services are also expanding rapidly in China. The survey finds that over 80 percent of senior executives employ an outsourcing strategy, shared services, or a combination of the two.

Senior executives across the Asia-Pacific also view China as the preferred destination for setting up shared services centers.

The survey also revealed low labor costs as one of the reasons for contracting outsourcing providers (51 percent of respondents choose low labor costs as the top factor), although it is clear that this is far from the sole determining factor.

In addition, when asked about key factors used in determining the location of their shared services center, respondents once again cited low labor costs, as well as language capabilities (53 percent each).

According to Alan Fung, partner of performance & technology, KPMG China, senior executives should be careful about making location choices based on cost.

"They should take into consideration the longer term needs of their business and how employing their outsourcing and shared services approach can align with their wider business growth strategy," he said.

The key rationale driving outsourcing strategies, Fung said, is no longer just cost arbitrage.

Equally or even more important is the need to ensure access to a reliable supply of abundant and skilled talent. Language, skills and infrastructure are all critical.