DuPont was in a bind. It outsourced the creation of an online fabric database for retailers and apparel manufacturers. Its first supplier failed. No wonder. The project was daunting. It required data from 600 fabric mills in 40 countries using eight different languages.
But the company couldn’t delay its Online Fabric Library because the CEO had sent letters to thousands of companies announcing the system would go live by a certain date. “There was a lot of internal pressure to deliver because this project had a lot of visibility,” says Mike Keating, Partner, Freeborders, the supplier who saved the day by stepping in and delivering the project three weeks early.
“Going from ‘It’s unlikely we’ll meet our target date’ to ‘beating the target date’ was a huge win for the CEO,” says Keating. “They worked week-ends and nights to make this happen for us under very tight deadlines,” adds Norman Beveridge, Global Manager for Apparel for INVISTA. (In 2004 DuPont sold its $7 billion fiber and textile arm to Koch Industries; the division is now called INVISTA. Antron, Lycra, Stainmaster, Thermolite, and Teflon are a few of its popular brands.)
Freeborders’s secret: offshoring to China.
Keating says Freeborders, which has over 400 people on staff in the US, Europe, and China, was able to ramp up its team immediately “because of the deep pool of talent in China.” Working 24/7 was a given. Hiring people at its office in Shenzhen, located an hour north of Hong Kong, was not a problem since “the best people like to work with American companies.”
But even more important was the fact the Chinese have a similar work ethic to Americans. “The Chinese are highly entrepreneurial, capitalistic, and competitive,” he observes
When there’s a challenge, the Freeborders China team typically assembles what they call a “tiger team.” Their job: To think about the problem, then solve it. At the end of the day, tradition demands they have a solution. Keating says being selected to join a tiger team is a high honor; the selection process is quite competitive.
Language was not a problem. Freeborders’ project manager in China speaks five languages fluently; his staff can communicate in English. Many of the supplier’s workers on this team actually worked for US software companies before returning home. Members of the DuPont team spoke eight languages. (The division spearheading the project is based in Geneva, Switzerland.) “We had no miscommunications because of language,” reports Beveridge.
Neither was the difference in time zones. Beveridge says his Chinese cohorts were flexible and always available for a phone call, even if it was late at night.
Cost is definitely a deciding factor. Keating maintains his staff earns 30-50 percent less than the wages of a comparable Indian programmer, on average. “The price was a better value than India,” Beveridge concurs.
Beveridge says he was concerned the intellectual property (IP) remained with INVISTA. Since China joined the World Trade Organization, this wasn’t a worry. IP issues still exist with Indian offshorers.
China’s Future in Offshoring
Keating is bullish on China. “I believe China will become No. 1 in IT outsourcing.” He says the world sees China as “a serious emerging player who everyone is afraid will become the 10,000-pound gorilla.” China is the No. 1 country from US-based investments, while India is No. 6, according to Keating. Cisco, Intel, and DuPont are investing heavily in China. “The message is: “Don’t bet against China,'” says Keating.
Lance Travis, Vice President of Outsourcing Strategies at AMR Research, takes a more tempered view. He believes China “will eventually mature and become a significant offshore locale.” But he’s “less optimistic” that China will produce a supplier who can generate $1 billion in revenues like the major suppliers in India.
The Indians enjoyed “a perfect storm of opportunity,” according to the AMR executive. Y2K allowed them to get started. There was no offshore competition in 1999. Travis believes China won’t be able to produce a $1 billion company–even in 10 years–because it has to compete with India. “The big advantage in labor arbitrage is over,” he says.
Yet he says Chinese suppliers will prosper, especially the ones who develop specific domain expertise. All the major outsourcing players are investing in capabilities in China, he reports. He mentions Accenture, BearingPoint, and IBM as well as the major Indian suppliers.
Ramsey Walker, Co-founder and Co-CEO of Freeborders, points out China has the largest number of software engineering graduates in the world. Last year China produced 21 percent of these graduates; India produced 7 percent and the US just 5 percent. “Chinese universities produce 200,000 new software graduates a year,” he points out.
Walker believes China’s advantage in labor arbitrage “will not shrink for the foreseeable future” for three reasons:
- Wage inflation in India. A February 2005 report by CLSA India found “significant salary increases of 12-18 percent last year.” Wages will increase this year too as demand for offshoring services rises. (See: India Sees Performance-Linked Salary Hikes for Outsourcing Staffers in 2005).
- China’s wages will not rise over the short term (three to five years) because “competition among the enormous labor pool will dampen inflation.”
- China’s wages may rise along its East coast over a longer period (five to seven years). But he believes Chinese entrepreneurs will move their facilities westward, where rates will remain low. That’s already happening in India.
Walker adds that clients have told him they are unhappy with their Indian suppliers because of the high attrition on teams. He says attrition is a problem on a software project because the ramp-up time can be long.
The CLSA report found every five points of employee attrition could knock off up to 1.5 points from gross margins because of higher recruitment and training costs, loss of business momentum because of delays in staffing, and potentially poor delivery. It found Patni had the highest attrition rate for the first quarter of 2005 at 21 percent. Tata Consultancy Services had the lowest with 9.2 percent.
The Freeborders co-founder notes that US companies are “more interested in China as a market than they are with India.” American companies will “make it a strategic initiative” to send work to China to learn about operating in the Chinese economy.
Companies who want to diversify their risk don’t want to send all their work to India, notes Walker. China is a popular back-up choice, he adds.
Finally, Americans like visiting China. (They are certainly more familiar with moo goo gai pan than Indian curries.) “We are constantly hosting our clients in Hong Kong and Shenzhen, who enjoy these cities. When our customers, who have been doing work in India, land in Hong Kong and Shenzhen, they think they’ve arrived in paradise. There is no comparison in infrastructure between these Chinese cities and less developed Indian cities,” says Walker.
While language is not an issue since most college-educated Chinese speak English (it’s a required college course), the current concern is with infrastructure. Telecommunications are not as robust as India at this time, Travis points out.
Selecting the Supplier
The Online Fabric Library allows retailers to request samples, do costing, and track production from mills using DuPont fibers, tasks which they heretofore managed by email and fax. “But this is too complex a process to do that way,” says Keating. “An online catalog creates huge efficiencies.”
Beveridge calls the library a “match-making service” between the mills and the retailers. Currently 582 mills are promoting over 30,000 fabrics to 200 retailers through the Library.
In June 2001 DuPont began searching for a white knight who would have the system ready by October 4, the day the project was set to debut at an important trade show in Paris. Freeborders had a four-week window to convince DuPont it was the right partner. Keating says Freeborders has a culture of meeting challenges like this head on. “If someone tells us it can’t be done, we say, “No way. We can do it,” the partner reports.
DuPont was looking for five things among the three down-selected contestants:
- Technical ability
- A proven project management process
- The ability to scale
- The ability to manage a large global project
- Strategic thinking
The outsourcing supplier’s management team huddled around its vice president of engineering and brainstormed. Within a week Freeborders was able to show DuPont “a shell of a solution.” The company actually coded the nascent application. After DuPont selected Freeborders, the supplier continued coding while negotiating the outsourcing contract based on the growing trust between the two parties.
Freeborders organized the project around DuPont’s business objectives, not just its IT needs. “They wanted us to be their business partner,” says Keating.
Beveridge says Freeborders took the work the former supplier had completed and built the requisite applications. “This was a design and build project,” he says. Walker says Freeborders has a tightly defined offshoring process. The supplier assembles a dedicated team. About a quarter of that team stays in America.
With eight weeks left to due date, DuPont asked Freeborders if it could deliver the library three weeks earlier so it could demonstrate the program at a trade show in Miami on September 10. The can-do supplier actually appreciated the challenge “because it allowed us to do an early market validation of the project and gave us the opportunity to gather new requirements.”
Turning a Cost Center into a Revenue Stream
Once the application was up and running, Freeborders continued to host the Library as an application service provider (ASP).
Freeborders’s next assignment was to expand the directory. The Library only lists DuPont fibers and fabrics. The company wanted to include any fiber, fabric or mill that wasn’t part of its network. The two companies created a joint venture for this open industry standard platform.
Last year the project was so successful the partners migrated from a free service to a subscription model. The mills fund the project by paying an annual fee for listing. “We turned a cost center into a revenue stream,” reports Beveridge. And that’s a happy ending to a project that had a difficult beginning.