Read the following case study and answer the questions at the end. You should be sure to use references and theoretical constructs to answer the question, and not write observational, personal answers. The suggestions and comments must be based on research. There is no minimum or maximum word limit for this task, and credit will be given to those who can apply the principles of the class sessions, alongside your own research, to produce credible, viable and justifiable answers to the questions. The Giant Awakens: Sheen Software Systems considers China for offshore IT outsourcing Case study by Erran Carmel Preface Mr. Frank Xin and Mr. Zhang Chang were ordering dinner at M on the Bund, the stylish eatery overlooking the dazzling Shanghai riverfront. “We are bullish on China and particularly on Shanghai” said Xin. His friend, Chang, vice president of IS at a major Shanghai bank, was more careful. “Look, Xin, as a friend, we think you’re taking some major risks in setting up shop across the ocean. And this stuff about lightweight methodologies seems lightweight to me.” Frank Xin goes to China Xin made up his mind that China was where his offshore-outsourcing unit would be. He had followed the recent emergence of the offshore-outsourcing industry in China. His deliberation was only over where and what form his Chinese operations would take. He considered Shanghai because of the “buzz” and because he had some family ties in the city. “Shanghai is a good strategic point to grow,” he said. And in answer to his own hesitation, he continued: “If Shanghai itself continues to get expensive, I can move to one of the nearby cities with tech parks, such as Suzhou or Hangzhou (each of which is 12 hours by train from Shanghai).” Operations Xin still wasn’t sure how to set up China operations. He saw two options: the first was to set up his own “captive” office that would be a subsidiary of Sheen – US. The second, which he was still exploring, was to enter into a partnership with an existing firm. In this arrangement he would sign an agreement with a Shanghai firm whereby the Shanghai firm would allocate some of its staff to Sheen. Xin saw advantages to each option. If he decided to lease an office, he had a number of choices. His first interest was in the Software Park in Pudang, a newly built area in eastern Shanghai. But the facility had been at full occupancy for years. Pudang rates are very low for Shanghai at 55È¼ per square meter, versus, about 70È¼-80È¼ in the rest of the city. Being a member of the software park, even if he did not reside there, would give Sheen other financial benefits: a tax holiday in the first three years (on profits); and a 50% reduction on taxes in the subsequent five years. Xin was not sure how much profits would be allocated to his Shanghai office, though. Xin began planning his offshore strategy by attending the Global IT outsourcing summit at an elegant hotel in downtown Shanghai, a few minutes’ walk from the riverfront (the “Bund”). The two-day conference was one of the first in China that focused on offshore outsourcing. It was organized by the Shanghai Municipal Foreign Economic Relations and Trade Commission, the Shanghai Municipal and Formalization Commission, the Shanghai Software Industry Association, and several other organizations. At the conference, the vice-mayor of Shanghai welcomed the attendees with a well-prepared speech that was targeted at the forum. About 200 people attended the conference, most of whom were from Chinese software companies. Several foreign firms sent their representatives, including ADP-Asia and Siemens. Conference speeches included those by the heads of Microsoft-China, Shanda (a leading computer game maker based in Shanghai), and the CTO of Webex, an American firm with R&D in Shanghai. The summit was covered in the next day’s English language “Shanghai Daily”, under the headline “China’s software outsourcing industry is expected to shorten its gap with India in about 3 years”. By 2003, the Chinese software market had been growing at a very fast rate for several years. Unlike the Indian industry, which most see as its main competitor, China’s industry enjoyed strong demand domestically from an economy that had been growing over the previous decade at double digit CAGR. Beginning around 2000, Chinese firms began to set their sights on augmenting their domestic demand with that from foreign markets. In 2003 China was expected to export roughly US$ 1 billion in software and software services (commonly called outsourcing). The Shanghai metro area accounted for roughly 12% of the total software exports. Shanghai was home to software R&D centers for HP and Ericsson, as well as support centers and localization centers for Microsoft and other multinationals. Xin and Sheen Frank Xin is representative of many global software entrepreneurs: as an “overseas Chinese,” he is able to bridge East and West. Xin has been living in Los Angeles for 15 years where he still has his home. Having grown up in Taiwan, he is able to speak Mandarin and can be understood in Shanghai, though he is still trying to master the local Chinese dialect, he says. Prior to founding Sheen he was at PeopleSoft. Xin founded Sheen in 2000 to provide customized solutions for the business and entertainment industries. His large clients include Disney and 20th Century Fox, but most of his clients are SMEs. In all cases, the development teams assigned to projects are small and nimble, three to six technical staff usually. Most of his clients are regional, in metropolitan Los Angeles, but some have been based elsewhere in California and the US. Sheen has four permanent employees and a dozen regular consultants/contractors brought in when needed. He runs a small lean shop that relies on the combined technical abilities and sales abilities of the principals. Sheen strategy “My strategy is to grow,” said Xin, “…to capitalize on our strengths and the strengths of the Chinese.” In Sheen’s client engagements, the firm uses its own adaptation of Agile methodologies. Agile methodologies are also known as “lightweight methodologies,” the most famous of which is Extreme Programming, or XP. The “agile movement” is a reaction to the “heavy” methodologies exemplified by the Software Engineering Institute’s CMM (Capability Maturity Model), which emphasizes controls and documentation, both of which are anathema to independent-minded programmers. “We’ve found that most clients don’t have the bandwidth to do full-blown systems analysis and design, so Agile methodologies are better suited. Agile approaches are much better suited to more and better communication between client and developers with lots of end-user participation and small, nimble teams of developers. By working closer with the developer, the client gets over the xenophobia of working with the foreigner, the unknown.” The other part of Xin’s strategy is to utilize the strength of the Chinese. While the Indian outsourcing industry has mastered the factory approach of software production, the Chinese software industry is only slowly following that lead, and perhaps reluctantly. About 20 Indian firms have attained the highest processing standards of software development, the CMM Level 5. India’s success is all the more noteworthy because its firms represent roughly 50% of all global firms who have attained this standard. “When we bid against CMM Level 5 firms, how do we heat them? We have to offer something different.” Chinese programmers, on the other hand, are educated in computer science programs with a tradition of theory and algorithm development. Students coming out of this educational system are not interested in working in factory environments in which they are handed specifications. They want to work with the customer to solve problems. “Agile programming is a much better fit to Chinese work culture than the stifling procedures embedded in the CMM.” – Xin. One of the cornerstones of agile methodologies is very tight teamwork and very tight interactions between client and developer. Sheen’s approach to teamwork is to place people at the client site for as long as possible. Sometimes this can reach half of the project duration. When the client wants the team at their site for longer periods, this adds to the project cost. Sheen passes the cost on to the client. “In China, everyone wants to be their own boss, people are less conformist, so when you use Agile methods, you allow everyone on the team to give feedback.” Xin was convinced that China is the location to launch his ideas and to offshore his services. His reasoning relied on the characteristics of the local market and domestic and international market opportunities. But is he right? Based on the Sheen Software Systems case study, answer and comment on the following questions, using references to theory and examples used during the course: Questions a. What factors would make China a successful option to deliver on Xin’s expectations? b. How can Xin assess China as a location compared to other possible offshore or onshore options? c. How should he proceed to set up his services in the location of his choice? d. What risks should he be aware of and be prepared to face? e. How may changes between the early 2000’s and today affect similar decisions to those contemplated by Xin?
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