On April 19, Microsoft Chairman Bill Gates visited China for the 10th time, bringing a surprise for Chinese outsourcing service companies with him.

Timothy Chen, Vice President and CEO of Microsoft’s Greater China Region, disclosed that the surprise from the world’s richest man was a promise to bring Microsoft service orders worth $100 million to China. Besides these orders, Chen said Microsoft is committed to helping local Chinese companies promote their competitiveness.

With these service orders, many Chinese outsourcing providers will have the chance to get a fresh start, with companies ready to fill orders having the early advantage. Other companies not yet up to speed will have the ability to tap into training offered by Microsoft.

In recent years, the Chinese outsourcing industry has developed at a faster rate. In 2006, China’s software outsourcing market reached $1.43 billion, up 55.4 percent from a year earlier, according to a report from CCID Consulting. The report predicted that by 2010, China’s software outsourcing market will exceed $7.03 billion, or 8.4 percent of the world’s total.

Despite these developments, China still needs another five to 10 years to catch up with India, the most favored nation for outsourcing. The U.S.-based Diamond Management & Technology Consultants Inc. issued a report in 2006 showing that 80 percent of the world’s outsourcing businesses currently flow to India. Thanks to its large population of computer literate English speakers and quality service, India has garnered the largest share of the global outsourcing market.

While China has the strength of a cheap labor force, it lags behind India in terms of service quality and qualified employees. The lack of a highly qualified human resource pool is one of the major obstacles China must surmount if it wants to develop an outsourcing industry to rival its southwestern neighbor.

Outsourcing 101

Outsourcing can be defined as the transfer of an organization’s entire non-core, though critical, business process functions to an external vendor that uses IT-based service delivery. By doing so, business process outsourcing (BPO) helps an organization concentrate on its core competencies, improve efficiency, reduce cost and improve shareholder value.

Large companies have long begun outsourcing their non-core businesses to cut costs. For example, Oracle has long outsourced its personal taxation functions to PricewaterhouseCoopers, one of the four major global auditing firms.

In 2006, the UK’s National Outsourcing Association found that outsourcing saves companies around 9 percent, while at the same time raises competitiveness and quality by 15 percent. Last year, 80 percent of Fortune 500 companies outsourced all or part of their information management functions. Presently, most companies would prefer to outsource their IT, human resources, and financing and accounting functions if possible.

Research from the United Nations Conference on Trade and Development (UNCTD) showed that of the 1,000 largest global companies, about 70 percent haven’t tried to outsource part of their business process to low-cost countries. The UNCTD estimated that the global outsourcing market was worth $300-$500 billion, and in 2007, the total market value would exceed $1.2 trillion, growing at a rate of 20-30 percent year on year over the next few years.

Due to the cost differences, developed countries like the United States, Japan and Western European countries prefer to outsource their business processes to low-cost countries like India, the Philippines and China.