Services outsourcing businesses here have certainly seen a slow-down; especially those that are oriented to international customers. An insider at one of the outsourcing companies here in SIP has told me they’ve laid off most of their people in the BPO division, their localization group has been idle the last two months, and they are laying off staff in their IT outsourcing division.

I would say the best positioned companies to weather the financial crisis are those that are domestically oriented – which is the majority of services outsourcing companies in China; and those international service providers with very deep pockets – ie, the Indians (including Satyam, if it finds financing, public or private). Most Chinese services outsourcing is done with customers within China. The outsourcers based in the Yangtze River Delta region stand the best chance with all the MNCs in the neighborhood to develop the technologies, processes and disciplines that will make them world class outsourcers in the international markets five to ten years in the future.

Since the Chinese market has indeed slowed down compared to 2006, overall industrial activity has decreased domestically. However, many mature Chinese companies are finding cost savings through outsourcing back-office services to Chinese providers; the Shanghai financial industry outsourcing back-office activities to Hangzhou providers is a case in point. The rigidity of the new labor law has made it more difficult to fire people; skilled, experienced labor is still difficult to find and salaries are still relatively high; hence, the appeal of services outsourcing in a modernizing China.

The Chinese services outsourcers that support Japan and South Korea are going to really hurt. Those two export markets are falling off a cliff economically. It is also possible that once the recessions in the those countries end, it will be more cost-effective for companies in Japan and South Korea to keep the services in-country, because of salary and operational cost deflation brought on by the recession.

So, services outsourcers based in China catering to clients outside China will continue to hurt. Domestic services outsourcers have seen business slow down; however, business will pick up for them as the Chinese economy picks up for secondary industries, and as Chinese consumers regain their confidence about the Chinese economy (which is why many Western companies are here in China – to sell to the Chinese).

Meanwhile, the Indian services outsourcing sector sees a slowdown in the growth going into 2009 from 30% per year to 10% to 15% per year for the next couple years. Further, their government is continually having difficulty rationalizing a business sector capable of capitalizing on the outsourcing services in its own backyard. Of course, it does not help that the CEO of Satyam – one of the Big 4 services Indian outsourcers – quite effectively scammed the company’s customers so he could live the good life. Sort of leaves a bad taste in a buyer’s mouth. Finally, with India and Pakistan posturing at their shared border, no wonder Western multinationals are diversifying their outsourcing risk by using service providers in China, too.

The next year could be the best opportunity the Chinese have of eating a larger portion of Outsourcing curry.