With Frederic Giron

On June 6, iSoftStone announced plans to make the company a wholly owned subsidiary of China Asset Management Co., Ltdand delist from the U.S. stock market. This is the fifth IT services (ITS) provider headquartered in China to announce plans to go private in the past 9 months. The others were Yucheng Technology, AsiaInfo-Linkage, Camelot and Pactera.

Why are these firms going private? Despite ambitious global growth plans, Chinese ITS providers have largely failed to articulate a compelling value proposition to U.S. and European clients. By focusing mainly on low-end application development services they have instead primarily competed with much bigger and much more experienced Indian providers – but without the ability to offer lower costs. In fact, the average profitability of Chinese ITS providerswent down from 10-15% to less than 5% over the past 2 years, when most large Indian firms are in the 15-25% range. Going private will give these5companies a chance to transform their current model relieved from the quarterly pressure to meet Wall Street analyst expectations.

Existing and potential customers of these ITS providers may have concerns seeing these providers going private, particularly regarding overall company transparency, including financial strength and corporate governance. I believe clients will have to balance their concerns against the potential benefits that going private may deliver, which include:

■      The delivery of Intellectual Property (IP) based solutions. Some of these newly privatized Chinese ITS providers will try to transform their operating models and move away from staff augmentation services towards building and selling software products. Organizations can benefit from a more holistic service offering together with strengthened software delivery capabilities. Case in point: Pactera, started to develop its own industry solutions for the financial services sector and horizontal solutions like Business Intelligence tools. In 2012, they recruited ex-president of SAP China to head their solutions team.

■      Expanded system integration capabilities. Customers may also have access to a broader range of service offerings from these 5 ITS providers post-privatization. Instead of offering only traditional infrastructure or application outsourcing services, these providers are likely to expand into areas like pre-integrated software and hardware solutions. Leveraging these packaged offerings alongside industry solutions can help organizations potentially save on system integration costs and accelerate implementation processes. For instance, finance companies can benefit from a software-and-hardware integrated solution with managed services package from Yucheng Technology, which significantly shortens overall implementation period and save total cost of ownership.

■      Improved service quality with more stable delivery team. With an average turnover rate reaching 15-20%, Chinese ITS providers currently face serious challenges managing service quality control and maintaining talent contingency plans. Post-privatization, Forrester expects ITS providers to allow more employees to participate in equity incentive plans. Organizations may ultimately benefit as these providers deliver more consistent quality from more stable delivery teams.

What impact do you expect the trend towards Chinese ITS provider privatization to have on your organization? As always, any feedback on the experience you’ve had with any of these Chinese IT S providers – or expect to have moving forward – is much appreciated.