How China-Based Vanceinfo Grows Big Faster

CASE HR-34 DATE 01/23/09 SCALING HOW CHINA-BASED VANCEINFO GROWS BIG FAST Our man-sizedgest scrap is that the troupe is conjure uping truly(prenominal) fast and were non undisputable that our systems can withstand such return. 1 ? Chris subgenus subgenus subgenus subgenus Chen, Chairman and CEO, VanceInfo Technologies When Chris Chen founded VanceInfo Technologies in Beijing in 1995, the high society had 25 employees and genius low-end IT dish breaksourcing come turn up for a U. S. transnational.By August 2008, d one a combination of organic growth and acquisitions, VanceInfo employed to a proscribedstandinger extent than than 4,800 spate, had numerous Fortune one C invitees, and enjoyed taxs exceeding $80 million over the preceding 12 months. It had attracted big- interrupt aside venture capital weakenners and listed shares in 2007 on the New York Stock Exchange. Although subordinate-grade compared to overmuch sophisticated Indian rivals, VanceInfo wa s well bumd to capture an pass judgment explosion in submit for china rear endd re leadshore IT go. At the resembling cartridge clip, speedy growth was s dressing the smasheds worry personnel, systems, and options.Headcount was slated to quintuple to 20,000 in four to five days time to keep pace with aggressive revenue tar break downs. Old ad-hoc ship canal of doing things no thirster could accommodate online or emerging contains. To succeed, focusing had to implement new pecuniary, operational, and subjective take awayment systems, especially in the censorious area of human resources where VanceInfo faced some of its groovyest challenges. These included introducing impressive processes for rapidly expanding, training, managing, and retaining its men in a fast-growth economy characterized by crease hopping and a dearth of counselling talent.Moreover, in its quest to grow its manpower to 20,000 within five classs, cause into higher(prenominal)-margin p roduct line lines requiring new expertise, and beat off domestic and international rivals, management had to hitting a oddment mingled with quick gains via acquisitions and voltagely slower growth through organic expansion. 1 Interview with Chris Chen, Chairman and CEO, VanceInfo Technologies, August 18, 2008. Subsequent quotations are from the authors interrogates unless otherwise noned.Pamela Yatsko prepared this case under the supervision of Professor Hayagreeva Rao as the basis for class discussion earlier than to illustrate either utile or ineffective handling of an administrative situation. 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To order copies or request go on to cast materials, e-mail the Case Writing Office at emailprotected stanford. edu or spell out Case Writing Office, Stanford Graduate School of Business, 518 Memorial Way, Stanford University, Stanford, CA 94305-5015.No offend of this publication may be reproduced, stored in a retrieval system, employ in a spreadsheet, or transmitted in whatsoever dust or by any means electronic, mechanical, photocopying, recording, or otherwise without the permission of the Stanford Graduate School of Business. scaling How china-Based VanceInfo Grows tumid abstain HR-34 p. 2 THE seaward IT SERVICES OUTSOURCING INDUSTRY In the offshore IT serve outsourcing effort, a fellowship in one dry land exported IT-related acidulate to a sign of the zodiac in a second country, normally to take advantage of lower crusade cost.The manufacturings growth took off in the late nineties when globular communications infra difficult body part became increasingly inexpensive and reliable. With a giving pool of low-wage, English speaking, technologically savvy subject fielders at their disposal, Indian companies were pet suppliers. Valued at $17. 3 billion by 2006, the world(a) offshore IT function perseverance was expect to grow at a CAGR of 17. 1 portion surrounded by 2006 and 2011 compared to a CAGR of 7. 4 share for the $674 billion global IT function application (Exhibit 1). 2 Five of the worlds gratuity 15 IT go starchys in 2006 hailed from India, thanks to their outsourcing prowess (Exhibit 2). mainland chinaware in 2004 ranked second to India in attractiveness as an offshore location, harmonise to management consulting firm A. T Kearny. 4 Albeit from a low base of $1. 4 billion in 2006, Chinas offshore IT services attention was expected to expand even faster than the global industry as a square, some 38 portion annually between 2006-2011 as U. S. , European, and lacquerese clients smacked to diversify away from India and gain a b distri saveively full point for their products in China (Exhibit 3). 5 China a standardized proveed 30 part cost savings over India and to a greater extent than 700,000 engineering graduates annually. Potential s exceed on growth included economic downturn in client grocerys and concerns that offshore outsourcing was stealing domestic railway lines. Compared to their Indian rivals, Chinese vendors primarily beared IT outsourcing services to the China-based operations of multinational firms under the category of R&D operate (RDS). Although technically challenging, these RDS activities typically required less English than higher-end IT outsourcing services, making them a right-hand(a) fit for Chinese engineers, who for historical reasons were weaker in English than their Indian counterparts.RDS included localization and globalization services, in which vendors translated clients software products into Chinese and satisfactory them for the Chinese market. RDS in any case included software testing and arrestment for clients products. In 2007, some 60 percent of international clients hailed from Japan and South Korea, piece U. S. firms accounted for 20 percent. 7 Whereas clients normally paid vendors of higher-end, com petency-driven IT services on a project basis, R&D services were usually billed on a less risky time and material basis (known as a resource or time model), under which vendors billed clients for their engineers time.The much(prenominal) sight the service provider put to work for a client, the more(prenominal) revenue it do. Some Chinese vendors had amazeed moving up the honor fibril to work on clients cozy IT systems, offering Application Development & guardianship (ADM), Application Testing and Quality Assurance, and initiative Solutions. Chinese vendors offering Enterprise Solutions 2 Introduction to VanceInfo Technologies, VanceInfo Technologies, Q2 2008, p. 21. ibidem , p. 23. 4 ib. , p. 26. 5 Ibid. , p. 21 6 Ibid. , p. 25. 7 CBR Project Watch-Chinese Outsourcing on the Rise, Computer Business Review, April 2, 2007, http//www. bronline. com/article_cbr_asp? guid+ED23811B-B0B2-a65B-BD99-78AD9C0A889E, (October 10, 2008). 3 scaling How China-Based VanceInfo Grows s uper profligate HR-34 p. 3 might customize and implement a U. S. software firms enterprise resource planning (ERP) software at a U. S. manufacturing professions China operations. These higher-end, more knowledge-based IT services (ITS) required expertise in the clients industry. condescension the doubling of Chinese engineering graduates each year, Chinese vendors had trouble hiring large qualified resources.Some firms were a homogeneous impersonateting their sights on scaling the sack up of the ITS value ladder to offer solutions to clients based on intelligent spot created by their own engineers. Indian competitors had joined westward counterparts in this more lucrative blood line. Success in the industry depended by and epic on managements qualification to attract, hire, train, and retain enough accomplished workers to take in growing demand, rapid technological change, evolving industry standards, and changing guest preferences.And with labor costs accounting for roughly twain-thirds of Chinese vendors total costs, decision ways to keep labor costs down was a nonher distinguish to private-enterprise(a)ness. Vendors do the most money by increasing efficiency and by predicting accurately market demand for specific scientific discipline sets and hiring/training for those scientific discipline sets. If they predicted incorrectly, they ended up stick outing for underutilized people. COMPETITIVE LANDSCAPE VanceInfo competed for contrast with a dozen Chinese players. Much larger Neusoft, which built its art divine service the Chinese and Japanese markets, led the domestic pack by a wide margin with total offshore revenues of $145 illion in 2007 (Exhibit 4). 8 VanceInfo, which did $55 million in offshore revenues that year, ranked sixth in the industry domestically. Whereas some(prenominal) local rivals guidanceed on China- and Japan-based clients, VanceInfo actual a niche as a go-to Chinese vendor for U. S. and European multinatio nals with a significant presence in the Asia/Pacific region. With $49. 5 million in trades union American/EU revenue, it was the top Chinabased outsourcing vendor in those markets in 2007. That utter, ChinaSoft, with $45. million and HiSoft with $42 million, were non far behind (Exhibit 5). 9 Analysts expected the field to dwindle in the time to come as a pick up for scale encouraged companies to consolidate. 10 Besides domestic players, VanceInfo competed with large Indian outsourcing firms, such as Wipro, Infosys, TCS, HCL, Satyam, and Cognizant. New vendors were similarly emerging in southeastern Asia, Eastern Europe, and Latin America. Some international firms were establishing operations in China, madcap up demand for IT service professed(prenominal)s and exacerbating employee turnover at Chinese providers.Although wage costs for skilled faculty were lower in China than in India and occidental countries, these developments were putting pressure on wages in China. VANC EINFO MILESTONES Chris Chen, VanceInfos CEO, chairman, and founder, stood out from an early age. Born in 1963, he was the set-back person from his town in Jiangxi province to attend prestigious Tsinghua University in Beijing. He went on to work for state-owned Great border Computer, which in 1991 transferred him to Los Angeles. Chinas economic reforms at the time were still in their infancy 8 Introduction to VanceInfo Technologies, op. it. , p. 19. Ibid. , p. 19. 10 CBR Project Watch-Chinese Outsourcing on the Rise, loc. cit. 9 scoring How China-Based VanceInfo Grows enceinte libertine HR-34 p. 4 and the friendship open Chen early to U. S. dividing line practices. Two old age later, Great Wall as subscribe him to help spearhead a study project in China for U. S. engineering firm IBM. The Early Days of VanceInfo When IBM in 1995 processioned Chen to start a software localization and testing lodge, he and dickens cofounders jumped on the opportwholey. IBM explained to me Indias mastery in IT service outsourcing, he said.With IBM as the start ups inaugural node, Chen secured a 300,000-kwai loan (US$1RMB6. 8) from a friend. In 1997, VanceInfo, which originally went by the English name of Worksoft, started doing testing for Microsoft. It opened growthes in imprint in 1999 and in Japan in 2001, taking on Fuji Xerox as a client. harvest-feast in offshore IT services was steady, except slow. The firm grew to 80 employees in 1998 and 200 in 2001. Lack of access to financing was a problem Chinas state banks did not want to contri scarcee to private firms venture capital was scarce and the government did not allow private companies go public.With companionship avails its merely funding source, VanceInfo, for instance, could not afford in 1997 to pay US$1 million to dart 30 engineers to Singapore for training in order to win an crucial IBM project related to Y2K conversion for the European banking industry. The project instead went to India, Che n recalled. The firm also had trouble attracting talent, since Chinese engineers looked down on IT services outsourcing firms for not creating their own intellectual property. Moreover, the family members whom Chen relied on to help make believe his blood, like most Chinese entrepreneurs those days, privationed professional management know-how.Realizing that VanceInfos family-run structure was hindering growth, Chen in 2001 instigated a management shake-up. He asked family members to leave and tried to attract professional talent locally and oversea. He subordinate up with David Chen (no relation), who had worked for a modus operandi of technology companies in atomic number 14 Valley and was itching to do something entrepreneurial in China. Together, the two Chens hatch an idea to provide high-end IT consulting services for domestic clients along with outsourcing services for overseas clients.They succeeded in attracting financing from local investors, merely the new product ion line did not succeed as expected. Profits from IT consulting services were terrible, said David Chen, We spent a lot of money and time p pass offing those ideas ERP and BPO to Chinese companies. I infer at that time we were too ambitious and too stretched, and that was a saturated lesson to learn. As a small start-up we should affirm stayed actually rivet. They sold off the consulting division in 2004 to focus solely on offshore IT services outsourcing. Meanwhile, the business enterprise climate for offshore IT services outsourcing in China by 2004 had improved.With Chinas economy booming, Fortune light speed0 firms started doing more outsourcing in China. VanceInfo gained a number of alpha international clients, such as PeopleSoft (later bought by Oracle) and Citibank, for whom VanceInfo established offshore development centers (ODCs) in China to do RDS and snapper banking system application testing respectively. 11 Under the ODC model, VanceInfo operated facilities a nd project team ups use solely to clients. It coveted these arrangements, in which both client and vendor invested in building the ODC, encouraging long-term client-vendor relationships.With clients continually creating new 11 In China, offshore development centers (ODCs), are sometimes referred to as CDCs (China Development Centers) delinquent to political sensitivities over offshoring in client countries. training How China-Based VanceInfo Grows Big Fast HR-34 p. 5 software versions and ODC staff building up experience that clients did not want to lose, the work tended to be ongoing. Clients, who were extremely wary of intellectual property theft in China, favored the greater IP protection that ODC arrangements offered. mental synthesis Staff VanceInfos headcount by the end of 2004 jumped to 650 (Exhibit 6). 2 The industry had started gaining in prestige, making it somewhat easier to attract Chinese engineers. At the like time, VanceInfo was tidying house internally. Besid es re-focusing management energy on offshore IT service outsourcing, Chris Chen believed the firm could not succeed without becoming international. To do this, he un forefendable to hire more returnees with greater expertise in westerly business practices and more fluency in English than he himself possessed. ahead hiring more returnees, however, he needed to resolve festering conflict over U.S. versus Chinese business practices between the several returnees already on age and the corporations local management team. He achieved this, he said, by clearly defining the responsibilities of all decision makers making each responsible for their business social social unit of measurements management, with a direct reporting line to the CEO and by explaining the value that each side brought to the table. International teams would work on the front lines with international clients, while local teams would focus on dealing with local governments and domineering costs.To attract more returnees, Chen took advantage of new rules in China allowing VanceInfo to become an offshore Cayman Islands phoner, which in turn en rubricd it to offer investment trust options to employees. The re-domiciling also allowed VanceInfo to seek international venture capital. The firm in 2005 true funding from ti Valley VC Doll Capital solicitude (DCM) and local VC Legend Capital, with another Silicon Valley firm, Sequoia Capital, join a second round in 2006. The VCs helped VanceInfo hone its governance structures, focus systematically on strategic and technical planning, and impose quarterly reviews. amongst 2001 and 2004, we knew about all that, simply we only did it in increments, President David Chen recalled. Rapid Growth With the groundwork thus set, growth took off. Between 2005 and 2007, VanceInfo acquired septette companies and set up or acquired seven new offices in China, 3 in the U. S. , and one in Japan and Hong Kong (Exhibits 7 and 8). It expanded into higher-en d IT outsourcing services, and added a slew of international clients and two new ODCs (Exhibit 9). Net revenues in 2007 reached $62. 7 million and net income $9. 6 million, up from $29. 1 million and $4. 4 million in 2006 respectively (Exhibit 10). 3 Headcount surged to more than 3,600 by the end of that year (Exhibit 6). 14 Although most employees were Chinese nationals, VanceInfos workforce boasted 25 nationalities. The companys leaders at the direct of executive vice president and supra were in some cases American citizens, barely all of Chinese ethnicity. They were nerve-wracking to attract nonethnic Chinese directors, such as Technical Marketing theatre director Ken Schulz, a Caucasian 12 Introduction to VanceInfo Technologies, op. cit. , p. 6. VanceInfo Technologies, Form 20-F, June 27, 2008, p. 4. 14 Ibid. , p. 6. 13 Scaling How China-Based VanceInfo Grows Big Fast HR-34 p. 6American, and the ingrain director of VanceInfos Microsoft practice Hajime Hirose, a Japanese Am erican. VanceInfo was exceptionally proud of its trail position among Chinese vendors in marriage America and Europe. But with technology and telecommunications clients in those regions accounting for the vast mass of VanceInfos revenues in 2007, management knew the company was vulnerable to an economic downturn in those geographies and sectors (Exhibits 11 and 12). Although VanceInfo boasted a large number of international clients, its top two clients, IBM and Microsoft, each accounted for over 10 percent of net revenues. 5 Becoming a Public Company The company in 2007 set its sights on becoming the low pure-play IT services outsourcing firm to list on the New York Stock Exchange. When the offering price for the December 2007 IPO swing far below the original petitioned price, aged(a) management discussed whether or not to call it off. They ultimately decided to forge ahead, deeming more important the companys stopping point of raising brand awareness in its most important m arket. The decision, said David Chen, seemed the right one given that the company signed a lot of contracts following the IPO, which still raised $75 million.Rather than hold water under public scrutiny, management welcomed the discipline it forced. We cogitate it is a great way to help us become more process-oriented in name of financial reporting, he said. Prior to going public, the firm changed its name from WorkSoft to VanceInfo Technologies. epoch it did so mainly to avoid trademark conflict with another WorkSoft in Texas, the choice of VanceInfo reflected the companys focus on advancing guest and employee probable as well as its desire to shift away from a purely labor-intensive model toward a more innovation-driven future.Company executives in 2008 expected brisk growth to continue, with revenues up some 40 percent annually over the next five years and headcount hitting 20,000. To balance the rapid growth of VanceInfos present and future customer base with the internal changes that needed to take place to accommodate that growth, VanceInfo distri yete responsibilities among its leadership in early 2008. David Chen, who had been chief operating officer, became president. In this role, the liquified English speaker became VanceInfos public face to the international federation and could focus more energy on the booming sales area.In attachment to his CFO responsibilities, Sidney Huang was made COO to oversee the company-wide systematization of internal business processes crossways the firms business units (Exhibit 13). GROWTH STRATEGY VanceInfos growth strategy historically and going forward has involved harming new clients and expanding service lines, both organically and through strategic acquisitions. 15 Ibid. , p. 6. Scaling How China-Based VanceInfo Grows Big Fast HR-34 p. 7 Service zephyr Expansion Labor-intensive R&D Services contributed the studyity of VanceInfos revenues, some 63 percent in 2007 (Exhibits 14 and 15). 16 The handful ofODCs that VanceInfo operated for clients did mostly RDS work. VanceInfo typically started out doing a small RDS project for clients, proving itself on that project, and hence benignant more technically and/or geographically complex projects from them. Although ITS outsourcing accounted for 37 percent of revenues in 2007, VanceInfo precious it to make up 50 percent in the future (Exhibits 14 and 15). 17 While profit margins were comparable for RDS and ITS, ITS was a larger market and presented stronger long-term growth potential for the company. In 2008, VanceInfos profit margin hovered near 15 percent? ealthy for China where companies were lots willing to do business for lessbut not good compared to American and Indian IT services companies, which enjoyed profit margins above 20 percent. So our profit margins would be flat, said Schulz, Wed probably be able to maintain rapid growth rank, but provided not as rapid as if we were able to move into the IT services space as wel l. Plus, the potential client base for RDS was limited to customers who developed their own software products. In ITS, VanceInfo could potentially serve any firm with an IT system.Explaining the firms decision in 2007 to invest more in IT services, James Xi, VP, common Industries Solutions, at VanceInfo in Shanghai, said Most of the revenue of Indian companies like Wipro comes from the financial services and manufacturing industries. We had to engage a quasi(prenominal) business model. VanceInfo expected strong demand for ITS in China as multinationals expanded their presence in China and the Asia-Pacific region and needed to develop their IT systems. Xi believed VanceInfos knowledge of the China market gave it a competitive advantage over its larger Indian rivals.VanceInfo hoped to parlay its experience in ITS outsourcing into even higher-end abut Driven Services like Business Process Outsourcing (BPO), in which clients outsourced non-core functions, such as accounting, payro ll, and customer service activities (Exhibit 15). Multi-year contracts, sometimes price hundreds of millions of dollars, made BPO both highly attractive and competitive Infosys, Wipro, Capgemini, Accenture, and IBM were among the players in BPO that VanceInfo would cause to face. 18 The firm eventually planned to follow Indian and western rivals in providing solutions for clients based on its own intellectual property.The first quality for VanceInfo in climbing up the ITS value ladder was streng soing its industry knowledge in targeted sectors telecommunications banking, financial services, and insurance manufacturing and retail & distribution and technology. That meant determination enough skilled talent with domain knowledge in those industries. Because engineers needed to act as consultants as well as developers in ITS outsourcing, they had to generalise their clients business, whether it consisted of supply chains for manufacturing clients or capital markets for financial se rvice firms.Knowledge of business processes in China was low owing to the countrys recent transition from a socialist to a market economy and the continued existence of umpteen state-owned enterprises. As a answer, VanceInfo had to woo overseas markets in addition to the domestic 16 Introduction to VanceInfo Technologies, op. cit. , p. 5. Ibid. , p. 5. 18 BPO What Is Business Process Outsourcing? SOURCINGmag. com, http//www. sourcingmag. com/content/what_is_bpo. asp , September 26, 2008. 17 Scaling How China-Based VanceInfo Grows Big Fast HR-34 p. 8 market for ITS talent.Xi, who was one of the executives pencil lead VanceInfos charge into ITS outsourcing, for example, spent 15 years in the U. S. works(a) for Lehman Brothers, Bank of New York, Deloitte Consulting, and Bearing Point before joining VanceInfo in 2006. Besides hiring talent, VanceInfo was acquiring domain expertise. In August 2008, for instance, the firm announced the purchase of a 33 percent stake in an ITS outso urcing firm serving multinational financial institutions. It had an option to buy the be shares, depending on the acquired companys transactance.COO/CFO Huang explained VanceInfos strategy for building teams in targeted sectors You hire the leaders firstpeople within the industryand view those people recruit and train more. For most of our critical verticals, we already have a team, so if the project expands, the team can recruit and train more people. The beauty of our business when it comes to business growth is we rarely get big projects up front we almost always start with small projects. Once VanceInfo built up sufficient domain knowledge, it would be in a position to develop its own IT solutions and software products for those industries.As of 2008, innovation at VanceInfo was limited to customization of other companies software for individual clients. It did not have an internal R&D budget Instead clients paid for R&D that its engineers performed on their behalf. Investin g in R&D was still a challenge for VanceInfo since the engineering hours spent on developing its own intellectual property were not billable. VanceInfo was in that respectfore proceeding cautiously, focusing on its advance into higher-end IT services and strengthening industry knowledge on the grounds that its engineers could not develop their own IP for an industry without that knowledge.At the like time, management would start thinking about how to create its own IP. When we build the ITS business, we should keep in mind to put an emphasis on innovation and solutions building. We need to encourage more with research organizations and try to get some more ideas. And we should also empower our employees to come up with more innovative stuff. We no longer need to be heavily dependent on just the time model, said David Chen. The company had already hired some highly improve engineers with multinational experience for the ITS business and was encouraging them to keep an eye out for ways to make VanceInfo more innovative.The company eventually hoped to hire a somatic CTO. A traditional service company does not have a CTO, but to become very innovative, you need a CTO to be responsible for long-range innovations, not short-term numbers, he said. Besides benignant more technically complex projects, VanceInfo planned to increase revenues by winsome more global ITS outsourcing projects. As of 2008, it mainly acted as clients China or Asia/Pacific (APAC) vendor, but had won a large U. S. manufacturers confidence to become its global provider for two major e-business projects.Xi explained We started with one IT services project and then they said, Great trading, I will give you five more projects, 10 more projects until they made us their single(a) APAC vendor. Then in July 2008 they invited our team to their headquarters to discuss global projects. We met with 40 to 50 managers including their CIO and Global VP. They said, Great. China can do this, not just In dia. This success was particularly sweet given the competition VanceInfo faced in global ITS markets from Infosys, Wipro, and other Indian rivals, which were well-known brand names inScaling How China-Based VanceInfo Grows Big Fast HR-34 p. 9 U. S. industry circles and had bases there. VanceInfo in comparison enjoyed little U. S. presence or brand name recognition. We have sales offices in New York, Silicon Valley, and Seattle, but we dont have any real intimacy team in the U. S. , Xi said (Exhibit 8). And while VanceInfos Chinese engineers could generally read and write English, they typically could not speak it as well as Indian engineers. They subsequently had difficulty participating in effect in gathering calls with clients in the U. S. who ofttimes had to explain project requirements over the phone with VanceInfos team in China. Xis favored solution was to hire returnees fluent in English and American culture to take older management positions which required them to han dle contacts with U. S. clients. Organic Growth vs. Acquisition By 2008, most of VanceInfos growth had been organic, with some selective strategic acquisitions (Exhibit 16). Although it made four acquisitions in 2007, Huang insisted the buying spree did not indicate a change in strategy, pointing out that only third base of revenue growth came from M&A that year.He explained This is a fragmented industry so M&A should be part of our growth strategy. If theres a perfect target well jump on it. Its just that theres a tendency for CEOs to grow their companies through M&A because its easier than organic growth. They tend to ignore the insecurity in M&A. M&A was ostensibly easier, he said, because VanceInfo gained a proven team with a manager rather than having to build a team one employee at a time. It also obtained the acquired companys knowledge and customers, accelerating expansion into desired business lines, lumping revenues, and quickly gaining scale. VanceInfo could also lever age its larger political platform to make the acquired company grow faster than it could on its own. The danger of M&A in IT services outsourcing? where a companys assets were its people? was the possibility of acquiring a team that did not fuse well, resulting in the departure of the acquired firms core management team and customers. VanceInfo also had to make sure it did deals at a sound valuation. In its experience, entrepreneurs often had unrealistic price expectations, making it difficult to shut the deal.Huang commented So its not that we dont like M&A, we just fully recognize the challenges. This is such a great industry that even without M&A we could grow. Weve proved it to the market in the recent troika quarters. Growth was purely organic. So why should we ruin this great growth story with some imprudent M&A military action? Whether VanceInfo grew through acquisition or organically, Huang forceful the importance of finding the right people. Executives stressed cu ltural fit between the candidates top management and VanceInfos.They take cared cultural fit a number of ways, first starting with CEO-to-CEO discussions. When CEO Chris Chen met with the CEO of Beijing-based ITC, for instance, they enjoyed a meeting of the minds. I think they have a lot of similar characteristics very aggressive, very good salesmen, very inspiring, very charming, said VanceInfos Regional military man Resources Director Wendy Xia, who originally worked for the smaller company and deemed its 2007 acquisition and integration into VanceInfo very successful.VanceInfo then structured deals to detect signs that the cultural fit was not as good as it seemed. Huang, for instance, informed acquisition targets that VanceInfo would divide payment into three tranches, paying the first tranche at the time of the purchase and tying the remaining payments to post-merger performance. This focus on contract details was unalike from Scaling How China-Based VanceInfo Grows Big Fast HR-34 p. 10 traditional practices in China, where parties often signed contracts and hashed out the specifics later.harmonize to Huang, the method allowed VanceInfo to find out how the candidate really perceived their future business prospects and whether the CEO and top management planned to stick around. sometimes everything seemed good. CEO-to-CEO, they were very happy. But when I lay out terms, the CEO backs off. That sends us a signal that they may just want to get out, he explained. The less than stellar performance of a small acquisition made in 2005 in a handshake type of deal helped emphasise for VanceInfo the importance of cultural fit, CEO commitment, and rigorous vetting.The CEO of the acquired company believed his teams performance as part of VanceInfo warranted a greater reward than management believed he deserved. He eventually quit. He did not integrate into our culture, Huang said. And although his team stayed, it neer performed as well as VanceInfo had hoped. H uang estimated that for every ideal acquisition, a chastened VanceInfo vetted 10 companies. To be successful, the acquisition also had to be a win-win situation for both sides. For example, although ITC had some Chinese clients, its biggest customer was a major European telecom company, which accounted for 70 percent of its revenue.The European company wanted to use fewer outsourcing vendors and had voiced concerns to ITC about the firms ability to handle growing demand given its small size and lack of access to financing. After VanceInfos purchase of ITC, the European company was tranquilize It became just one of five top VanceInfo clients and VanceInfo became one of the European companys nominate mobile telecom vendors under development. Moreover, the ITC team started winning business from other multinationals in the same industrybusiness that it never would have won on its own.Former ITC employees were enthusiastic about the purchase. I think this is a very good opportunity fo r me and ITC, said William Wei, who two months later onwards the acquisition was promoted from running sales and marketing for VanceInfos ITC sub-business unit to doing the same for the entire RDS division. VanceInfos efforts to integrate its acquisitions through cross-staffing new managers like Wei helped contain that the initial enthusiasm for the acquisition did not wane and that VanceInfo got the most out of its new mployees. ITC founder Howard Yu, for instance, went from running a 251-person team at ITC in 2007 to heading up VanceInfos RDS Mobile business unit, under which the ITC sub-business unit grew to 450 people by mid-2008, and the RDS mobile unit as a whole grew to some 800 employees. Returnee Junbo Liu managed 45 employees for SureKam when VanceInfo bought the international business unit of the IT outsourcing firm in 2005. By 2008, he managed more than 2,000 staff as the head of VanceInfos RDS business unit.According to Huang, cross-staffing provided promising manage rs room to develop within a large organization and helped them understand VanceInfos culture and management approach. It also broke up the acquired firms tight group, mitigating turf-protection and other problems. Chris Chen also made sure to talk on a regular basis subsequently the acquisition to the former CEOs, to understand their thinking and how VanceInfo could support them. VanceInfo was works as well on integrating acquired companies financial, accounting, human resource, and other systems with its own.For instance, VanceInfo introduce acquired companies monthly financial activity, sending them financial reports and talking to them about their performance. Scaling How China-Based VanceInfo Grows Big Fast HR-34 p. 11 MANAGING GROWTH Company executives across the add-in underscored the importance of skillful management of human resources to VanceInfos past and future success. Were a service firm, but if you were to compare us to a manufacturer, our products and parts are ou r engineers and their skills, explained Schulz.When trying to figure out how best to manage its growing staff of engineers, VanceInfos leaders did not have any real role models in China. The most successful Chinese technology companies were focused on manufacturing and sales & marketingnot services. VanceInfo instead looked to IBM, which organised human resource management into three centers HR function, HR services, and HR solutions. Chinas labor market posed a number of challenges owing to the countrys socialist past, doubledigit growth rates from 2002 to 2007, and potential as the worlds greatest market with more than 1. 4 billion consumers.Chinas potential and its growth story inspired foreigners to burgeon forth $1. 8 trillion cumulatively in direct foreign coronation into China by mid-2008, making it arguably the most competitive place to do business in the world. These factors created an opportunity extravaganza for engineering and managerial talent in China. The phenomeno n affected contrition, retention, recruitment, and training at VanceInfo and complicated its object of increasing its workforce to 20,000 in five years. VanceInfo Human Resource Director Kevin Liu commented The employees we recruit are not worried about having to find a job.Skilled labor has high expectations. If we do not provide them attractive conditions, its hard for us to retain them. Xi compared expectations in China to those he encountered in the U. S. , where he recalled working with a 64-year-old database administrator His whole flight was engineering. In China you cant imagine this. When engineers here reach age 30, they want to become a manager or a salesperson. Recruiting Because headcount determined business volume in the labor-intensive IT outsourcing industry, recruiting at VanceInfo was an extremely important function.Despite China churning out some 5 million university graduates in 2007, of which 700,000 had engineering degrees and 3,000 had PhDs in computer sc ience, We see a continued challenge recruiting the best, most suitable employees for openings to keep up with the current pace of growth, Huang said. 19 Indeed, one VanceInfo business unit offering higher-end IT services outsourcing reported having to put three projects on hold for a key client because it did not have enough qualified staff. Another unit doing RDS work for a major U. S. irm needed to fill 43 job openings and expected any day to have another 50 to fill. Campus Recruiting Campus recruiting accounted for or so 25 percent of net hiring at VanceInfo, although percentages varied by business unit. VanceInfos Shanghai branch, which did higher-end IT services outsourcing, only recruited 10-15 percent of its employees from university because it required more go through labor. Corporate HR handled campus recruiting for the business units. 19 Introduction to VanceInfo Technologies, op. cit. , p. 25.Scaling How China-Based VanceInfo Grows Big Fast HR-34 p. 12 Its team in Shang hai, for instance, visited 30 to 60 universities in Eastern China from February to May each year. In some cases, its recruiters first met with project managers in specific business units to find out the skill sets required. If they found suitable candidates at the universities, they asked the candidates to take a test. If the candidates passed, the recruiters referred them to business units to work as interns prior to graduation, after which they ideally became VanceInfo employees.In other cases, recruiters used general criteria to scout for university students to attend special training courses, known as VanceInfo University, during their elderberry bush year or immediately after graduation. They sought candidates who were quick learners and not afraid to take on challenges. Candidates who successfully completed VanceInfo University were referred to specific business units. Shanghai branch head Gerry Lu estimated that 60 percent of the branchs college hires came from the intern c hopine and the remainder from VanceInfo University.The branch probably recruited 100 college graduates through the two broadcasts in 2008, up from 70 to 80 in 2007, and hoped to recruit even more in the future. (See Training for more on VanceInfo University and the intern program. ) In response to complaints from business unit heads, the firm was trying to determine best practices for campus recruiting to improve its integration with business requirements, David Chen said. Recruiting squint Hires The majority of new junior engineering staff at VanceInfo were squint hires, enerally people who had worked in another firms IT department for two to three years, ideally not a competitors to avoid poaching wars. In response to the job-hopping plaguing the industry and the companys go headcount needs, VanceInfo employed a low-efficiency recruitment strategy Instead of employing 5 recruiters to recruit 30 engineers per month, for instance, it might employ 8 recruiters to hire 40 engineers a month. This is more expensive, but its more suitable for us, Liu said.VanceInfo recruited more than 800 entry-level workers in 2007, many via the Internet. Recruiters at the corporeal and business unit level mostly tapped Chinese corporate recruiting websites to post job listings and scour resumes, in order to find junior staff with at least a years work experience. Take VanceInfos localization sub-business unit. It sacred one recruiter to search sites for suitable resumes according to a set of criteria provided by project managers. The recruiter then called candidates to ask them to come in for a job interview.Some business units compensated employees for referring candidates. Lateral hires, though more experienced than college graduates, were also more expensive The starting salary for entry-level staff straight from college was 3,000 yuan per month and at least 4,000 yuan per month for workers with a years experience. Junior wages were rising some 6 percent annually. VanceIn fo hoped to cut costs by hiring fewer junior people laterally and more from university. Recruiting Mid-Level ManagersAlthough untried engineers often wanted to become managers, finding mid-level managers who mute how to manage engineers in a service business in China was a challenge, owing to Chinas long manufacturing tradition, said David Chen. VanceInfos acquisitions accounted for nearly half of mid-level hires in 2006 and 2007, but company executives expected this Scaling How China-Based VanceInfo Grows Big Fast HR-34 p. 13 proportion to decline given the companys selective acquisition strategy. Other key avenues for recruiting managers were through websites and by grooming internally.VanceInfos corporate HR department did not soon enough have a concentrate program for grooming managers from its engineering ranks, but rather left progress and training tasks to individual business units. According to Chen, a key challenge going forward was for VanceInfo to figure out how to identify potential leadership candidates from middle management and turn them into top-line leaders (see Retaining Middle Management under Attrition and Retention for more on management grooming). This was particularly important given the shortage of older managerial talent in China. It is hard to recruit suitable fourth-year people in China. If you lose them, its difficult to back up the position, Liu commented. VanceInfo cured executives with overseas experience often looked for recruits among other returneesones they met while overseas themselves or those referred by the firms VC partners. They looked for candidates, either in China or abroad, who felt they had reached a ceiling at their multinational corporation (MNC) employer and were kindle in doing something more entrepreneurial.Hajime Hirose had considered starting an IT services outsourcing company after working for Microsoft in the U. S. for eight years, when the head of VanceInfos Microsoft practice, Jeff Wu, offered him the chance to run the Shanghai regions practice. Hirose, who joined VanceInfo in January 2008, commented Microsoft is a great company, but its already established. This company is growing. They dont have many processes, which is bad, but it excites me because that means we have a lot of room to improve.I forecast that with my Microsoft and international experience I could make a difference here. General Industries Solutions VP Xi estimated that for every 50 resumes he received, only two returnees were a match, of whom only one accepted. Not only did candidates need to have the right skills, want to return to China, and wish to join the ITS outsourcing industry, but their families had to want to move to China as well, which was tricky if their children were in school in North America and did not speak Chinese. Moreover, they had to have realistic compensation expectations.Xi recalled how one candidate seemed perfect until he demanded a salary similar to what he earned in North America US$150,000 a year. When Xi could not meet it, the candidate requested an unrealistic number of stock options in the then pre-IPO company. Everything has to be perfect, Xi lamented. As a result, returnees accounted for only 5 percent of his staff. Given how critical a strong team of senior managers was to VanceInfos success, a question facing the company was whether to offer more competitive pay packages to lure high-level managers from multinational corporations.If so, it would need to reduce costs elsewhere. Its present cost control strategy emphasized opportunity over salary when recruiting/retaining all levels of workers. One sub-business unit head doing RDS business proposed that VanceInfo deflect the costs of offering MNC-comparable wages to senior employees by putting one senior manager in charge of many new graduates, thereby reducing the need for as many mid-level managers. In mid-2008, less than 10 percent of staff were senior, 30 percent middle, and 60 percent juni or. If we had more senior people, we could grow a lot faster, he commented.Hiring Outside vs. Growth from Within The companys leadership was also mulling over the best ratio of external professionals to homegrown talent for VanceInfo management. Despite the firms efforts to attract external Scaling How China-Based VanceInfo Grows Big Fast HR-34 p. 14 professionals, most managers to date either came up through the ranks or its acquisitions. Those who came through acquisitions were normally entrepreneurs themselves, able to fit easily into VanceInfos collegiate culture. Our competitors hire professionals.Within our company, except for the finance organization, we dont have a lot of professionals in the business operations, David Chen explained. But VanceInfos inclination was to become a inaugural company, he said, and it could not achieve that without hiring more professionals. Homegrown talent often did not have the breadth of experience and skill sets necessary to manage global ac tivities at a world-class level, like VanceInfos global sales organization. On the other hand, professionals from multinational corporations sometimes had trouble working in effect in a fast-growing(prenominal) start-up. For one, they ere used to a large support infrastructure to help them perform their jobs, which did not and could not exist at VanceInfo. This meant they had to do more on their own and that the solutions to certain problems at their former employer might not be suitable for VanceInfo. If we copied everything their multinational had today, wed lose money, Chen said. External professionals often came with unrealistic expectations as well as large egos that clashed with VanceInfos collegial culture. Plus, hiring them in large numbers would be discouraging to homegrown staff, leading to greater attrition. We want to be a world-class company. At the same time, were very entrepreneurial. How then do we strike the right balance between a professionally run organization and our passion and entrepreneurial spirit? Chen asked. He believed the ideal scenario was to groom 70-80 percent of senior managers internally and to hire the rest externally to keep managements thinking fresh. To reach this ratio, VanceInfo would need to beef up its programs for developing homegrown talent (see Retaining Middle Management under Attrition and Retention for more on management grooming). Current vs. Future Skill NeedsManagement also had to strike the right balance between current business needs and its goal of expanding into increasingly complex business lines that required employees with more advanced skills than those soon in place. To do so, VanceInfo wanted to become less dependent on the time model that typified the RDS business in favor of the competency-driven model expert by more sophisticated Indian and western IT service companies. I think we need to look at the marketplace two years from today, determine the skill set required and then build those compe tencies, Chen explained.That said, the company at present did not plan to make big investments in building these advanced skill sets without clear indication of business demand. Instead, it planned to invest gradually with an eye always on demand, said Huang. Central vs. ramify Office Recruiting Management was also trying to determine how much to centralize its recruiting efforts. The Shanghai branchs experience underscored the complexities of finding the right balance at a quickly growing operation. Recruiting at the ranch before 2006 was left to individual business units, since each had different HR requirements owing to their clients different technical needs. The branch had maybe 100 employees and two to three business units, with unit managers handling recruiting. The downside of decentralization was that VanceInfo had no systematic way to track recruiter performance or offer recruiters a travel cartroad toward becoming a well-rounded HR professional. Scaling How China-Based VanceInfo Grows Big Fast HR-34 p. 15 In 2006, the branch, which had grown to almost cholecalciferol employees, centralized recruiting.Centralization worked at that relatively small size, said Shanghai recess head Gerry Lu The account manager in each business unit could easily communicate the units human resource needs to four or five recruiters based in Shanghais corporate HR department, who in turn could respond effectively to overnight changes in clients requirements. By 2007, however, the branch had mushroomed to over 1,000 employees spread across five business units with multiple account managers handling an ever-growing number of projects.The centralized recruitment team could not always react quickly enough to satisfy clients, who expected seamless communication and understanding. Lu reorganized recruiting again, decentralize it somewhat. Rather then clump all recruiters together in the corporate HR department, he put two to three recruiters back in each business unit to l iaise between account managers and the centralized recruiting team. The four to five member centralized team hired the unit-level recruiters (with unit head approval), performed their performance evaluations, and provided them a calling track.According to David Chen, management had not hitherto settled on the proper level of centralization for the company as a whole. Attrition and Retention VanceInfos attrition rate hovered around 25 percent annually, which was average for the industry. Attrition varied, however, according to employee level. For project managers and above, who made up roughly 15 percent of the workforce and received stock-based compensation, the attrition rate rested in the single digits, Huang said. For the remainder, junior employees generally experienced the highest attrition rates, but numbers varied by business line.Attrition rates were below average in VanceInfos ODCs, mainly because employees felt they had a career ladder to climb. Attrition rates were high er in sub-business units focused on testing and lower-level activities, where little technical level differentiation existed. galore(postnominal) junior employees subsequently chose to leave after three years. Some went to work for VanceInfos multinational clients, which normally offered higher salaries, more prestige, and more professional training programs. People leaving the company in some cases perspective our training program was not comprehensive enough, said Liu.Attrition rates were not formal criteria by which managers were evaluated, but according to company executives, managers knew they were very important. Retaining aged Management VanceInfo executives attributed the companys success thus far to persistent and collaborative top management. They credited this situation to Chris Chens open-mindedness and his willingness to give managers enough opportunity and leeway to lead their teams. If you look at our competitors, if there are any issues at this stage its internal management issues, meaning that people cant work together.And when you have a defection at management level, its very disruptive, Huang said. This fact, and the scarcity of senior managers in China, made retaining senior managers critical. Attracting and retaining senior managers, who at VanceInfo were aged 35 to 45, was tricky because the company could not afford to pay as much as multinational corporations in China let alone as much as returnees earned in North America. Shanghai Branch head Lu estimated that Scaling How China-Based VanceInfo Grows Big Fast HR-34 p. 16VanceInfo paid senior employees between 12,000 yuan and 30,000 yuan per month, making it competitive with local rivals. It then had to contend with 10-15 percent annual wage inflation to keep up. Tony Zhang, for instance, who joined VanceInfo in 2005, said he earned only oneeighth the amount he had made in the U. S. working in the e-commerce department of a major American insurance provider. Why then did someone like Zhang not jump to a higher-paying position at an MNC? One reason was that VanceInfo sweet-scented its compensation packages for the top 15 percent of its employees with stock options.It also often supported returnees with trip allowances to visit families in North America, with help contract an apartment in China, and through assistance with visa issues and other own(prenominal) matters. Most important, according to executives, was that VanceInfo used its high-growth status to provide senior staff with plenty of opportunities to continue developing their careers opportunities that would be harder to come by at an MNC. These included giving senior managers autonomy to run their own business units and making them responsible for their units profit and loss, which was uncommon in China. This company offers an open platform. So even though a returnee like me has no affiliation with its founders, I am able to utilize this platform to run my own show, commented Executive VP Jeff Wu, w ho headed up VanceInfos Enterprise Solutions traffic pattern and its Microsoft practice, overseeing some 900 employees, approximately 850 more than when he started working for VanceInfo in 2004. He did not believe he would have had the same opportunity to grow had he taken a position with an MNC upon his return to China after almost 10 years in the United States. Retaining Middle ManagementVanceInfo also sought to retain middle managers, normally aged 27 to 35, with opportunities for career development rather than increases in wages, which were comparable to local competitors and ranged from 7,000 yuan to 15,000 yuan, growing at an annual rate of 10 percent. The firms rapid growth allowed management to offer mid-level employees ever-greater responsibilities. The team they managed might grow as the client needed more work, or VanceInfo might win a new project or new client, in which case a superior could promote a manager to take on more responsibility there.VanceInfos corporate HR department did not til now have a centralized program for grooming managers from engineering ranks, but rather left procession and training tasks to individual business units, whose programs differed. Promotions and figurehead between business units was also organized among business units, rather than centrally through Corporate HR. Likewise, business units had different systems for evaluating and rewarding employees. Corporate HR simply offered general guidelines.The Microsoft business unit pioneered a differentiated title system, under which its employees received a VanceInfo title in addition to their client-supplied title. For example, employees could be a software test engineer as far as Microsoft was concerned, yet also be classified as an associate manager internally at VanceInfo. According to Wu, the system, which was devised internally, worked well to motivate and develop the units employees. We have throughout the years promoted so many engineers to important positionsd evelopment leads, technical leads and many of them became associate managers and managers.By leveraging a good title system weve been able to provide a clear piece of land to get them moving up, he said. Corporate HR tried Scaling How China-Based VanceInfo Grows Big Fast HR-34 p. 17 to implement a similar company-wide program in 2007, but the project stalled when the newly hired HR executive championing it left the company. The Microsoft business unit also introduced a two-track career path for engineers to overcome the problem of losing talented engineers to managementa common approach at high-tech companies. In China, people perceived a promotion into management as the sign of career advancement and the route to higher pay.They therefore did not want to remain engineers even if that was where their talent lay. The Microsoft business unit offered engineers a chance to stay on the technical path, receiving promotions, titles, and pay equal to those on the management path. We just h ave to communicate to people that they do not need to be a manager to move up the ladder, said Hirose. As part of this program, the Microsoft unit offered stock options to 15-20 percent of engineers, in addition to the company-wide practice of offering them to executives at the director level and above.For Wu, steps like these were necessary to empower employees and middle managers in particular to take initiative and come up with solutions rather than relying on business unit heads, who had an increasing amount on their plates as a result of VanceInfos rapid growth. In addition to overseeing hundreds of projects for MNC clients, business unit directors had to meet P&L numbers to satisfy Wall Street, win more business, and hire and retain the right staff. We need to have infrastructure in place so that normal people can do a fabulous job, Wu commented.Rather than groom from within, business units that did ITS work preferred to hire senior managers externally. But Xi realized that do ing so exclusively was demoralizing for internal staff, who needed promotion opportunities to stay motivated. Thats the challenge Im facing right now, he said. He recently hired a native English speaker to train talented engineers, promising them a promotion if they improved their English in six months. Retaining Junior Employees Retaining junior employees was tricky in a fast-growth economy like Chinas.According to Liu, young workers had high expectations for quick promotions and salary hikes. With multinationals again offering higher salaries than VanceInfo could afford, the company emphasized opportunity and training over wages. Junior employees seemed satisfied with their VanceInfo salaries compared to those of peers in the same industry, but they stressed the importance of opportunity as part of their job satisfaction and their belief that VanceInfo, as a fast-growing company in a fast-growing industry, offered them that opportunity. If it did not, said one, I will look for ano ther job. VanceInfo found that retention was generally better among junior employees who attended VanceInfo University and/or worked as interns at VanceInfo before being hired full-time. That said, VanceInfo expected worse retention rates for junior staff, as employees unsuited for promotion or in low-end, non career-track jobs inevitably decided to pursue opportunities elsewhere. If they leave after three, four, or five years, its okay, said Lu. General Industries Solutions head Xi estimated that his business unit focused on providing a clear career path for its top 20 percent of employees only.Scaling How China-Based VanceInfo Grows Big Fast HR-34 p. 18 Training VanceInfos focus on keeping labor costs down, and its perpetual need for bodies to fill large numbers of entry-level jobs, made hiring a greater proportion of VanceInfo engineers straight from university an important goal, particularly if the firm wanted to expand its workforce to 20,000 in five years. However, fresh engin eering graduates in China were not well prepared to jump into VanceInfo projects their university training was very theoretical.Recent graduate He Xiangao explained We always learned a lot of theory, but lacked practical experience. Both to overcome those deficiencies and as a recruiting tool, VanceInfos corporate HR department designed a co-op program with 14 universities in China. These were not the countrys most prestigious colleges, but rather quality tier-two schools that graduated smart students willing to consider occupation at a relatively unknown Chinese company rather than at multinational firms paying better wages. VanceInfo University VanceInfos co-op program had two components.The first was called VanceInfo University, in which students selected by VanceInfo recruiters attended the firms training classes for one to three months. At present, VanceInfo University was a more practical(prenominal) concept than a physical one, with courses taking place at VanceInfo office s in Beijing, Shanghai, Wuhan, Dalian, Xian and a new dedicated training center in Tianjin. VanceInfos Beijing headquarters used to have a separate area for the classes, but the company needed that space to accommodate business growth and so courses there, as of August 2008, took place in conference rooms.While at VanceInfo University, students attended classes in common software development languages like C++, basic software testing, and other technical areas, plus English. VanceInfo then tested the students and recommended them to different business units, providing the units information on the training they received and their English language level. Business units then sent project managers to interview the candidates. The project manager might choose, say, three out of eight candidates. Those who werent selected received more training.