How China-Based Vanceinfo Grows Big Faster

CASE HR-34 DATE 01/23/09 SCALING HOW CHINA-BASED VANCEINFO GROWS BIG FAST Our biggest ch totallyenge is that the comp each is ontogeny very fast and were non sure as shooting that our systems can withstand such(prenominal) proceeds. 1 ? Chris Chen, hot seat and CEO, VanceInfo Technologies When Chris Chen arrangeed VanceInfo Technologies in Beijing in 1995, the alliance had 25 employees and i low-end IT operate outsourcing hold for a U. S. multinational.By August 2008, through a combination of innate ascendth and acquisitions, VanceInfo employed much than 4,800 people, had numerous share 100 customers, and enjoyed r scourues exceeding $80 one and only(a) million million over the preceding 12 months. It had attracted big-name venture bully fragmentiseners and propensityed shares in 2007 on the New York Stock Exchange. Although small compared to to a greater extent sophisticated Indian rivals, VanceInfo was salutary piazzad to start out an expect explosion in d emand for china found onshore IT go. At the very(prenominal) age, speedy growth was hackn marrowd the sozzleds counselling personnel, systems, and visions.Headcount was slated to quintuple to 20,000 in four to five familys time to delay pace with aggressive r so farue tar repulses. Old ad-hoc ways of doing things no all-night could accommo get wind current or incoming ingests. To succeed, circumspection had to implement saucily monetary, operational, and cozy charge systems, especially in the overcritical battleground of human resources where VanceInfo go about(predicate) whatsoever of its peachyest contends. These included introducing effective processes for rapidly expanding, planning, managing, and retaining its custody in a fast-growth frugality characterized by subscriber line concern hopping and a dearth of focaliseing talent.Moreover, in its quest to grow its wreak lowforce to 20,000 within five old age, move into higher-margin calling li nes requiring freshly expertise, and beat out domestic and international rivals, management had to strike a balance wheel amidst quick gains via acquisitions and electromotive forcely slower growth through organic expansion. 1 Interview with Chris Chen, Chairman and CEO, VanceInfo Technologies, August 18, 2008. Subsequent quotations are from the authors interviews unless other than noned.Pamela Yatsko prepared this case under the supervision of Professor Hayagreeva Rao as the basis for class discussion alternatively than to dilate either effective or ineffective handling of an administrative situation. Copyright 2009 by the Board of Trustees of the Leland Stanford subaltern University. All rights reserved. To order copies or request permission to reproduce materials, e-mail the Case Writing force at emailprotected stanford. edu or put out Case Writing Office, Stanford Graduate School of contrast, 518 Memorial Way, Stanford University, Stanford, CA 94305-5015.No part of this publication may be reproduced, stored in a retrieval system, utilize in a spreadsheet, or transmitted in some(prenominal) form or by any means electronic, mechanical, photocopying, recording, or otherwise without the permission of the Stanford Graduate School of Business. scoring How china-Based VanceInfo Grows Big unfaltering HR-34 p. 2 THE OFFSHORE IT SERVICES OUTSOURCING intentness In the offshore IT service outsourcing exertion, a order in one country exported IT-related knead to a flying in a second country, universally to take advantage of lower labor be.The exertions growth took off in the late 1990s when global communications infrastructure became to a greater extent than and more inexpensive and reli subject. With a large pool of low-wage, face speaking, technologically savvy tameers at their disposal, Indian companies were preferent suppliers. Valued at $17. 3 billion by 2006, the global offshore IT serve industry was expected to grow at a CAGR of 17. 1 per centum between 2006 and 2011 compared to a CAGR of 7. 4 part for the $674 billion global IT services industry (Exhibit 1). 2 Five of the worlds evanesce 15 IT services dissolutes in 2006 hailed from India, thanks to their outsourcing prowess (Exhibit 2). china in 2004 ranked second to India in attractiveness as an offshore location, tally to management consulting unfluctuating A. T Kearny. 4 Albeit from a low base of $1. 4 billion in 2006, mainland Chinas offshore IT services industry was expected to expand however faster than the global industry as a whole, some 38 percent each year between 2006-2011 as U. S. , European, and Japanese thickenings looked to diversify away from India and gain a foothold for their products in China (Exhibit 3). 5 China in like manner exserted 30 percent cost savings over India and more than 700,000 plan graduates yearlyly. probable brakes on growth included economic d take gotturn in leaf node markets and concerns that off shore outsourcing was thievery domestic stage descents. Compared to their Indian rivals, Chinese vendors primarily offered IT outsourcing services to the China-based operations of multinational tights under the category of R&D Services (RDS). Although adeptly challenging, these RDS activities typically required less English than higher-end IT outsourcing services, do them a comfortably go on short for Chinese engineers, who for historical reasons were weaker in English than their Indian counterparts.RDS included give-up the ghostical anestheticization and globalization services, in which vendors translated clients software system products into Chinese and adapted them for the Chinese market. RDS alike included software testing and development for clients products. In 2007, some 60 percent of international clients hailed from Japan and South Korea, while U. S. stanchs accounted for 20 percent. 7 Whereas clients broadly paid vendors of higher-end, competency-driven IT se rvices on a project basis, R&D services were usually calculate on a less risky time and material basis (kn avouch as a resource or time model), under which vendors billed clients for their engineers time.The more people the service provider put to work for a client, the more revenue it do. Some Chinese vendors had started moving up the value chain to work on clients internal IT systems, offering Application Development & Maintenance (ADM), Application Testing and Quality Assurance, and first step Solutions. Chinese vendors offering Enterprise Solutions 2 admission 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 Big Fast HR-34 p. 3 world power customize and i mplement a U. S. software firms enterprise resource planning (ERP) software at a U. S. manufacturers China operations. These higher-end, more knowledge-based IT services (ITS) required expertise in the clients industry. contempt the doubling of Chinese applied science graduates each year, Chinese vendors had trouble hiring abounding qualified resources.Some firms were also setting their sights on shell the top of the ITS value carry to offer solutions to clients based on intellectual property created by their launch engineers. Indian competitors had joined western counterparts in this more lucrative craft. Success in the industry depended more a lot than non on managements ability to attract, lock, train, and retain enough scientific discipli destiny workers to meet growe demand, rapid technological change, evolving industry standards, and changing customer preferences.And with labor costs accounting for roughly 2-thirds of Chinese vendors radical costs, buzz offing ways to keep labor costs down was some other blusher to competitiveness. Vendors make the some money by increasing efficiency and by predicting accurately market demand for specific scientific discipline sets and hiring/ cooking for those skill sets. If they predicted incorrectly, they ended up paying for underutilized people. COMPETITIVE LANDSCAPE VanceInfo competed for telephone line with a dozen Chinese players. Much larger Neusoft, which built its business line serving 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 umpteen topical anaesthetic rivals focused on China- and Japan-based clients, VanceInfo developed a niche as a go-to Chinese vendor for U. S. and European multinationals with a significant presence in the Asia/Pacific region. With $49. 5 million in Nort h the Statesn/EU revenue, it was the top Chinabased outsourcing vendor in those markets in 2007. That verbalize, ChinaSoft, with $45. million and HiSoft with $42 million, were not far arse (Exhibit 5). 9 Analysts expected the field to dwindle in the future as a need for scale encouraged companies to consolidate. 10 anyhow domestic players, VanceInfo competed with large Indian outsourcing firms, such as Wipro, Infosys, TCS, HCL, Satyam, and Cognizant. New vendors were also emerging in Southeast Asia, Eastern Europe, and Latin America. Some international firms were establishing operations in China, driving force up demand for IT service maestros and exacerbating employee turnover at Chinese providers.Although wage costs for skilful staff were lower in China than in India and western countries, these developments were putting pressure on remunerate in China. VANCEINFO MILESTONES Chris Chen, VanceInfos CEO, chairman, and founder, stood out from an early age. Born in 1963, he was the first person from his townsfolk in Jiangxi province to attend prestigious Tsinghua University in Beijing. He went on to work for state-owned Great wall Computer, which in 1991 transferred him to Los Angeles. Chinas economic reforms at the time were thus far 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 Scaling How China-Based VanceInfo Grows Big Fast HR-34 p. 4 and the experience exposed Chen early to U. S. business serves. Two years later, Great border assigned him to help spear toss a major project in China for U. S. technology firm IBM. The Early Days of VanceInfo When IBM in 1995 approached Chen to start a software topical anaestheticization and testing alliance, he and devil cofounders dancinged on the opport social wholey. IBM explained to me Indias success in IT service outsourcing, he state.With IBM as the start ups first customer, Chen secured a 300,00 0-yuan 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 b scatteres in Shanghai in 1999 and in Japan in 2001, taking on Fuji Xerox as a client. Growth in offshore IT services was steady, alone slow. The firm grew to 80 employees in 1998 and 200 in 2001. Lack of find to finance was a problem Chinas state banks did not sine qua non to lend to private firms venture capital was scarce and the government did not let private companies go public.With company profits its only backing source, VanceInfo, for instance, could not drop in 1997 to pay US$1 million to send 30 engineers to capital of Singapore for training in order to win an of the essence(predicate) IBM project related to Y2K conversion for the European banking industry. The project instead went to India, Chen recalled. The firm also had trouble attracting talent, since Chinese engineers looked down on IT services outs ourcing firms for not creating their own intellectual property. Moreover, the family members whom Chen relied on to help build his business, like most Chinese entrepreneurs those days, lacked 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 go out and act to attract professional talent locally and overseas. He hooked up with David Chen (no relation), who had worked for a event of technology companies in Silicon vale and was itching to do something entrepreneurial in China. Together, the two Chens hatched 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, only the new business did not succeed as expected. Profits from IT consulting services were terrible, utter David Chen, We spent a lot of money and time p progress toin g those ideas ERP and BPO to Chinese companies. I think at that time we were too ambitious and too stretched, and that was a trying lesson to learn. As a small start-up we should view as stayed very focused. They sold off the consulting division in 2004 to focus solely on offshore IT services outsourcing. Meanwhile, the business climate for offshore IT services outsourcing in China by 2004 had improved.With Chinas sparing booming, Fortune 1000 firms started doing more outsourcing in China. VanceInfo gained a number of distinguished 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 core group banking system action testing respectively. 11 Under the ODC model, VanceInfo operated facilities and project police squads dedicated solely to clients. It coveted these arrangements, in which both client and vendor invested in building the ODC, encouraging long-term c lient-vendor relationships.With clients continually creating new 11 In China, offshore development centers (ODCs), are sometimes referred to as CDCs (China Development Centers) due to political sensitivities over offshoring in client countries. Scaling 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, promote the greater IP protection that ODC arrangements offered. Building Staff VanceInfos headcount by the end of 2004 take offed to 650 (Exhibit 6). 2 The industry had started gaining in prestige, making it somewhat easier to attract Chinese engineers. At the same time, VanceInfo was tidying house internally. Besides re-focusing management energy on offshore IT service outsourcing, Chris Chen believed the firm could not succeed without worthy international. To do this, he inevitable to take away more returnees with greater expertise in western business practices and more fluency in English than he himself possessed. Before hiring more returnees, however, he needed to crash festering conflict over U.S. versus Chinese business practices between the several returnees already on visiting card and the companys local management team. He achieved this, he said, by clearly defining the responsibilities of all executives making each responsible for their business building blocks 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 controlling costs.To attract more returnees, Chen took advantage of new rules in China allowing VanceInfo to exit an offshore Cayman Islands company, which in turn entitled it to offer stock options to employees. The re-domiciling al so allowed VanceInfo to seek international venture capital. The firm in 2005 received funding from Silicon Valley VC Doll Capital Management (DCM) and local VC Legend Capital, with another Silicon Valley firm, Sequoia Capital, get together a second round in 2006. The VCs helped VanceInfo hone its governance structures, focus systematically on strategical and technical planning, and impose quarterly reviews. Between 2001 and 2004, we knew about all that, nevertheless we only did it in increments, prexy David Chen recalled. Rapid Growth With the groundwork thus set, growth took off. Between 2005 and 2007, VanceInfo acquired seven companies and set up or acquired seven new offices in China, three in the U. S. , and one in Japan and Hong Kong (Exhibits 7 and 8). It expand into higher-end 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 work force boasted 25 nationalities. The companys leaders at the train of executive vice president and preceding(prenominal) were in some cases American citizens, only all of Chinese ethnicity. They were difficult to attract nonethnic Chinese charabancs, such as Technical Marketing Director Ken Schulz, a Caucasian 12 Introduction to VanceInfo Technologies, op. cit. , p. 6. VanceInfo Technologies, material body 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 Shanghai director of VanceInfos Microsoft practice Hajime Hirose, a Japanese American. VanceInfo was particularly proud of its leading position among Chinese vendors in North America and Europe. merely with technology and telecommunications clients in those regions accounting for the vast absolute majority 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 man Company The company in 2007 set its sights on neat the first pure-play IT services outsourcing firm to list on the New York Stock Exchange. When the offering price for the December 2007 IPO fell far down the stairs the original petitioned price, precedential management discussed whether or not to call it off. They ultimately decided to forge ahead, deeming more important the companys goal of raising brand awareness in its most important market. 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 bristl e under public scrutiny, management welcomed the discipline it forced. We think it is a great way to help us become more process-oriented in terms of financial reporting, he said. foregoing to going public, the firm changed its name from WorkSoft to VanceInfo Technologies. While it did so mainly to stay off trademark conflict with another WorkSoft in Texas, the choice of VanceInfo reflected the companys focus on advancing customer and employee potential as intimately 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 picture and future customer base with the internal changes that needed to take place to accommodate that growth, VanceInfo spread responsibilities among its leadership in early 2008. David Chen, who had been chief o perating officer, became president. In this role, the fluent English speaker became VanceInfos public face to the international comm building blocky and could focus more energy on the booming gross revenue area.In rundown to his chief financial officer responsibilities, Sidney Huang was made COO to oversee the company-wide systematization of internal business processes across the firms business wholes (Exhibit 13). maturement STRATEGY VanceInfos growth strategy historically and going in front has involved attractive 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 Line Expansion Labor-intensive R&D Services contributed the majority 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, pro ving itself on that project, and past winning more technically and/or geographically complex projects from them. Although ITS outsourcing accounted for 37 percent of revenues in 2007, VanceInfo wanted 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 graveled stronger long-term growth potential for the company. In 2008, VanceInfos profit margin hovered some 15 percent? ealthy for China where companies were often 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 plausibly be able to maintain rapid growth rates, but sound not as rapid as if we were able to move into the IT services space as well. 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, frequent 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 bemuse a similar 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 Process Driven Services like Business Process Outsourcing (BPO), in which clients outsourced non-core functions, such as accounting, payroll, and customer service activities (Exhibit 15). Multi-year contracts, sometimes worth hundreds of millions of dollars, made BPO both highly attractive a nd competitive Infosys, Wipro, Capgemini, Accenture, and IBM were among the players in BPO that VanceInfo would remove 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 step for VanceInfo in climbing up the ITS value campaign was streng whence its industry knowledge in targeted sectors telecommunications banking, financial services, and insurance manufacturing and retail & distribution and technology. That meant finding 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 understand their clients business, whether it consisted of supply chains for manufacturing clients or capital markets for financial service firms.Knowledge of business processes in China was low owing to the countrys recent renewal from a socialist to a market economy and the continued make i tence of many state-owned enterprises. As a result, VanceInfo had to tap 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 leading VanceInfos charge into ITS outsourcing, for example, spent 15 years in the U. S. working for Lehman Brothers, fix 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 outsourcing firm serving multinational financial institutions. It had an option to buy the remain shares, depending on the acquired companys performance.COO/CFO Huang explained VanceInfos strategy for building teams in targeted sectors You hire the leaders firstpeople within the industryand have those people conjure 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. erstwhile 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. Investing 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 therefo re 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 same time, management would start thinking about how to create its own IP. When we build the ITS business, we should keep in headway to put an emphasis on innovation and solutions building. We need to cooperate 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 educated 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 unified CTO. A tralatitious service company does not have a CTO, but to become very innova tive, you need a CTO to be responsible for long-range innovations, not short-term numbers, he said. Besides winning more technically complex projects, VanceInfo planned to increase revenues by winning 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 job, I will give you five more projects, 10 more projects until they made us their exclusive APAC vendor. Then in July 2008 they invited our team to their headquarters to discuss global projects. We met with 40 to 50 charabancs including their CIO and Global VP. They said, Great. China can do this, not just India. 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 gross revenue offices in New York, Silicon Valley, and Seattle, but we dont have any real affaire team in the U. S. , Xi said (Exhibit 8). And while VanceInfos Chinese engineers could ordinaryly read and write English, they typically could not speak it as well as Indian engineers. They subsequently had difficulty move effectively in throng calls with clients in the U. S. who often had to explain project requirements over the phone with VanceInfos team in China. Xis preferred solution was to hire returnees fluent in English and American culture to take elder management positions which required them to handle contacts with U. S. clients. Organic Growth vs. attainment By 2008, most of VanceInfos growth had been organic, with some selective strategic acquisitions (Exhibit 16). Althou gh it made four acquisitions in 2007, Huang insisted the buying spree did not indicate a change in strategy, pointing out that only leash 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 spotless 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 danger in M&A. M&A was apparently easier, he said, because VanceInfo gained a proven team with a passenger vehicle 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 leverage its larger 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 casualty of acquiring a team that did not integrate 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 reasonable valuation. In its experience, entrepreneurs often had unrealistic price expectations, making it difficult to close 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 past three quarters. Growth was purely organic. So why should we ruin this great growth story with some imprudent M&A action mechanism? Whether VanceInfo grew through acquisition or organically, Huang emphasized the importance of finding the right people. Executives express cultural fit between the candidates top management and VanceInfos.They determined cultural fit a number of ways, first jump 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 Human 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 different 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.According to Huang, the method allowed VanceInfo to find out how the candidat e 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 underscore for VanceInfo the importance of cultural fit, CEO commitment, and fuddled 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 never performed as well as VanceInfo had hoped. Huang estimated that for every completed 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, a lthough 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 reassured It became just one of five top VanceInfo clients and VanceInfo became one of the European companys key 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 for me and ITC, said William Wei, who two months after the acquisition was promoted from running sales and marketing for VanceInfos ITC sub-business unit to doing the same for the entire RDS division. Va nceInfos efforts to integrate its acquisitions through cross-staffing new managers like Wei helped ensure that the initial enthusiasm for the acquisition did not set 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 coping 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 managers live 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 after the acquisition to the former CEOs, to understand their thinking and how VanceInfo could support them. VanceInfo was working as well on integrating acquired companies financial, accounting, human resource, and other systems with its own.For instance, VanceInfo tracked acquired companies periodical 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 board 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 our 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 techn ology companies were focused on manufacturing and sales & marketingnot services. VanceInfo instead looked to IBM, which organized 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 sterling(prenominal) market with more than 1. 4 billion consumers.Chinas potential and its growth story inspired foreigners to move $1. 8 trillion cumulatively in direct foreign investment 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 phenomenon affected attrition, retention, recruitment, and training at VanceInfo and complicated its goal of increasing its custody to 20,000 in five years. VanceInfo Human Resource Director Kevin Liu commented The employees w e 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 life history 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 science, 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 servic es 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 rough 25 percent of net hiring at VanceInfo, although percentages varied by business unit. VanceInfos Shanghai complexify, which did higher-end IT services outsourcing, only recruited 10-15 percent of its employees from university because it required more experienced 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 Shanghai, 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 senior 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 program and the remainder from VanceInfo University.The branch probably recruited 100 college graduates through the two programs in 2008, up from 70 to 80 in 2007, and hoped to recruit even more in the future. (See Training f or 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 Lateral Hires The majority of new junior engineering staff at VanceInfo were lateral hires, enerally people who had worked in another firms IT surgical incision 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 rising 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 corporate and business unit level mostl y 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 dedicated 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. VanceInfo hoped to cut costs by hiring fewer junior people laterally and more from university. Recruiting Mid-Level ManagersAlthough young engineers often wanted to become managers, finding mid-level managers who understoo d 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 stock-still have a modify program for grooming managers from its engineering ranks, but rather left packaging 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 particular ly important given the shortage of senior managerial talent in China. It is hard to recruit suitable senior people in China. If you lose them, its difficult to back up the position, Liu commented. VanceInfo senior 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 stool (MNC) employer and were interested in doing something more entrepreneurial.Hajime Hirose had considered starting an IT services outsourcing company after working for Microsoft in the U. S. for octette 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 processe s, which is bad, but it excites me because that means we have a lot of room to improve.I figured 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 regard 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 accounte d 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 junior. 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 collegial 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 goal was to become a world-class 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 activities at a world-class level, like VanceInfos global sales organization. On the other hand, professionals from multinational corporations sometimes had trouble working effectively in a aggressive start-up. For one, they ere u sed 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 discourage 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 currently 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 practiced 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 competencies, Chen explained.That said, the company at present did not plan to make big investments in building these advanced skill sets without clear property of business demand. Instead, it planned to invest gradually with an eye always o n demand, said Huang. Central vs. outset 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 biography path 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 500 employees, centralized recruiting.Centralization worked at that comparatively small size, said Shanghai Branch head Gerry Lu The account manager in eac h 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, decentralizing 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 liaise 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 career track.Accordi ng to David Chen, management had not yet 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 custody 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 higher in sub-business units focused on testing and lower-level activities, where little technical level differentiation existed. Many 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 thought 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 Senior Management VanceInfo executives attributed the companys success thus far to stable 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 sweetened 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 lease an apartment in China, and through assistance with visa issues and other personal 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, who headed up VanceInfos Enterprise Solutions Practice 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 yet have a centralized program for grooming managers from engineering ranks, but rather left forward motion and training tasks to individual business units, whose programs differed. Promotions and movement between business units was also organized among business units, rather than cent rally 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 positionsdevelopment 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 pathway 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-w ide 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 procession 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 have 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, ste ps 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 doing so exclusively was demoralizing for internal staff, who needed promotion opportunities to stay motivated. Thats the challenge Im facing right now, he said. He of late 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 strong-growing company in a fast-growing industry, offered them that opportunity. If it did not, said one, I will look for another job. VanceInfo found that retention was generally better among junior employees who attended VanceInfo University and/or worked as interns at VanceInfo before macrocosm 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 engineering 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 interoperable experience. Both to overcome those deficiencies and as a recruiting tool, VanceI nfos corporate HR department designed a batting cage 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 employment 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 virtual concept than a physical one, with courses taking place at VanceInfo offices 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.Whi le 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.