Equity Firm Pours $48 Million Into Chinese IT Outsourcing Company

Francisco Partners' massive investment in DarwinSuzsoft is a ringing endorsement of the opportunities for software outsourcing and development in China.
One of the world's largest technology investment firms announced today that it will sink $48 million in private equity into DarwinSuzsoft, a Chinese company that specializes in IT outsourcing.

The deal by Francisco Partners, which has $5 billion in capital, demonstrates the growing momentum in China as a destination for IT and business-process outsourcing. Francisco is known for such deals as its $200 million acquisition of software company FrontRange Solutions and sizable investments in Barracuda Networks and Primavera Systems.

"We think it's the largest deal ever done for outsourcing and offshoring in China," said DarwinSuzsoft CEO Dan Ross in an interview. "It's not typical for a Chinese investment, but I think you'll start to see more of this because the heat is growing rapidly in terms of the marketplace."

DarwinSuzsoft employs 1,000 people, of which about 800 are in China. Its outsourcing business is in both BPO and IT, ranging from quality and assurance to application development, and its customers are primarily in the financial services, insurance, and the technology industries, with rapid growth in health care.

Francisco Partners will use the acquisition to gain greater access to opportunities in China. It gains majority ownership of the company and most of the seats on its board. The $48 million will be used for acquisitions and, to some degree, organic growth, Ross said.

Companies are finding talent in China at wages that are 30% to 40% lower than India, Ross said. And more companies, particularly banks, are also looking to the region as they grow frustrated with India's high staff turnover rates.

"It's a massive phenomena," Ross said. "I don't know any [large company] that is not considering China at this point."

Ross, meanwhile, downplays China's ongoing problems with political corruption and its refusal to meet the U.S. government's demands for better intellectual property protection. The communist government's efforts to discourage corruption and payoffs has resulted in outcomes for some officials that would be considered extreme, if not horrific, by U.S. standards: death by hanging. "There are aggressive public displays of people caught with their hand in the cookie jar," Ross said.

The company originated as Darwin Partners and has had a presence in China for seven years. Last year it acquired Chinese software-development company Suzsoft and changed its name.

DarwinSuzsoft works closely to train and recruit students from Tsinghua University, which has a status in China similar the U.S.'s Massachusetts Institute of Technology, and recently hired 150 graduates from the university. It's also funding academics working on a research project at Peking University, the equivalent of Harvard in China, Ross said.

The legal process in China for protecting intellectual property has improved dramatically in recent years, Ross said. Besides, since DarwinSuzsoft is based in the U.S., any IP issues can be handled in the U.S. courts.

DarwinSuzsoft also works to reassure its clients by giving them a tour of its extensive security measures in its Chinese facilities, which include biometrics identification from room to room and security cameras.

Ross said customers tend to move cautiously when first outsourcing to China, contracting work to perhaps a handful of people, but grow their contracts with DarwinSuzsoft once they become comfortable. "There's this toe-in-the-water, show-me mentality," he said. "But the quality of the development work and the Q&A work is so high that they gain confidence immediately."

Ross said the company has had "encouraging" discussions with large software companies that are doing more business in China, both as a potential market and as a new site for software development. Oracle, Microsoft, and IBM are among the vendors expanding their presence in China.

India vendors are making a bigger play for China, too: Tata Consulting Services plans to grow its staff there to 5,000 people. Yet Ross said Indian companies have a harder time doing business with the Chinese than U.S. comanies due to political tensions and distrust that date back to the Indo-China war of 1962.