Caution Marks Outsourcing in China - ' China'

China's Communist legacy means that the state permeates many activities.

This influence could affect whether a company receives sufficient backing to carry through on its obligations, Weild said.

A turning point for China was its joining the World Trade Organization in 2001, which meant that companies could approach Chinese partnerships with a greater sense of assurance—up to a point.

"Chinese laws today are actually quite good. They conform with WTO standards. Where the problem comes in is on the enforcement side," said Michael Mensik, a partner at Baker & McKenzie LLP, in Chicago.

With enforcement still largely untested, a U.S. company might do well to set up a captive operation, Mensik said in August at the China IT Service Summit in New York.

In addition to IP concerns, there is a host of other areas IT pros should be aware of before dealing with partners in China. For example, Mensik said, foreign investment is regulated in China and requires government approval and registration.

In addition, there are equity restrictions by industry, such as call centers, or so-called value-added telecommunications services, which may be only 50 percent foreign-equity controlled.

Further, businesses typically have a narrow, defined scope; foreign exchange is regulated; and loans must be registered within a certain time. Technology transfers are also regulated—approval is needed, and registration cannot be done online.

If that weren't enough, labor laws must be taken into account. Some notable differences, according to Mensik: There is no employment at will; written employee agreements preclude termination without cause and without severance or prior notice to the employee and to the labor union; disputes are subject to local arbitration with the right to appeal.

Further, Mensik noted, when an invention is created in the course of a worker's employment, the employer is liable to pay a certain percentage of profits to the employee.

In addition, said Mensik, public security and government employees have the right to examine employee communications. Bierce pointed out that this capability raises the question as to whether the government could be seizing information to create its own data repository. The danger is similar to that of industrial espionage, Bierce said.

Mensik stressed the need for a solid contract once all these considerations are taken into account.

"The IP is going to land in China; the work is going to be done in China. So you should get a master IP agreement," said Mensik. But perhaps more important than the agreement itself is simple trust. "It's the trust you develop during the negotiation process that will carry you over the bumps," Mensik said.

But, he added, China is becoming more adept at dealing with IP questions. "Companies that have had IP issues have found ways of dealing with it through civil actions [and] local police enforcement. It has changed dramatically in recent years," said Mensik.

One reason for such change may be that, after China became a WTO member in 2001, the Chinese government established the State Intellectual Property Office and State Copyright Bureau for the protection of IP, said Yu Cisheng, deputy director-general of the IT office of Beijing Municipality, which promotes the technology industry in the Beijing area.

Spurred by WTO directives, the Chinese government has also vowed to purchase "original software and bring along the whole society to employ original software," Cisheng told the New York conference audience.

For Chinese software companies, much is at stake. Powerise, which was founded in 1992 and had revenue of $50 million last year, has been listed on the Shenzhen, China, Stock Exchange but aspires to be listed on the Nasdaq.

With $20 million in U.S. sales at present, the Beijing-based company aims to build on that presence to achieve $100 million in sales within three years, Huichun Lin, CEO of Powerise, told the China IT Summit audience in New York.

"We are seeking to take advantage of money markets and management in the U.S.A. and use the advantage of training, expertise and cost in China," Lin said. "Our goal is becoming the best international software company in China."

So far, things are going smoothly in Powerise's relationship with Ozburn-Hessey. "If we didn't have a Chinese-speaking developer on staff, I think it would be a much different proposition," said Ozburn-Hessey's Spieth. And is he satisfied with the quality of work?

"I am, and we are," Spieth said.

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