Microsoft and Chinasoft have entered into a five-year application services agreement.
The contract formalizes the relationship between the two companies, which have worked together in the past on a project-by-project basis. Microsoft invested $20 million in Chinasoft last September in a move that also saw the World Bank pump in a further $15 million.
Microsoft currently owns a 10.24% stake in Chinasoft, which grew net profit 35% to CNY25 million ($3.1 million) on sales that fell 18% to CNY138 million ($17.2 million) in the six months ending June 30, 2006, due to the company winding down its hardware business.
Each year of the new agreement with Microsoft has an annual revenue cap, which increases over the course of the deal from $7.2 million in the year ending December 2006, rising to $20.2 million in 2011. No specifics details of the work that Chinasoft will perform have been detailed, and the vendor said that the purpose of the framework was to lay out the ground rules for future project work.
Microsoft is not putting all its eggs in one basket, in terms of tapping into China’s rapidly increasing supply of low-cost development resources. The company announced plans to set up a joint venture vehicle in China with India’s largest software services firm Tata Consultancy Services last September, and Microsoft also led a consortium that invested $15.5 million in applications services firm Dalian Hi-Think Computer Technology in June 2005.
Chinasoft’s contract win with Microsoft marks a big success for a Chinese vendor, as one of the reasons cited as to why the country will find it difficult to close the gap on India is that there are no indigenous software services vendors of a comparable size to the larger Indian players, which makes it harder for them to bid for big deals.
