Eastern European startups take on India's outsourcing stronghold

An emerging breed of Eastern European software developers are offering specialist outsourcing services, rivaling the Indian outsourcing giants. How are they gaining the upper hand?

India's huge, successful and highly profitable IT industry is facing powerful headwinds. IT outsourcing is changing, there's a shift to new technologies while growing competition from Eastern Europe and Latin America are forcing India to re-evaluate its strategy.

The new rising stars of the global IT scene are countries such as Poland, Ukraine, Romania, Belarus and Russia. Latin American nations such as Argentina and Brazil are also growing in importance. Although their industries are small compared to the might of India, they are providing stiff competition.

India's industry grew during the offshoring boom of the 90s and early 2000s as businesses from Europe and the US struck outsourcing deals with Indian tech companies. This created a group of tech giants in Bangalore that have become known by the acronym "Twitch" - Tech Mahindra, Wipro, Infosys, Tata Consultancy Services, Cognizant and HCL.

These are the big players in India's market for IT and business process management which could hit $167bn in 2018 and is expected to grow about 8% a year, according to Nasscom, the trade body for the Indian IT industry. But sustaining this growth will require these giants to adapt to the new realities of the global IT market.

Today, the single outsourcing model that they pioneered has changed for good. Rather than hire a single tech giant to handle all their IT needs, businesses are dividing tasks between several providers. The move to cloud means there is less work for outsourcing companies in running data centers. Meanwhile, automation is increasingly taking care of commoditized work such as logging security issues.

The challenge for the IT industry is to move with the times and excel in the innovative new areas such as mobile apps, Internet of Things (IoT), blockchain, machine learning and conversational artificial intelligence (AI). Software companies are working closely with their clients to develop these systems using agile development methods, where clients and suppliers empower their staff to work together to encourage maximum flexibility but with minimum restraints.

"This is the area where the East Europeans have been doing really well," says Neil Barton, research director for IT and outsourcing at Gartner. "For the new, sexy, digital business greenfield projects with agile development methodologies, they have good developers, like India, and are lower cost than in the West. But the fact they are working in pretty much the same time zone as Western Europe has made them quite attractive for doing that kind of work and that has driven a lot of the growth for Eastern Europe," he adds.

A key principle of agile development is that the teams are located close together so they work in physical proximity. This creates a challenge when the team is remote, though this can be overcome with collaboration tools such as video conferencing if there is a one or two-hour time difference to the business stakeholders. But if the team has a five or six-hour time difference to the stakeholders, this kind of agile working is harder.

Sam Mantle, managing director of digital enterprise at East European developer and consultancy Luxoft, says the new innovative services are a comparatively small part of the work of the Indian giants. They have a legacy of low-cost IT work and basic business process outsourcing involving manual data entry.

"All these roles are being replaced by automation, so the Indian giants are in a dilemma because they have realized that a lot of their revenues are going to disappear and will be replaced by the technology that they and others can create."

Where once a team of IT staff would check for alerts and logging events from the system then rectify problems, today this is automated, eating away at the business of the tech giants.

By contrast, East European developers are excelling at the automation of tasks in infrastructure and operations and in creating new application development software. Smaller and more nimble, the East European software companies are concentrating on the newer technologies such as AI, data analysis, IoT and blockchain. Luxoft is headquartered in Switzerland but has some 13,000 developers based largely in Eastern Europe across Russia, Ukraine, Romania and other countries.

Hareesha Pattaje, managing director of Synechron Technologies, says the Indian industry is hitting back at the East European upstarts in part by shifting to "multi-shore delivery." Synechron has offices in Pune, Bangalore and Hyderabad in India. "They are expanding their presence in near-shore centers in Latin America, South East Asia and Eastern European countries to leverage talent, cultural familiarity and geographical advantages. This also helps the Indian software industry cope with the time differences with the western world," he says

He adds that the industry is shifting strategy towards value added services such as consulting, digital, cloud and analytics. "Better training infrastructure is allowing Indian programmers to get re-skilled on the latest technologies," he says. These include IoT, AI, Machine Learning, data science, robotic process automation and blockchain as well as languages and frameworks such as Java, UI/UX, .Net, Python, Selenium and BPM.

Meanwhile, Lev Shur, president of solutions at Exadel which operates from locations across Eastern Europe, says: "It's not like it used to be, where a client would say give me so many people and we would put together a team and we give out the tasks. The process is changing. Today, it is much more creative, you are really part of the product and the projects are really quick - one or two weeks so it is becoming more about ownership, participation and problem solving from each member of the team."

Gartner's Neil Barton says that once IT directors at businesses could impress their boards by making huge one off cost savings of up to 30% through outsourcing IT work to India. But when their finance chiefs come back to them today and ask them to make similar levels of savings, they struggle. The growth of the IT industry in India has pushed up wages, which are growing at 10% a year compared with 3% growth in Eastern Europe, he says.

But however smart, agile and nimble players may be in Eastern Europe and other competitive IT hotspots around the world, they face powerful competition from India. Barton estimates that while there may be some 600,000 developers working on IT in East Europe, India has 2.5 million. That gives the nation considerable heft in reshaping its tech industry towards the new growth areas.