nearshoring
Offshore Outsourcing

Why European nearshoring is definitely an option now

This is a contributed piece from Daniel Olsson at Soitron, an IT outsourcing specialist that recently expanded into the UK.

Outsourcing and offshoring continue to be major drivers in the global economy, especially in the Information Technology industry. But of course, there are many forms of ‘shoring’ that CIOs need to consider. Earlier this year, respected consultants Ernst & Young predicted, for example, that it might be time to ‘reshore’ work in capital intensive industries like aerospace, as increasing wages in countries such as China erode their labour cost advantage.

But as salaries for UK IT professionals remain higher than many other geographies, it may also be time to start to look at another form of ‘shoring’ – nearshoring – moving your business or IT processes to third parties in nearby countries, so as to make the most of available skills, attractive economies of scale, nearby time zones, cultural familiarities and so on.

For the UK, the nearest and most promising nearshoring market has to be CEE – Central and Eastern Europe, which encompasses the emerging economies of a diverse range of nation states, all the way from the Baltics, Poland, the Czech and Slovak Republics, Bulgaria, Romania and, on the periphery of Europe, Turkey.

What is attractive about CEE over other parts of the globe though as possible offshoring destinations? There are a range of factors, from the macro to the micro. At the former end, companies might be impressed with local domestic economic growth and political stability, for example, while at the latter end many of these polities offer labour pools with high ratios of well educated (University degree and postgrad level), English speaking candidates, marshaled into well-organised teams by a growing band of maturing service providers.

Major names

The rise of this geography in the outsourcing universe has been noted by a range of third party experts – but perhaps more significantly, by businesses, which are ‘voting with their feet’ by moving more and more operations here. To take just a couple of examples, Sabre and Motorola have now got significant nearshored software development centres in Poland, while firms like Comarch, Capgemini and HCL have growing footprints in the same country in the IT consulting field. In the Baltic States (Latvia, Lithuania, Estonia), to quote PwC, “The IT sector [there] has had a dynamic growth story, benefitting from a well-qualified and relatively cheap specialist local workforce; this is also one of the key sources of competitive advantage for the growing business processes outsourcing industry.” Last but definitely not least, IT and business process providers who’ve opened thriving bases in Romania include such tier one names as Accenture, Atos, Capgemini, Endava, Genpact, Luxoft, Ness Technologies, Stefanini and Wipro.

So – CEE is definitely ‘happening’ as a place for IT development, consulting and other forms of work that may traditionally have been the province of an India or a Philippines. But of course, it’s something of an artificial denomination, too; there are big differences in a Turkey and an Estonia, differences that the potential UK outsourcing customer will want to be aware of before they go down this route. We have therefore assembled a set of brief snapshots based on both public data and our own exposure to these markets to give some ‘helicopter’ views of each country.

Slovakia and the Czech Republic

Most observers would agree that these two neighbours have the most mature IT market in CEE, a fact reflected in the way that suppliers of the rank of the HPs and the Ciscos of the world have set up in both. Indeed, Prague is now in the top 20 (2013 data) of all global outsourcing centres, with many Czech IT professionals (who tend to be at least moderately proficient in not just English but also Russian and German) now working in a range of business process outsourcing (BPO) capacities, from application services to infrastructure management.

If the Czech side of the coin is well-developed, Slovakia is a less sophisticated market, perhaps, but still with real potential; it’s cheaper, has a large cohort of trained professionals (at least 18,000 Slovaks work in shared delivery and a further 10,000 do so in dedicated IT – in fact, Gartner thinks ICT work now makes up at least 5% of the country’s entire GDP) and, again, good language skills (English and German). Many commentators agree that these two countries also tend to be strong in following both EU laws (e.g. on copyright) but also tend to have a cultural affinity for sticking to contracts – which could be useful to know!

Bulgaria

Definitely coming up the nearshoring ranks, Sofia has become the 50th most popular outsourcing destination, probably due to what Gartner characterises as ‘Lower-than-average costs’ for service provision within Europe and the EU and its ability to offer back-office BPO and software development, management and maintenance capacity. Customers have favourably noted the country’s very flexible labour laws, which make it very easy to ramp or down capacity, as well as the national work ethic, even among the so-say ‘Gen Y’ (young graduate) staffers.

However, there are some caveats. Bulgaria is seen as an environment with some challenges around education and skills, as well as its relative slowness in implementing EU data security strictures, which could be a no-no for some UK firms. On the other hand, there are some real strengths here, too, such as in niches like .Net and Java; it is also a great jumping off point, due to proximity and language skills, for entry into the Russian market, if that is one of your business’ aims.

Romania

Romania is developing a broad range of IT and business process skills  - from application development (particularly agile development), application management, business solutions in ERM, CRM and e-commerce, and testing services, to finance and accounting, HR and customer support.

Whilst the main business centres are Bucharest, Iasi, Cluj-Napoca and Timisoara, Brasov, Constanta and Craiova are also developing a wide and significant skills base.

Part of Romania’s attraction is its strong language skills. English is now spoken by more than 90% of its IT professionals, and a significant number of Romanians are prolific in French, German, Italian and Spanish – a result of compulsory foreign language classes in Romanian secondary and high schools.

The government is actively supporting the growing IT industry, with incentives offered to investors and IT workers. IT workers are exempt from income tax – normally a flat rate of 16% - and have been since 2001. Incentives and subsidies to multinationals (particularly technology companies) to set up in Romania, particularly in underdeveloped areas, have led to 77 million Euros in government aid during the past two years alone. Furthermore, there are several tax exemptions for companies based in industrial parks and science technology parks (no property tax).

Turkey

OECD estimates place this country as set to be the third highest growing country after China and India by 2017 – even possibly climbing to second place after that. It’s certainly a very lively and promising market, with a strong higher education sector, commitment by the state to roll out 4G nationally by 2016 and indeed a determined push by Ankara to boost the country’s IT competency and competitiveness. However, be aware that this has yet to translate into real depth in engineering skills – though that hasn’t stopped firms including Fujitsu and Atos setting up shop here.

Clearly, then, CEE is becoming more and more of a convincing outsourcing option for Western European organisations – but that local knowledge of its complexities may come in useful to turn that promise into solid nearshoring success.

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