Eastern Europe an Emerging Outsourcing Leader - a deep look!

Hot on the heels of the release of major information report for IT Outsourcing industry in Central and Eastern Europe, “CEE IT Outsouircing Overview 2010”, we start observing an increasing number of publications trumpeting “the emergence of new IT outsourcing leader”.

Eastern Europe is more often named by many as an emerging outsourcing hotspot which is going to challenge world’s premier outsourcing destinations, especially for knowledge-intensive and innovative R&D and software engineering work!

Is it really going to happen? and if yes, what preconditions for this?

In our new series “Eastern Europe an emerging IT outsourcing leader”, we’ll try to answer some of these and other not less important questions.

But let’s get some things clear at first!

Post #1 - Two Meanings of The One Name

I picked up this example as there is some confusion in differentiation between outsourcing destinations in general and IT outsourcing destinations in particular.

To clarify this I’d like to take example with “car” - as this word may have some imaginative similarities in this respect. The word car can be used to describe both a sedan and a big truck, when speaking of the car we can mean them both, right?

Well, in this case the question to these car owners - “can you help me to move my belongings to new flat?” will be differently considered. Same story with IT outsourcing, as in metaphorical comparison such outsourcing trucks as “India” and “China” can completely move company’s belongings while such sedans as East European countries can move some compact or fragile parts at a time.

Let’s expand this thought a bit more, let’s see the moving process in this way - the India truck can move everything, but in a bulky way making you feel a bit concerned over the road, while Eastern sedan taking just some parts gives you control. See it is more about specialization :)

That said, indeed, Central and Eastern Europe is an emerging destination for IT outsourcing, and have been considered so for the last decade. But the competition with BRIC countries is rather illusive and might be considered seriously only in selective yet very crucial areas of IT outsourcing umbrella.

What does it mean?

Eastern European has always been considered as destination of choice for complex, knowledge-intensive software engineering and R&D projects, requiring in-depth expertise and innovation.

With solid scientific legacy and strong technologically-oriented education system (with only 1% of world’s population Ukraine has 6% of the world’s scientists) Eastern Europe appeared as a perfect choice for desperately seeking technological brain Western hi-tech innovators.

Apart from one-stop-shop outsourcing destinations such as India and Philippines featuring high-level of English penetration and abundant talent pool of various types of trades Eastern Europe since the first day was associated with the word “technology and engineering”.

Thereby, the lion share of the portfolio of IT outsourcing services provided by companies from Eastern Europe mainly composed of services related to software engineering and product development, while India, Philippines and China’ IT offerings largely mixed with data processing & support related offerings such as data management, IT support, system administration and others.

Where it came from?

Having well-developed scientific research and space industries the Soviet Union needed an efficient and productive education system able to cope with the growing demand for engineering brain.

The popularity of engineering and scientific professions has been spread throughout then-occupied and allied Eastern countries, thousands of universities and faculties have been opened setting a mark for high-quality technical education.

Andre Geim 2010 Nobel Physics Prize winner about Soviet Union education - You cannot obtain such an education, not in Harvard nor in Cambridge, nowhere!

Subsequently, all that brought an incredible progress in electronics and technology science making Eastern Europe a viable resource for immigration resources of Western countries. Providing some statistics, there were millions of engineers, scientists and mathematicians migrating to the US and Europe, during and after the collapse of Soviet Union. Then Polish immigrants, made a huge contribution to the UK labor market after joining to EU.

Thanks to cultural, historical and religious affinities, scientific and education potential immigrants from Eastern Europe saw a warm acceptance in their new whereabouts leading the innovation and technological advancement in United States and Europe. Several examples of this fact: Google with its founder Sergey Brin, two Nobel Prize Winners, physicists Andre Geim and Konstantin Novoselov and many others.

This fact not only spread the reputation of Eastern Europe as a mine of technological and scientific talent, but predetermined the whole course of the future industry. Eastern Europe’s colossal pool of engineers, scientists, mathematicians proved to be a magnet for foreign companies seeking technological brains.

After the collapse of Soviet Union in many member states rocket building facilities and scientific bases were re-qualified for providing commercial hi-tech services and products. Since early 1990s various organizations have been formed on the facilities of technical universities and scientific laboratories to provide assistance in complex R&D areas.

Back to 1991, the Swiss software innovators came to Ukraine for technological competence and signed what is known as the first outsourcing contract signed in Eastern Europe.

It was exactly the group of scientists from the Kiev Institute of Cybernetics, nowadays known as Levi9 Ukraine, which provided technological supervision for the development of large-scale object-oriented system which subsequently earned its owners TOP100 Manufacturing Software Firms Award.

What does it mean? - Part II. Innovation Outsourcing

Well, basically it means that although Eastern Europe is considered as a competitor to world’s top outsourcing clusters such as BRIC for the provision of whole range of IT outsourcing services this general competition term is rather illusive and argumentative.

There is a huge gap in terms of market revenue and labor pool between India, China and Eastern Europe, and even considering the stunning 23 percent growth rate for IT export in Eastern Europe its still far behind the so-called competitors’ indicators.

Another trend, however might be observed in the niche of software engineering and R&D areas as previously indicated 23 percent of growth mainly distributed between these to backbones of Eastern European IT export market, with countries such as Ukraine and Romania doubled their export of software development services.

Innovation outsourcing to Eastern Europe is booming and big internationals such as Siemens and Deutsche Telekom already gave a preference to Eastern European providers to source their innovation and knowledge-intensive activities.

In the next part we will discuss:

1. Factors that might influence alignment of forces in IT outsourcing:

The EU - US outsourcing race

Last year European Union outspent US for IT Outsourcing contracts for the first time benefiting Eastern Europe as a regional cluster for Western Europe.

Beginning of 2011 was marked by the quick start of US economy, while EU faced currency crisis and economic recession in its second-tier member countries. This may have a bearing on the spending figures.

Nearshoring Trend

Nearshoring is a main trend in today’s outsourcing arena. Similar time-zones, physical proximity and cultural affinity proved to be as important outsourcing drivers as cost-savings and technological competence.

Increased focus on vulnerability management as well as shift in outsourcing delivery preferences to nearshore and sameshore can help nearshoring destinations such as Eastern Europe to profit from nearshoring advantages in their specific clusters.