Nearshoring to Eastern Europe as solution to the EU labor shortage

“Outsourcing to Eastern Europe as solution to EU labor shortage”, is a study prepared by “Nearshoring Blog” to discuss the current issues of the EU largest economies associated with the lack of qualified hi-tech specialists as well as labor restrictions and multicultural issues that prevent countries from immigration of foreign work.

Another part of study updates the perspective of Eastern European countries for providing nearshore outsourcing services, and their possibilities to fill the gap in increasing labor shortage inside the European Union.

The study consist of the following sections:

1. Germany - EU largest economy needs 400,000 high-tech specialists
2. Economic Recovery
3. Lack of specialists
4. Immigration - not welcomed
5. Offshore Outsourcing? No, look closer!
6. Why outsource? Why just don’t attract people from other EU member states?
7. Nearshore Outsourcing. Win-Win solution

and provides latest statistical data and trends on Germany labor market in general, and IT specialists market in particular. In this post we presented a part of the study, while the full version is available in PDF format here


Part I. Germany – EU largest economy

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Germany - EU largest economy needs 400,000 high-tech specialists

In the first chapter of series we decided to start from Germany - the EU largest and most technological economy. The country which has been crying out for skilled hi-tech specialists and engineers for years, yet opposing to the idea of attracting foreign labor.

Economic Recovery

The country steadily emerges from the crisis and sees record growth of 3.3 percent. Booming demand for Germany cars and technologies from Asia, particularly China - world’s largest consumer market strengthen country’s export indicators.

The experts confirmed that Germany is one the raise. The third quarter of 2010 indicated a massive trade surplus, grew nearly 9 percent. German consumer confidence shows stabilization as well. The index is set to come in at high 4.9 points for November, which is almost in line with economists’ forecast of 5.2 points.

However, according to latest labor market surveys the EU largest economy and world’s major exporter is in desperate need for skilled specialists and engineers across sectors, with greatest need in hi-tech sphere with overall 400000 positions unfulfilled in the field.

A survey conducted for the sector WirtschaftsWoche magazine revealed that a high percentage of the 450 businesses questioned for the poll said they had declined contracts during the first half of 2010 because they did not have enough staff to take on the extra work.

“The lack of labour is developing into a dangerous brake on growth, particularly for small and medium-sized companies,” said Marie-Christine Ostermann, chairwoman of the employers’ association Young Businesses-BJU, which co-commissioned the survey.

Please access the full version of the study in PDF format here

Will decision of non-EU expansion till 2020 boost IT outsourcing in Eastern Europe?

In recent article we discussed enlargement of the EU and its impact on outsourcing landscape in the region. We considered two phases of expansion as they have been mostly associated with countries representing outsourcing providers market:

• 1st wave in 2004 with Malta, Cyprus, Estonia, Latvia, Lithuania, Poland, Czech Republic, Slovakia, Slovenia, Hungary,
• 2nd wave in 2007 with Bulgaria and Romania

Experts agreed that expansion of the EU boarders further Central and East has contributed to re-arrangements in the state of things in the region’s outsourcing market. Especially the first wave.

Once region’s premier outsourcing destinations, such as Poland, Czech Republic and Hungary which were mainly associated with the growth of nearshore outsourcing in the region have fallen in rank and gave their way as the top locations to Bulgaria and Romania. In 2009 A.T Kearney Global Services Location Index ranked Bulgaria and Romania as top destinations for outsourcing services while Czech Republic, Hungary and Poland fallen significantly.

These re-arrangements were associated with the impact of EU-membership on those 2004 entrants. Economic transformations, wage inflation and increasing operating costs resulted in eliminating cost advantage that countries offered before. While both Romania and Bulgaria representing a second wave of EU enlargement in 2007 being still on the earliest stages of transformation towards EU model. Having improved legislation, market economy and all other qualities needed to meet EU acceptance criteria these countries are developing markets with competitive prices and abundant talent pool.

Further East

However, experts agree that Bulgaria and Romania will not escape the impact of EU membership and some studies already indicated changing environment and growing indicators. Opened borders will attract many talented professionals to search for new opportunities while influx of foreign investment and new standards raise costs.

In the meantime we see a growing interest towards far Eastern neighbours, who has not joined the EU yet. According to the 2010 Global Services 100 lists, Ukraine is 11th and Belarus is 13th among Top 20 leading countries in the area of IT Outsourcing and Hi-Tech services with Ukraine representing the region’s biggest IT outsourcing professionals market with 11,000 professionals involved.

With shift in delivery preferences and outsourcing drivers in Europe towards nearshore options experts signal growing interest to Ukraine and Belarus. Being closest of those non-EU member states these counties might represent the second wave of nearshoring trend becoming outsourcing magnets.


No EU expansion till 2020

This trend might be facilitated by the news about the EU expansion plans put on hold till 2020. Instead, the new format for cooperation development with Armenia, Belarus, Georgia, Modlova and Ukraine is planned to be on place, including EU plans to ease visa and trade relations with those non-EU countries in the near future.

Ukraine is announced to get an action plan for visa-free regime with EU member states on November 22, 2010 while Ukraine itself establishment Visa-Free Regime for Citizens of EU since 2005.

Thus, geographical proximity and no-visa traveling together with cost advantages and large resource base will be driving forces for IT outsourcing market growth in Eastern Europe.

IT Outsourcing – Choosing the right supplier

During the last years we’ve seen growth in demand for ITO and BPO services at the international scale. The crises brought both economic challenges and increased competitiveness across the sectors. Companies still are under the constant pressure to streamline efficiency and innovation while cut costs and derive more value.

From this perspective outsourcing appears as a liveable tool to respond to the current economic challenges and stay afloat, but still shaky economy requires businesses to take any step more cautiously, including outsourcing.

As a respond to this caution we’ve seen advisories across continents published their fit-to-all guides as to how chose the right outsourcing destination and partner. Although some of them were published for the promotional behalf of various providers we‘ve seen a change in key aspects to consider while selecting IT outsourcing choice.

Main Criteria have changed

Once not that long ago main criteria such as English language speaking skills and high numbers of unemployed locals turned into the often misguided recommendations of where to consider outsourcing and were substituted by the data safety and business continuity. Ability of both supplier and destination to provide data safety and business continuity became a key aspects of decision making process.

Evaluation Process

Some time ago the main process of evaluation revolved around the provider itself, as there wasn’t to much choice in destination options. The main aspects were:

- Company track-record and reputation
- Skills and competences
- Quality and Security
- Experience and References
- People

While making evaluation process companies should assess all that criteria and define which provider’s set of qualities fit most. Also, companies considered the human factor in each contender team, from managers to the people in the field to define the synergy and communication capabilities.

Further, with the growing popularity outsourcing seen emergence of new destinatons from exotic to socially downtrodden areas, business deal-makers from around the globe compete for a slice of the billions dollars outsourcing pie. Rise of whole new bunch of emerging outsourcing destinations have changed global outsourcing landscape and companies not being able to overlook new opportunities began to explore new outsourcing possibilities.

But investor and prospective client interest cannot longer be motivated by the provider’s assessment alone, as country legislation, infrastructure and approachability play a crucial role in outsourcing success or failure. Every company that outsources is fully exposed to the threats and hazards of the location where their operations hosted.
The terrorist attacks and corruption scandals of recent years in the offshoring industry main destination proved the importance of location assessment in decision making process.
Beyond reputations, expertise and skills of provider, one of the most critical issue became the developer’s country of origin. The knowledge of economic progress, democracy status, educational potential, etc. will let to assess potential benefits or losses of co-operation.

Industry attention

Following the suite leading analysts include not only the best location rankings into their reports and surveys, but also ranked the most unattractive and dangerous outsourcing destinations to help development and location specialists to determine the best location choice for their organization.

The location analysis became an integral part of each analysts study and report. Industry leading firms such as A.T Kearney, Black Book of Outsourcing, Gartner and Everest take annual outsourcing location rankings to analyse changes and developments in each region and update the perspective on providing outsourcing services.

Central and Eastern Outsourcing Association (CEEOA) leading regional union of IT associations commissions its annual Central and Eastern IT Outsourcing review to analyse the developments in CEE region and update perspectives of each country in providing IT outsourcing services.

Will the Cloud computing displace traditional IT outsourcing?

Browsing through the web last week I found an article with quite a strong title “The end of outsourcing?!”, written by my friend and fellow IT outsourcing expert. In the article he argued about the prediction made by the head of the outsourcing practice at consultancy A.T. Kearney. In its report “The End of IT Outsourcing As We Know It” Mr. Arjun Sethi states: "In the next five years, outsourcing as we know it will have disappeared." Well, I would say rather bold prediction, especially taking into account recent predictions about the “upcoming golden age of outsourcing”, nevertheless let’s try to find out the probability of such prediction.

There have been much said about the future of IT outsourcing lately. From the Cloud dominance to global shift in delivery and governance models to reverse sourcing and protectionism. Myself, I conducted several works and started a number of discussions here in LinkedIn with the relation to the Cloud computing and its potential affect on IT outsourcing industry. While I saw many experts predicted growing trend for pay-per-drink model there wasn’t concordance and obvious verdict for the shift inside the industry anytime soon. Of course there are some obvious benefits of this model, such as costs, agility and focus which can provide a whole new set of opportunities for both business and individuals. But for the corporate sector, bread and butter of IT outsourcing, all they don’t outweigh security, reliability and ownership of proprietary systems yet. Moreover, investments made by corporations into the existing infrastructure slow down adoption in the sector.

In his forecast, however Mr. Arjun Sethi associates massive reconfiguration of IT ousourcing industry, that according to him should take place in the nearest future precisely with the rise of the Cloud computing. The new era will be driven by Google, Amazon and bunch of new players, while powerhouses such as HP, Accenture and Xerox are in peril to lose their leading positions, and boutique Indian outsourcers poised to disappear at all. Well, it is quite truth that we are moving away from large multi-year full stack contracts towards more specialized, smaller service agreements, but with the current massive consolidation many of those specialized providers will be under umbrella of those big ones.

I also agree that the Cloud brings huge opportunities for highly-configurable systems that might fit needs of many sectors and industries, but standardization which, according to Sethi will feature the revolution in industry is unlikely. Although, today all major software houses and providers include cloud computing offerings in their portfolio, most of them just contemplate their core offerings with the Cloud options, even Microsoft - the company that announced a company-wide refocusing on cloud computing still fully relies on its software installed in physical assets. It will take more than a year or two or even three to change their model.

Although cloud computing experienced a phenomenal growth during last years, it's still in its infancy in corporate sector - cash cow of IT outsourcing industry. No doubts it will grow, grow fast, especially in SME sector, but it will take a good amount of time to make this transition to fully based pay-per... model. And still much should be done before we can signify the new era - meanwhile, forgive for my prejudice I don’t see end of traditional outsourcing.

Will be glad to know other opinions. Please join the conversation in Linkedin, click here.

Has the recession changed outsourcing drivers for SME's and large companies?

Surely, there were a number of different aspects of outsourcing between enterprise and SME sectors even before the crisis. Outsourcing played different roles and spanned around different areas in each league. However, before the crisis some trends became widely common. Both sectors showed move towards more strategic forms of outsourcing where costs reduction wasn't only one major factor that drove outsourcing decisions. The crisis, however is deemed to change this trend. In volatile economic climate of last years many experts distinguished outsourcing drivers for each sector - claiming that large companies want to globalize and cut costs, while small and mid-sized seek expertise.

According to the latest survey by National Outsourcing Association the focus on the costs reduction has risen significantly among large end-users of outsourcing in UK. Today's big customers want 15 percent savings from outsourcing compared to 10 percent before the recession, while the time they want to achieve reduction has shortened. Access to the specialized skills and offloading of internal resources for mission critical processes ranked distant second and third positions.

At the same time another survey focused specifically on SME sector came with different indications. According to the survey conducted by Irish-based HiberniaErvos Technology Group, 63 percent of SME's who already utilize outsourcing put the ability to free up internal resources and focus on business-critical processes as a major benefit of outsourcing.

So is it just a specifics of each sectors? or there are more inclusive post-recession factors on place (such as difficulties for SME's to compete for qualified talent domestically or shortened time-to-market)?


Join the LinkedIn discussion on related subject here

Europe beats US in the number of outsourcing deals but anticipates slowdown during recessionary times

Recent report from TPI shows that Europe finally outruns US for outsourcing deals but sees a slowdown during recessionary times. There were a record number of outsourcing contracts signed by European companies during 2008 despite a 50 per cent fall in the value of deals in the second half of the year, and only one significant mega deal signed during the 3rd quarter.
Worldwide, IT outsourcing deals were worth up to €72bn which is more 5.6 per cent than those signed in 2007. The number of contracts in Europe rose by 17 per cent year on year and for the first time Europe outruns the US with 55 per cent of signed deals, compared to just 32 per cent in the US. The number of European deals hit 271, compared to 243 across the Atlantic.
According to Duncan Aitchison, president of TPI research company, such high results were achieved mainly because of the strong first half and in particular through the level of mega-deal activity in the region, which awarded two-thirds of the world's $1bn-plus contracts last year.
But as the global crisis hit hard business in Europe fell by 50 per cent in the second half of the year and the value of contracts awarded in Europe dropped significantly. According to the report new outsourcing contracts in Europe fell from 75 to 56 in the 2nd to 3rd quarter of this year with total contract value decreasing from US$18.5 billion to US$5.5 billion and that weakness continued into the fourth quarter, and looks likely to remain into the first part of 2009.
Aitchison claimed that the outsourcing market will have to rely on smaller deals to maintain its growth in 2009. In the past couple of years the mega deal has been consigned by many to the outsourcing scrap heap in favour of multi sourcing that is choosing separate suppliers for different processes. This has allowed smaller, more specialised service providers to step into the limelight. However, with the focus moving back onto cost as the main deciding factor in outsourcing, having one outsourcing supplier will minimise management, due diligence and supplier selection costs. It should also provide the end user with savings achieved by buying in bulk. So maybe we are seeing a pause as mega deals, generally, take some time to set up.
As more and more organisations come to grips with the credit crunch, we will see outsourcing move to the top of the boardroom agenda. Outsourcing has always been associated with cost savings and now with all companies setting aggressive cost saving targets for next year we may see more and more outsourcing contracts come to fruition.