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.

BPO in Europe - offshore or nearshore?

Recent article by Alsbridge's BPO and shared services advisory practice in Sourcingmag.com discusses the opportunities of the development of Global BPO service market in Europe. Many experts see continental Europe as a next major business process outsourcing (BPO) growth area. But the question is - will Europe open its doors to leading Indian offshore providers, or will keep its short-sighted nearshore precedency.

One of they key aspects in determining the possible directions of BPO market movement in Europe is to look at the development of the sister ITO market which has been showing a clear signs towards homecoming for last decade. The panacea of outsourcing to nations such as India and China has proven illusory for many European companies. Latest reports confirms that long-distance offshoring does take its toll on the control of projects and erode program management and communication.

The lowering satisfaction levels combined with terrorist attacks, corruption scandals and rising attrition levels in India contributed to the shift in outsourcing delivery preferences towards nearshore and sameshore options. The survey being made by Black Book Research in 2009 confirmed this shift naming Central and Eastern Europe and Latin America top destinations for operating with lowest downstream risks for Western Europe and US respectively.


What is the relationship between ITO and BPO.

Although there are many differences between ITO and BPO, some relations are overt. The main objective of ITO is to improve IT infrastructure and reduce the cost of IT systems while BPO goes beyond that improving the performance, efficiency and productivity of a business. Nevertheless, most of the key core processes of a business require IT support whether its logistics management or financial management or customer care, all those processes will have a strong IT infrastructure to them.

That said both ITO and BPO come as a one strategic decision for the C-suite. The top management should co-ordinate IT strategy with the BPO strategy coherently. With this intimacy between two most European companies will be making sourcing decisions and determining best location choice based on their previous experiences and main drivers.


Current state of things

Global BPO is rather old hat in the UK and it remains Europe’s largest BPO market with Switzerland, Netherlands and Nordic countries showing high activity in these areas.

The largest European economies among which Germany and France show some signs of reluctance towards BPO though. That reluctance is explained by experts as a difference of world view - while cold-blooded Anglo-Saxons would outsource their grandmothers if they could, those conservative and consensus-driven Europeans prefer to keep the back offices close to home.

Many BPO suppliers - even a leading French supplier selling to French customers - complain of a crushing lack of interest in their outsourcing wares. It seems concerns about BPO's incompatibility with Europe have real currency at a local level, and as a result many local French, German or Italian organisations instinctively baulk at the prospect of externalisation. But the likes of Philips, Axa or American Express have proven that the barriers can be overcome.

They have experience with shared services and have accumulated the skills to know how to deploy them; they know that complex European language requirements can be handled well by low-cost east European locations.

In short they know that BPO works, and that there are only imagined barriers to it working well in Europe. More and more companies are finding that they can get it right, lowering operating costs and improving back-office quality and compliance as a result.

The question will global BPO works in Europe or it repeats failure of ITO.

Nearshore - the new offshore?

Realities of unsafe world affected outsourcing industry


Despite the economic crisis and challenges it has brought to global economy, the outsourcing market is expanding to offer both a bigger choice of locations and a wider range of services. These are turbulent times increased importance of operational efficiency and cost reduction, which closely associated with outsourcing nowadays. As the scale of this crisis become clear, most companies introduced cost-cutting measures and approved outsourcing strategies. Many see outsourcing as a road to survival as it allows to mitigate budget and bottom line pressures.

Outsourcing is not, however, appeared to be a panacea as many have tried and failed to make it work, especially where long distances, unfamiliar cultures and intellectual property along with other risks are involved. There was a big rush to go offshore early this decade, particularly to India. But the time and expense traveling to remote locations mainly caused by cultural and language dissimilarities has been noticed.

The global political, economical, social and security changes during past year have a substantial impact on outsourcing industry at international level. After the terrorist events and corruption scandals of 2008 in one of the offshore industry main destinations, the outsourcing decision process as well as risk/reward calculations have irreversibly been changed. The new realities of socially unsafe world have fully overrun into outsourcing decisions. Client's interests are no longer motivated by only English language skills and high numbers of unemployed locals as such criteria do not ensure data safety and business continuity. As every company that outsources is fully exposed to the downstream risks, unless it can establish the threats in the regional location where their operations are hosted.

As the savings gap between India and other world locations sunk to less than ten percent, the value proposition is tempered more by potential threads. From this point, the ability of suppliers to ensure that customers' sensitive data and business processes remain safe with the perspective to location's proximity, intellectual protection and infrastructure capabilities has been considered as an important element of decision making process and included into strategic outsourcing planning. While less inclusive outsourcing location rankings based on cheaper but skilled labor pools and tax incentives considered to be not sufficient to make a qualified destination decision.


Nearshoring - strong trend

Escalating uncertainties of regional threats in offshore locations combined with increased focus on vulnerability management and demand to keep data, process resources and account executives closer to where clients actually based have contributed to the shift in delivery preferences.

The survey being made by Black Book Research indicates that Central and Eastern Europe and Latin America are viewed as significantly less dangerous outsourcing locations that all major hubs of India and being marked as the top destinations for operating with lowest downstream risks in 2009. According to research having centers nearshore and sameshore will be a major client priority during next years.

Compared with offshore outsourcing, there are some other factors of nearshoring allowing to improve outsourcing governance and build productive relationships with providers, including less travel costs, less time zone differences, and closer cultural compatibility. In nerarshoring study conducted by Erran Carmel and Pamela Abbott argue convincingly that distance still matters, and point to customer choosing the nearshore option to gain benefit from one or more of the following constructs of proximity: geographic, temporal, cultural, linguistic, economic, political, and historical linkages.

Canada, Central and Eastern Europe and Latin America, for example, are significant nearshoring destinations for US and West European customers respectively, and some analysts argue that US and West European clients can have lower total costs with nearshoring to Canada and Central and Eastern respectively than with offshoring to India. As proximity between parties provides with lower costs interaction enabling client's management to be more present in the project, cultural closeness also makes easier communication thereby reducing time to reach a conclusion. Time zone aspect eliminates the need in extra work. And as a result of all this the hourly rate difference between nearshore service model and “traditional” farshore model is eliminated and real costs match.

Conclusion

Increased focus on vulnerability management as well as shifting outsourcing delivery preferences to nearshore and sameshore allow nearshoring destinations to profit from nearshoring advantages in their specific clusters based around clients in North America, Western Europe and in a less degree East Asia, differentiating themselves from farshore suppliers on proximity criteria. While traditional offshoring suppliers, particularly Indian leading providers will find the lack of client nearshore and sameshore options as absolute deal breakers and streamline their efforts on advancing to Central and Eastern Europe as well as Latin America to establish data and service centers to reduce downstream risks and diminish concerns of US and European clients.