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!

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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.

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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.

Egypt Crisis - will it change outsourcing landscape in the region?

A weeks-long unrest in Egypt has became a real crisis, which already been named by some as “the worst disaster since Iran’s revolution”. One of the country’s main industries - tourism has already felt consequences of this crisis as tourists planned their holidays in Egypt from around the world have been advised not to enter the country because of unrest and tense situation.


Direct competitors of Egypt's Red Sea coastline such as Turkey, Spain and others are getting benefits of busy beaches and flows of tourists as last have turned their back after several weeks of anti-government protests that forced president Hosni Mubarak to flee the country.

What about Outsourcing?

Some acclaimed experts already expressed their cautions with regards to perspectives of Egyptian outsourcing industry unless the situation stabilize soon. For the last several years Egypt’s outsourcing services industry demonstrated dynamic growth getting fame as a hotspot for global outsourcing.

In 2009, Egypt for the first time has joined joined Gartner's alphabetically-ranked annual list spelling out the world's top 30 leading locations for outsourcing services. One of the main treats of such a progress has been named Egypt’s government extensive support and liberalization of tax regime for ICT. Egypt received enormous support from the government, particularly in the ICT industry with a reported $2 billion investment in its telecommunications infrastructure.

This crisis might be a heavy blow to Egypt perception at the international outsourcing arena as despite its robust progress and high rankings, the country has a number of weaknesses among which most notorious - negative business perception.

An LSE Outsourcing Unit in its study “Beyond BRIC” noted that Egypt still suffers from a negative perception and a belief that it is a country regularly targeted by terrorists and government disputes.

From the history one might notice what role perception plays in such industry as IT outsourcing. As a perfect example India’s terrorist events and corruption scandals in 2008 which have irreversibly changed risk/rewards calculations in the whole outsourcing industry pushing India in its own outsourcing crisis.

Alignment of forces in the EMEA region

Egypt has been considered for years as a bridge between Europe, Middle East and Africa. The country has been competing with Morocco and East Europe for European clients, mainly from UK, France and Spain and was looking to expand its reach to Benelux market (Netherlands, Belgium and Luxembourg). The country has been positioning itself as a nearshore destination to Europe, following the growing nearshoring trend in the region and jumping on the bandwagon of Central and Eastern European cluster.

In its report “2009: The Year of Outsourcing Dangerously” the Black Book of Outsourcing included Egypt in the list of safe locations for operating with low downstream risk leaded by Central and Eastern Europe and Latin America, while the entire Africa region was recommended to be avoided.

However, the current crisis and its possible developments can have a detrimental effect on country’s outsourcing gains of past years. As in response to precarious conditions conservative and consensus-driven Europeans might not include Egypt in the list of preferable outsourcing destinations keeping short-sighted nearshore precedency.

Moreover, other emerging outsourcing hotspots such as Serbia, Romania, Ukraine and Belarus are on the track to grow their positions as leading locations for offshore/nearshore services placing a significant emphasis on IT and business process services providing a vehicle to their economic growth.

For Egypt there is everything still to play for and - we hope - its government will not forget lessons learned previously reacting in good faith and on reasonable grounds so to prevent disaster that will be remembered by next generations.

Nearshore Study. What defines the nearshore zone?

Join the LinkedIn Discussion on this Topic.

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The aim of this paper is to analyze the changes occurred in IT outsourcing industry,

point out to the current and future trends and clarify belonging criteria of the co-called nearshore zone.

Quote from the study

"However, not only has the number of known nearshore sites have grown significantly over the last years, but the amount of advertising and promotion on behalf of country developers has skyrocketed.

From exotic to socially downtrodden areas, business dealmakers from around the globe compete for a slice of the billions dollar nearshore pie."

Contents

• Shift in Delivery Preferences
• Popular Trend
• What defines the nearshore zone

Shift in Delivery Preferences

Nearshoring, often referred as Nearshore Outsourcing took a wild ride during last years. The global political, economical, social and security changes during last years have a substantial impact on outsourcing industry at the international level.

The realities of an unsafe world have fully overrun into outsourcing decisions. The challenging component of outsourcing governance has shifted to mitigating downstream risk by determining the best location choice for their organizational processes.

As the savings gap between India and other world locations sunk to less than ten percent the value proposition is now more tempered more by potential threats. Increased focus on vulnerability management as well as geographical proximity has made for a shift in delivery preferences towards nearshore and sameshore options.

The survey made by Black Book Research in 2009 indicates that Central and Eastern Europe along with Latin America are viewed as significantly less dangerous outsourcing locations for US and EU respectively that all major hubs of India and being marked as the top destinations for operating with lowest downstream risks in 2009-2010. According to research having centers nearshore and sameshore will be a major client priority during next years.

Nearshoring - The Growing Trend

This shift in delivery preferences allowed many destinations under the so-called

Nearshoring umbrella to profit from their geographical advantages in their specific
clusters based in North America, Europe and Asia.

However, not only has the number of known nearshore sites have grown significantly over the last years, but the amount of advertising and promotion on behalf of country developers has skyrocketed.

From exotic to socially downtrodden areas, business dealmakers from around the globe compete for a slice of the billions dollar nearshore pie.

While there are some proven nearshoring destinations such as Canada, Central and
Eastern Europe and Latin America that according to analysts represent a viable
alternative to offshore options for US and West European countries there are many
other locations that seems to follow the trend and claim to be nearshore locations as
well. So, what criteria can be used to define location as a nearshore?


What defines the nearshore zone?

Definitions vary as to what qualifies as a nearshore location. Duncan Aitchison
international managing director of TPI, does not get hung up on semantics, but claims that moving across a close country border without crossing an ocean is a good way to define a nearshore contract. But how close?

Tony Virdi, partner at outsourcing advisory firm Atos Consulting puts it at anywhere
within three and a half hours' flying time, meaning Canada, most European and Latin America destinations qualify. However, flight from New York to Mexico takes more than 5 hours, should it still be considered as a Nearshore?

In truth, nearshoring locations should sit along a spectrum of potential outsourcing sites. At one end sit the far offshore locations such as India and China, separated by both cultural and geographic distances while from other side will be onshore locations such as Ireland and some US cities.

Geographical factor however is not only one determining "nearshority" as there are
many other important aspects such as linguistic and cultural ties, common history,
similarity of education, directness of communication and visa relations.

All this factors should be carefully considered in order to determine the best location fit for an organization prior to start a comprehensive assessment of locations infrastructure, intellectual property and business protection, laws, regulations and labor potential.

Did you know?

As a part of our creative activities :) we're pleased to introduce encyclopedoical category "Did You Know?" together with #nearshorefacts hashtag on twitter to provide you with quick and notable facts surrounding nearshoring industry.

As a first shot we'd like to cite CEE IT Outsourcing Review 2010 Fact Collection.

First Fact:

In 2009, the number of IT specialists employed in companies providing IT outsourcing and software development services in the CEE region reached 95,000. Ukraine and Romania led statistics with 18,000 and 14,000 respectively

LinkedIn Discussion - Agile and Nearshore - two elements of formula to successful software development (IT Outsourcing)?

During the last years we see an astronomic adoption of Agile methodologies to software development process of organizations across industries. Latest Forrester Research of 1300 IT Professionals revealed that 35 percent of respondents stated that agile most closely reflects their development process.

Being unique in their specific approaches each of Agile methodologies shares the common idea of aligning programmers and business users more closely together to build the right product faster. This is especially important to IT outsourcing industry as usually there is a lack of communication between customer and service provider.

In this way Agile promotes more direct and face-to-face communication and collaboration between two teams with customer side engaged in the product building.

Yet this might be difficult to achieve in long-distance engagements, where far-travels, time-zone and cultural differences might hamper collaboration and coherence between the teams.

Solution?

Well some outsourcing practitioners say “one can perceive Nearshore and Agile as two core elements of a certain formula to effective software development.”

In this formula Agile is responsible for the rapid delivery of business value and smooth adoption to changing requirements through the better alignment between programmers and business users, while nearshore chemicals, namely proximity, cultural and business language constructs are actually ensure that alignment between the teams.

What is your insight? Is distance still matter in today's technology-enabled world? And what is your take on combining Agile + Nearshore as well as comparing Agile to traditional (non-iterative) methodologies?

Please share your insight on these questions here or in LinkedIn

The overview of the study prepared on this topic might be founded in our previous article "Agile and Nearshore - Formula for Successful Software Development".

Thanks!

“Agile and Nearshore - The Formula to Successful Software Development”

"It's time for software professionals to stop sitting on the fence where agile is concerned.

Forrester Report 2009

This is the quote from our new research “Agile and Nearshore - The Formula to Successful Software Development”, which is officially available here

We would like to draw a special attention to this work, as the aim of it is to give a broad overview of the Agile development methodologies, their practical appliance and successful combination with nearshore IT service delivery models.

The study analyzes the history of Agile development, discusses the main changes occurred in commercial software development sector over last years and presents a real-world case-studies of successful implementation of Agile methodologies in conjunction with Nearshore delivery approaches.

The study features successful implementations of Agile methodologies for software product companies “Borland”, large ICT multinationals “British Telecom” and professional ITO service providers “Levi9 Global Sourcing”. Especially the last one, as the company successfully crafted these two elements of successful software development into one robust approach!

Want to know more about the formula and real-world case-studies check out our report!

Coming soon......

Cio's embrace custom application development

As the recession eases, senior IT executives are shifting their focus from using
technology to reduce costs to using technology to drive revenue. At the same time,
improving customer service has become a pressing concern at the highest levels,
as companies are intent on maintaining relationships with profitable customers
and acquiring new ones. CIO magazine’s 2010 State of the CIO survey found that
managing customer relationships as a core function jumped to 34 percent from 18
percent the previous year.
CIOs are in an ideal position to help improve those relationships by implementing
IT solutions that can meet customers’ unique needs. This report focuses on how an
increasing number of organizations are using custom application development as a
means to enhance customer service with tailored solutions.
According to a poll conducted by IDG Research Services, nearly two-thirds of CIOs
and other senior executives surveyed listed improving customer satisfaction among
the top three factors driving the need for custom application development; they
also cited the need to differentiate their companies from competitors, and the
need to comply with regulations and industry mandates.

Austrian IT companies chose nearshore for outsourcing their software development

As a part of its Pan-European IT outsourcing research 2010, IT Sourcing Europe, a UK-located ITO research and advisory agency presented its findings of Austrian IT Outsourcing Software Development survey.

The survey aimed to explore the key trends and challenges among software development firms that outsource their software development areas to the 3rd party outsourcing providers.

In the period between September and October 2010 approximately 160 small, mid-sized and large companies across verticals in Austria were surveyed.

The survey results indicated that the number of nearshore software development outsourcers is double the number of offshore outsourcers (32% vs. 16%). For the time frames the study differentiate as offshore at least 2 time zones away from the home country, while nearshore maximum 2 time zones away or within Austria.

These figures supported by the top outsourcing drivers of the choice of the outsourcing destination in Austria which are: geographical and cultural proximity (25%), available IT resource pool (19%) and low costs (18%);

Among the main outsourcing goals polled companies indicated the following: to reduce operating costs (30% of respondents); to get access to more qualified resources and skills which are hard to find within Austria (24% of companies polled) and to respond to pressures from investors and/or executive management to cut down software development budgets (22% of participants);

The majority of the Austrian companies surveyed (28%) outsource 40% to 59% of their entire software development function, while only 2% of companies outsource less than 10% and 19% of companies outsource 90% to 100% of their software development volume.

The most outsourced area of expertise in Austria is Web 2.0 (Microsoft ASP.NET, Java, EpiServer, open source etc) – 42% of companies polled, followed by mobile development (34%). The least outsourced area of expertise is embedded development (only 3% of companies surveyed).

IT Outsourcing Market in Central and Eastern Europe: Trends, Figures, Predictions

Nearshore Blog analyses main trends surrounding IT Outsourcing market in CEE region

Contents

Introduction

About CEE Review

Trends Confirmed!

• Trend 1. Shortage of IT specialists in developed economies
• Trend 2. Growing IT workforce - Romania and Ukraine leaders
• Trend 3. CEE IT Outsourcing Market Growth 4
• Trend 4. More market players despite crisis 4
• Trend 5. The EU - US outsourcing spending race will continue
• Trend 6. Nearshoring strengthen its positions at global aren
• Summary

Introduction

The Nearshore Blog in conjunction with Levi9 Global Sourcing are pleased to present an analysis of “the Central and Eastern European IT Outsourcing Review 2010” annual research conducted by CEEOA with the aim to study main trends, figures and predictions and update the perspective on the potential of the CEE region for provision of nearshore IT outsourcing for the Western European countries and for offshore IT outsourcing for the US market.

The CEE IT Outsourcing Review is the research work that became one of the most demanded analytical source about the state of IT outsourcing market in CEE region within such a short period of time celebrates its third edition this year.

Being an information partner to CEEOA traditionally the Nearshore Blog team conducts its overview of the research and provides the perspective on the main trends and predictions surrounding IT outsourcing market in CEE region.

From this partnership it became a good tradition to exchange the views and predictions for the time to come and we are pleased to say that historically our views are in line, therefore our work represents a complementing rather than debating character.

This year the study appeared exactly the same way, so we’re pleased to present our overview of “Central and Eastern IT Outsourcing Review 2010”.

About CEE Review

Central and Eastern European Outsourcing Association (CEEOA), an information partner of the Nearshore Blog has been conducted the research project “CEE IT Outsourcing Review” annually since 2007. The previous issues of the report have been accessed by more than 15,000 people annually and were referred by industry research heavyweights. KPMG referenced the report in its “Exploring Global Frontiers” study.

This year “CEE IT Outsourcing Review 2010” represents a unique combination of proven research methodology, meaningful expert view and representative online surveying. By encompassing 246 companies operating in outsourcing service market from 16 countries alongside with 25 representatives of national outsourcing associations and impressive panel of leading industry experts the study provides a comprehensive yet accurate overview of the state of IT outsourcing industry in the CEE region.

Trends Confirmed

Being an information partner to CEEOA, the Nearshore Blog team was particularly pleased to learn that many of the predictions and trends we indicated previously on Blog’s pages are in line with the study data and leading industry’s experts forecasts.

Several independent experts and outsourcing activists kindly responded to the survey questions and provided their insights with regards to major trends and currents in IT outsourcing industry worldwide and in the CEE region specifically. Among the expert panel there are:

Phil Fersht, Founder and CEO of Horses for Sources outsourcing advisory firm,
Christoph Prieler: Offshoring Executive, Managemen Consultant, University lecturer
Magdalena Szarafin - Chairman of IFRS Practice Committee at German CPA Society
Boris Kontsevoi - Founder and President of Intetics Co.

Trend 1. Shortage of IT specialists in developed economies

The publication of the “CEE IT Outsourcing Review 2010” coincided with the series of studies “Nearshore as a solution to EU labor shortage” conducted by Nearshore blog this month. Similarly to our predictions the study “CEE IT Outsourcing Review 2010” together with the expert panel paid a great deal of attention to the growing shortage of IT specialists in the developed economies which might develop into a dangerous brake on post-recession recovery and innovation in developing economies.

One of the study experts Franco Dal Molin indicated:

In a number of West European economies there is – despite the crisis – still a significant shortage of skilled IT specialists. Finding developers and hiring them fast enough becomes often more crucial than just lowering costs. Finally, in times of uncertainty and volatility, outsourcing is looked at as an ideal way to become more flexible and/or scalable.

The survey trends summary reflected that increase in skilled specialists shortage is among TOP 10 region’s main trends with 32 per cent of survey respondents indicated it as the major trend.


Trend 2. Growing IT workforce - Romania and Ukraine leaders

From other side the study indicates a continuing increase in the number of employed specialists
working in the Central and Eastern European IT services market throughout 2009. The higher education that formed the base of educational systems in former Soviet Union countries experiences a further improvement of their already strong focus on fundamental engineering education.

This is one of the most important factors contributing to the preparation of qualified specialists in the industry. The presence of strong science schools and further education system conversion, fueled the rapid increase in the number of companies providing IT outsourcing and software development services in the CEE region.

In 2009, the number of IT specialists employed in companies providing IT outsourcing and software development services in the CEE region reached 95,000. Romania and Ukraine led in growth in the number of IT specialists with 12.33 and 9.51 per cent growth.

Trend 3. CEE IT Outsourcing Market Growth

The most prevalent trend in 2009 was the increase in the volume of IT outsourcing services
provided. The volume of work exported in 2009 indicated a noticeable growth in comparison to
the findings of the ‘CEE IT Outsourcing Review 2008’.

The general volume of IT outsourcing and custom software development services exported from
the CEE region reached USD $4 billion in 2009. The largest growth took place in Romania and
Ukraine. These two leaders invariably show high rates of market growth and leave other countries far behind in terms of the volume of IT outsourcing services exported. Hungary, Poland, Belarus, Czech Republic and Bulgaria close out the list of leaders.

Outsourcing services providers are quite optimistic about their development prospects for 2010. Respondents from all countries forecast 10%-30% growth depending on specific circumstances at work within each individual country.

According to the forecasts of those surveyed, the volume of IT outsourcing and custom software development services exported from the CEE region will reach about USD $5 billion in 2010.

Trend 4. More market players despite crisis

Rather interesting trend might be observed from the study statistics on the number of companies within the region. As reasonably one might have thought about decrease in the number of companies throughout economic meltdown the actual figures are quite opposite.

Not only no significant bankruptcies, closures or IT outsourcing company failures were reported during 2008-2009, in fact 20% of responding companies were established during that period. These were mainly small-sized companies established in times of negligible redundancy at the
end of 2008 through the beginning of 2009. Many of these companies also were the result of
business restructuring when service companies shifted to independent organizations.


Trend 5. The EU - US outsourcing spending race will continue

Last year TPI’s sweeping report marked that Europe outran US in terms of IT outsorcing spending. The report indicated that EU businesses signed a record number of IT outsourcing contracts in 2009 and beat US in terms of Total Contract Value (TCV). By the end of the third quarter of 2009, G2000 companies headquartered in Europe were spending more on outsourcing deals overall than G2000 firms with headquarters in the US and Canada.

The study surveyed the expert panel on the further dynamics in this competition. While most experts agree on the difference in economic cycles between EU and US being the main driving force in this competition, some respondents indicated the gap in IT and telecom between US and EU which can be a motive for European companies to spend more to make up the distance missing.

In a further perspective experts associated dynamic with the size of economies. Since USA and Canadian economies is just about 7% bigger than EU economy, the outsourcing spending of both regions, especially long-term, to smooth out saturation effects, should be about the same.

Trend 6. Nearshoring strengthen its positions at global arena

The Key Conclusions chapter within the study signals that software development and IT outsourcing services provider industry in Central and Eastern Europe successfully overcame all of the challenges of the recession of 2008 and resumed its previous trajectory of growth.

The main drivers behind this dynamic experts named the numbers of long-term contracts and big clients who transferred their projects on software development to their CEE outsourcing partners.

The expert panel came to agreement that such a trend closely associates with the growing notion about outsourcing as a people’s business where geographical, cultural and language proximity are of importance for buyers. Sourcing buyers survey shows that customers from Western Europe are likely to make business with partners from Central and Eastern Europe as their locations are available within 2-3 hours, their business partners speak their languages. They are high-qualified тв the prices are still lower than those in Western Europe.

The panel indicated a growing significance of nearshoring at the global outsourcing arena. As new stratums of businesses, especially mid-size businesses, are coming to outsourcing market, they feel more comfortable to work with nearshore providers.

Additionally, similar time zones and physical proximity promote more efficient operations. A noteworthy and interesting side effect of this is acquisition of Latin American and East European providers by Indian companies.

Summary

In 2009, the software development and IT outsourcing services provider industry in Central and Eastern Europe successfully overcame all of the challenges of the recession of 2008 and resumed its previous trajectory of growth.

The industry used the recession time to reorganize internal business processes within companies, to optimize costs, and to further develop more qualified operational business management processes

Such rapid recovery by the industry, and resumption of its previous growth rates, are testament to the strength and solid prospects of the business model used by Eastern European outsourcing companies in their strategic development.

According to the forecasts of those surveyed, the volume of IT outsourcing and custom software
development services exported from the CEE region will reach about USD $5 billion in 2010.

The material prepared by Nearshore Blog in conjunction with Levi9 Global Sourcing based on informational sources of CEEOA (http://ceeoa.org).

Levi9 Company Profile might be found on the pages of the study within the Partners Section. The study can be accessed on (http://itonews.eu)

Keeping up with Nearshore expansion - regional sub-groups to our group in LinkedIn

Dear Readers,


As we've been written in our previous posts "it's time to Nearshore", it's time to explore the unique opportunities provided by the optimal outsourcing model which has become the result of years of researching and practicing by businesses and practitioners from around the globe.

Although Nearshoring has been mainly associated with the European continent we saw an astronomical emergence of the practice on the lands of Western Hemisphere. Where escalating uncertainties and regional threats of the main offshore destination combined with increased focus on vulnerability management and demand to keep data close have changed delivery preferences of US businesses towards nearshore and sameshore options.

Nowadays, Nearshoring is a main outsourcing buzzword in Latin America, the region considered to be the main nearshoring destination for US. Recently the region held a prestige ranking contest "The Nearshore Americas Power 50" naming the most influential Nearshore figures from 16 countries from Americas region.

All this confirms the expansion of the Nearshoring across the world borders which, we personally think is rather reasonable :)

That said, we'd like to introduce the regions sub-groups in our sister LinkedIn group "Nearshore Professionals". You're very welcome to join!

The shortage of IT specialists in EU - predictions, solutions, consequences.

In the last decade, an increasing demand for high skilled hi-tech workers and engineers could be observed in most EU leading economies. From this point the ability of national education system to supply businesses with qualified specialists seen as crucial in driving post-recession growth and innovation.

Paradoxically enough, but the growing importance of IT coincide with rather different trend in education where popularity of hi-tech trades in falling swiftly. Result local institutes and universities do not produce enough qualified graduates while at the same time aging generation of old-school engineers comes to retirement.

What might be seen as a solution to the growing shortage of specialists, namely immigration and internalization of labour stumbles on the growing multiculturalism and immigration issues in most of Europe.

Based on this we conducted series of studies aimed to identify the current state of things on EU labor markets, main trends and solutions which can pick up the pluck on the growing shortage of hi-tech specialists.

The strategy of choice appeared as Nearshoring - as it provides two-way benefits to EU businesses - from one side enabling to access much-needed resources, while helping to explore and expand to developing neighbouring markets using local expertise of nearshore providers.

To bring this topic up and find out opinion of our readers and members of sister Nearshore Professionals Group on Linkedin we started series of discussions and pools (on the right side of this blog) where you can express your take on this problem, its solution and future trends.

Nearshore Study Part II. Netherlands - European leader in IT innovation

The Nearshore Blog is pleased to present the second part of the study series “Nearshoring to Eastern Europe as solution to EU labor shortage”.

The study is conducted by the Nearshoring Blog in conjunction with Levi9 Global Sourcing to analyze the issues of the EU leading economies associated with the lack of qualified IT specialists as well as existing labor restrictions and multicultural problems that slowdown countries innovation and post-recession recovery.

The issue of this series coincides with the first international report on shortage of IT specialists published by UNESCO in October 2010. The report features escalating demand for engineering talent across the EU as well as indicates serious shortage of engineers in most sectors.

The Nearshore study. Part II Netherlands - European leader in IT innovation

The second part of study concentrates on the Netherlands. The Dutch economy is among leaders in innovative activity and highly relies on the hi-tech sector. From this point the ability of Dutch economy to supply businesses with highly-qualified resources seen as a crucial prerequisite for post-recession recovery and further economic growth.

With this aspect in mind we decided to concentrate the second part of our study on the potential of Dutch IT service market, its needs in terms of supply of highly-qualified IT specialists and current labor regulations and multiculturalism issues preventing Dutch businesses from immigration of foreign work and as a result slowdown in growth and post-recession recovery.

Please note: The following chapters present the first part of the study content providing details of the analysis of Dutch IT service market as well as current trends and issues on the labor market, and its ability to meet the demand for hi-tech specialists.

The full paper can be accessed by following this link or in “researches” section of our blog.


Major trend

In the last decade, an increasing demand for high skilled hi-tech workers and engineers could be observed in most the EU leading economies. This development has been associated with the development of increasingly integrated labour markets and the appearance of skill-biased technological change which is often ascribed to the acceleration of technological developments in the information and communication technology (ICT).

In the first chapter of this series we examined the current situation on IT labor market in Germany - the EU largest economy and world’s leading exporter along with its effect on further economic growth.

The study confirmed that German economy and labor market experience rather opposite trends:

• from one side there is a booming demand for German goods and services, particularly from Asia, which result in growing trade surplus and customer confidence
• from another part Germany experiencing a real labor crisis. Market surveys indicate that the country is in desperate need for skilled specialists and engineers with overall 400 000 positions unfulfilled only in IT

The survey conducted for famous German IT sector magazine revealed that a high percentage of 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.

Businesses cannot fill open jobs with suitable candidates and 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.

Data on similar trends has been observed in other EU developed economies such as France, UK and the Netherlands. Especially the latter, as the Netherlands is one of European leaders in technological innovation and world’s largest exporter of IT services and chip manufacturing.

Netherlands - European leader in IT innovation

The Netherlands can fairly be considered as a hi-tech engine of the European Union. The following facts just prove this statement:

• Some 70 percent of all innovation in the Netherlands is IT-related. The country is a world’s leader in ICT patent applications with more than a half of all patents submitted by Dutch companies and organizations are related to hi-tech sector.
• The country is a world’s fourth-largest exporter of IT related services with software sector contributes annually 17.3 billion euros to the Dutch economy
• Netherlands is a world’s leader in embedded systems and a world leader in chip manufacturing equipment
• The country is one of the most 'wired' countries in the world, with broadband network is the second-highest in Europe and over 90% of Dutch households have a computer

Apart from all this the country boasts of the region’s most advanced infrastructure and hosts a number of high-capacity networks used for R&D purposes, thereby providing platforms for global software developers, hardware companies and IT consultancies.

Shift to Service Model

Such progress in information technology along with increasing role in Europe’s business and scientific areas contributed to the further shift of Dutch economy from the production to the service based.

IT services became more tradable and Dutch IT sector achieved a record growth of 4.2 percent in 2007, exceeding GDP and average European IT industry growth of 2.9 percent, with the software sub-sector showing growth of 9.5 percent. IT market in the Netherlands experienced a fast growth over last decade developing in a 30 billion market already in 2007.

Demand for hi-tech specialists

Rapid technological advances and increasing use of information and communications technology (ICT) have increased demand for skilled labour dramatically. Before the crisis, Dutch IT industry employed over 255,000 people; or 3.5 percent of the total workforce.

Demand for information technology workers in the Dutch services sector continued to grow despite the crisis. The industry labor market surveys showed that IT specialists have become a hot property in the Netherlands because too few young people entered the field over the last decade and national educational system cannot meet the demand for hi-tech specialists.

As it was indicated in the first part of the study the Netherlands follows similar to Germany trend where hi-tech and engineering trades falling in popularity. Contrary to

the country’s growing role in Europe’s IT innovation young population in the Netherlands is not rushing to get IT education.

“The decline in engineering’s popularity among students is apparently due to a perception that the subject is boring and hard work, and engineering has a negative environmental impact, and may be seen as part of the problem rather than the solution,” explains Tony Marjoram, the Report Magazine editor.

Despite the high salaries in the sector the image of hi-tech professions still stays at the relatively to other sectors low rank in the Netherlands. As result local institutes and universities do not produce enough qualified graduates while at the same time aging generation of old-school engineers comes to retirement.

With overall shortage of hi-tech specialists and engineers comes to 1.2 million in the EU - based on data provided by European Round Table of Industrialists - the Netherlands together with Germany, France and UK responsible for a lion share of that shortage.

Please note: The previous chapters presented only the first part of the study content. The full paper can be accessed by following this link or in “researches” section of our blog.

Nearshore Study Part II. Netherlands - EU leader in IT innovation

Dear Readers,


The Nearshore Blog team is extremely pleased to announce about the completion of the second part of our "Nearshoring to Eastern Europe as a solution to the EU labor shortage" studies series. The work is almost finished, and the study is in the pipeline :)

Hot on the heels of welcoming reception of the first part of the studies "Germany - EU largest economy needs 400,000 high-tech specialists" we concentrated our investigative efforts on analyzing another European leader in IT sphere - the Netherlands yet native land for Nearshore blog!

The Dutch economy is among world leaders in innovative activity and highly relies on the hi-tech sector. From this point the ability of Dutch economy to supply businesses with highly-qualified resources seen as a crucial prerequisite for post-recession recovery and further economic growth.


With this in mind we dedicated the second part of our study on the potential of Dutch IT service market, its needs in terms of supply of highly-qualified IT specialists and current labor regulations and multiculturalism issues preventing Dutch businesses from immigration of foreign work and as a result possible slowdown in growth and post-recession recovery.

As a solution to the growing shortage of IT talent the study considers nearshore outsourcing and staff augmentation services from Eastern Europe.


The study paper is expected to be accessible within the weeks and Nearshore Blog is thankful for all your support and help!

Lineke Sneller CIO of the Year 2010

Lineke Sneller, CIO van Tele2, heeft de CIO of the Year Award van 2010 gewonnen. Een zeskoppige jury, onder voorzitterschap van Bernhard van Oranje (founder Levi9), heeft haar gekozen als opvolger van Arjen Dorland, VP en CIO van de Downstream-organisatie binnen Shell. De bekendmaking vond plaats tijdens de zesde CIO Day in Noordwijkerhout.

It's Time to Nearshore - Letter from Authors

First of all, it's our greatest pleasure to see an increasing interest in nearshoring from business and academic communities across the world. It became apparent that Nearshore community is growing at a fast pace and more people became interested in nearshoring day by day.

We've seen a growing membership in our Nearshore Group on Linkedin as well as growing demand for information from business and academic representatives across the world, who are willing to raise the standard of management knowledge in the field and explore nearshoring benefits.

It also became clear that our active position in investigating nearshoring at both corporate and governmental levels became critical into providing a specialists means on what works and what does not, so helping businesses to make the right choice for their business engagement models.

Today, it is crucial as never, as European businesses are under the growing pressure of labor shortage from one side, and escalating discontent with traditional offshore model from another. Businesses in largest EU states such as Germany and France show signs of reluctance towards globalization of their sourcing strategies, while there is a growing labor gap with shortage of 400 000 IT specialists and engineers only in Germany.

A survey conducted for the leading German magazine revealed that a high percentage of the German 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.

This lack of labour is developing into a dangerous brake on growth, particularly for small and medium-sized businesses and at this point it can only be reversed by companies looking for staff augmentation services abroad.

Serious immigration problems, strict labour policies and tax regulation together with the low-popularity of hi-tech specialities in countries such Germany, France, Netherlands make filling the gap for the account of internal training or immigration programs highly unrealistic.

From other side, outsourcing and, especially nearshoring proved to be a viable alternative to complement existing resources with highly-qualified yet less expensive workforce.

Being not only a cost-reduction mechanism, as with its closeness and cultural advantages nearshoring opens up perfect possibilities for various outsourcing models and approaches, from multi-sourcing to captive centers, it is also a prefect entering strategy for Western European companies to advance to economically growing Eastern European market, as the partnership with local providers not only provides access to less expensive and developed labor market and skills, but also enhance local market knowledge and expertise.


Conclusion

With this crucial aspects in mind we conducted a series of studies to discuss the current issues of the EU largest economies associated with the lack of qualified hi-tech specialists and labor restrictions.

We also want to update the perspective of Eastern European countries for providing nearshore outsourcing and staff augmentation services, and their possibilities to fill the gap in increasing labor shortage inside the European Union.

The first part of the study can be accessed here or in “Publications” section.

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.

Polish delegation presented country as an attractive outsourcing destination in New York

On October 12th representatives from Poland, Silesia region stayed in New York to promote Poland and the Silesian region in southern Poland. The Silesian delegation and the representatives of the Polish Consulate in New York were working together to convince US businesses and potential investors to consider Poland a valuable business partner.

The delegation included Mateusz Skowroński, Manager of Investor Assistance Centre. Mateusz, was assisted by Michał Urbankowski, Consul at the Trade and Investment Section of the Consulate General of Poland in New York and Wanda Lopuch PhD, President of Global Sourcing Council, who organized the visit.

The event was broadcast over the internet to 12 000 recipients around the world, and was covered by New York Times. Mateusz Skowroński, member of the Katowice City Hall, presented the offer of Poland's Silesian region and promoted Katowice as a reliable partner in business. Mariusz Tomaka of DisplayLink and a member of the US-Polish Trade Council was interviewed and given the opportunity to introduce US businesses to take a closer look at Poland and Silesia as a potential service provider.

Business Process Outsourcing (BPO) has been growing steadily in Poland for the last couple of years and we anticipate this trend to accelerate in the future. At this time Poland, still considered a market with untapped potential, was a home to approximately 370 BPO and Shared Service Centers operating and expanding around the entire country. It is estimated that by the end of this year- 2010 about 60 000-70 000 people will be employed in this sector.

The Tech Recovery of 2010 Is Underway

As it was predicted by leading research agencies 2-3Q of 2010 continued a strong tech recovery in US and Europe. In its latest IT market outlook Q2 leading industry researcher Forrester indicates the growth of global IT market at the 7.8% mark.

Software and computer equipment awill be the strongest categories, with PCs, peripherals, and storage equipment leading the computer category, and operating system software and applications setting the pace for software.

As a factors for such growth experts associate a better-than-expected performance in communications industry and overall good performance of the economies in US and major European countries. Globally, the tech market measured in US dollars will grow by 7%, with the somewhat weaker outlook for the US tech market offsetting slightly better performance in Europe and strong growth in Latin America, the Middle East, Africa, and Asia/Pacific.

As for forecast for 2011 experts caution with economic indicators. Unstable US currency, Greek debt crisis and fears of one spreading to Portugal, Spain, Italy might influence global economy. Andrew Bartel from Forrester research sees global and US economies will fall between extremes of strong growth or recession, growing weakly but not slipping back into recession.

In general forecast for IT market in 2011 is set on 7.4% mark. Data source - Forrester US And Global IT Market Outlook Q3.

Ukraine to get action plan for visa-free regime with European Union

Ukraine expects to receive an action plan on the European Union's introduction of a visa-free regime for Ukrainian citizens at the Ukraine-EU summit in Brussels on Nov. 22, the press service of the Ukrainian Foreign Affairs Ministry has reported.

"Kyiv is expecting to receive an action plan on the European Union's introduction of a visa-free regime for Ukrainian citizens at the next Ukraine-EU summit, which will be held in Brussels in November," Pavlo Klimkin, the deputy foreign minister of Ukraine, said at a meeting with the ambassadors of EU member states on Monday,

Klimkin briefed the EU member state ambassadors on the results of the 13th round of talks between Ukraine and the EU regarding the across-the-board and deepened free trade zone, and pointed to the main priorities of the talks between Ukraine and the EU.

The EU member state representatives were briefed in detail on the key results of the visit of Prime Minister of Ukraine Mykola Azarov to Brussels on Oct. 13-14 and the state of bilateral relations between Ukraine and the EU on the eve of the Ukraine-EU summit in Brussels on Nov. 22.