Eastern Europe - a fast growing offshore location for outsourcing
By Kevin Duffy
Summer 2005
Given all the hype surrounding India as the offshore location of choice, it may surprise some to learn that Eastern Europe is experiencing huge growth in this sector. Poland, the Czech Republic and Hungary, in particular, have been quick to capitalise on the trend, with Poland being the fastest growing offshore location for IT outsourcing over the last three years (source: Frost & Sullivan).
Of course India still leads the way, with 25 times more export focused IT professionals than Poland, the Czech Republic and Hungary combined. Whilst these countries may be starting to close the gap, there is clearly a long way to go before they can claim to be operating on a similar scale to the heavyweights.
In January 2005, the Economist Intelligence Unit published the results of its latest analysis of the ‘attractiveness’ of various countries as offshoring destinations. Each country was scored against nine criteria commonly used by companies when deciding where to offshore. Eastern Europe scored very strongly with the Czech Republic ranking third after India and China, whilst Poland was fifth and Hungary was close behind in eighth place.
Why Eastern Europe?
There are a number of factors that make Eastern Europe an attractive prospect and give it the potential to become a leading offshore destination:
- highly educated workforce
- low staff costs
- strong foreign direct investment
- excellent language skills
- cultural and geographical factors.
Which companies are already in Eastern Europe?
Each of the global IT service providers have established operations in Eastern Europe. Initially the idea was to enable business growth within these new and emerging local markets, but demand has been lower than expected, and as a consequence the focus has shifted more towards the provision of offshored services to companies located in higher cost areas. What started out largely as IT services has quickly expanded to cover a wide range of business processes, and there may now be as many as 350 call centres, with over 9,000 staff in the Czech Republic and similar numbers in Hungary.
Amongst the big names are Accenture, who opened their Business Process Outsourcing (BPO) delivery centre in Prague in 2001 and now employ more than 1,000 staff providing a range of services including finance and accounting, procurement and supply chain management, customer care and processing. Hewlett Packard are another company keen to invest in Eastern Europe, who on the 15 April 2005 signed an agreement with the Polish government to create a finance and accounting centre in Wroclaw that will employ over 1,000 staff.
Last year Progeon, the BPO subsidiary of Infosys, established its new centre in Brno and is already serving two very large US clients. More than 90% of their staff in Brno have a university degree, and all possess excellent language skills, speaking English and at least one other language besides Czech.
So should we all consider Eastern Europe?
As with any decision, there are many questions that should be asked before embarking on an offshoring programme. Some organisations begin by considering ‘What?’ and ‘Where?’. We have seen above all that aspects of operations could be offshored, and Eastern Europe is clearly a location that should now be considered, alongside the more traditional destinations such as India and China.
A more important question, and perhaps the one that organisations should consider first, is ‘Why Offshore?’ Reasons such as cost reduction, or emulating competitors, are insufficient. Offshoring must only be considered as an integral part of a well structured and all encompassing business strategy. This will help determine which parts of your organisation should be offshored, and the best approach to take. A number of alternative models exist, including establishing your own shared service centre, outsourcing to a third party, build-operate-transfer or a joint venture.
The Winchester White Proposition
Choosing a suitable model, and ensuring that it is well implemented and managed, will guarantee delivery of planned savings without damaging the corporate brand or negatively impacting the customer experience. Winchester White helps client organisations do just that. We guide and direct our clients through the many stages of outsourcing, from developing the initial strategy, through to the selection of an appropriate supplier or partner and delivery of the required service. We have recently been engaged by a number of organisations to help with service reviews and contract renegotiations, which clearly indicates that outsourcing is a complex matter that companies don’t always get right first time. Moreover it also highlights the need for a degree of flexibility in order to accommodate business change.