Central & Eastern European IT Outsourcing – 2011 Market Overview

IT Outsourcing to Eastern and Central Europe is on the rise and the market comprises of sixteen countries Ukraine, Romania, Hungary, Poland, Czech Republic, Belarus, Bulgaria, Estonia, Serbia, Slovakia, Lithuania, Croatia, Moldova, Latvia, Slovenia and Albania. This market has seen good YoY growth since 2009 (31%) and 2010 (24%). Growth was very low in 2008 (2%) due to the global financial crisis. Total revenues were close to US$ 5Bn in 2010. Eastern European outsourcing handles tasks that are more complex and knowledge-intensive; IT projects like software engineering and R&D which require expertise and innovation. Young and talented IT professionals in this region are low cost but handle low-level as well as high level projects which include developing software for financial institutions to developing sensitive software for defense projects.

Education and Scientific Culture

Erstwhile Soviet Union has to be credited for scientific education that most of the countries in this region have. Ukraine, Belarus that were part of Soviet union and the countries like Poland, Hungary, Romania and most of the other sixteen nations share borders with communist Soviet Union that needed people with technology and engineering brain for the high technology oriented industries like space, heavy engineering and defense. The need led to an productive education system with large number of universities with big scientific faculties have been set up for quality technical education and the popularity of engineering and scientific professions have spread throughout the occupied and allied Eastern countries.

Central and Eastern European region has the highest concentration of scientists, mathematicians and highly qualified technical engineers. Many of them migrated to US and Europe, during and after the collapse of Soviet Union and were able to integrate themselves in those countries and rapidly grew in the organizations and attained key positions. Some of them even became highly acclaimed and successful entrepreneurs in the IT Industry. The scientific culture and educational system still prevail to this day and companies have realized this potential and have been utilizing it successfully for the growth of their businesses. Not only the high skilled processes but also the low skilled processes such as BPO processes like payroll, Finance and Accounting, HR etc are also being outsourced to the providers in this region. BPO industry is fast growing.

Key Country Analysis:

Ukraine has seen good 25-35% growth in the past two years and it is expected reach US$ 1Bn in revenues in 2011. Software development, software testing and application maintenance are major services that are offered.  With favourable tax regime and more than 20,000 professionals in the industry, Ukraine is expected to keep its market dominance in the region. English language proficiency is an area of concern. Highly qualified and technically skilled professionals are the key for Ukraine outsourcing success. AT Kearney 2011 Global Services Location Index (GSLI) rank 38.

Romania is the second dominant player in the region which is a well known destination for outsourcing like IT services and support, contact centers and back-office support. Around 100,000 professionals are employed in this industry with major Outsourcing vendors like, Genpact, Wipro, etc and MNC players like HP, Oracle etc have set up operations here. Even without much support from the government, Romania with its multi lingual skilled population is attracting lot of outsourcing business. Infrastructure in Romania is also good for the industry. AT Kearney GSLI 2011 rank 25.

In the Eastern Europe region, Hungary has a 25% share for Outsourcing and sector is relatively well developed. Many international players like Morgan Stanley, GE, Nokia etc (also Indian outsourcing players like TCS, Genpact) have local delivery capabilities built. Application-related outsourcing, payroll & HR management, accounting and billing are the key processes outsourced here. Budapest is known as the most desirable outsourcing destination in the whole region. Hungary has seen steady growth (27%-33%) in revenue terms in past two years. AT Kearney GSLI 2011 rank 31.

Poland is a high skilled destination for IT outsourcing. Polish ITO and BPO providers are capable of serving the wide variety of services that are in huge demand. Poland is among the top 10 preferred Outsourcing Nations due to highly-qualified IT community and world-class education system. Krakow and Wroclaw are the latest preferred outsourcing destinations developed by Poland government and the government provides incentives for this sector. Poland has seen good growth (30%) in past two years. Multi lingual capability is an advantage. AT Kearney GSLI 2011 rank 24.

Czech Republic has seen normal growth (15%-20%) in the past two years. Apart from the low cost and proximity advantages the country also has highly skilled professionals and good education system which is helping it in becoming a dominant player in the Knowledge process Outsourcing Industry.  Prague has been a well know outsourcing destination for the past ten years.  Many MNC like IBM, Accenture, and Microsoft have all set up operations in Czech Republic. AT Kearney GSLI 2011 rank 35.

Belarus outsourcing industry survives due to the availability of low cost resources and support from the government policy –“IT Country”. Other benefits are large local pool of talent with high quality of education, geographical and cultural proximity to Europe. The presence of bigger outsourcing vendors focusing on Germany, here is a testimony of the fact of presence of highly skilled labor force. The market has grown around 24-28% in past two years.

Bulgaria has good potential in outsourcing industry and is expected to grow by about 50% in 2011. Analytical skills, language skills, cultural and geographic proximity, low tax rates, are the basis of competitiveness. BPO followed by ITO is the predominant form of outsourcing. High knowledge and competence are critical success factors. Majority of the outsourced work come from the UK, US and Germany. MNC like Microsoft, CSC, SAP, Boeing, Ford, Nortel etc have centers in Bulgaria. AT Kearney GSLI 2011 rank 17.

Estonia has pool of highly educated, tech-savvy workers; a modern telecommunications infrastructure; and low cost of operations that has attracted companies like eBay. Since it gained independence, Estonia has invested significant resources in improving its technology infrastructure. Tallinn is the major outsourcing destination in the country. Work is mostly outsourced from the Nordic region, Russia, Poland and Germany. AT Kearney GSLI 2011 rank 11.

Serbia geographically proximity and cost effective are key factors. Intellectual capital, attractive labor costs, high fluency in English and strong engineering education are other factors. Government offers a range of incentives aimed at enhancing the country’s competitiveness as an investment location. It has been a good two years for Serbia as the outsourcing industry performed well and has moved up in the region.

Slovakia outsourcing industry is supported by good quality infrastructure like telecom, power and real estate. Multi national players like Dell, HP, Accenture, and IBM have operations in this country. Technical support centers, software development & maintenance, BPO, and other services are provided. Bratislava and Kosice are the outsourcing centers in the country. AT Kearney GSLI 2011 rank 40.

Lithuania Outsourcing industry is ranked 14^th globally according to A.T. Kearney GSLI 2011. Lithuania has the largest IT industry among the Baltic nations – nearly 75 percent of all Baltic IT companies are located in Lithuania. BPO, CRM and call centers provide services in English, German, Russian, Polish and Scandinavian languages for the entire European market. Geographical proximity to clients, a quality infrastructure, and an educated workforce are the primary drivers.

Croatia is a country with good talent and growth opportunity. International companies such as Microsoft, Ericsson, Siemens, and IBM have operations in Croatia. Outsourcing services such as software consultancy, custom application development, consultancy, customization services and system integration services are offered here. Zagreb is the destination for outsourcing. Tax incentives are provided by the government.

Moldova has a good pool of well educated, highly skilled, multilingual professionals, geographic proximity, cultural affinity and compatibility with Europe. Companies like Adobe, Endava, Pentalog, Cedacry, and Allied Testing have centers in the country. Services that are offered here are Financial and accounting Outsourcing, QA and testing and BPO. Government provides tax exemptions.

Latvia's IT capabilities already gained some recognition as the IT BPO sector is not much popular. But there is a potential for growth and the government is investing on improving the scenario by providing tax incentives. AT Kearney GSLI 2011 rank 13.

Smaller nations in this region are slowly increasing their share in the outsourcing industry in this region. These nations with smaller populations and good scientific and engineering education system due to the erstwhile Soviet Union influence are producing good local talent. These small countries that broke away from Soviet Union and that gained their independence in the early 1990 are establishing themselves and rebuilding the nation by overcoming  the political and infrastructure hurdles. Some of the nations like Serbia are recovering from civil war and rebuilding their nation and Outsourcing industry will help them get revenues, provide jobs to the citizens and showcase themselves as technology oriented and highly skilled nations.

Growth story continues

Central and Easter European outsourcing is expected to grow at a healthy rate in the next few years. Traditional Indian Outsourcing firms that dominate the Global Outsourcing Industry have built up significant capabilities in this region by setting up their own operations and acquiring firms in this region. Good scientific and engineering education, multi lingual capabilities, local talent pool at low cost is going to fuel the outsourcing market in this region. Governments across this region have announced economic incentives, favorable economic policies and developed the education system by investing in monetary and human resources are a major initiative for growth. Innovation, R&D and high end technology outsourcing along with BPO processes like FAO, HRO, etc are also being outsourced by major Multi National Companies to this region and profit from the low cost and high quality services from here.

Countries in this region are also forming Industry association in the lines of NASSCOM in India who will be doing the necessary lobbying and showcase the region in the outsourcing industry. Near shoring is another trend that is fueling growth as the region has geographical proximity to European Nations, similar time-zones and cultural affinity. Language capability is critical as India and China do not have the European language capability and this region can take advantage by producing more talented professionals with specific language ability that can join the outsourcing industry. Most of the dominant Industry players in IT, IT Outsourcing, Business process Outsourcing, Manufacturing, Engineering and Automobile etc are setting up operation centers and also outsourcing to the regional outsourcing vendors to benefit from the low cost and highly qualified and talented professionals. 

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Source: CEEOA Outsourcing Review