Eastern Europe to Dominate the IT / ICT Outsourcing Space

Eastern Europe, already a popular and trusted nearshore location for continental Europe outsourced functions, is sweepingly ramping up as a hotspot for global players luring more and more software outsourcing contracts. Just consider the latest activity in the region: Wipro opened its development center in Budapest (in December 2010) and chemical producer Celenase has recently contracted IBM to run its financial shared services center in Hungary.

So what are the driving forces that make the Eastern European region so attractive? A shift in economic patterns, rise in tertiary occupations, improved FDI and government initiatives (lowered tax rates) to promote trade, and improvement of national fiscals are the underlying factors for increased ICT and are the major drivers for IT services and software development. Eastern Europe also ranks high in terms of work ethics and cultural sensitivity, adding to the region’s attractiveness as a base for outsourced activity.

And of course not to forget about the cost advantage. According to the industry experts, the cost advantage offered by Central and Eastern European firms to nearshore and offshore buyers is comparable with that offered by China.

Summing up, it is now highly likely that Eastern Europe will move out from being an ‘emerging destination’ to a ‘key destination’ for IT outsourcing activity. The region is expected to experience a new surge of demand from Western Europe and at the same time gain a ‘hard to ignore space’ on the world arena in the coming years.

Source: SourcingNotes

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Western Europe’s Outsourcing Trends

Western Europe, the second largest outsourcing market after the US, is characterized by a pretty diverse behavior in terms of software development outsourcing habits. The latest trends and key similarities and differences in ITO engagement were recently highlighted in a report by an independent IT outsourcing (ITO) research and advisory company IT Sourcing Europe. The report is based on a comparison analysis of corporate outsourcing behaviors in the United Kingdom, Denmark, Germany, Switzerland, Netherlands, and Austria.

Below are some thought-provoking findings for nearshore and offshore software vendors:

1. Regarding the most popular outsourcing destinations in 2010, the majority of the UK and Dutch companies (23% and 29% respectively) outsource their software/web development offshore (i.e. India, China, Philippines, Pakistan, etc.), while most of Danish (34%), German (37%), Swiss (41%), and Austrian (32%) companies prefer nearshoring when it comes to outsourcing software development (Eastern Europe and the Baltic states are among the most popular destinations).

2. Regarding the future outsourcing destinations, the equal number of the UK outsourcers (28% and 28% respectively) will place their software development function nearshore and offshore; the majority of Dutch companies will be sourcing nearshore (27%), while Danish, German, Swiss, and Austrian companies will continue outsourcing nearshore (25%, 31%, 32%, and 30% respectively).

3. Regarding the actual savings from the outsourced development, most of the UK (36%) and Danish (27%) companies save 40% to 59% of their operating costs, while majority of Swiss (35%), German (38%), Dutch (28%), and Austrian (31%) companies manage to save 10% to 24% from their outsourced development.

More interesting findings will be available in the European ITO Intelligence Report 2010 to be released in December 2010.

Source: IT Sourcing Europe

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The Nearshoring Choice of European Businesses

During one of the latest Global Services’ webinars, Avinash Vashistha, CEO and Chairman Tholons, noted: "Western Europe has done a significant amount of nearshoring to Eastern European countries which have become a part of European Union.”

But what makes EE/CEE locations so attractive for Western clients? Why, unlike their American counterparts, European businesses prefer to keep their IT initiatives close to home? Why such popular offshore destinations like India and China are losing ground?

According to Tholons and Global Services' joint study, the first reason for Europe’s neashoring success lies in the conservative nature of Europeans who are comfortable to keep work close to home and do not have a settled tradition of sending work overseas. And traditions mean much in Europe.

The second reason is the wide choice of Eastern European countries which are traditionally strong in IT with a reputable and solid background in computer science. For example, the study distinguished the following EE countries strong in software outsourcing: Poland provides excellent BPO and IT services, Hungary offers cost effectiveness for clients, Russia is good at technology development and R&D work, Ukraine offers capabilities in BPO, and Romania in business analytics.

And last but not least, the study mentions financial attractiveness, cultural compatibility, and good educational structure of EE countries.

Attractive combination altogether, isn’t it? No doubt, EE/CEE shall see increased investments in the near future and increased customer interest in their IT offering.

Source: Global Services

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Nordic ITO buyers’ satisfaction fuels market growth

Apart from Central/Eastern Europe which is one of the world’s most tempting ITO spots, other European regions equally show positive tendencies and expand their ITO market. To get an insight into the current state of affairs of the Nordics outsourcing market let’s turn to EquaTerra’s recently released 2010 Nordics Service Provider Performance and Satisfaction study that covers the Information Technology Outsourcing (ITO) and BPO markets, usage and service provider performance.

The sweep of the survey is impressive: the 2010 Nordic study investigated over 440 outsourcing contracts held by over 220 of the top IT spending organizations in the Nordic region. The total annual value of the contracts included in this study is over €3 billion, accounting for around two-thirds of the total Nordic outsourcing market in terms of annual contract value. All commercial sectors are represented in the study.

The 2010 results reflect positive tendencies: the ITO market is growing and the buyers are considerably satisfied with the delivered services. In more detail, you can see the exact percentage ratios summarized below:

• 84% of all Nordic ITO buyers polled indicated they will continue to outsource at the same or higher levels going forward.

• 72% of Nordic ITO buyers, up 8% compared to last year, indicated that outsourcing contributes significantly or moderately positively to meeting the primary drivers and benefits sought from their efforts.

• 55% of respondents are very satisfied or satisfied with their ITO efforts, and 29 % are somewhat satisfied. Only 6% are very or somewhat dissatisfied.

• 84% of all Nordic ITO buyers are satisfied with their outsourcing service providers in terms of general satisfaction, and 91 % of buyers would recommend their service provider(s) to another outsourcing buyer organization.

The use of offshore outsourcing in the Nordics has significantly increased over the past year. 52 percent of Nordic ITO buyers are currently making use of offshore outsourcing, up 11 percent compared to last year. This complies with the global tendencies of greater use of nearshore resources with similar language skills, cultural proximity, and closer time zones.

Source: EquaTerra

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EU Enlargement and Nearshoring

With the accession of new Member states in 2004 and 2007 the European Union grew to 27 countries. The trend of nearshore software development outsourcing to Central Europe that started in mid 1990s, became much stronger. Initially it started as outsourcing smaller projects by small and mid-size companies. Shortly, the region has arrested the attention of the global IT players like Capgemini and EPAM Systems, therefore enhancing the scope of the projects outsourced, and enabling the region to compete with well-established Indian and Chinese IT providers.

According to the recent data provided by Deutsche Bank Research, the overwhelming majority of German, Swiss and Austrian vendors still outsource their IT activities to Czech, Slovak Republic, and Hungary preferring them to more remote Asian destinations. However, the impact of EU enlargement on the Central European outsourcing market is forked. While expanding the market of IT services, fostering both demand and supply growth, it may lead to labour costs increase, consequently rising the development costs. And as Natasha Starkell, CEO of Goal Europe has noted the “higher wages will push offshoring further east”, namely to Russia, Ukraine, and Belarus. Product development, software testing, and application reengineering are already in high demand in the emerging markets.

Eastern Europe enjoys cultural and geo proximity to Western Europe, has a large pool of highly educated professionals, especially in the field of math, science, physics, and IT which makes it an attractive nearshore outsourcing destination for EU enterprises. Moreover, as baby boomers retire and Western Europe runs out of engineers and other highly qualified staff, even more IT work will move to Eastern Europe.

Source: levhouse.com

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The Russians are coming! Why IT buyers are selecting Russian suppliers like EPAM

Five years ago, India was synonymous with IT offshoring. Today, that is not the case. IT buyers can find IT developers and engineers in every corner of the world.

Two areas are seriously challenging India's supremacy: China (position No. 2) and Russia (No. 3). Today, many IT outsourcing buyers are experienced offshore customers. They are going outside of India for specific skills they can't find there, in the US, or in Western Europe. And they want to mitigate risk by sending work to more than one locale and distribute their efforts in software outsourcing. Eastern Europe, Russia, and China have been the big beneficiaries.

According to the Russian Software Development Association (RUSSOFT), Russian outsourcers have enjoyed 40 percent annual growth since 2003; 2007 is on par to equal that growth spurt. EU and US-based IT outsourcing buyers are sending work to Russia because its suppliers have distinct advantages over both China and India. They include:

The ability to handle complex tasks. Anyone who grew up in the Sputnik era knows the former Soviet Union's emphasis on math and science. Today's for-export IT companies are enjoying that vaunted legacy. That's why Russian IT suppliers specialize in embedded software, mission-critical, complex applications, system engineering, multi-platform projects, and algorithmic work. Russian workers can tackle non-standard tasks essential for troubleshooting and new software product development. An educated labor force. Half of Russian students major in science and math. That's 20 percent more than in China and at least twice the amount in India, Japan, or the US. A deep talent pool. Today 1.3 million Russians have degrees in computer science or engineering, yet only 70,000 work in IT-related jobs. The deep pool will keep wages steady in the next 24 months. Compare this to India, where wages are going up by as much as 10 percent a year. A stable workforce. Attrition rates in India routinely stay in the high 20s. The IT industry average in Russia is eight percent. A March 2007 IDC white paper entitled "Russia As Offshore Software Development Location: Should You Consider This Your Next Move?" found respondents discovered "price alone is a poor decision criterion which must be balanced by other considerations, not the least of which is the stability of the relationship, i.e. the rate of staff turnover." Labor stability means there is no need to overstaff projects to protect against high attrition. This saves money in the long run. Speed-to-market for new product development. In today's intense global marketplace, companies have to stay agile if they are going to remain competitive. They have to feed the revenue cycle by thinking up and then bringing to market new products. The Russian's ability to handle complex projects has helped its outsourcing buyers reduce time-to-market of critical new products, which has helped their bottom lines more than the initial cost savings, according to the IDC study. Cost. Russian salaries remain much lower than their counterparts in the mainstream ITO destinations, let alone in Western Europe or the US. Geographic proximity. Russian's major IT centers, the ones whose residents have the greatest scientific knowledge, are three hours or less by air to any Western European capital, making Russian suppliers the natural choice for nearshoring opportunities. The time zone difference is more convenient for both EU and US buyers than India or China. Cultural affinity. The Russian culture, business ethics, and mindset are closer to the EU/US than their Asian competitors. The benefits of working with EPAM, CEE's and Russia's ITO leader Currently there are dozens of players in the rapidly maturing ITO market. EPAM Systems, which was established in 1993, is the leader for many reasons: Size, stability and scalability. Currently, EPAM is the largest software services supplier in Central and Eastern Europe by both revenue (estimated US $100 million in 2007) and head count (3,000 plus employees). Also, the company is one of the fastest growing firms in technology world and has been recognized among the Deloitte Fast 500 for six years in a row and by Software Magazine among the Top 10 fastest-growing software product and services companies in $30 and $100M revenue range category for 2007. Efficiency and Quality. EPAM demonstrates sustained excellence in software engineering outsourcing following the latest development and technology standards. It uses a proprietary SDLC management tool designed specifically for distributed development using RUP and Agile methodologies. EPAM customers rely on its extensive outsourcing experience of 20+ million hours of successfully completed projects gained since its foundation in 1993. Software vendor partnerships. One of the unique aspects of EPAM's delivery model is its close partnerships with major software vendors including Microsoft, SAP, BEA Systems, and Hyperion which EPAM serves as clients as well. "Such relationships are a sound competitive advantage which helps us bring cutting edge expertise to our corporate clients and help them to build complex, mission-critical applications based on the new, advanced technologies," says Arkadiy Dobkin, EPAM CEO and President. "Participation in actual new product development for the top software vendors in the world is an unbeatable, unique experience that prepares our teams ahead of the market." US headquarters. EPAM is a US corporation based in New Jersey, which means it is subject to western corporate and intellectual laws; this is important because it simplifies the contracting stage and provides the highest level of comfort to US and EU clients. Multiple jurisdictions. EPAM's buyers benefit from the company's global delivery offices in the US, UK, Germany, Hungary, Russia, Belarus, and Ukraine. Multiple locations also mitigate geopolitical risk. The company routes the work to the most appropriate spot based on technology skills and vertical industry expertise. Strong onsite presence. EPAM currently has about 80 employees in the US and 200+ within the EU who provide strong interface to the company's development offices in Eastern Europe. Marquee client roster. Some of the biggest names globally outsource to EPAM. They include Reuters, London Stock Exchange, Colgate-Palmolive, British Telecom William Hill, Empire and CareFirst BlueCross BlueShield, Schlumberger, Halliburton, SAP, BEA Systems, Microsoft, and Hyperion, to name a few. Today, IT buyers are developing a more sophisticated offshoring strategy. That's why they are turning to Russia in general and EPAM in particular to help them stay competitive in our global village. Lessons from the Outsourcing Journal: India is no longer synonymous with offshoring. While other countries still have not challenged India's hegemony, buyers today are sending work to other places to search for specific skills and to mitigate geopolitical risk. They are selecting Russian suppliers for the following reasons: 1. The ability to handle complex tasks 2. An educated workforce 3. A deep talent pool 4. A stable work force 5. Speed-to-market 6. Cost 7. Geographic proximity 8. Cultural affinity Buyers chose EPAM because of its: 1. Size, stability, and scalability 2. Efficiency and quality 3. Software vendor partnerships 4. US headquarters 5. Multiple jurisdictions 6. Strong onsite presence 7. Marquee clients Source: Outsourcing-Center.com

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