|
|
The overlooked potential for outsourcing in Eastern Europe |
Companies that seek to outsource their IT and business processes seldom head for the region - but soon more of them will.
Detlev Hoch, Michal Kwiecinski, and Peter Peters
Web exclusive, December 2006
With less than 1 percent of the world's $30
billion market for offshore IT and business process outsourcing (BPO),
Eastern Europe lags far behind more prominent locations, including
India, Ireland, Malaysia, and the Philippines (Exhibit 1). Our research
suggests that this may soon change: demand for offshoring1 among Western European companies rose by half from 2004 to 2006, with Eastern Europe emerging as a favorite destination.
Although Eastern Europe's governments have not wooed business as
effectively as those of the more established destinations, offshoring
in that region offers three primary advantages: low wages comparable to
India's, a relatively low risk profile for key factors such as reliable
infrastructure, and cultural and geographical proximity to Western
Europe. McKinsey estimates that offshoring activity in Eastern Europe
could triple, to more than 130,000 jobs, from 2005 to the end of 2008
(Exhibit 2). What's more, given the relatively low pace of the region's
wage inflation (Exhibit 3), along with abundant output from local
universities, this talent source could remain economically competitive
for at least 15 years.
Eastern Europe is a particularly attractive option for Western European
companies. Not only is it nearby, but companies can often find language
capabilities (especially French and German) that are less readily
available in India or Southeast Asia. At the same time, the new members
of the European Union - particularly the Czech Republic, Hungary, Poland,
and Slovakia - can offer average labor cost savings of 40 to 60 percent
over costs in Western Europe, while cities in EU-candidate and non-EU
countries can offer cost advantages of 60 to 80 percent.
However, choosing a suitable location isn't just a matter of picking
the right country; employment costs differ widely among cities because
of limited labor mobility and varying unemployment rates. Companies
should look beyond the first-wave locations (such as Bratislava,
Budapest, Krakow, and Prague), where wages for experienced workers are
rising faster than inflation. Instead, they should begin to explore
midsize cities with little or no offshoring activity but large talent
pools, where the labor cost advantage is more likely to remain
attractive for the next decade.
Beyond the well-known capitals, Eastern Europe has 40 to 50 provincial
cities with universities large enough to supply a highly skilled labor
force, along with cultural environments that lend themselves to the
creation of suitable clusters of employers for university graduates
(Exhibit 4). This wealth of options can help companies reduce their
labor costs and spread potential risks across a portfolio of locations
with different risk profiles by taking into account the reliability of
infrastructure, political stability, and the possibility that talent
might emigrate, be enticed by competitors, or prove less capable than
anticipated.
Most service centers in Eastern Europe today are so-called
captives - they are owned by the companies sending them work. Independent
Eastern European providers of IT and business process services have a
significant opportunity. But with few exceptions - Luxoft in Russia and
Ericpol Telecom in Poland, for example - these companies are not on the
map compared with better-known global and Indian players, some of which
are setting up their own centers in Eastern Europe. So far, homegrown
players have merely responded to local opportunities instead of seeking
out seemingly more difficult global markets.
There are several reasons for this caution. First, Eastern European IT
services providers, at their current scale, have difficulty keeping up
with the 20 percent growth they can generate in their domestic markets.
Second, regulations and inconsistencies in labor laws complicate
expansion beyond national borders - expansion that is a necessary
precursor to gaining scale comparable to that of the global providers.
Finally, continental European companies have been slower to embrace
offshore outsourcing than have those in the United Kingdom and the
United States, which traditionally favor the English-speaking countries
in Asia. The opportunity for local service providers prepared to step
up to the challenge, either alone or with the help of private equity
firms, is tempting. Luxoft, for example, has grown at an annual rate of
60 to 70 percent for each of the past five years. In 2005 the company
had revenues of $45 million.
Cities and nations also have a stake in this growth opportunity.
Perhaps drawing on the experiences of the Indian trade association
Nasscom,2
they should work with service providers to develop a regional effort to
expand the market. A full-time team that promotes a city as an
offshoring destination and supports investors in their search for
talent and infrastructure can make a big difference to the development
of a local market. Lodz, in Poland, has undertaken one such initiative,
which has been helping to make the city a developing hub for services
in business process outsourcing and IT. Local governments also can work
with companies to restructure regulations in ways that facilitate
cross-border growth. 
About the Authors
Detlev Hoch is a director in McKinsey's Duesseldorf office. Michal Kwiecinski, a consultant in the operations practice, is based in the Warsaw office. Peter Peters, a principal in the global IT practice, is based in the Duesseldorf office.
Notes
|
|
|
|
|
|
