|
|
|
| Monday, November 27, 2006 | |
| Deploying a Global SDM Model for the Central & Eastern European Markets | |
|
|
Why Central and Eastern Europe?
Chart 1 highlights the diversification of the global business and IT-services markets. These results are taken from our most recent (3Q06) Quarterly Pulse survey which polls EquaTerra advisors and the leading multi-national and India-based service providers on trends in the BPO and ITO markets. These findings highlight that the Central and Eastern European markets are more active than the Chinese or Philippines markets.
There are several reasons for buyers to consider the Central and Eastern European markets. Some of these are similar to those that would apply when considering and selecting any non-domestic location for services. Others are more specific to these markets themselves.
| • |
|
Diversification. As buyers expand their global sourcing footprint, it is important not to over-invest in any one single location. Diversification — for risk management, cost, continuity and skills access reasons — is a sign of a mature sourcing model. The Central and Eastern European markets have different risk, cost and skills profiles than other near and farshore destinations, and can offer balance to any buyer’s global services portfolio. |
| |
| • |
|
Language and culture. The language skills found in these markets are diverse. Romance as well as English-language skills are readily available, though typically not the primary language. There is also often positive to strong cultural affinity between these countries and those in continental Western Europe, given geographic proximity and historical conditions. This is the case, for example, between the Czech Republic or Poland and Germany or Romania and Italy. |
| |
| • |
|
Skills. The educational systems in these countries are generally good, and have strengths in engineering, the sciences and mathematics. Also, depending on the country, there are legacy strengths from investments in Soviet-era research and development efforts. |
| |
| • |
|
Proximity. In addition to cultural affinity, there is the practical issue of geographic proximity for Western European and even North American buyers. From the perspective of the sourcing process and the ongoing outsourcing management and governance processes, ease of access to Central and Eastern Europe is a plus. |
| |
| • |
|
Market presence. Several of these countries, including the Czech Republic, Hungary, Poland, Slovakia and Slovenia, have joined the European Union (EU) and the others are all petitioning for admittance. Membership has its privileges, and makes working with other Western European members easier and in some cases more acceptable. These countries have, at least for the time being, the dual benefits of membership and lower labor and associated costs of doing business. However, the Central and Eastern European services markets face many challenges. These are both in terms of becoming and remaining compelling sources for business and IT services, as well as competing against their global peers from countries such as India and longer term China. These challenges include the following: |
| |
| • |
|
Capacity. These markets individually and even collectively are much smaller than either India or China. The six countries covered in this article have a total population of less than 100 million, and the population’s are flat or in some cases declining. As a result, the available workforce for business and IT services is relatively small. There is also competition for talent from other market sectors in these economies. Skilled population constraints will remain a permanent attribute of these markets. |
| |
| • |
|
Costs. These markets, in almost all cases, operate at a higher cost level than India or China, typically by 25% or more. Costs will also rise as countries are integrated into the EU. While in some cases cost-level disparities are more acceptable to buyers — for example to access staff with key language skills — for general IT or business-process skills cost disparities are a disadvantage. |
| |
| • |
|
Geopolitical. Most of the countries in Eastern and Central Europe are generally stable politically, particularly in comparison to other offshore destinations like Pakistan, Thailand or Africa. There is also no ongoing looming national rivalry similar to that between India and Pakistan, and the markets and political environments are for the most part more open than in China. However, there are issues with corruption (Bulgaria, Romania) and national political instability (Hungary). Indeed, recent political protests in Hungary highlight the somewhat fragile nature of the political environment in several of these former Soviet satellites. |
| |
| • |
|
Business environment. While there is recognition in these countries of the economic opportunities that supplying business and IT services represents, there is not extensive government support or strong driving trade groups akin to Nasscom (India) or even BRASSCOM (Brazil), though Hungary has the Hungarian Software Alliance (HSA). Most local service providers are small (less than 100 staff), and multi-nationals have made some investments in the area, primarily in the Czech Republic, Hungary and Poland, though not on the scale of other geographies. Separately, there are also issues with Intellectual Property (IP) protection and the quality/accessibility of the overall legal system, especially in smaller Eastern and Central European countries. There is also not a large local market for business and IT services, as there is, for example, in China. English-language capabilities can be a concern in these markets relative to India, but not when compared to China. Physical infrastructure is adequate, but network/telecommunication infrastructure needs investment in the smaller countries. |
|
|
