Traditionally, the European business-process-outsourcing market has been dominated by U.K. contract activity, with offshore business-service delivery coming primarily from providers in India.

This is finally beginning to change. In the first half of 2004, approximately equal BPO contract value emerged from both mainland Europe and the United Kingdom. At the same time, the emergence of cost-effective nearshore business-process services within European Union entrants is creating an alternative to onshore service delivery with a wider European appeal.

The area within mainland Europe where business-process outsourcing is emerging most strongly is Central Europe, principally Germany and Switzerland as well as the Benelux countries.

There are two contributing factors behind the rise in adoption of BPO in these regions. First, there’s the existence of the European headquarters of multinational corporations, mostly manufacturing companies, in Geneva and Brussels. This leads to the outsourcing of back-office support functions such as human resources, F&A, and procurement. For example, in the past six months, Affiliated Computer Services has been awarded an HR outsourcing contract by GM Europe out of Switzerland, while IBM has been awarded a 10-year procurement outsourcing contract by Goodyear Dunlop Tires Europe out of Belgium.

The other major contributing factor is the presence of a strong financial-services sector. In particular, BPO contract activity in Germany is being led by the banking sector. For example, Xchanging was recently awarded a major BPO contract by Deutsche Bank to develop its securities-processing services within its European transaction bank subsidiary.

Other recent contracts in these two regions include:
 

Although recent levels of BPO contract activity appear to be lower in the Nordic countries than in Central Europe or Benelux, the rest of Europe shouldn’t be discounted. For example, Accenture recently announced negotiations for a pan-European HR outsourcing contract with Sandvik in Sweden. There is also a modest level of customer-management services contract activity in Sweden. In addition, IBM recently disclosed its involvement in a congestion-charging scheme for the city of Stockholm; however, this is in the pilot stage and currently appears unlikely to develop into a full-fledged BPO contract.

BPO activity in mainland Europe tends to be dominated by the financial-services sector, in which organizations are prepared to outsource middle-office processes, and the manufacturing sector, in which organizations tend to outsource back-office support functions, such as HR services, and some front-office customer care and support activities.

This pattern of activity is, in part, reflected in European usage of offshore business-process services. By sector, government bodies have not been, and are unlikely to be in the short term, significant users of offshore business-process services, even in the United Kingdom.

The most active sector in Europe for use of offshore business-process services is the financial-services sector. However, most offshore business-process usage within the financial-services sector currently comes from the United Kingdom and is enacted in the form of captive centers—centers that are owned and operated by the parent organization rather than by a third-party outsourcing vendor. The U.K. financial-services sector has had links with India established over a long period and became an early adopter of offshore services at a time when there was little established offshore BPO vendor capability. However, in establishing their own captive shared-services centers, these organizations have traded off some of the benefits of ongoing service improvement and cost reduction in return for greater control and greater initial process and sector knowledge.

There have been many examples of organizations outsourcing established onshore, in-house shared-service centers in order to achieve ongoing service improvement, additional cost reduction, and economies of scale. Captive offshore centers are no exception to this philosophy, and it seems probable that European financial-services firms will begin to outsource their captive offshore centers once these start to require process and technology refreshment, and once the current political and press opposition to offshore outsourcing has quieted down. So, it seems likely that these centers will slowly transform into multishore, vendor-operated business-process facilities.

At the same time, the new EU entrants—with their access to highly skilled personnel speaking a range of European languages—present opportunities for cost-effective nearshore outsourcing. While these countries join the European Union, it’s expected that multishore outsourcing will be expanded, with these emerging locations being used for complementary processes that need to comply with EU regulations. Again, it’s likely that the current dependence by the financial-services sector on Indian-based captive centers will gradually transform into a greater use of multishore capability provided by BPO vendors. This pattern of delivery capability will also be more favorable to European firms based outside the United Kingdom, and so supports the expanded use of business-process outsourcing across a wider range of European countries and businesses.

The main inhibitor to the use of offshore services is current political and press opposition. This is coupled with fears of the impact of the opposition on clients, further enhanced by a fear that use of offshore business-process services could be used to undermine a firm’s client base by its competitors. At the same time, organizations are concerned about the reliability of offshore infrastructure and the perceived difficulty of migrating complex processes. In practice, organizations that have used offshore services tend to dismiss the risk of infrastructure failure as unfounded. However, they still are usually offshoring only basic data-entry tasks and simple rules-based processes. Less than 10% of offshore service delivery is currently concerned with processes requiring agents to make informed decisions using their own judgment, or analytical and complex services such as insurance underwriting. However, these services will increasingly be regarded as suitable for nearshore service delivery from the EU, if not offshore service delivery from Asia.

Other issues that are increasing in significance include rising labor rates and high staff attrition rates. In India, staff attrition rates are estimated to average 22% per year, with rates significantly higher for voice-based processes.

In response, organizations are becoming increasingly creative in combating attrition. A strong indigenous brand image is a major factor in personnel recruitment and retention, as are more rigorous recruitment programs, salary schemes incorporating stock options, and bonuses based on length of employment.

Technical support and simple customer-care processes lead the use of offshore outsourcing by organizations in the manufacturing sector, while offshore business services are increasingly being deployed by the manufacturing sector in support of HR outsourcing and F&A. Again, there are elements of these latter processes that are better supported from nearshore centers than offshore centers.

Regardless of perceived challenges and inhibitors, it’s clear that mainland Europe is emerging as a multishore service opportunity. We’ll keep an eye on expansion and growth and share our findings with the outsourcing community over regular periods.

John Willmott, founder and CEO of U.K.-based NelsonHall, can be reached at john.willmott@nelson-hall.com.