Expensive, Yet Attractive
Following the unification of Germany and the collapse of the Soviet Union , as this region's economy tries to quickly integrate with its more affluent Western neighbors, many of its countries are trying to become not only the extended workbenches of companies from high-cost countries, but also their backoffices.
“This trend started about three years back with the large Western European companies with large-scale transaction processing, tapping the outsourcing potential of the CEE,” says Rebecca Scholl, an ex-Gartner outsourcing expert, who is now the VP of Business Development at U.S.-based IT and BPO service provider, Affiliated Computer Services (ACS). “But increasingly this concept is catching up with many other companies as well.”
What is unusual about this trend is that even as cost in CEE countries is high and availability of human resources is still low compared to their Asian counterparts, something other than cost savings is driving companies to this region. “The main reason we went to Russia is that we needed high quality people for our work. We are not looking for hundreds of people; we need just tens of them but we want high-quality,” says Robert D. Miningham, President and CEO of U.S.-based Miningham & Oellerich that too preferred Luxoft after dealing with an Indian company for a “pretty long time.”
The biggest attraction of this region for the new breed of outsourcing seekers is proximity; and this refers to both physical distance and cultural closeness. The time difference, particularly with Western European, is almost non-existent, while the CEE countries have close geographical and cultural ties with the markets of Western Europe and the U.S. Typically, nearshoring locations score high marks because of their lower costs for communication between the purchaser and the provider of the nearshoring service.
Proximity has other advantages as well. First, personal contact that enables solutions of complex problems face to face. Next comes the benefit of a common language — even though official languages may differ, nearshoring locations often have people who are proficient in the language of their client. This is followed by cultural understanding. Nearshore service providers almost always offer a better knowledge and understanding of the cultural background of their clients than their counterparts in far-shore locations.
Studies reveal that CEE is particularly interesting for German companies since nearly 40% of schoolchildren in the new EU member states learn German. The proportion is particularly high in those countries bordering Germany and although this does not mean that German is spoken fluently, it does signify that at least there is a basic level of proficiency that can be built upon. Similarly, Romania is interesting for French companies as 85% of schoolchildren there learn French.
“There is great affinity between the CEE nations and the West [ern part of the world],” says Nick Puntikov, Chairman, Programming Committee, Russoft, the official lobby of the Russian IT outsourcing industry. Puntikov is also the President Eastern Europe, Exigen Services, an IT service provider in the CEE that has a strong presence in the U.S. He adds that his U.S. clients too “have observed numerous times that the psychology, mindset and work ethic that CEE nations have is a very good fit with the U.S. and the EU culture.”
Along with proximity many Western companies perceive the stable workforce and relatively big wage difference between Western Europe and the U.S. as other key determinants of the appeal of this region. “Unlike the global average attrition of about 25% in the outsourcing industry, the CEE boasts an average personnel attrition rate of only about eight percent,” says Puntikov. “This is a strong incentive for clients to put work there, because it means time and money saved on the hiring and training of new staff to replace the team members lost to attrition,” he adds.
As for cost effectiveness, although the labor and other costs are much higher in the CEE nations than the world's most favorite outsourcing destinations, India and China , they are still much lower than Western Europe and the U.S. In the new EU member states the average labor costs for non public services are around one-fifth of those in Germany ; in Romania and Bulgaria labor costs are less than 10% of those in Germany , according to a Deutsche Bank research.
Where and What in CEE
While the general perception is that Russia is good for IT outsourcing and Central Europe is ideal for back office, many offer diverse views. Scholl of ACS, for instance, says that Central Europe is only suitable for back-office work in German and English and for no other language. Overall, for language-related back-office work Spain is a much better option, according to her. But Puntikov of Russoft says, “Learning international accounting is not more difficult than software programming. So it is just a matter of time that Russia emerges as a BPO destination, too.” However, Bulgaria , Czech Republic , Hungary , Poland , Romania and Slovakia could be considered as “key countries” for both IT and BPO services, according to the IT and business process advisors, EquaTerra.
Nevertheless, it is a fact that many large U.S. and EU clients outsource R&D and complex IT to Russia than the rest of the region. This is because for long Russia has had a reputation for skills in science and math and its powerful system of higher education — a legacy of the Soviet era — produces many graduates every year that specialize in computer science, math and engineering. AMR Research estimates that half of Russian students major in engineering or science and math (20% more than in China , and at least twice the amount of India , Japan , or the U.S. ). As a result of this high-degree of education, the Russian workforce also possesses a great amount of creativity, which is vital for quality problem solving. The nature of the education itself is also very problem-solving focused, which in turn produces a project-oriented culture and workforce, as opposed to a staff augmentation approach that characterizes other regions.
