Challenges
Still, outsourcing to the CEE is not an easy decision. For one, “pressure of overheated labor market and rising cost in the CEE requires service providers to reevaluate their outsourcing model carefully,” say Julia Simonova, Marketing Director, Luxoft. The costs in recent years have risen considerably: Between 1996 and 2004 labor costs in the new EU member states rose by an average of 7.7% each year, according to the Deutsche Bank research. In Romania they have climbed 8.1%, in Slovakia by 9.7% and in Lithuania by no less than 15% per year. By contrast, wage growth in Western Europe was modest: 2.1% in Germany and 3.4% in the EU.

To remain competitive, even as Lev Saks, CEO-U.S.A., Luxoft, says that most providers, who wish to stay competitive, “are moving bulk of their delivery organization to regional offices, keeping only the front offices in high-cost major cities or location”, Peter Schumacher, of the Germany-based outsourcing consultancy firm Value-Leadership says that “cost in the CEE is more likely to increase rapidly than otherwise.”

Then there are several regulations to be taken into consideration when outsourcing in the European markets. “In particular, employee transfer rules regulated by the European Acquired Rights Directive (ARD), as well as data-privacy regulations, need to be integrated to the sourcing process,” says Scholl. The ARD provides protection to employees in the context of the transfer of a discrete function to an external party, but in some countries employees complain that they would prefer to have the right to choose.

Fragmentation and size of the providers is the other constraining factor. For instance, the Russian IT-service sector has hundreds of providers, most of which are fewer than 100 people in size and only a few years old. This creates a scenario of unknown firms with questionable stability and viability from the user perspective. It also means that many offshore projects are simply too large for these firms to undertake. Consolidation for firms also proves challenging from a business perspective, particularly across borders (e.g., a U.S.-based Russian firm buying a domestic Russian provider) due to restrictions on foreign ownership and taxation disincentives.

The final challenge is scaling up. While the talent pool in the CEE is deep and talented, the unsavory truth is, it is also very young and inexperienced. Though the pool of skilled labor is quite large in most offshoring locations, formal qualifications often provide very little indication of whether that pool is also suitable for employment by a service provider with international clients. “Not all universities satisfy the standards that are usually met in Western Europe or the U.S. ,” says the Deutshce Bank report, according to which just 10% of graduate engineers, mathematicians, statisticians and physicists in Russia are suitable candidates, in terms of their training, for the jobs required by a Western outsourcing seeker.