by Irina for IBA Group
Posted on May 8, 2013
Karl Flinders of Computer Weekly published some research recently that explored the development of the CEE outsourcing market in some depth.
One of the standout statistics was around the cost of doing IT work in China today, with an average programmer earning about $20,000 a year. This shows that China can no longer be considered a low cost destination for IT outsourcing and of course there are all the associated problems of distance, language, and culture.
But what I found really interesting was the demand for IT workers predicted across Western Europe. Despite the economic difficulties, IT workers are still in demand and the data published in Computer Weekly shows that by 2015 there will be a deficit in many European nations. For instance, the UK will need 55,000 more IT professionals that it will have, Germany will need 75,000 more, and Italy 55,000 more.
With the costs soaring for IT work in Asia, and Western European countries still needing an enormous amount of IT work – and not having enough IT workers – the argument for working with companies based in Eastern Europe is obvious.
When companies with a good reputation and great expertise can be found just a short flight away – close enough for a day trip – it makes sense to explore this option for many more reasons than price alone. As the example of average costs in China demonstrates, IT outsourcing is today about a lot more than low cost offshoring. Europe needs to work together to plug the skilled worker deficit.
HR magazine published a feature earlier this month titled “lower-skilled jobs still threatened by outsourcing to Europe” – the kind of headline that compels a reader to read on, but the story isn’t quite as described.
The feature is extremely confused for a number of reasons. First, the writer is not just talking about low-skilled jobs – he uses the comparison of experienced IT industry workers to contrast different salaries across Europe. Then secondly, he talks about how salaries in Germany, France, Belgium, and Ireland are up to 57% higher than in the UK.
This confuses me. IT professionals on £42,000 per year are not low-skilled workers and if there are many countries in Europe paying higher salaries than the UK then surely those are the places where most skilled workers will go anyway?
And I would question this data. I have a lot of Irish friends and they are almost all figuring out how to leave Ireland. It is impossible to believe that pay and conditions are better there than in the UK.
The most confusing thing is that this is now 2013. Europe expanded to the east in 2004, almost a decade ago. It feels very strange for the media to be talking about how jobs are threatened by outsourcing when Europe itself is a free trade area that encourages businesses to work across borders – with the free movement of people a key part of the union.
I was recently in a bar talking about the continued expansion of the EU to two senior executives from Austria. I asked them how they felt about Bulgaria and Romania joining the union – they immediately responded enthusiastically and suggested that it will make business with these two important markets a lot easier.
This is the complete opposite of the British reaction – where a fear that thousands of people will flood to London from the new EU member states is still the normal reaction. Only the British press appears to be still fearful of the European Union, with this ‘jobs threat’ headline just the latest example I have read.
There are more British people living and working across Europe than Europeans working inside the UK. So why does the media fear this European jobs threat? It seems that many British people are capable of venturing into the world to find where the opportunities exist.
International analyst firm Gartner recently suggested that IT Outsourcing this year would be worth around 697 billion Euros. That’s an enormous amount of business and IT service companies are all keen to find a way to enjoy taking a percentage of that global spend for themselves.
While countries like India, China, and the Philippines have dominated the international outsourcing market, there are many locations in Central and Eastern Europe that are now snapping at their heels. Serbia, Romania, Albania, and Croatia are all examples of locations where many IT specialists are located and yet their cost is lower than experts with the same skills in Western Europe.
A recent report on the software development and IT outsourcing industry in Ukraine determined that over the last eight years, the volume of software development and IT outsourcing services in Ukraine has grown by a factor ten.
According to the research findings, in 2011 the volume of IT outsourcing and software development services provided in Ukraine reached US$ 1.1 billion and the number of IT specialists working in the industry reached 25,000 people with 20% growth.
But in many cases, many small companies with no international footprint are located in these countries, ready to do business, but unsure how to find clients in the west. It’s no good just being a lower cost if you have no way to develop relationships with potential clients in the west of the continent.
The East may be rising in importance and certainly worth a look if you are considering outsourcing your IT services, but the companies that are based in the CEE region need to build better relationships with the clients in the west. Without this, they will forever be seen as just a lower-cost alternative to local IT experts and that is a long way from the truth.
The latest Top 100 Outsourcing destinations research published by international advisory firm Tholons makes for good reading if you want to explore Eastern Europe. No fewer than sixteen different cities in the region are described in a report that covers the entire globe.
Kraków in Poland was described now as an ‘established’ location for offshore outsourcing, with the rest described as emerging, aspiring, or on the radar. Kraków and Dublin were the only European cities in the top ten on the Tholons list – with the other eight all being from Asia.
This is a great result for the CEE region in general. Tholons lists many cities across Asia and Latin America, but to find so many cities of interest to the outsourcing community all clustered together in Eastern Europe does demonstrate that a cluster of expertise is developing.
All the cities listed have the great advantage of being close to potential clients in Western Europe and being close to other great delivery centres in the CEE region. With some locations better at ITO and some better at BPO, it’s encouraging to see so many cities all in one single region.
With experts such as Tholons shining a new spotlight on Eastern Europe, it cannot be long before many other cities in the region start being recognised for their delivery capabilities too.
The analyst firm Horses for Sources is conducting their annual survey on the state of outsourcing in 2013. You can participate in the survey here and I would recommend adding your voice because this is one of the best annual summaries of what is going on in the sourcing industry.
One of the biggest changes I have observed over the past few years, and one that is accelerating at present, is a reduction of the offshoring concept – meaning that the world feels a lot smaller and that it is now normal to perform various tasks for a company in many locations.
If you go back a decade or more, an offshore IT delivery centre felt very much like it was in another location, a place where you might not expect senior executives from the client firm to be based. India is a good example – it was a low cost software production centre and executives only ever visited on business trips.
Eastern Europe is the same. There was a clear divide between where the clients were located and where the delivery centres were being developed. But this has all changed and Eastern Europe has changed much faster than locations like India.
It’s still a big journey for an American or European executive to get over to India and despite offshore delivery from India becoming common, there is still a clear divide once you arrive in the country and see a shining new software factory right next door to a slum.
It’s almost a decade now since countries like Poland and the Czech Republic entered the European Union and all these nations to the east now feel like an integral part of the continent – even more so now that the Eurozone is struggling. Ukraine grew over 5% last year and the Czech Republic almost 2% so these places to the east are really helping Europe as a whole.
We are already seeing a situation develop where Eastern Europe becomes a market for Western Europe to work with, rather than a place to locate lower-cost services. How long before it looks far more attractive to invest in the east?
New data from real estate experts Jones Lang LaSalle has indicated that Romania and Ukraine are becoming far more important players in the Central and Eastern Europe outsourcing market – challenging the more traditionally dominant Polish market.
Ukraine was highlighted in the research — the value of its IT outsourcing market hit $1bn in 2011, the Financial Times reported earlier this month, up tenfold in the last decade.
Among those major companies setting up in Ukraine, according to Kyiv Post, is Nestle, which recently opened a service centre — right across the border from Poland in Lviv.
You might ask why a real estate company is releasing data on the ITO and BPO industries and how they could be offering analysis on the growth of the hi-tech service sector. Growth in these markets needs people and offices and so one of the business areas with their finger right on the pulse of which region has the most interesting growth prospects is the commercial real estate sector.
They know where companies are investing before the companies themselves make a big noise about their own success – so markets like Ukraine are clearly now developing a momentum worth watching closely.
Poland may remain dominant in the BPO and call centre market, but this enormous growth in IT spending further east is a sign of where the smart money is heading.
For the past few US presidential elections, outsourcing offshore has been a major topic of debate. Usually the rhetoric revolves around which potential president will be tougher on offshoring than the other.
At the last election there was talk of new tax hikes for companies purchasing services from other overseas companies – but of course nothing happened, this really is just electioneering.
The USA remains the most powerful economy in the world even after the financial meltdown starting reshaping world finances. American products produced by companies such as Boeing and Microsoft sell all over the world. These products are also developed all over the world – business today is a global network of companies selling products and services across borders.
The offshore outsourcing debate during US election campaigns has always been full of hot air, playing to a domestic audience that likes to think of American companies employing only American workers, but the world economy is no longer just concerned with domestic politics.
If Dodge wants to sell cars outside the USA they need to employ people in the markets where they want to sell. If Microsoft wants to ensure their products work correctly across all the major markets of Asia, they need to employ people in those regions.
And when it comes down to IT expertise, the USA has plenty of that – it’s the birthplace of every modern giant in technology from Google to Apple, but that doesn’t mean there is not technology expertise outside the USA. If an American company wants to employ the services of an IT expert outside of the USA then that’s their choice – it’s a straight decision based on competition.
And the USA remains a powerhouse so they should welcome international competition – it will only help them to raise their own game.
Technology industry analyst HfS Research has launched a survey asking whether they should stop using the word ‘outsourcing’ in their coverage of the industry – and even whether the technology services industry should entirely stop using the word. Is it a dirty, tainted word?
Most involved in technology outsourcing have moved on from the old days of labour arbitrage or augmentation. Service providers like IBA don’t just pitch themselves as the cheapest offshore service providers; they position themselves as the experts in whatever they do. They promote specific areas of business and expertise.
The buy-side clients commissioning work (or outsourcing the work) from the service providers know that they are buying in expert services, usually services they could not perform in-house. They don’t want the cheapest provider – they want the best for their business.
But the political rhetoric has barely changed. As the US presidential election approaches, outsourcing is still considered a dirty word for politicians and a way to score a few cheap votes by patriotically insisting that they would ban it forever. But we all know that US politicians say this at every election.
These same politicians probably calculate their budgets using Microsoft Excel and broadcast information using Cisco services. They fail to see that any large technology company is already working with global resource and any company starting today with a need for some technology development will consider hiring suppliers from all over the world.
It’s not that outsourcing is about shipping work off to cheap economies; it is that the Internet has created a global marketplace. If the marketplace is global then that can create both problems and opportunities back at home, but how come the politicians rarely focus on the opportunity of small niche companies being able to reach a bigger market?
So do you agree with HfS? Is it time the industry stopped using the term outsourcing and if so, what would be better word to replace it?
The British communications regulator Ofcom just published a new analysis of telecommunications in the UK and there were some interesting results. After years of constant growth, Britons are now making fewer calls on their mobile phones, but the number of text messages sent has increased dramatically.
So the British are texting more and speaking less – is it significant?
It shows a marked change in the way people are communicating today. For instance, the survey notes that 58% of British adults send at least one text message a day, yet only 49% engage in a face-to-face conversation on a daily basis.
The argument for texting is easy – it is an asynchronous mode of communication. In short, I can send a text and not worry about disturbing the person, they can respond in their own time. A call is intrusive – it demands immediate attention. I personally ignore my telephone if I am busy with work because to endlessly be picking up the phone each time it rings would mean I never actually achieve a thing – other than answering calls from people who assume I am free to talk.
But it is significant to see that the number of calls is actually dropping and it is a worry for the mobile phone industry. They don’t make much money on texts – they are usually bundled into a contract, so voice calls are dropping and many are learning how to use their 3G connections to make a call bypassing the phone company.
But the most shocking news from this survey has nothing to do with phones at all. Can it really be true that half of British adults do not have a conversation with another person for an entire day? Maybe they should pick up the phone and call a friend…
by Irina for IBA Group
Posted on June 13, 2012
The research and analysis company, Everest Group, just published their latest Market Vista: Q1 2012 report – a quarterly focus on global outsourcing and offshoring activity and it shows that despite troubled times in many business markets, outsourcing is holding steady.
First quarter global transaction volumes reached about US$3bn in annual contract value (ACV), an increase of 11 per cent over the previous quarter. Compared to Q4 2011, the global market saw a 9 per cent increase in Business Process Outsourcing (BPO) transactions while IT Outsourcing (ITO) transaction volumes remained about the same.
83 per cent of the deals signed were new transactions showing that there is still plenty of business coming through – it is not just about companies renewing their existing outsourced contracts.
Some key points noted in the new report include:
• BFSI (banking, financial services and insurance) sector leads the market in transaction volumes with an increase of 12 percent while the MDR (manufacturing, distribution and retail) vertical saw a 9 percent increase. Transaction increases also were recorded for public sector, energy and utilities, and telecom verticals, but the healthcare vertical saw a large drop in deals signed during the quarter.
• Transaction volumes decreased in North America, held steady in the United Kingdom and increased significantly in Rest of Europe.
• Offshore activity saw 30 delivery centres established across captives and service providers in the first quarter compared to 29 in the previous quarter. With significant activity occurring in Latin America and Eastern Europe.
This latest research shows that the offshore outsourcing market remains strong, despite economic and business uncertainties in the market today. It is also worth noting that Everest see significant activity in Eastern Europe – this is a key region to watch at present.