Mark Kobayashi-Hillary

Readers of the US newspaper The New York Times cannot have failed to notice a recent feature on the number of hi-tech businesses working in Eastern Europe.

Accenture in Prague is working on behalf of companies such as Rhodia and SAP. The newspaper piece comments: “The United States may turn to India to fill many of its call-centre jobs and the like. But Western Europe is turning more frequently these days to its own backyard, transforming a few urban centres of the former Communist bloc into the Bangalores of Europe.”

One might question whether Bangalore is actually the kind of city any European would aspire to emulate. Ask any Indian who is not from Bangalore what they think of the southern hi-tech hub and they will tell you that the weather is nice, but you have to tolerate horrendous traffic, an airport that is miles from the city with no rail link, and sky high restaurant and bar prices.

IBM, Dell, and Morgan Stanley have all outsourced functions of their business to Eastern Europe too – ensuring that this is not just about Western Europe sending work to the East. The Americans are also working with Eastern Europe.

The New York Times spoke to Robert H. Brown, an outsourcing analyst at Gartner Dataquest, who expects growth in Eastern Europe to outstrip the rest of the market in the next four years, expanding close to 30 percent by 2010, compared with 25 percent for the global market. Those are exciting growth figures. This is a market not only growing steadily out of the recession; it’s growing faster than anywhere else in the world.

And what’s the key difference in this region compared to India? European business culture, political stability inside the European Union, and the ability work in English, German, French, Russian, and any other local language. You can’t find that in Bangalore. I should know. I once worked for a French company in Bangalore and we struggled to even find a receptionist who could answer the phone using French.

When the A8 nations joined the European Union in 2004 – expanding the union to the east – it was expected that many would migrate west in search of work. Many people did, but now many have gone home because high quality work in technology industry has come to them. The New York Times reports: “In the Czech Republic, unemployment fell by the start of this year to 7.1 percent from 7.8 percent in 2002; in Poland, joblessness dropped to 13.4 percent from 20.2 percent five years ago; and in Slovakia, to 11.6 percent from 19.7 percent, according to Eurostat.”

That’s positive news. The brightest and the best companies in Eastern Europe have been trying hard to alert those thinking of working with India that there is a more local alternative. If a heavyweight paper such as the New York Times is now shining a light on the region then hopefully more senior executives will come to see what is on offer.

IT Services: Three Major Trends

The past couple of years have been a trying time for anyone involved in IT services in all parts of the world. The global economic slowdown has affected most sectors, leaving few end-user companies in a strong position, spending on IT for the future. Most have just been focused on budget cuts and strategy reviews.

The growth of IT services being delivered from central and Eastern Europe (CEE) boomed almost in parallel with the growth of delivery from more remote locations, such as India, but can the troubles faced by India help European technology firms? Outsourcing slipped down the management agenda during the recession and is now becoming a popular recovery strategy, so this combination could mean the CEE region has far more to gain from the recovery.

And even now some growth has returned – albeit still fairly weak – can the IT industry just deliver ‘more of the same’? The reality is that the IT services industry has to change if it is to grow and succeed in the long term. There is an emergence of some important new markets, being driven by what might be termed ‘mega-trends’ in society. While service sector firms can sit and wait for a recovery in retail or banking, it’s going to be these mega-trends that really shape the future of the industry.

First, the ageing population in developed ‘western’ societies. By the middle of this century it is estimated that fewer than half of all Germans will be economically active. The majority will be either elderly or children, neither contributing to government finances. So how can a developed country like Germany continue to expect economic growth at the same time as maintaining the existing social welfare standards – all with fewer people working and contributing to the economic welfare of the nation? They need to partner with local expertise to succeed.

Second, sustainability is back on the agenda. European governments are implementing a system of carbon reduction commitments in 2010 that will force companies to audit and reduce their carbon use. This push from government will change corporate culture across the entire European region – and beyond. Large European firms will need to partner with local expertise to succeed.

And security is becoming more important, with governments launching national identity schemes and improved border controls – all these new security systems are based on some form of technology. Large European firms will – once again – need to partner with local expertise to succeed.

These three major trends are going to change the shape of IT services in future. But how many executives on the buy or sell side of the outsourcing equation have considered just how much their own marketplace might change this century, especially in Europe?

Welcome

Welcome to the new IBA Group blog. I’m Mark Kobayashi-Hillary, a writer and blogger based in London, UK, and I’m going to explore some themes related to the global IT services industry on this blog. You can find out more about me and my books and blogs on my website.

Let’s start by exploring the idea of Central and Eastern Europe (CEE) as an outsourcing destination. It’s only natural to ask if the region is still attractive? IBA Group is headquartered in Prague, but they have most of their resource in Belarus, so they do have experience of several CEE markets and therefore some insights into the benefits of working in this region.

But naturally, one of the first questions asked with IT outsourcing is around the cost. And places like the Czech Republic or Belarus can’t compete with the low cost resource available in markets such as China, but then outsourcing your IT is about a blend of attributes, value, not just cost. The countries where IBA operates can compete at around a similar price to India, so that’s a good benchmark to start with, and being in Europe the resource remains local to European companies.

There are some other factors that make this blend of EU and non-EU delivery attractive. Resource in Belarus costs less than in the Czech Republic, but the Czech facilities are covered by international legislation such as the EU Data Protection Directive – essential if you want your team to handle any customer-sensitive data. And having the ability to blend EU and non-EU teams by allowing the EU-based team to anonymise data gives a real cost advantage, with the security of European legislation.

Belarus is not a regular holiday destination for many western Europeans; in fact it remains a bit of a mystery to many. But this can be countered by thinking back a few years to how Eastern Europe has opened up to people from all parts of Europe in general, since liberalisation two decades ago. The Czech Republic is now a common destination for tourists from across Western Europe, making it a comfortable and familiar European city. It’s only a matter of time, and perhaps a budget airline route, before Minsk enjoys the same popularity.

In fact, Belarus offers some of the best technology scientists in the world. The former Soviet Computer Research Institute and Computer Production Association founded the IBA Group (in 1993, after the end of the Soviet Union), and though the Soviet empire has long crumbled, there remains a legacy of gurus and expertise in areas such as IBM mainframes – the classic legacy technologies still used by banks and insurance companies the world over. Many of the gurus from the Soviet research institutes came to work at IBA.

This blog is published by IBA Group, but if it were just a regular advert for the company then it’s unlikely you would return to read the second one. The aim is to engage and educate, to offer some new opinions on IT services and outsourcing, and in particular on the eastern European market. It’s clear from just thinking about what to enter in this first blog that there is still a lot to learn from the CEE region.

What are your questions? Let’s start a debate…