The Biggest Growth Engine for Offshore Outsourcing

London, England, 24 April 2006 — European-based companies will fuel the growth in offshore outsourcing with a 50 percent 'year on year' rise in spending predicted in 2006 and 2007, analysts said at Gartner's European Outsourcing and IT Services Summit today. The growth in the region is primarily driven by companies based in the UK, with increasing demand in Germany and the Nordic countries in particular. Growth in the US, which is a more established market, is predicted to grow at 30 percent during the same period.

"The market for offshore outsourcing is on the increase, with the number of companies using high levels of offshore activity globally set to increase from 13 to 20 percent in the next two years," said Ian Marriott, research vice president at Gartner. "European companies are likely to be at the forefront of this increased activity as new markets open up."

A recent global survey of 945 people undertaken by Gartner found that India remains the main destination for global offshoring, with China and Brazil competing for second place. For European companies India is still number one and China featured as a potential top three choice, however, both are set to face competition from markets closer to home.

"For some years now India has been the number one choice for the vast majority of European companies looking to offshore," said Mr Marriott. "However India is in danger of becoming a victim of its own success. According to Mr Marriott the increase in demand for resources from India is stretching the availability of the experienced labour pool, leading to increasing attrition rates and subsequent increases in salary levels. "All this points to the fact that European companies need to cast their net wider and consider other options based on their individual circumstances," he said.

While the survey found that China came out as a top three offshoring choice for European companies as well, many European buyers increasingly favour a nearshore alternative. According to Mr Marriott, "The limited English language capability, lack of maturity and experience in global services contracts, combined with a tendency to focus heavily on the US mean China is not as appealing for European countries." Similarly, Brazil and Mexico, which featured strongly in the global ranking, are not currently strongly targeted towards Europe. Their focus is mainly on the U.S, largely due to their geographical proximity and time zone benefits.

Consequently, Gartner said a 'nearshore' location, that is countries within Europe itself, will be more attractive destinations for European companies looking for offshore potential. Gartner highlighted the top 10 nearshore locations.

Top 10* nearshore locations for European companies
Czech Republic
Hungary
Ireland
Latvia
Northern Ireland
Poland
Romania
Russia
Slovakia
Spain
*in alphabetic order

Gartner categorises these top 10 countries into three distinct groups:

Group 1 - Long standing members of the European Union (EU)
This group, which is comprised of Ireland, Northern Ireland and Spain, is the most mature. It has a robust infrastructure, political and economic stability and no travel or visa restrictions for EU members. Employees operate in a stable and sophisticated domestic environment and are therefore well set to respond to the buyers' requirements. Ireland and Northern Ireland offer staff with natural English language skills, and have strong government support to promote Foreign Direct Investment (FDI). The fact that all three share the same privacy and security legislation with the rest of the EU is a major advantage.

However, according to Mr Marriott, "Such sophistication does come at a price. The cost base, such as labour and real-estate costs are of course higher here than in the developing nations, and these factors must be considered."

Group 2 - New members of the European Union
This is the largest of the three groups and includes the Czech Republic, Hungary, Latvia, Poland and Slovakia. It is an attractive proposition, particularly in the short to medium term while costs remain low compared to the more established European Union countries. Political and economic stability have improved greatly since EU membership and there is a good cultural fit for central European nations. Language skills are fairly good within the group - German is a particular strength - and technical skills are high.

However, Mr Marriott cautioned, "The labour pool is potentially good in these countries, but not always scalable and companies will not always find all the services they require in one location. Maturity of skills is also currently lower than Western European countries". Gartner's research highlights that current capabilities include the provision of help desk facilities, application development and maintenance and some business process work. Business skills are still maturing and will come in the main from the presence of large, traditional service providers as well as established Indian-based providers looking to expand their capabilities in the local market. The latter will also have an interest in establishing themselves within the EU for security and privacy reasons.

Group 3 - Non members of the European Union
Romania, Russia and other former Soviet states make up the third group. Romania is already taking steps to join the EU and is closer to meeting the established parameters; whereas the former Soviet states have further to go.

"These countries do not have the cost pressures that many other European nations are experiencing and consequently will remain attractive from a pure cost point of view for longer," said Mr Marriott. Language skills are generally good with linguists who can offer English, French, German and some Italian. Romania's universities produce good technical and engineering graduates whilst Russia's elite universities have extremely high standards in maths and science. Consequently the labour pool is of high quality and is very scalable. Gartner sees the key capabilities in these countries as applications services, rather than business process skills.

Government support in Russia has increased in recent years, and Romania is very focused on bringing in foreign investment and growing the domestic IT industry. Culturally there is better alignment with the EU than one would expect from India and China, but the approach to global business is behind the rest of Europe and needs time to mature. Similarly, the infrastructure is not as solid as elsewhere on the continent. Said Mr Marriott, "Visa requirements can be trickier in this part of the world and the political and economic environments are potential areas for concern. Security, privacy, software piracy and Intellectual Property (IP) protection are likewise less straightforward here, and this needs taking in to account."

One of the main findings from Gartner's recent research on offshoring is that companies are unlikely to find every capability in every country at any one time, although the more developed the location the more scalable the offering is likely to be. "Offshoring needs to be part of a wider sourcing strategy that takes a longer-term view of where capabilities are best deployed, regardless of their location," concluded Mr Marriott. "In addition, buyers have to be realistic about their willingness and capability to address the increased risks and challenges of having work delivered from offshore locations".