Look east

Ingram Micro, Misco, Computacenter and Capita are among the channel giants ‘nearshoring' more functions to eastern Europe. But what's the appeal?

How to cut costs without sacrificing service quality is at the forefront for any IT channel firm in these austere times, and a growing number are looking to eastern Europe for the answer.

Distributor Ingram Micro last week revealed plans to double staff at its Bulgarian shared services centre to 500 as it transfers more transactional support functions from its country operations in western Europe to Sofia, with labour costs cited as a key factor.

Meanwhile, two of the UK's top 10 resellers - Computacenter and Misco - have both set up services centres in Budapest in the past year.

The practice of transferring IT or business processes to low-cost destinations less geographically and culturally remote than India is hardly new, with IBM for instance having operated a delivery centre
in the Czech Republic since 2001.

But whether it's Budapest (pictured, right), Bucharest or Bratislava, more firms - including those in the channel - are being lured to eastern Europe as they look to trim support, software development or back-office costs.

"It's now a lower risk for new companies coming in," said Mark Badi, international services director at Computacenter, which recently set up a 50-strong Budapest service desk to give customers that have moved to an external support model a cheaper option to its hub in Barcelona.

"The fact that all the big names - IBM, HP, BP - are here and employing hundreds of thousands of staff is a clear signal that the nearshore model is working and that the benefits to be gained are achievable," he added.

The figures add up

The upper echelons of a list of the top 50 global service locations compiled by AT Kearney in 2011 is dominated by Asian countries, thanks mainly to their wafer-thin labour and real estate costs. Top- placed India was handed a score of 3.11 for financial attractiveness, one of the highest on the list. China (2.62), Malaysia (2.78), Indonesia (3.24), Thailand (3.05), Vietnam (3.27) and the Philippines (3.18) who were all also in the top 10, all scored close to or above three, while eastern Europe's leading protagonists generally managed only two (Poland 2.14, Hungary 2.05, Czech Republic 1.81).

But the horror stories associated with offshoring to the sub-continent are playing into the hands of countries more closely and geographically aligned to the UK, said Marcin Malinowski, director of international services at Polish CRM consultancy Outbox.

"People have been burned by offshoring to some degree," he said. "The Indian model is more about quantity than quality and people are fed up with having to deal with people in a different timezone with limited language skills. Eastern Europe is somewhere in between. It's in the same timezone, it has the same European culture and maybe better language skills and a better understanding of business."

Daily rates for contractors in Poland are 30 per cent lower than the UK, Malinowski said.

Budapest, along with Prague, initially dominated the nearshoring market, with Hungarian officials claiming the country now plays host to 80 shared service centres employing 30,000 staff. Bratislava, which is just one hour from Vienna by train, has also proved a big draw, particularly among the big PC vendors such as Dell and Lenovo.

However, Hungary, the Czech Republic and Slovakia were consistently outstripped by Poland across 10 variables assessed by Gartner in its 2014 list of the 30 top locations for offshore services.

Malinowski said Poland's location at the centre of eastern Europe and large population make it an obvious choice for nearshore support and development centres. But the real jewel in its crown is its technical prowess, he argued.

"We have more than 40,000 tech graduates annually," he said, adding that not only Warsaw (pictured, above) but also Wrocław, Łódz, Gda´nsk and Kraków - where Capita recently set up a 550-strong shared service centre - boast strong reputations as nearshore hubs.

But fears that Hungary's labour pool has been milked dry are wide of the mark, according to Badi.

"A few years ago, Budapest and Prague were very popular with shared service centres and service desks, with 70 to 80 per cent coming here, and over the past few years other countries have become more popular," Badi (pictured) said. "Gartner may be looking at whether the available labour pool is saturated, but the president of the Hungarian Investment Trade Agency (HITA) has said he is in discussions with 30 shared service centres today and that is because it is not yet saturated and the benefits are very strong."

Vacancy rates in Budapest have doubled to 25 per cent in the past five years, Badi said, meaning real estate costs are also relatively low, but Hungary's ability to produce young workers with good language skills is its trademark, he added.

As a rule, the further east you go, the cheaper it gets, but there is always a trade-off between price and quality, Badi warned.

"Bulgaria is probably a lower-cost location even compared to Budapest in terms of labour and real estate, but it does not have the same intellectual capital," he cautioned.

"It may be an option for lower-cost, back office transactional services but it would be harder to deliver high-quality, customer-facing services from there."

Even closer to home

With its cheap labour and deep talent pool, Ukraine has also proved to be a honeypot for western firms looking to slash software development costs.

However, Jeremy Davies, co-founder of analyst house Context, suspected the "gunboat diplomacy" currently on display in Crimea will make western firms think twice about investing not only in Ukraine but also the wider region.

"There's nearshoring - and then there's nearshoring." he said. "Spain has become an attractive place to nearshore because average wages have dropped by 20 per cent in the past two years. People will be thinking, ‘if it can happen in Ukraine, it could happen in the Czech Republic or Poland, so let's look closer to home', and somewhere such as Spain could gain as a result."

In any case, the UK government should work harder to ensure more IT jobs remain in the UK, said Tom Kelly, chairman of cloud vendor Ospero.

"If you can architect it over there for 30 per cent of the cost, with staff who are as technically sound as in the UK, why wouldn't you do it? The UK government has to look at what it's doing in terms of investment in people, particularly in IT, to ensure this does not proliferate," he said. "All they are doing is exporting the jobs of 16 to 17-year-old school leavers, when they should be making a real attempt to keep [the jobs] here."

POLAND

Population: 38.2m

GDP per capita (PPP): $21,000

AT Kearney ranking: 24

Notable firms: Capita, Capgemini

Poland secured more shared service centre projects than anywhere outside India or the US between 2003 and 2012, according to fDi Markets. It is also the only eastern European country to score above "good" in four of the 10 variables Gartner uses to assess offshore locations: government support, labour pool, political and economic environment and cultural compatibility.

UKRAINE

Population: 44.6m

GDP per capita (PPP): $7,400

AT Kearney ranking: 38

Notable firms: Samsung, Huawei

Thanks to its low wages, Ukraine bests all other eastern European countries in terms of financial attractiveness, according to AT Kearney's 2011 study. But the country is marked down on its business environment, finishing 48th out of 50 ahead of only Indonesia and Pakistan. Gartner gives Ukraine the lowest score of "poor" for data and intellectual property security and privacy, reflecting its continuing high incidence of software piracy.

SLOVAKIA

Population: 5.4m

GDP per capita (PPP): $24,000

AT Kearney ranking: 40

Notable firms: Lenovo, Dell

Slovakia's nearshore market is dominated by its capital Bratislava, where 75 per cent of the population works in the services sector. According to Gartner, Slovakia boasts a "good" labour pool and Dell recently gave the country a vote of confidence by pledging to create another 600 jobs there through the opening of a new customer services centre.

HUNGARY

Population: 9.9m

GDP per capita (PPP): $21,000

AT Kearney ranking: 31

Notable firms: Computacenter, Misco

Hungary was an early leader in the nearshoring scene, although fears the market has become saturated may be wide of the mark, with local officials claiming they are currently in talks with 30 companies looking to open centres in the country. As it has one of only a few languages in Europe that are not part of the Indo-European family, Hungarians tend to be skilled linguists, making the country a natural choice for UK firms.

BULGARIA

Population: 7m

GDP per capita (PPP): $16,000

AT Kearney ranking: 17

Notable firms: SAP, Ingram Micro

AT Kearney regards Bulgaria as one of eastern Europe's top nearshoring destinations thanks to its low labour costs. But Gartner rates the country's labour pool and language skills as merely "fair". Bulgaria "must be wary of skilled professionals moving to other parts of the EU for a better career and salary", following the removal of restrictions on 1 January, the analyst added.