Eastbound with outsourcing – IT services in Central and Eastern Europe

16 April 2015

Competitive costs and skilled tech workers are making Central and Eastern Europe (CEE) a go-to destination for a new model of IT outsourcing, with complex development projects being entrusted to talented start-ups in the region. Chris Beaumont, director of Equity & Grant, and Sean Murphy, director of Marrable Services, speak to Sarah Williams about the trend towards outsourcing bespoke software solutions, and what makes CEE so attractive.

For the past two decades, the idea of 'outsourcing' has been synonymous with countries in Asia-Pacific. Indian giants Wipro, InfoSys and Tata Consultancy Services remain some of the largest IT outsourcing companies globally, while competitive offerings from locations such as Malaysia have latterly turned heads.

The very essence of outsourcing, though, is the drive to increase efficiency, and so as issues such as price inflation and high staff turnover start to hinder the traditional Asian markets, it's no surprise that European companies are taking note of the technical wizardry of a region rather closer to home.

With a booming IT start-up culture and a wealth of technologically educated workers, Central and Eastern Europe (CEE) is now a highly attractive destination for companies seeking to partner up on advanced ICT services.

The signs are everywhere. Barclay's IT helpdesk centre in Vilnius, opened in 2009, is now one of the largest technology operations in Lithuania. Meanwhile, Google's recent announcement that it will open local offices in Lithuania and Bulgaria to add to its existing sites in the Czech Republic, Hungary, Poland and Slovakia, is testament to its eagerness to engage the growing number of CEE tech start-ups in its commercial networks. In Bulgaria alone, for example, around 100,000 people are currently employed by the IT sector, of which 17,000 are professional software engineers, according to the Bulgarian Association of Software Companies.

Offering much more than 'cheaper' labour, the rapidly expanding IT industry in CEE is increasingly able to provide complex development services such as bespoke software engineering and web platform services.

Traditionally held in-house, these are services that companies in the UK, mainland Europe and the US are for the first time outsourcing to a large extent, facilitated by the skilled, reliable partnerships available.

Eastern promise

For Chris Beaumont, a software delivery specialist and director at nearshore partnering consultancy Equity & Grant, the trend towards working with CEE providers is a response to the evolved needs of today's companies.

"People often think that outsourcing is all about cost, but the model has matured," he says. "Cost can play an important part, but there is awareness that there's much more to making the right decision. Often businesses want to focus on their core and don't have sufficient skills in other areas; possibly they lack in-house innovation and are looking to draw on broader talent pools and find new ways of working.

"Another key driver is the need to increase flexibility, particularly in the ICT space - an area of business dominated by projects that start and finish, where a stable in-house head count doesn't provide the most efficient model. Companies are looking for ways to address skills gaps, bring in new ideas and innovation and increase flexibility. All those areas are addressed very well within the CEE and it is quite a different model from what you find in the far-shore model in Asia-Pacific."

Beaumont, who works principally with companies in the UK, Nordics, Baltics and Poland, emphasises that some of the shared culture between workers can be a bonus, as well as the proactive attitude of these young enterprises.

"There is a much stronger cultural alignment in many ways and that reduces the challenge of outsourcing," he says. "A lot of the players in this particular region are also much smaller, more entrepreneurial. Even the biggest players in the Baltic states, for example, would be considered fairly small from a global perspective. That means that every client is important and gives them a very strong desire to please; they're often much less contractual, less bureaucratic and keen to be judged on results. And because they've become operational more recently, they started as agile organisations, so are much more responsive."

It's a point that Sean Murphy, director of software delivery and outsourcing company Marrable Services, also recognises. In 2013, Marrable partnered with Qubiz, a software development agency in Oradea, Romania, initially to deliver a bespoke asset-management system for a UK media company; it is a collaboration that continues to be very rewarding.

"You can't work in a very 'waterfall' way anymore," Murphy says. "You have to be agile, and that is typical of how the Romanians operate; every day they stop and talk about what they've delivered, any issues, and what they're going to do tomorrow. Culturally, they are very expressive and want to engineer with you; whereas in the past with far-shore outsourcing it's been more of a 'father-son' relationship, where they will follow instructions but not necessarily question anything. CEE providers can become almost like your in-house permanent IT staff, which is a huge advantage."

With confidence

The preparedness of CEE workers to challenge and question, matched with clear acumen in the field, is giving Western companies the confidence to outsource complex software development, rather than the simpler ICT 'commodities' services allocated to the traditional Asia-Pacific model.

Another obvious perk for European businesses working with CEE companies is the similar time zone and close geographical proximity. With no visas required and affordable flights just a couple of hours long, it is easy to meet face-to-face throughout a project - something that Murphy and Beaumont strongly encourage for initiating and maintaining a close relationship. Sharing many hours of the working day also makes collaboration and problem-solving more straightforward.

For more distant companies, such as the US, there are also many benefits to be found in working with CEE providers, such as high levels of technology-based education, proficiency in multiple languages and stable infrastructure.

"Romania has about 64,000 IT specialists, with around 8,000 graduates each year from what they call 'IT' or 'technology' universities, purely focused on turning out engineers from a technology perspective," Murphy says. "There is also the stability. You can't have a country where there are going to be power outages, or the data connection keeps failing. That reliability needs to be there, and we've found that all these things are heavily invested in by the Romanian Government."

"Partners across CEE offer everything from infrastructure to databases, hosting arrangements, helpdesk and ICT support services, but isolating the right partner can be a convoluted process. "

In Beaumont's experience, this investment and connectivity is region-wide. "Governments in CEE, almost across the board, are very committed to making business work," he says. "They recognise that their economies need significant development and they have looked at the areas where they can support that activity. Education in the computer-science space is just one of those."

In the zone

Countries just outside CEE, in particular Ukraine and Belarus, also have burgeoning IT service industries and highly skilled employees, and can offer competitive costs. As Beaumont points out, though, there are certain comforts - as well as financial incentives - to be found in staying under the auspices of the EU.

"The fact that the CEE region is broadly within the EU gives good solutions to some of the concerns you may have in terms of the legal operating environment," he says. "Under EU law, you will have fewer concerns around IP, retaining your code and possibly your data security.

"There's also still a significant amount of European structural funding available. That means grants to support not only local companies, but also global companies that wish to set up service operations within certain countries."

Another advantage CEE companies can offer is a high level of staff retention, allowing for knowledge transfer and consistency of service, compared with the higher attrition rates in India and Southern Asia.

"Our retention rate in Qubiz, our Romanian partner, is about 97-98%," Murphy says. "So when I'm talking to UK CEOs, CTOs and CIOs, that is a huge advantage for them. They know that if they start working with me they're going to have the same people there in three years' time."

Partner up

Partners across CEE offer everything from infrastructure to databases, hosting arrangements, help desk and ICT support services, but isolating the right partner can be a convoluted process. While a search engine would immediately throw out a list of established Asian players, CEE companies can be harder to find, with less developed websites and marketing presences.

One identifier that can prove useful for choosing potential partners from a line-up is membership of the various business partner schemes, which can help demonstrate a company's expertise in the specific software capabilities you require. Industry leaders within different fields such as Cisco, IBM, Informatica, Microsoft and Oracle all offer 'partner' status to accredited commercial associates. Ratings systems such as Microsoft's 'gold-certified partners' can help companies to stand out with regard to their level of ability within a particular software competence.

Above all, however, a company's outlook and proven history of delivering must be weighed up, and companies without official partner status should by no means be ruled out.

For Murphy, the true markers of ability are simply a company's track record of delivering and its customer testimonials.

"You've got to do your research, get client references and look at what they've delivered in the past couple of years," he says. "So there is that bit of work to be done, to enable you to select the right suppliers."

Specialist consultancies like Marrable Services and Equity & Grant, with a good working knowledge of the region and a range of contacts, can certainly provide a good starting point for a search. Once a shortlist is established, it's also advisable to get a feel for companies by meeting them on their own premises. You should also pay particular attention to location.

"It's important to think about precise geography," Beaumont says, "which country or part of a country will provide the best balance of costs, skills and broader operating environment for your particular need - whether it's avoiding specific hotspots, or finding your niche development partner. Subsidies can also have a significantly affect on your choice. With good advice, you could find that your advantage from outsourcing will be maintained much longer."

While the advantages of these new outsourcing models are apparent, companies must proceed with care concerning their own competencies. Murphy emphasises that certain core services should always remain in-house, and, for any outsourcing partnership to be successful, the right arrangements must be in place at both ends. Only then can outsourced services feed smoothly and effectively back into the global operation and the benefits of increased efficiency be felt.

Chris Beaumont is a director at Equity & Grant, a specialist UK company that provides a range of business internationalisation and nearshoring services. He has a background in consulting, software development and delivery in public and corporate sectors.
Sean Murphy is director and co-founder of Marrable Services, a London-based software solutions company, and is the author of ‘Location Matters’, a whitepaper on IT farshoring vs nearshoring. He has over 25 years’ experience managing large-scale delivery projects mainly within media and finance.