Offshoring Not Destructive, Says New EIU Report

by Amanda Banks, Tax-News.com, London

02 June 2006

A new report from London's Economist Intelligence Unit says that the future of offshoring is not the destructive race to the bottom lamented by so many commentators, but a search for the right skills at the right price.

'The new face of offshoring: closer to home?' is a newly released report from the EIU sponsored by Hewlett-Packard. It says that locations closer to home - 'nearshoring' operations in Central and Eastern Europe and North Africa - will be a key focus of expansion, especially for companies based in Europe. The report asserts that the most important development in offshoring is not the drive for ever-lower costs, but the emergence of diverse new locations that support more sophisticated offshoring requirements.

"As costs rise in nearshoring locations like the Czech Republic and Hungary, some expect them to become just a footnote in the broader history of offshoring," says Delia Meth-Cohn, Senior Consultant, Economist Intelligence Unit. "But demand is increasing for more complex capabilities and a closer linguistic and cultural fit with customers-that makes lower-cost European locations very competitive alongside global centres in India and China."

The conclusions of the report are based on in-depth interviews conducted by the Economist Intelligence Unit with senior executives, responsible for managing shared-service and outsourcing centres in the EMEA region and beyond.

The briefing paper argues that three trends are driving the shift to nearshoring:

• European companies need shared service centres that can operate in European languages, not just in English. But India or other rock-bottom locations cannot support operations in anything but English. Most companies also feel more comfortable with the cultural and geographical proximity of European locations. With Central European locations still at least half the cost of the cheapest western European locations, most are willing to pay the small premium needed to get a service centre that addresses business needs.
• New offshoring functions require more interaction. As offshoring becomes mainstream, the pioneers are pushing beyond the standard offshoring activities, like finance and IT support, to more complex and customer-facing operations. As more and more transactions can be standardised and performed remotely, these kinds of higher-value services need the language and cultural skills that are prevalent in nearshore locations.
• The rise of global service delivery. Global outsourcers supporting business operations prefer not to divide up the world into nearshore and offshore. They see their role as developing a portfolio of cost-effective service centres that can run around the clock, with a wide range of skills and capabilities. With demand now stronger from Europe, global outsourcers are focusing on boosting their capabilities in the EMEA region. Even Indian vendors are now opening new centres in Central Europe to serve the global and European market.

Benchmarking EMEA locations, the report finds that:

• Central European locations - the Czech Republic, Hungary, Poland and Slovakia - enjoy low costs, strong skills, EU regulations and solid infrastructure. They will remain attractive for higher-value services for the foreseeable future. Wage costs are around half of those in western Europe and wage inflation has slowed since EU membership in 2004-but some cities are already overcrowded with offshoring centres, reducing labour availability and pushing up costs.
• Romania, Bulgaria and the Baltic states also offer similar skills with lower wages and are currently attracting a flow of new investment into offshoring operations.
• Russia is starting to develop a niche in global IT and R&D offshoring, based on its strong human resources.
• New locations like Egypt, Morocco and South Africa can offer competitive advantages, but companies need to ensure these markets can supply the right skills to meet their business requirements.

"Close connection to Europe and the right cost structure were the main criteria for HP to open several centres in Central and Eastern Europe," says Francesco Serafini, head of HP in Europe, Middle East and Africa. "It is one of the world's most dynamic regions with a high availability of skilled workers in a stable economic, political and social climate."

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