It is official: Europe is #1 By Robin van Koert Airbus is the world's largest airplane maker. In 2004 Europe also took over first place from the United States in offshore outsourcing. The Airbus success is the result of European cooperation. However, the credit for the top position in the offshoring ranking has to go to individual companies. In both cases, the objective is to increase the competitive strength in the world's markets, albeit by using different means. Is the European success a blip or the start of a trend? Europe leads the market for offshoring contracts worth more than 40 million euros. In 2004, the Europeans signed 28.4 billion euros in contracts. An increase of 3 billion euros compared to 2003. The Americans accounted for 24.5 billion euros of the total of 58 billion euros, or 49 percent for Europe and 42.3 percent for the United States. The Dutch share was 3.2 percent, almost 1.9 billion euros. The spectacular growth of offshoring in Germany is the main reason. In only a few years the German share went up from almost nothing to more than 12 percent. The steady growth in the United Kingdom also contributes to the increase. In addition, the economic situation in the US also partly explains the European success. In 2002, the value of offshoring contracts from that country still amounted to 31 billion euro. From 27 billion euros in 2003, the total went down even further to 24 billion euros in 2004, a decrease of over 22 percent. However, in that same period the dollar suffered a substantial loss in value. The share of business process outsourcing (BPO) in offshoring rose from 22 to 33 percent. In terms of value the increase was more impressive, notably from 12 to 19 billion euros. In the last weeks of 2004, ABN Amro confirmed the trend. A little fewer than 3,000 jobs will leave the Netherlands. Partly this is highly skilled IT work, which will be moved to other countries by way of offshoring. Despite all this, 67 percent of the value of offshoring contracts still concerns IT projects, the 'traditional' work. In the Netherlands the percentage is even higher. However, a shift is taking place worldwide towards outsourcing business activities such as financial services, accounting and procurement. Nevertheless, Dutch entrepreneurs maintain a focus on IT projects. Still, European competitors, like the British and the Germans, do follow the trend. The question is whether the Netherlands can afford to choose differently for much longer. A recent publication by the Netherlands Bureau for Economic Policy Analysis (CPB), 'Relocation from the Netherlands', indicates that offshoring is a win-win situation for all countries involved. Companies that outsource work and those, which take on that work all improve their competitive advantage. At the same time, offshoring enhances the competitive strength of the countries in which those companies are located. A while ago, management consultants McKinsey calculated that every offhoring euro generates about one and a half euro, of which a little over one euro and ten cents ends up in the outsourcing company's country. That is not to say that jobs do not disappear, because both low and high skilled jobs do. However, other jobs take their place. In the Netherlands, hundreds of thousands of jobs disappear every year for a variety of reasons. Still, a similar number of jobs are being created. It seems that a life of continuous learning and changing will be our motto for the future. The top ranking in the offshoring market has other consequences for Europe. As long as the United States dominated the offshoring market, companies such as IBM, HP, Accenture, CSC, Electronic Data Systems and Affilliated Computer Services took advantage of that situation. Last year's rise of Europe changed all that. European companies such as CapGemini and Siemens gained market share in their home markets. Apparently offshoring can also generate jobs. At the same time, Indian companies such as Tata Consulting Services (TCS), Wipro and Infosys have reached the Top 20 of the largest IT service providers. TCS also reached the Top 10 of the most profitable companies. These successful Indian companies are directing their attention more and more to Europe. Wipro's sales in Europe are 350 million euro, a third of its total revenues. Internet and telecommunication innovations gave the companies their current status. Work for overseas customers could be executed in India. However, according to the CPB, companies have a preference for locations close to clients, suppliers or employees. For the Indian IT service providers, personal contact with the clients is of ever growing importance in order to make the jump to the Top 10. After the pioneers, it is now time to convince the next batch of entrepreneurs. TCS has several offices in different European countries, including the Netherlands. An Indian service provider is about to open a call centre in the United Kingdom. The offshoring discussion is becoming more complex. It is no longer only about jobs that are leaving Europe. Blip or trend? The question does not have an unambiguous answer. Nevertheless, it appears that a leading offshoring position mostly leads to positive effects for Europe. However, according to the CPB, it is important for research and development to remain in Europe. Offshoring strengthens the competitive position of European companies on the world market. European companies are able to command a larger share of the European market. Indian offshoring service providers are directing more of their attention towards Europe, which can also create jobs. An increasing share of the added value created by offshoring ends up in Europe. However, the Netherlands is not Europe. Despite increased European cooperation, individual countries are also each other's competitors. Europe's leading position may be a blip. Still, BPO appears to be there to stay, as does the increasing competitiveness of the world market. It is time for the Netherlands to perceive that development as an opportunity instead of as a threat. Robin van Koert, 7 February 2005