Good old new Europe By Robin van Koert India is the future, China a close second and the Philippines and the smaller Asian countries are emerging. "Go Far East, entrepreneur", seems to be the offshoring slogan. However, it is not that simple for everyone. Asia is far away. The culture is different. The distant unknown deters. Enter Eastern Europe. From far away to close by. Unknown becomes familiar. Are the former Communist Eastern European countries a fully-fledged alternative? The Czech Republic is popular. According to a survey of five hundred executives, the Central-European country is the most popular offshoring destination after China and India. On the basis of nine decision-making criteria for offshoring, the Economist Intelligence Unit investigated which countries are most attractive. Apart from the Czech Republic, two more former COMECON countries are in the Top 10 of the best offshoring locations: Poland at five and Hungary at eight. Slovakia, Bulgaria and Romania follow closely at twelve, thirteen and fourteen, respectively. This does not mean that the Eastern European countries are global players of stature. The number of offshoring projects is relatively small. The size of the contracts is also smaller than those in India. The future is nevertheless promising. According to research by Ernst & Young, the Netherlands is the largest foreign investor in Poland and the Czech Republic. Both service providing and manufacturing companies contribute to that status. At the same time, the popularity of the other Eastern European countries is growing. Lithuania, Latvia, Bulgaria, Romania, Belarus and the Ukraine are also countries to which Dutch companies outsource ICT-projects. An offshoring survey commissioned by the United Nations Conference on Trade And Development (UNCTAD) indicates that almost a quarter of Europe's offshoring contracts are awarded to Eastern Europe. According to the UNCTAD report, Poland, Hungary and Romania are the most popular countries. However, with the exception of the latter country the Dutch mainly prefer the new EU member states. Membership of the EU is an important reason for the significant increase in the interest in offshoring to Central-Europe. Trade within the EU, as well as traveling between, and working in, EU members states is easier than for the other Eastern European countries. For example, the Dutch trading volume with the Czech Republic has increased by tens of percentage points since that country's entry into the EU. Programmers and other IT-experts from the new EU countries can work on projects in the Netherlands for longer periods of time without any problem. Nevertheless, EU membership also has a negative impact on another advantage of the new Europe within the EU: the labor costs are gradually rising. Romania is the country, which benefits most from that development. Together with the Czech Republic and Hungary, that country is now one of the most popular offshoring destinations for Dutch companies that want to outsource their software development. Furthermore, according to Paul Tjia, offshoring expert for GPI Consultancy, the business climate in Romania is more agreeable, closer to that of Mediterranean countries such as France, Italy and Spain. It is clear, therefore, that entrepreneurs should not consider the former COMECON countries as all being mirror images of each other. Differences in political situation, infrastructure, rates and language ability certainly are relevant. With respect to the latter, the Baltic states and Romania have the additional advantage of the presence of German- and French-speaking staff, respectively. English is not a problem anywhere, because the younger generation is growing up with that language. However, India still has quite a lot more to offer than Eastern Europe. Particularly concerning knowledge and experience, but outside cities like Bangalore, Chennai, Delhi and Mumbai the rates are also attractive. In addition, other Asian destinations are often even cheaper. So why still choose Eastern Europe? The answer is simple: for the Dutch small- and medium-sized enterprises (SMEs) India and the other Asian countries are just a touch too exotic. The time difference does not help either. For the large transnational companies (TNCs) outsourcing to another time zone is an advantage. They already operate worldwide and offshoring to India and further away is a logical step. At the same time, Indian companies are able to offer a much broader range of products. However, entrepreneurs of SMEs prefer the more familiar European surroundings. Smaller cultural differences and, if need be, you can come and go in one day. Having to work with multiple companies is not a problem for them. It can even be an advantage. For every project you can select the best supplier. What kind of work are we talking about? For the time being, Dutch companies are mainly outsourcing the development of software to eastern Europe; partly through local companies, but also through subsidiaries or the Eastern European branches of IT service providers such as Logica CMG. Atos Origin, another large IT service provider, offers a relatively new product from Poland: infrastructure management. "Certain network management tasks can rather easily be carried out from a distance", explains Tjia. "Also thanks to such new services, Dutch IT service providers are gradually acquiring a larger offshoring market share", he adds. Indian global players have noticed the SMEs' preference for offshoring destinations in Eastern Europe. Girish Ramachandran, Regional Director Northern Europe for TCS in Amsterdam, explains the Indian presence in Hungary by saying that "it is the reason that Tata Consultancy Services (TCS) is pursuing a global delivery strategy with, amongst others, a branch in Budapest". The potential of the former COMECON countries can hardly be underlined more emphatically. The new Europe feels familiar, sometimes even without actually being so. However, the former COMECON countries are not all alike. The business climate, infrastructure and political stability can differ. In the longer run, the relatively small labor markets might pose restrictions. However, for the time being that is not the case. On top of that, successful Indian enterprises have also discovered the new Europe. You could call that a stamp of approval, including access to the Indian labor market. Therefore, Eastern Europe appears to offer a good alternative to Dutch SMEs. Robin van Koert, 4 April 2005