Outsourcing in Eastern Europe

Eastern Europe has the potential to be the next outsourcing hotspot, says a December 2006 study by McKinsey. According to the report, “The Overlooked Potential for Outsourcing in Eastern Europe,” this region currently holds less than 1 percent of the world’s offshore IT market, but by the end of 2008, offshoring to Eastern Europe could triple, to more than 130,000 jobs. Wages in this location resemble those found in India today, and are not expected to rise significantly (whereas India’s wages may). Wage inflation in Eastern Europe moves at a very slow pace, the report states. Other benefits of the area include its low-risk profile and cultural proximity to Western Europe, as well as less expensive labor than Western Europe.

The report encourages companies to explore smaller cities, instead of jumping into locations such as Budapest, Krakow and Prague. Almost 50 cities in Eastern Europe have large universities that would allow employers to tap into a ready pool of skilled graduates, McKinsey notes. These midsize cities in Romania, Russia and Bulgaria are less likely to have offshoring activity already under way, so the “labor cost advantage is more likely to remain attractive for the next decade,” according to the report. One example: Katowice, a city in Poland, has 7,400 university graduates who have suitable talent.

However, the benefits of outsourcing to this region may not be as substantial for U.S. companies as they are for European corporations. Companies in Western Europe can benefit the most from outsourcing to Eastern European countries because they are more likely to find compatible language capabilities in nations like Hungary and Poland than they would in Southeast Asia, McKinsey’s report states. And McKinsey’s research shows that Western European companies’ need for offshoring increased by 50 percent in the past two years.

As with any potential offshoring location, you must weigh the reliability of the infrastructure and political stability of Eastern European countries, the report cautions. Another concern: The workforce could shift to a competitor that decides to set up shop. However, having a portfolio of offshoring locations reduces potential risk.