For European companies considering outsourcing their IT, there is a nearby alternative to India: Eastern Europe. In 2005 This market was worth 149 million Euros in Hungary, 132 million in the Czech Republic and 201 million in Poland, according to a survey by PAC. In Hungary’s case this represents 16% growth, 11% for the Czech Republic and 9% for Poland. Recent high profile examples have been DHL’s move to Prague and Exxon’s setting up shop in Warsaw and Budapest.
There is much logic to this. The eastern European countries had a fine tradition of education e.g. in standardized tests, Hungary’s student maths scores are higher than the US and the UK. Budapest IT salaries are around one third of London, and although they are rising it can be seen that they will take many years to get anywhere near Western European levels. Nonetheless, this is still something of an area for pioneers. In terms of maturity, in my own experience the Czech Republic was comfortably the best established, followed by Hungary, with Poland lagging. In Prague and Budapest it is possible to find several companies who have successful operations, and at least a few recruitment agencies etc geared up to service them. This was much tougher in Poland, let alone the “wild east” of Russia or Romania, or even Belarus or Ukraine.
However it remains to be seen whether these countries will grab much market share from India, which has great advantages of scale, many years of success in this area, and a largely English-speaking workforce. Salaries in India are still a fraction of those in Hungary, even in Bangalore (never mind Chennai, Hyderabad etc) so their economic advantage looks secure for years, while the sheer number of large companies that have trodden the path to Bangalore means that, ironically, India may actually be of lower risk than Eastern Europe, at least in terms of being “proven”. The greater travel time and time-zone differences are the main drawback here, but if India can work for US companies with a 11.5 hour time difference, why not for UK companies with a 5.5 hour time difference? (yes, India’s time zones are measured on half-hours, a relic of the English civil service).
Some companies will worry that the economic benefits for the more advanced/”safer” places like Budapest and Prague may be transitory. Ireland used to be a popular cheap location, but years of EU-fuelled growth at rates of 8% have now brought Dublin close to the UK in terms of IT salaries. This might indicate that, given the setup costs and risks, it is better to go the whole way and go to India, where the wage differences are so vast that it will take decades to get to Western levels, even at the current high salary growth. One interesting recent step was the Indian firm Satyam opening an office in Hungary. The idea is that customers who want to try off-shoring but are nervous can start in Hungary, and then move to India as they grow more confident. Eastern Europe also has one advantage over India – continental language skills, which would be important for markets such as France and Germany.
Certainly the “India effect” is having a structural effect on IT consultancy prices. Even Accenture has been forced to cut daily rates, and indeed Accenture’s consulting revenues are actually in decline, but their overall figures are holding up to a rapid rise in outsourcing deals that is making up for the loss in consulting revenues.
Of course there have been some well-publicized problems, such as Dell’s abortive Indian help-desk, which I can testify from personal experience had big problems, but there seem to have been more successes than failures. After all, it is not as if IT projects in the US or UK all go swimmingly well.
Just as manufacturing has, to a large extent, moved to China, it may be inevitable that more and more IT jobs head off to India, and to a lesser extent Eastern Europe. The economics are compelling, and as more and more companies make it work, it feels less like a pioneering activity for the mainstream, which will fuel further growth.