IT outsourcers are demanding more than cheap labor from their offshore partners. Learn how Central and Eastern Europe have gained a stronghold in this evolving industry.

The stereotypes commonly circulated about outsourcing are becoming increasingly farther from the truth. Western firms that outsource their information technology work are relying less on traditional markets in Southeast Asia to fulfill large chunks of services and more on providers in Central and Eastern Europe to do customized and compartmentalized tasks. Recent research indicates that IT outsourcers are seeking greater knowledge of and attention to specific products and services and that the successful labor providers are those that show adaptability and response to their clients in a variety of ways.

Results from the 2008 Black Book of Outsourcing survey of top IT company executives reflect the growth of the Central and Eastern European markets compared to their Asian counterparts. The Black Book research as well as a Forrester Research study indicate that IT companies are redirecting their outsource spending toward providers that can come up with more than just simple labor. Another study that focused on healthcare firms found that while they are becoming less likely to outsource the bulk of their IT departments, the successful outsource providers are the ones that are taking a more integrated and active role in the company.

IT Outsourcing Map Changes As Industry Evolves

Central and Eastern Europe have gained a foothold in the outsourcing market by embracing a style that seems antithetical to the longstanding practice of providing cheap labor in the absence of government regulation, environmental policy, and positive public relations. Several key cities in the region compare favorably to traditional locales in Russia and Southeast Asia when ranked in a Black Book survey measuring sustainable policies, attractiveness to employees, the business environment, and the financial environment. “Many people, when they looked at outsourcing, were looking to move their operation to a low-cost country, and I think a lot of those advantages became short-lived,” says Doug Brown, co-author of The Black Book and subsequent surveys.

Brown notes that much of what sets the European markets apart is an investment in building a skilled workforce that pays higher dividends than the cheapest possible labor. “People have the training, so they can see beyond just their tasks,” he asserts. “They can see how they can actually solve problems for their client companies.”

Kyiv, Ukraine, for example, scored 20 out of a possible 25 points in the category that measures worker training, skills, and education, lifting its total score over competitors in Russia, India, China, and the Philippines. Seven Central and Eastern European cities scored a 20 or higher in this category, likely due to an ample and highly structured educational infrastructure similar to those in Western nations. “The talent, the training…in many ways these different policies are developing a social community there, giving back to the community as well as the environment,” adds Brown.

In the Ukraine, where more than 70 percent of the people possess at least a secondary education, a dozen universities were cited in a GoalEurope study for their excellence in computer science education. GoalEurope also reports that the Ukraine government is upping educational spending from between three and four percent of its gross domestic product to 6.5 percent.

This increased educational commitment is reflected in Brainbench’s 2006 Global Skills Report, which ranks the Ukraine fourth in the world in overall IT certifications. The nation ranks in the top five for certifications in SQL (ANSI), RDBMS concepts, C++, and software testing.

Another category where Europe fares well is in environmental and economic policy, as companies strive to preserve the ecology while gaining key PR boosts. “They’re looking for the outsourcers also to really put in the innovation for those green initiatives, to represent them,” says Brown. “If they’re outsourcing their data centers, they want to make sure that they’re doing it not only in terms of regulations that are pending, but the public relations aspect in general of allowing somebody to take that over and not doing it right.”

The Black Book survey finds that 52 percent of CIOs and IT executives are dissatisfied with environment, workforce, and economic development capabilities in their current arrangements, a factor that is leading the exodus to Europe.

Outsourcers in Search of Better ROI

Wherever they go, Brown expects firms to insist upon more binding contractual terms that will hold the outsource vendors to benchmarks in environmental protection and workforce development. “Above all, with the environment and those kinds of things coming into play, it really has to become more than just lip service,” Brown asserts. “It really must become, ‘Prove to me that we can do this.’”
The demand for better infrastructure is representative of an outsourcing market that’s tilted toward firms that are looking for more in return when they send their work offshore. “It’s really becoming, “What else can you add?’” notes Brown.

Brown adds that as the current economic downturn has forced IT managers to cut their budget, they’re turning to their outsourced departments to come up with the kind of enhancements they won’t get in-house. This is taking place, as 70 percent of firms in a Forrester study cited that they are negotiating lower rates with suppliers in response to the slowdown in the economy. The report, The State of Enterprise IT Services: 2008, also states that 29 percent of those same companies are setting higher ROI standards for new projects and initiatives.

Yet, the move toward outsourcing is not flagging, as 43 percent of the firms are increasing the use of offshore vendors, and the same percentage are doing more infrastructure outsourcing.

Healthcare Provider Trends

Healthcare providers are among the many calling for an attentive, piece-meal approach. Where outsourcing declines are showing is in the use of what is sometimes known as “extensive IT outsourcing.” Mike Smith, author of a report issued by healthcare researcher KLAS, notes that the term is used by KLAS to describe organizations that outsource either a majority or all of its IT work.

According to a KLAS summary report on the topic, an estimated 12 percent of U.S. hospitals with at least 100 beds engage in extensive IT outsourcing, but more have discontinued the practice than have signed new extensive IT outsourcing agreements in the past year. Smith is reluctant to say that this trend is reflective of a greater movement in the broader realm of IT outsourcing, but Brown indicates that what’s going on in healthcare is representative of many industries that rely on a vertical model.

Hospitals and healthcare organizations require a great deal of industry-specific knowledge from partner vendors, but this is true of many other fields that are experiencing the same dissatisfaction with traditional outsourcing practices and markets. Many healthcare companies that are dissatisfied with extensive IT outsourcing are instead outsourcing component parts of their IT operations. KLAS has identified growth in this area that Smith calls “discreet or selective” IT outsourcing.

Companies are also breaking their application support apart, keeping a few industry-specific components in-house while outsourcing the rest. “So that they recognize that some of these outsourcers are really, really good, they have world-class facilities that they can take advantage of, and they really do a pretty good job with keeping systems up and available 24×7,” notes Smith.

A Time of Transition

The IT outsourcing world is experiencing time of transition and maturation. Companies across a wide spectrum of industries are beginning to take a different approach to IT outsourcing as they seek to find greater yields from the practice amidst a more uncertain economy.

Yet there remains plenty of room for the IT outsourcing market to grow. The Forrester study reveals that only nine percent of firms use offshore resources as extensively as they think is possible, and more than half are exploring the possibility of moving IT work overseas. The following additional developments were reported:

• Approximately 22 percent of companies in the Forrester study are not using offshore IT services providers, but were actively tracking their developments. 
• Nineteen percent have pilot programs in place. 
• Fourteen percent are committed to offshoring and are expanding their use. 
• Nine percent are using offshore resources wherever and whenever possible. 
• Thirty-seven percent don’t offshore and won’t in the next year.

Still, the study cautions against offshoring plans that are too aggressive, noting that: “The longer and broader the deal, the higher the level of dissatisfaction.”

“Outsource providers will have to adapt to companies that seek to maintain some degree of centralized control while still sending some of their IT abroad,” notes Brown. One way in which the outsourcers can do this is by seeking out leadership with knowledge of the industries they serve. “As outsourcing has evolved, especially in the U.S., some of the CIOs and CFOs who have lost their jobs have reinvented themselves to become strong outsourcing leaders. So these people are getting a lot more savvy,” he adds. Those minds at the top can then engineer a more responsive outsourcer.

“There’s going to be a lot of attention toward getting more out of your outsourcing staff than you have seen previously,” concludes Brown. “My recommendation is to people-push this, encouraging the capability of people to innovate and customize.”

Published by SoftServe, Inc.