14 September 2018

Nearshoring in the CEE: Looking for Perspective Locations

Analytical Research

Why is it so interesting and important? In recent years, the Central and Eastern Europe has become one of the top software development outsour iscing destinations. One of the main factors of the increasing popularity of CEE countries a striking development of nearshoring.

The nearshoring can be defined as outsourcing of business services, especially information technology processes, to companies located in a nearby country, often sharing a border with the target country. It involves outsourcing work to companies with the economic benefits of an offshore location, but a closer cultural, linguistic and geographic fit with the user generation.

European tech hubs are expanding, and they are looking for new places for nearshoring. It is a consequence of an obvious disbalance in dynamics between development of IT sector and number of highly qualified IT specialists in the developed countries. Major Western European IT companies need additional capacity.

Traditional outsourcing destinations such as Asia or South America still remains very attractive, but often their capacity is near to its maximum level. The labour costs are getting more and more expensive and state aid and incentives are minimized or canceled by the governments in these countries. That’s why western businesses focus on discovering new destinations with comparatively low labour costs, enough surplus of highly qualified IT specialists and state preferential conditions for IT industry like tax incentives, etc.

For companies from countries that outsource the most of their development work, such as the U.K., Germany, Switzerland, France or the U.S., the CEE tends to be the best alternative.

Firstly, the biggest valuable asset of the CEE region is creativity and energy brought by young talented people. Considering ageing of the population in Western and Central Europe this is the strategic advantage of the CEE region. The low cost of qualified staff and a large number of highly educated, bilingual and qualified IT professionals constitute vital strength of the region.

Secondly, close ties between the CEE countries and the key Western European markets in terms of culture, geography and partly language facilitate cooperation significantly. There are deep differences between Western and Eastern parts of Europe, but all European countries share common fundamental values and principles.

Thirdly, according to the World Bank, the regional business regulations reforms in Eastern Europe are more advanced than those in South Asia, East Asia or Latin America. As a consequence, Eastern Europe now stands ahead of global competitors, making it easier and more cost effective to start and run a business in the region.

What’s is our strength? Big consulting companies can provide a lot of useful information for IT companies about perspective of nearshoring, but they have no appropriate capacity to cover whole range of important questions. They have deal mainly with legal aspects. Some particular aspects and topics need much deeper approaches and camp researches, which cannot be fulfilled by big consulting companies.

Goals and tasks. We are looking for new dynamic places for IT development, first of all those that still are not popular, because of short spell of function. As a rule, they have perfect infrastructure, noticeable lower labour costs, lower tax burden, surplus of highly qualified IT specialists. We need to identify risks of such places as well.

Completing of three key tasks will help to achieve main goal of this project.

1. Analyzing large massive of data and information to compare different locations, which try to develop nearshoring services.in term of attractiveness for IT companies.

2. Evaluating of the factors, which can accelerate development of new dynamic places for IT sector, as well as course negative trends and increasing risks.

3. Creating of “Map of Opportunities and Risks” of nearshoring in the CEE by systematizing main findings and outcomes of research.

Main research questions.

1. What kind of services do Western and Central Europe’s IT companies want to outsource?

2. What factors are the most important for the effective nearshoring of IT services?

3. What available locations for nearshoring services do exist in the nearest regions?

4. What places from the list of available options can ensure the best benefits for Western and Central Europe’s IT companies?

5. What is the expected pace of growth of the CEE IT market and its segments?

6. What future trends will be dominating in IT industry and where new dynamic locations for nearshoring will arise?

Methodology and methods. Research interdisciplinary approach is crucial. Set of factors determinates IT companies’ decisions concerning nearshoring of some services. Economic factors (noticeable lower labor costs, lower tax burden, surplus of highly qualified IT specialists, etc.) have significant impact on their choice, but political, cultural and social factors play essential role as well. That’s why work on such kind of projects goes beyond economic domain. Political, institutional, cultural factors need to be taken into consideration too.

We also intend to pay attention to non-economic factors of IT industry’s development. Individuals, their social, psychological and cultural background play an important role in IT industry. IT specialists are considered like people with particular type of thinking. Their decisions are based on personal and non-economic factors. Taking in account this fact the detailed research of the social and cultural factors should be made before looking for concrete partners for outsourcing. For example, it is not enough to analyze only the financing amounts for the outsourcing center in order to evaluate the prospects of its development. Non-economic factors like the quality and commodity of life should be taken into consideration too. The actual IT specialists changing their place of work and life very easy and often and such mobility should be considered like one of their particular features.

Project Leader:                                                               Adrian Verner

Duration of Research Project:                               1.04.2019 — 30.08.2020

Publication of the briefing paper:                       October 2020

Public presentation:                                                    November 2020

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