Six Reasons Why Europe Is Now the Fastest-Growing Outsourcing Market

6Europe has edged out the US—and every other geography—as the leading outsourcing market in the last two quarters of 2013. A recent study found  Europe had a 43 percent global market share of outsourcing deals, beating the US’s 35 percent. In addition, Europe accounted for two of outsourcing’s megadeals valued at $1 billion or more. The US only secured one.

“The outsourcing supply side is gearing up for a surge in consumption of outsourcing services in Europe,” observes Ilan Oshri, professor of technology and globalization at Loughborough School of Business and Economics in the UK.

Why is the European outsourcing market growing faster than the US market? Experts cite six specific reasons.

Six reasons why European outsourcing is growing

1.    Timing is a key factor. Jim Reesing, president, business development for the US for Xchanging, observes that the US “was an early adopter of offshoring in India.” To make that radical business method palatable, the Indian outsourcing providers “spent a lot of time educating the American market about offshoring.” Now that offshoring is an accepted international business practice, the resistance in Europe has largely vanished. “It’s time,” he says.

“All of this is happening when the European market is gaining more experience in both outsourcing and captives,” adds the professor.

2.    America’s more stringent immigration laws are another factor. “They pose challenges for Indian outsourcing vendors” because they have difficulty inserting their subject matter experts into client engagements on US shores without the requisite paperwork, Professor Oshri explains.

3.    As a reaction to these American restrictions, the Indian service providers have turned their focus to Europe for new business opportunities. Professor Oshri, who also is the director for the university’s Centre for Global Sourcing and Services, points out “some Indian providers have made strategic acquisitions to improve their onshore/offshore offerings in Europe while others have increased the number of their personnel onshore by recruiting locally.”

4.    European corporate growth as companies emerge from the global recession. Outsourcing is a key element for controlled success when companies are growing rapidly. For example, Professor Oshri notes, “contact centers in the UK have seen a significant increase in activity.”  He says the increased local demand encouraged international players to set up new contact centers in the UK.

5.    Supplier desire to be close to their clients. The goal is to deepen their partnerships. “They want to leverage their outsourcing relationships to deliver additional services such as innovation,” points out the professor. Olaf Baunack, managing director for Alsbridge, notes that buyer perception of outsourcing has changed. “Today buyers want ‘quality’ sourcing. They no longer select the lowest cost vendor,” he says. It’s often easier to deliver these more challenging buyer demands like innovation when the partners can interact face-to-face.

6.    The ascendance of near shoring. Professor Oshri says “the near shoring trend is accelerating, particularly in central and eastern Europe where talent is available for both IT and BPO services.”

Baunack says an emerging trend is to move work formerly offshored to India back to Europe. This is occurring for a number of reasons:

  • The popularity of the hybrid-shoring model. Baunack says corporations all over the world, not just in Europe, are using a hybrid-shoring model, which allows them to parcel out work to outsourcers based on their expertise, not their location. He says service providers are offering this model “because it’s making them successful.”
  • Cultural differences. The Alsbridge executive says some Europeans found it difficult to work with Indian services providers because they don’t speak German, French or Italian. And cultural differences did affect the work product.
  • Time zone challenges. Reesing of Xchanging adds that EU countries have an easier time working together because of the geographical proximity compared to working with providers in India and China.
  • Service provider maturity. Reesing notes “eastern European providers now have the scale and depth to become externally focused.”

Professor Oshri adds some companies chose “to keep their revenues in Europe by setting up shared services centers in places such as Romania, Poland or Hungary.” He says today most new captive set-ups are either onshore or near shore and almost all of them are shared service centers.

Opportunities for second-tier providers

Another European outsourcing trend is the burgeoning opportunities for second-tier providers, both Indian and European. Two drivers are fueling this trend. The first relates to size. Baunack says in Germany, for example, most large companies prefer to keep their IT departments in house. But a lot of mid-range companies are now poised to outsource their IT departments because they don’t have the scale or efficiency to handle the current increase in work themselves. But they don’t want to use the mega suppliers like T-Systems or IBM because of the relative size difference. “They prefer to do smaller,” he says.

The other factor is specialization. The Alsbridge director says outsourcing buyers seek out specialized vendors for portions of specific processes they have not been able to outsource the first go-round. “These companies are in their second stage of outsourcing and  need specialized help,” he explains. He predicts this will “create a lot of opportunity for Indian second-tier providers.”

What’s happening where

Here are some additional observations about the European outsourcing trend:

Baunack of Alsbridge says “ITO is five years ahead of BPO” in Europe. He also predicts outsourcing in Europe is moving east.

The professor says some suppliers “are finding it hard to set up operations in lucrative markets such as the UK because the market is already saturated. However, many still make the investment because they believe it is imperative for them to operate from the UK as part of their global footprints and service mentality.”

What does this all mean? “Put all of the above together, the bottom line is that the consumption of outsourcing services by European firms is increasing with a bigger portion of such services provided in Europe,” sums up the British professor.

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