Eastern Europe: Service providers hope that accession to the EU, and better language skills, will help them fend off Indian and eastern dominance.
In less than a year's time, 10 further countries will join the European Union. All but Malta and Cyprus are in central and eastern Europe. Doing business with companies in the region will become easier. But costs will still be significantly lower than in France, Germany or the UK, even in fields such as IT where demand is growing fast.
IT services businesses in the region hope that EU accession will boost cross-border trade, and in particular with Germany. Despite its economic woes, Germany remains the world's second largest IT market, yet German companies have been relatively slow to embrace IT outsourcing.
While Indian outsourcing companies have made significant inroads into the US and UK IT services markets, Indian and Asian companies have found it harder to make headway in northern and central Europe.
The reasons are as likely to be cultural as technical. Indian IT services companies can provide large numbers of skilled graduates with good English. However, far fewer Indian graduates speak good German, and Indian businesses are less experienced in the cultural and business mores of mainland Europe.
"If you look at outsourcing companies in India or Malaysia, they have gained their experience from dealing with UK or EU businesses," suggests Simon Evans, a managing consultant in the IT group at PA Consulting in London. "US companies operate in a really very different way to the way German companies operate. There is a huge cultural learning curve for the (Indian/Malaysian) company to go through, even if they can learn the language."
This cultural gap and growing pressure on companies in Germany in particular to cut costs, presents an opportunity for eastern European contractors.
When it comes to IT skills in depth, India still has the edge, and IT services companies in Poland, Hungary and the Czech Republic cannot compete on cost alone with India, Malaysia or China.
However, the high standard of general education in eastern Europe, and a healthy supply of graduates with both languages and business experience, means that the region is attracting interest both from the large outsourcing providers, and their customers.
In Latvia, for example, there is a significant pool of experienced IT professionals - particularly in research institutes-and IT graduates, says Valdis Lokenbahs, president of DATI Group, the country's largest IT services provider to the western market. Latvia's location is an advantage in itself and an opportunity to amalgamate eastern and western business cultures, he says. Its IT experts can also work in several European languages.
"In the European market, language skills are an issue, in particular in customer-facing tasks," agrees Marty Cole, global head of outsourcing at Accenture, the IT consultancy. "Business process outsourcing is growing fast."
Accenture has a business process outsourcing centre in Prague, in the Czech Republic, where staff work in multiple languages to support customers.
Such multi-lingual call centres and support locations are not new: IT companies have run centralised helpdesks in Europe for at least a decade. Locations such as Ireland and the Netherlands are now being augmented by offices in eastern Europe. These new offices have more than just a cost advantage: they provide business continuity, and are well placed to serve the emerging eastern markets, including Russia.
This is important, as acting as a lower cost alternative to Irish or Dutch operations will not be enough to establish countries such as Hungary or the Czech Republic as significant players in IT services.
Wages for skilled IT staff have risen fast in eastern Europe, and this will only accelerate with EU membership. Just as a company can unplug operations in Dublin or Amsterdam and move them to Prague or Budapest, it can switch to cheaper still locations, such as the Baltic states or Belarus.
Instead, outsourcing specialists believe that the best prospects for eastern European states lie in establishing themselves as effective niche players. And - although it may go against the notion that IT outsourcing can be done anywhere-eastern Europe will also win business because of its proximity to the EU.
This so-called "near-shore" outsourcing appeals to cautious CIOs who want to maintain control over IT assets, and it also works well for work that can or must be done during the customer's working day. For infrastructure-based outsourcing contracts, near shore outsourcing may well win out over outsourcing in India or the far East, even if the cost savings are smaller.
"A US customer might not mind that their data centre is in California and they are in New York," says Gartner analyst Gianluca Tramacere. "But European customers want to know that their equipment is somewhere where they can reach it. If a server is down, they want to be able to kick it."
This level of control appeals to companies in sectors such as financial services, and this is a market that is becoming more receptive to the idea of outsourcing to eastern Europe. For their part, outsourcing providers are promoting their skills in handling projects that may require close liaison with the customer's IT team.
"When we provide complex IT solutions to financial institutions, some of that work can be done in our offices, but a big part of the project must be done at the client's site," explains Maciej Modrejewski, country manager for Poland at Fiserv, the financial IT specialists. "They don't want us to bring in people from the other side of the world, which is why Fiserv invested in Poland."
However, for more companies to turn to eastern Europe for their IT projects, the region will have to address some of its disadvantages.
Although language skills are generally good, executives who have worked with eastern Europe say that English skills need further attention. The eastern European states could also do more to promote their IT expertise: a casual search by the FT found very little government information online, promoting IT in the region, in English or German.
And eastern European countries need to act to improve their reputations for IT security and for protection of intellectual property. The region may not be the hotbed of hacking and virus writing that some reports suggest, but Gartner rates Hungary, Poland and the Czech Republic as merely "fair" for IT security issues, ahead of Russia (poor) but behind India (good) and Ireland (excellent).
"Businesses are attracted to eastern Europe by the cost advantages, but the countries need to address their intellectual property security issues and ramp up their business and project management skills," says Mr Tramacere at Gartner. "As a niche player, the region could be very important. But the biggest mistake they can make is to take a me-too approach and compete head-to-head with India."
