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September 25, 2006
Offshoring 2.0: epicenter Eastern Europe
By Shyamanuja Das
On September 19, two IT services companies having operations primarily in Central and Eastern Europe (CEE) announced their decisions to merge. The merged entity will have a total employee base of more than 2,200 with operations a pan-CEE presence spanning Hungary, Russia, Ukraine, and Belarus.
The merger between EPAM Systems - ranked as the leader in CEE region by Global Services - and Vested Development, Inc is an example of what to expect in this fast maturing region for outsourcing.
By all probability, we are seeing a tipping point for the region as a global outsourcing destination. Well, it is not going to be the Next India, as the clich? media headline for emerging locations goes. It need not be.
Major services firm in the region not only know that they are well behind larger Indian firms in terms of maturity of service delivery, they also understand that they cannot compete with the Indians if they play a scale game. The entire region has a combined population that is a fraction of India's; what's more, most countries in the region like Ukraine, Belarus, and Bulgaria are witnessing a negative population growth for some time - and which is likely to continue.
Many of the firms in CEE are playing the value game, creating companies that may be far smaller than the end-to-end offshore companies, but are becoming significantly large as specialized companies.
EPAM, for example, is clearly focused on offshore product engineering space and with this merger (when its revenue will touch $70 million), will become one of the biggest companies in the area - probably the biggest, with the possible exception of Ness Technologies.
In India, on the other hand, beyond the top five-six companies, others are yet to cross the threshold where they can compete as equals with the established onshore service providers, as far as scale is concerned. And they have never bothered to create that differentiation in terms of value creation.
This was an opportunity available to the tier II firms in India. But the CEE firms have seized it. In the process, they are making the next big wave in globalization of services. Call it Offshoring 2.0, if you like. This will create a clear differentiation between the volume players and value players at a global level.
The voice of the business managers looking for "value" from outsourcing is only becoming louder. Companies created to provide that value through specialization will surely make the next big disruption, if they pull it off successfully.
While Chinese companies just try to replicate India model, bettering India in terms of cost, but by following the rules made by the Indian companies, CEE firms are redefining those very rules. As a set of recent endorsements like this one from Deutsche Bank shows, they are succeeding.
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