One of the key decisions in any sourcing strategy is the delivery destination. Choosing the right location for your operations can be the difference between success and failure. As part of a mini-series of articles, we will be investigating some of the key destinations for sourcing operations across the globe, highlighting some of the best and most reliable markets for delivery. We will start close to home, by looking at the major destinations for outsourcing in Europe.
In the UK, one of the key markets for offshoring is Europe, partly because of the advantages of geography. The European continent offers a range of different services from business process outsourcing (BPO) and Information Technology Outsourcing (ITO) to Artificial Intelligence (AI) and automation. Sadly, the choice by the British public in the summer of 2016 to leave the European Union (EU) will likely cause friction between the renegade Britain and the united nations of the EU which will undoubtedly damage the climate for business. One of the major potential setbacks would be leaving the single market, the customs union that unites the EU and removes tariffs on cross border trade within the bloc. However, the future of sourcing in the EU is not so dire and the continent is ripe with opportunity and options. According to industry research in 2017 by ISG, sourcing in Europe has been growing at pace, thanks in part to several major deals being signed early in the year. Barry Matthews of ISG expects more growth in the EMEA sourcing market. “We expect a robust second half (of the year) for the EMEA market, with traditional sourcing spend growing by a mid-single-digit percentage for the year.”
On shoring is a traditional alternative to nearshoring in Europe alongside insourcing, providing services in house, avoiding outsourcing services at all. The UK market is full of opportunity, the UK has a long history of outsourcing and has the most mature outsourcing market in the world, home to many major outsourcing organisations and new service provider challengers. One of the key drivers for on shoring is the shared business culture, language and legal system, which supports areas such as negotiation, best practice and communication. The UK has a thriving market of automation providers and agile, niche operators, designed for the digital, gig-economy thanks, in part, to major education and start-up hubs (such as Oxford, Edinburgh and London) and a friendly business environment over the past two decades.
One of the best examples of the UK market for sourcing is Scotland. Recently ranked second in customer support centre services research by FDi Benchmark, beating rivals across Europe, such as Wales and Germany, the Scottish central belt has been praised for its industry hubs and low utility costs. Scotland looks to high tech and more complex outsourced services, such as legal sector sourcing, as a core market. As people come to expect more analytics and data skills from service providers, Scottish sourcing suppliers stand to benefit due to a high talent workforce, strong digital infrastructure and a high quality of life. As Stephen Flaherty, Managing Director at J.P.Morgan put it, “Why invest in Scotland? The primary reason is talent.”
The issue of on shoring is that cost arbitrage is not going to be readily available. Although the average salary in Scotland is roughly £120 a week cheaper than London, options across the UK in areas such as Wales are cheaper and in comparison to the continent, salary costs are high. Another major criticism is that on shoring offers little access to the EU market after Brexit including the wealth of talent provided by EU workers.
Ireland offers many of the benefits of on shoring with some added bonuses. Ireland will not be immune to Brexit, recent studies suggest that Brexit may damage Irish Gross Domestic Product (GDP) by as much as 3.5%, although Ireland will remain a part of the single market. The potential reintroduction of a hard-border between the Irish Republic and Northern Ireland will play havoc with cross-border trade and supply lines and may increase political tensions that have been largely dormant since the Good Friday Agreement. However, Ireland remains an attractive destination, ranked 18th on the World Bank, Ease of Doing Business report, just behind Germany and a quickly growing economy (GDP grew by 5.2% in 2016) as slack from a major recession and banking collapse in the late 2000s. Ireland enjoys the advantages of a hugely talented workforce, with English language skills that open up opportunities in a range of different services.
There are plenty of benefits to outsourcing to Ireland, cheaper average wages than the UK open up cost arbitrage opportunities, tax incentives and a friendly business environment encourage investment, fantastic digital and physical infrastructure and the benefits of the EU market, all adding together to make Ireland particularly popular with financial institutions (thousands of jobs have been transferred to the Emerald Isle in the past couple of years from the UK). High skill manufacturing and research (such as pharmaceutical manufacturing) is growing in Ireland, Almac has opened a new facility in Dundalk. A study by law firm, Matheson, in partnership with the Economist Intelligence Unit found that “a unique combination of factors, not one specific element, attracts investment to Ireland.”
If we move further from the UK, the economies of Spain and Portugal become key options for potential outsourcing services. After suffering severely in the financial crisis of 2008 and the subsequent Eurozone banking crisis, the two countries are on the road to recovery. Portugal has a thriving ITO industry and due to being in the same time zone as the UK and good English language skills (ranking 15th out of 72 countries in a recent survey on English language ability), Portugal is also popular for call centre services. In 2015, Gartner ranked Portugal the fifth best country for captive or outsourced IT and business process services. One of the key draws for the region at the moment is its high unemployment rate, especially amongst younger workers. Currently unemployment in Spain is 17.1%, offering a slack in the labour market that reduces upward pressure on wages and provides a good pool of available labour across the business hierarchy.
Spain and Portugal are working hard to take advantage of the current opportunities and incentivise investment with cheap and reliable utilities, innovation hubs, economic stability and tax incentives. Portugal has the 2nd fastest broadband in the Eurozone and the 4th fastest in the world according to Lisbon Nearshore. Thanks as well to the high quality of life, Spain and Portugal are becoming exciting alternatives to established destinations. If the region can develop more stable banking and economic conditions in the medium to long term, the region could become an established destination for the sourcing industry.
Probably the most established sourcing market in Europe is the CEE region, offering a wide range of services across multiple destinations, the most established being Poland and Hungary. Part of the regions success has derived from its ability to create a more digitally focused economy due to reaching maturity in the past couple decades thanks to almost a century behind the iron curtain. Countries, such as Poland and the Czech Republic have been able to develop strong ITO and BPO sectors thanks to skilled workers in IT and plentiful pool of labour. After joining the single market, the region capitalised on cost arbitrage to offer outsourced services to Western nations, everything from BPO to manufacturing, capturing the market and gaining a bank of expertise for offering outsourced services. Newer options are emerging in the CEE market, such as Georgia and Latvia, whose adoption of new technologies and investment in digital hubs and infrastructure mirrors the investment of Poland in ITO services 15-20 years ago. The CEE market still enjoys good economic growth (Poland grew its GDP by 3.7% year-on-year) and opportunities exist for offices in many of the region’s major cities. Skilled and experienced staff populate the BPO and ITO market while the market offers further opportunities to the East. Good connections to Eastern Europe exist across the UK and the experience of sourcing services provides easier negotiation and communication processes.
However, the region is facing increasing issues. Recently tension has been growing between the EU and the right-wing governments of Poland and Hungary is not causing too much disruption in the business environment, however the threat of sanctions and punishments could sour the mood. The major issue for the region however is employment, as the pool of labour in countries like the Czech Republic (where the unemployment rate is 2.9%) and Slovakia reduces. According to Mirolsav Kralik of the Slovak-Serbian Chamber of commerce, Slovakia is short of at least 80,000 workers. This could place pressure on wages and make it difficult to source new talent. Increasingly, other nations in the region, for example Serbia, are looking to steal investment from established markets.
Sourcing in Europe is like a branching menu, depending on what you want and require, the options are there, from high tech and complicated operations to back office business process. Despite Brexit, the European market remains full of opportunity for UK sourcing.