The Next India

A recent analyst report from global consultancy McKinsey & Co.—aptly titled "Time to Go East?"—heralded Eastern Europe as a potential hotbed of IT and business processing outsourcing. Although the authors of the report don't believe that Eastern Europe will grow to dominate the $300 billion per year outsourcing industry, the Czech Republic, Hungary, Poland and Slovakia will provide 100,000 full-time equivalent workers by 2008.

Eastern Europe has a number of attractive benefits for those looking for an outsourcing venue. First, most Eastern European nations are already members of the European Union, which means they are up to speed and meeting the same standards and regulations as those in Western Europe. Second, although India may have the largest English-speaking population on the planet, Eastern European universities graduate a large quantity of Dutch, French, German, and Swedish speakers as well as English speakers. Third, Eastern European labor rates will not reach par with those in Western Europe for at least the next 15 years. Finally, there's the simple proximity. Why should technologists in your Frankfurt office spend nine-and-half hours on a flight to Bangalore when Krakow, Poland is only two hours away?

Of course, Eastern Europe has its downsides. For starters, the region lacks a brand image. Indian outsourcing firms have developed their reputations by attaining Computer Maturity Model Integration (CMMI) Level 5 ratings and by providing a long list of offshoring success stories. Currently, Eastern Europe remains a crapshoot when it comes to quality and value. Unlike India, Eastern Europe isn't a single nation, which means that firms may be bogged down by competing national and local regulations. Also, without an Eastern European equivalent of Infosys, Tata or Wipro to help drive business to the region, attracting Western European firms' attention will be difficult. Finally, many of the nations that would benefit the most from locating processes to Eastern Europe—that is to say, continental Western Europe—lag behind the UK and the US when it comes to outsourcing IT and business processes.

Although offshoring to India and Southeast Asia has benefits for North American and European firms, such as follow-the-sun support capability and a healthy dose of wage arbitrage, the idea of near-shoring has been gathering steam in the financial services industry. Credit Suisse located one of its centers of excellence in North Carolina, where the cost of living and real estate prices are much lower than anything found in the corridor that runs from Boston to Washington, DC. The fact that the local talent is the same talent that keeps Bank of America's and Wachovia's systems up and running probably didn't go unnoticed either.

For those financial institutions located in the City of London, there's always Northern Ireland, Scotland and Wales. Over the past few years, Northern Ireland and Scotland have been doing a good job of luring the Celtic Tiger a little north and a little east. Wales might not be banging its drum as loudly as its neighboring regions but it has something to offer that others cannot: proximity to the most recently laid transatlantic fiber-optic cable, which happens to come ashore in Wales. By connecting trading systems to the fiber-optic cable, firms can shave off a few more microseconds of message latency during the roundtrip journeys to the US exchanges.

When it comes to outsourcing, there's something to be said for that old adage: It's all about location, location, location.

Rob Daly is deputy editor of Waters and can be reached at rob.daly@incisivemedia.com.