EU Enlargement and its impact on nearshoring perspectives

The market interest towards CEE has first been invoked long before the EU accession of the new Member states in 2004 and 2007. At the beginning of the 1990s the region turned into prosperous niche for investment, with Central European countries like Poland, Hungary and Czech Republic taking the lead in the transformation towards market economy. Afterwards, starting from the mid-1990s, the Central European region has got into discernible trend of software development outsourcing, competing with the well-established Indian and Chinese IT providers.

The first wave of nearshoring is commonly associated with Central European and Baltic states that became the members of EU in 2004, most notably with Hungary, Slovakia, Poland and Czech Republic. While the Far Eastern competitors still dominated on the large-scale project market share, the Central Eastern IT providers became increasingly involved in “SME for SME” scheme, which provided for the outsourcing of the middle ranged and small projects. Shortly, the region has arrested the attention of the global IT players like Capgemini and EPAM Systems, therefore enhancing the scope of the projects outsourced. According to the recent data provided by Deutsche Bank Research, the overwhelming majority of German, Swiss and Austrian vendors still outsource their IT activities to Poland, Czech, Slovak Republic and Hungary, with Indian and Eastern European companies ranking next in the outsourcing list.

As for the EU enlargement, its impact on the Central European outsourcing market is of double meaning. On the one hand, it creates greater single market for IT services, boosting both outsourcing demand and supply. However, in the long and middle-term, the labour costs will increase, consequently rising the development costs. Thus, EU membership will minimize the competitive price advantage the accessing countries have previously enjoyed. In this respect, Natasha Starkell, CEO of Goal Europe has noted that the “higher wages will push offshoring further east”.

The second wave of nearshoring, introducing new outsourcing players like Romania and, to the lesser extent, Bulgaria has begun to decline with their accession to EU in 2007. At the same time, Eastern European outsourcing sphere is gaining strength, notably during the last five years. Particularly, Ukrainian Hi-Tech Initiative reports that in 2006 Ukraine’s IT exports totalled $ 280 million, counting for 60% growth over the previous year.

Recently, a number of high technology companies like IBM, Cisco and Motorola have entered the country’s IT market. The country stands out for impressive technical know-how, and attractive pricing despite of the certain increase in the salaries of the personnel involved in the software development sphere and corresponding increase in the hourly rates. With the rates at 15 – 22 EUR per hour, the country occupies middle-ranged price segment, offering more appealing rates than the competitors from other CIS countries, namely Russia and Belarus.

The majority of Ukrainian software development enterprises are oriented towards SME customers, offering them a value proposal composed of reasonable pricing and consistency of quality assurance. Over the last five years, it became a widespread trend among Ukrainian IT entrepreneurs to enhance the focus on improving the quality of the delivered services (ISO and CMM certifications) and extending the knowledge of developers through professional certifications and trainings.

Another point of consideration includes marketing instruments of the Ukrainian IT vendors. Over the years, endeavours in the IT sphere have grown from the “shy” marketing to full-fledged strategies, gaining increasing support from the government. The initiatives of interest include annual Ukrainian Outsourcing Forum, regular Ukrainian showcases at CeBIT exhibition in Hannover as well as Silicon Valley Open Doors conference. In year 2007, Ukraine hosts Central & Eastern European Outsourcing Summit that emphasizes the role of Ukraine as the one of the outsourcing leaders in the CEE region. Other favourable market tendencies include the establishment of professional organizations and associations in the IT sphere. The most popular in the country’s IT environment seems to be Ukrainian Hi-Tech Initiative, IT Ukraine Association as well as Ukrainian Association of Software Developers.

Quoting Imrana Khan and her publication “Ukraine: A Promising IT Outsourcing Hub”, Ukrainian government contributes to the advancing of the Ukrainian IT industry by recently passing more than 20 laws that have to do with IT sphere and intellectual property issues. Taking into consideration the above mentioned facts, in 2006 Ukraine was included in the top-five list of the most appealing outsourcing destinations among some Western European countries.

Another prospective direction lies in the scope of decentralization of the outsourcing sphere: according to “Outsourcing to Ukraine: 2006 results and 2007 expectations” analysis, the dynamic development of the regional companies (mostly SMEs) enables them to compete on an equal footing with the capital, Kyiv. Vast scientific potential of Lviv (Lemberg), Kharkov and Odessa equips the regional companies with highly qualified workforce as well as highly developed IT infrastructure.

To conclude with, the recent enlargement of the EU, has intensified the existent competition between Central European and Far Eastern IT companies, also featuring Eastern European countries as top contenders in the global outsourcing race. Moreover, some of the CIS countries like Ukraine are swiftly shifting to providing nearshore software development services as the core of their offerings. Without any hesitation, the EU enlargement has contributed to the development of the already existent nearshoring tendency, with Western European businesses choosing software development partners in lower-cost neighbouring countries, however in the mid-term perspective this choice would be made in favour of the EU “next door” neighbours.