The countries of Eastern Europe are characterized by an attractive economic dynamism. Foreign investment has been flocking to this region for several years, as it seems to be so propitious for the development of their activities. The post-pandemic economic recovery promises high growth rates boosted by the return of foreign investment and the revival of foreign demand. Indeed, local economies are very open in a number of sectors. This greatly encourages European and more widely Western economic actors to find strategic partners and trusted suppliers in Eastern Europe. These partners can cover various functions such as the manufacturing and distribution of finished or semi-finished goods, but also the subcontracting of specific services. This is a case of outsourcing strategies carried out by the major decision-makers of companies wishing to achieve productivity gains. Indeed, by transferring part of the non-strategic activities, generally commercial, administrative, logistical and accounting support to specialized service providers, companies optimize their organization and can thus focus on their main business. Finally, more and more European companies intend to promote partnerships on an intra-continental scale in the name of European economic sovereignty. This paradigm shift in the business world reflects a desire to defend themselves but above all to promote local and regional know-how.
2. Advantages of outsourcing
Outsourcing and the use of foreign subcontractors still instinctively recall its less shiny side. However, outsourcing is first of all a strategy available to businessmen and economic decision makers to generate value for shareholders and increase the profits of their companies. These profits are then reused as internal investments in these same structures and benefit the activities of the companies that practice them. Thus, outsourcing often appears as a necessary solution to meet the development needs of a company.
3. Why aiming Eastern Europe for outsourcing?
Eastern Europe has been a hot spot for the development of subcontracting activities for several years. The best subcontracting companies are present in the region. The countries of Central and Eastern Europe offer an economic, legislative and fiscal background that supports all entrepreneurial projects as attested by the World Bank’s doing business indicator. This context allows these intermediary providers to deliver competitive services at a lower cost to foreign operators. Moreover, even if the rates appear less competitive compared to those offered in Asian markets, the quality of their skills is a decisive attribute that plays in their favor. Their attractiveness is also based on other resources such as their flexibility and their ability to speak several foreign languages. Finally, the geographical location of Eastern European countries appears to be a considerable advantage. On the one hand, it represents a proximity with the centers of consumption and the headquarters of multinationals. In concrete terms, time differences are very limited with Western European cities, for example. They benefit from a central position on the Eurasian scale which makes them commercial hubs. Moreover, many countries are members of the European Union, which results in smooth customs and logistical flows. As a result, it has been easier to outsource both production and support activities to Eastern European countries. Among these production activities, the electronics sector ranks first. In fact, in 2016, 50.3% of European outsourced production in electronics was carried out in Eastern Europe according to Information 4 Manufacture. The value of the European subcontracted electronics assembly market is estimated at more than 40 billion euros for the same year.
Digital and IT outsourcing
However, beyond this long-standing experience, there has been a trend in outsourcing digital functions for several years. It includes developer jobs, data management jobs and cybersecurity jobs. Several national efforts in the region have been carried out primarily in training, as shown in the table below. In Poland, for example, there are nearly 500 IT training programs from which nearly 15,000 new engineers graduate each year. The same applies to the IT sector in Hungary, from which almost 3,000 students graduate every year. In Ukraine, this number rises to 16,000 graduates. In this way, they are able to provide expertise in the entire range of these fields, always competitively and at a lower cost. The efforts of public authorities in terms of innovation also feed this strong affinity of local actors for digital. This is partly reflected in the development of high-tech incubation districts that concentrate start-ups at the cutting edge of progress as well as foreign companies interested in local know-how. This is notably the case in Ukraine through the Unit City or in Poland, which has seven technology centers spread throughout its territory. All these measures have helped to promote skills that are increasingly recognized and renowned worldwide. It is worth mentioning the figures for the Hungarian IT sector: almost 93% of IT skills are destined for export and generate 1.95 billion euros per year, which represents 8.2% of the total value of Hungarian exports. Far from being an exception, the Hungarian case is the translation of a global trend that prevails in the whole region. Thus, similar figures can be seen in several other countries such as Ukraine and Romania. Therefore, the most relevant illustration of this reality would probably be the Romanian company Softwin SRL, which develops software and creates digital platforms. Several foreign institutions and international companies, such as European and American publishing houses, have used its services for their own activities.
Back-office and BPO outsourcing
In addition to IT services, Central and Eastern European countries have also become breeding grounds for support and back office activities such as financial activities, including management and accounting, as well as sales and logistics support. All these functions are largely outsourced to specialized and more efficient local companies. The leading call center company Telus International provides IT support, customer service and after-sales service for a range of European companies from its call centers in Sofia and Bucharest. It is worth mentioning that the development of these activities has been made possible thanks to the ability of the workforce in these countries to speak several languages. There are also opportunities to outsource administrative activities such as human resources. Today, there are a large number of international recruitment agencies in Eastern Europe that act as intermediaries in the sourcing process between large international groups and the labor supply available in the region. JobAurora is one of them. It operates from Ukraine and companies from Europe as well as from Asia and the MENA region use its services.
Today, there is also a new way of outsourcing those back office functions that is clearly accelerating since the pandemic crisis. This consists of centralizing them around a structure that is as multifunctional as it is flexible. In this formula, it is no longer a question of external service providers with whom companies collaborate. It is about employees who work on several missions and at very broad levels from Shared Services Centers. These SSCs are increasingly popular with large European groups, such as Sanofi, which opened its own in Budapest in 2019. The French pharmaceutical giant employs 350 people in charge of all the group’s accounting, part of human resources and also data processing. Air France has also announced the creation of its SSC in Hungary for financial and accounting activities. General Electrics is outsourcing its customs audit and compliance activities to its own shared services center.
However, it is important to note that there is now also subcontracting in functions that require a certain amount of technical and technological knowledge and skills. For several years now, the European aeronautics industry has been subcontracting maintenance and the development of spare parts to companies in Central and Eastern Europe. The upward trend is particularly remarkable in the medical field. Indeed, world-class pharmaceutical companies tend to outsource their testing processes to university and private contract research organizations. Eastern European companies are not likely to escape this trend, as they have a proven track record in terms of research and development and innovation industry.
The economic indicators in Eastern Europe are, on the whole, positive. This encourages investors and business decision makers to take a closer look at these countries and their economies. Outsourcing certain activities to competent local providers is one way to benefit from these conditions. An increasing number of Western companies are opting for this choice for a variety of reasons and in a variety of sectors. Indeed, if for a long time the Eastern European countries have been a safe haven for the less strategic functions, today, following an upturn in the industry, they also attract high value-added activities. InterTrade Consulting is a strategic consulting firm based in Paris and Kiev. Its mission is to assist European companies to expand their activities in Eastern Europe. Thanks to a network of approved partners in several countries of the region, the firm offers a comprehensive service combining local knowledge and professionalism.