The Hindu Business Line : A growing threat

THE European Union has recently expanded and brought 10 countries into its fold. In this context, the first question that comes to our mind is: What does this portend for the Indian IT sector?

Indian IT companies, especially those from the small and medium enterprises (SME) sector, are recovering from the poor economic conditions of the last two years and hope to cash in on the upswing of the market. Billing rates have taken a downward direction whereas competition from the local IT companies has ensured that salaries continue to increase. At this juncture, are we ready to face the onslaught from Eastern Europe?

According to Gartner, the Eastern European IT market is set to capture 10 per cent of the EU market by 2007 and the largest area of growth will be in software!

The expanded EU faces major challenges and formidable obstacles to a smooth integration. The new members — Poland, Hungary, the Czech Republic, Estonia, Latvia, Lithuania, Slovakia, Slovenia, Malta and Greek Cyprus — are twice as poor as the old ones. The old EU member states account for 95 per cent of the new EU's wealth.

While the problems are of Europe's concern, here's taking a look at some areas of concern for Indian IT firms and the need to suitably plan for the future:

Prospect perception: The view of the European prospect at this point is that, the new EU nations offer the potential of an easily available workforce which can be utilised for the purpose of IT outsourcing. This avenue has already been tried by several firms, with reasonable success, and offshore development/service centres have been established.

Poland, Hungary and Estonia are some of the nations that have competencies similar to Indian IT firms. A general opinion also is that IT costs in India are growing higher when compared with East Europe.

Location advantage: The new countries bring with them a logistical advantage combined with the flexibility to adapt to different working conditions. Firms prefer these countries for `near shore' outsourcing as to and fro travel is easier and there is a perception of better control.

Cost structure: The new members' level of education and technological savvy is much lower, as are their wages. The average salary in Slovakia, Poland and Latvia is about $300 a month, compared with $2,400 in Germany or $2,800 in Britain. Their unemployment figures are higher. Cost reduction, a major trump card used by Indian firms, is also neutered as the average rates quoted by firms in these countries is much lower than the average of the billing rates of Indian firms.

Capital investment: Some companies already have their outsourced development centres in the new EU countries and are also ready to invest additional capital to expand centres and provide technical training to the local resources. They are also making use of graduate students by offering internships and training assignments and later absorbing them into the company.

Flexible labour laws: The labour laws in some of these countries are flexible, and combined with the availability of a large number of educated workforce, provide an added incentive for firms to invest and set up branches. In Hungary, for example, there are 352 working days! Motorola, which started off with two programmers in Krakow, now has more than 500 software engineers in Poland, Romania and the Czech Republic.

Perception of risk: With the entry of these countries into the EU, the risk perception will also diminish over time. Companies that were hesitant to invest in these countries will be more willing now, though this could take time. According to estimates, this region will remain a low-cost area at least for the next 15 years.

IT-enabled services (ITES): Considering the BPO sector, EU law stipulates that individual/personal information of the resources cannot be let outside the EU zone. This has been an impediment for ITES companies, keen on garnering the back-office processing business from mainland Europe.

This is another factor to be considered as this area does not require in-depth technical knowledge and the new countries can easily act as the outsourcing hub for the economically-richer EU nations.

Despite all these issues, India Inc has a good brand image and recall. The technical superiority and adaptability have also been time-tested.

We need to leverage on these issues, combined with our quality process, to counter the threat from the new area.

The author is Chief Marketing Officer, Dexterity Business Analysts, and can be reached at spravin@dba-corp.com

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