With offshore and near-shore outsourcing of traditional IT and back-office work in Europe set to grow 30-35 per cent per annum in the next few years, the Continent is the place to be for countries such as India. With Indian service providers vying for every bit of the European opportunity, they will need senior managers who have the aptitude to interact across cultures.

Mohan Murti

Is capturing the European outsourcing business on your scheme of things? Make sure your passport is handy. Offshore and near-shore outsourcing of traditional IT and back-office work in Europe will grow 30 per cent to 35 per cent each year in the next few years. As the urgency to cut costs forces European companies to overcome reluctance to entrust parts of their business to outsiders, the size of the European market now rivals that of North America. Europe is becoming what America was, 12 to15 years ago.

Every company large, medium and even small now wants to look at outsourcing and offshoring.

The palpable reason is to reduce operating costs by up to 50 per cent in some cases since hourly rates for workers in Asia, Eastern Europe and other emerging markets are anywhere from 30 per cent to 75 per cent lower than they are in Western Europe.

Other paybacks are improved quality among offshore providers including flexibility and 24/7 operating hours. What will this imply in the next two to five years?

First, European sourcing is causing price pressure on all service providers, domestic and foreign, which means customers will have the upper hand in negotiating deals.

With Indian service providers vying for every bit of the European opportunity, including analysis, back-office functions and process management, they will need senior managers who have language ability, understand strategy and industry-specific processes, and possess the aptitude to interact across cultures and adapt quickly.

BPO Trends

European companies, banks, insurance are beginning to contract for services ranging from payables and receivables dispensation, payroll processing, HR record-keeping, basic accounting to airline reservations services. Such Business-Process Outsourcing (BPO) activities are increasing rapidly.

The trend seems to be less on offshoring discrete processes within a department and more on moving the entire function offshore.

To be cautious, some European companies are beginning to focus on developing a true global delivery model: Hiring multiple vendors in multiple locations, depending upon who can provide the best quality at the best price for each service.

The UK continues to be at the vanguard in developing these markets domestically, and both the public sector and financial services have been areas where outsourcing has been rampant. The strongest growth predicted, however, is in BPO. The European Union (EU) BPO market alone to be worth whopping {euro}400 billion by 2010.

Challenges in the European Market

There are, however, challenges within the European market. Both IT and BPO industries in Europe are still patchy. Companies have had hitch entering Europe, finding they have to attack country by country. They may be first-rate in the UK, for instance, and abysmal in Germany.

Quality of Supplier

Companies are increasingly looking to buy outsourced solutions based around a process area rather than a functional area, which is in turn based around the performance of a particular part of the business. As companies across Europe move towards becoming performance-driven enterprises, BPO is going to make a lot of sense. However, edge in quality, resilience and constancy will be paramount. Virtual organisations will become more common as companies focus on their core competencies.

Opportunities

Within Europe, the highest levels of activity outside the UK are being driven by financial services companies and multinationals based in central Europe, predominantly Germany, Switzerland and Benelux. There is also a comeback of BPO, primarily HR outsourcing, in Sweden.

In Germany, Europe's biggest economy, banks are leading a trend of handing over entire business processes to third parties, with overall outsourcing revenues tripling from the year-ago period.

Germany now has 15 per cent of the global outsourcing market, up from 4 per cent last year, behind the US with 42 per cent and the UK with 17 per cent. European businesses have now farmed out so much work that they account for almost half of the global outsourcing business.

With less exacting labour laws and a well educated English-speaking low-cost workforce in India, Anglo-Saxons were the first to seize on the cost-cutting opportunities offered by off-shoring at first primitive, then more classy tasks.

More continental Europeans are leaping onto the bandwagon, building service centres in countries such as Poland, the Czech Republic and Hungary.

European Back Offices

In Europe, the pattern of growth is dominated by considerable increases in BPO contract activity in the financial services and manufacturing sectors.

The BPO activity in the European financial-services sector is concentrated mainly around middle-office service silos, with high activity in the outsourcing of policy-services administration by life-insurance companies.

However, it is the banking sector, rather than insurance, that accounted for 65 per cent of European financial-services BPO contract value awarded.

This growth will continue in coming years, as some of the key European retail banks are studying how to apply BPO to achieve service transformation.

Within HR outsourcing, the blueprint of activity by sector has been relatively well established for some time, but the retail sector has emerged a major new source of demand over the past year.

Elsewhere in back-office services, indirect-procurement BPO is proving to be a solid market from small beginnings, pan-European payroll services are showing increasing uptake.

Language and Location

Many European companies that are already outsourcing F&A and other business processes are increasingly selecting service providers that can offer "hybrid" services, where service delivery comes from two or more locations, often determined by multiple foreign language requirements.

For example, an accounting business deal might be serviced from Budapest in Hungary and cover some 15 languages generally served by most Eastern European BPO service providers.

These languages include Dutch, English, French, German, Greek, Italian, Spanish, Russian and all four Scandinavian languages.

India is also often a acme choice to serve many English-language client service delivery needs. Although English is regarded as a

lingua franca

, that alone may not be sufficiently attractive, particularly for Continent-based companies.

Language skills are an important selling point that should not be carelessly wasted.

Along with speaking the language, knowledge of the culture and customs represent the prerequisites not only for efficient communication but for winning business, in Europe.

(The author is former Europe Director, CII, and lives in Cologne, Germany. Feedback may be sent to mohan.murti@t-online.de)

(This article was published in the Business Line print edition dated September 11, 2006)
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