Topic: The Development of Global Outsourcing in Europe

The world is facing both a financial crisis, an economic, a social and values crisis.

Nobody is able to foresee the end of the crisis. What is quite sure is that years coming will be worse in United States and specially in Europe and it will take years for a full recovery.

Before the crisis the world community had a positive perception of international outsourcing. The developing countries such as China or India took important measures to urge western companies to outsource a larger part of their activities and create jobs for a skilled local manpower. It was and it is, until now, a “win-win” agreement.

Western governments, except for companies working in strategic areas such as defense and for the United States the spatial industry, put no restriction, respecting the liberal approach of the market. Some western trade unions were reluctant but so much that the unemployment level was socially and politically acceptable this disagreement had no consequences.

But since year 2008 important economical and political events in Europe or in the vicinity of Europe challenge political and business leaders:

•        Ireland, Greece and Portugal were close to bankruptcy and need a huge financial help from European Union. Spain and Italy could be the next.

•        Among the 27 members of the EU there is not a common political and economical approach to solve the crisis. States interests prevail.

•        The need for dignity and freedom in the Arab World (especially in Tunisia, Libya and Egypt) has huge consequences on illegal immigration in EU. Politically nationalist leaders who are found of protectionism are more and more popular.

The consequences of these events on international outsourcing:

In the short term the outsourcing industry suffered from the economic crisis.

Prices of IT outsourcing services declined by 5 percent to 20 per cent through 2010. Renegotiations of existing contracts rose to more than 60 per cent.

The organizations are increasingly relying on outsourcing to achieve cost optimization.

The Western Europe decision makers have three main reasons to outsource:

1. Reduce operating costs.

2. Shortage of domestic IT skills and resources. For example Germany reported a need in hi-tech sphere with overall 400 000 positions unfulfilled.

3. Focus on core business expertise.

But we may underline a new important difference in outsourcing policies: near shore and offshore outsourcing.

In 2011 more Western European clients outsource their IT near shore (to Central or Eastern Europe) or within own country.

Factors that drive companies’ choice are:

•        Geographical proximity ( short travel time and, thus, increased communication with vendors)

•        Strong R&D potential of former USSR nations

•        Strong language skills (not only good English language but also German, French, Spanish, Italian language skills).

In 2011 22% plan to transfer their IT software development near shore versus 11% of those who plan to outsource offshore.

Trends and changes.

•        An increased demand for outsourced IT services for public sector. Demand will increase due to recent turmoil in such countries as Ireland and Greece as well as economic uncertainties in other EU state members.

•        An increased focus on  Small or Medium Enterprises. SMEs account for 59% of the total Union economy, generate 67% of employment and contribute around two third of the EU GDP.

•        Cloud sourcing. The European commission has commissioned the report “The future of Cloud Computing” to capture the development and its relevance and meaning for the European market.

•        Mobile Development and integration explode. The phenomenon of Mobile

 Application Stores (Apple, Android, and Nokia) has created a new industry. Mobile portable devices appear more essential in enterprise business processes so requiring integration and calibration with existing infrastructures and systems.

To stay part of the game in Europe Chinese providers must focus on SMEs and anticipate smaller and, thus, less profitable deals in the short term. To ensure more significant profits in the long term they will have to improve their adding-value service offering and cloud capabilities.