Despite the continued optimism around the outsourcing industry, recent years have seen the model change as low-cost jobs overseas continue to be automated. This shrinking profit pie means that countries must continuously offer more than cheap labor to remain competitive.
For major outsourcing hubs in the developing world, this has proven especially problematic. The overall size of the global IT outsourcing industry has dropped nearly 30%, from $105bn in 2014 to $77bn in 2017.
India remains the most popular hub for outsourcing work as it offers a massive labor force and some of the most affordable rates for work in the world. The country counts over 200 multinational corporations with offices in India as well as 500 companies that deliver said services. Even so, recent years have seen more countries rise to challenge the traditional offshore locales by changing their value proposition.
Instead of challenging the low costs of labor, which is a near impossibility relative to countries like China and India, many European countries have focused on their cost effectiveness and quality of skilled services to narrow the existing gap.
While some larger Western European countries have become popular destinations—such as Germany and the UK—by and large, this new 'nearshore' trend is being led by the continent's emerging Eastern bloc, with Romania at the helm.
Romania's Advantages in Human Capital
In the rush to outsource all or substantial portions of their work in search of reduced overheads, companies have focused for too long on cheap labor alone. For countries like India and China, this model has been a lifeline and a major economic driver. However, for many, overall value – in the form of top quality work at a good value– has become more important than price alone, and corporations have begun to factor in price-quality and cost efficiency into their calculations.
In search of the higher-level work and skilled labor that many traditional players in outsourcing have not been able to meet, corporations have begun looking closer to home for outsourcing solutions, and Romania has emerged as an attractive option. In recent years, Romania has seen a large shift toward offering these services, and large international companies across diverse industries – including IBM, Microsoft, Oracle, GE, Deloitte, Dell, UbiSoft and QualiTest – have opened offices there. According to ATKearny's Global Services Location Index, the country is already ranked in the top 20 countries worldwide for outsourcing, and is a top 5 choice in Europe for a number of reasons.
For one, the sector already employs a sizable workforce of over 100,000 professionals, mostly focused in insurance, financial services, telecom, gaming and banking. The number is also rapidly rising, with the sector expanding by 10% in the past year alone while contributing nearly 20% of the existing outsourced workforce in Central and Eastern Europe. This explosive growth is the result of the country's strong emphasis on technology and language education. Even with a rate of nearly 15,000 students with IT-related degrees graduating annually, companies are in a race to fill open positions and demand continues to skyrocket.
Most importantly, these new workers entering the market are highly skilled. They are multilingual—an estimated one in five Romanians speak multiple languages—which is a key characteristic for companies that work across continents, exhibit high-level technology and financial skills, and generally require lower salaries than similarly qualified workers in the West.
The Logistical Upper Hand
More so than human capital, however, Romania's position relative to the world's major Western business hubs makes it a more appealing option than its Asian counterparts. Unlike India or China, which are several time zones ahead of the US, UK, and most of Europe, Romania is only two hours ahead of England, and seven away from the US East Coast.
This may seem superfluous in a digitized world, but speed of operations can lead to major profits, or losses, if tasks must wait a full business cycle to be approved or completed. For companies that establish branches within countries they outsource work to—a practice most major corporations follow, including QualiTest—traveling to Romania may also be significantly more cost effective than repeated trips to India or the Far East. With shorter flight duration and more available flights than say, to India, travel to Romania is also made possible for shorter-term trips and even next day returns.
And while costs of labor may be lower in the Far East than Eastern Europe, overhead costs – including costs of flights, management, and the potential costs of cultural gaps – are lower when outsourcing to Romania.
Romania also benefits from two political factors—its membership in the European Union, and strong institutional support from the government. This includes several tax incentives and breaks, alongside wages that remain highly competitive within the EU (the average minimum wage is the second lowest in the political union). More importantly, membership in the EU comes with more than just financial and security advantages.
As a member state, Romania's regulations and compliance laws must fall in line with the broader union, meaning that companies have significantly less startup barriers when setting up BPO or ITO offices. Apart from easier setup, this gives companies a much safer framework and infrastructure for financial transactions, as well as access to many of the same financial services and banks available across the West.
A Rising Near-source Destination
For companies looking for nearshore outsourcing solutions, Romania is increasingly appealing. The country's labor force is highly qualified and focused on sectors that have not been overtaken by automation. The provision of financial and IT services still requires a highly skilled hand, and education is a vital component contributing to Romania's place as a top destination for these solutions. For any company considering outsourcing, going with the cheapest option may not always get the best results. Instead, going for the most cost-effective option, as Bucharest and other Romanian cities are quickly proving to be, means that companies can still reduce overheads, but without the worry of regulatory headaches and work that isn't up to accepted standards. Overall, East Europe continues on its emergent financial trajectory, and Romania is rapidly picking up the mantle of leadership.
Tali Shem Tov is CEO of QualiTest Israel.