Innovation is the nearshore lure

To steal a march on the Indian outsourcing giants, Eastern Europe is looking to offer clients business advantage through higher levels of systems creativity

It used to be said that "Nobody ever got fired for buying IBM." Nowadays that might be rephrased as "Nobody ever got fired for outsourcing to India." Certainly the huge chunk of the IT outsourcing pie still being gobbled up by sub-continental Asia shows that the twin attractions of low-cost expertise and cultural compatibility - especially in terms of spoken English - are still exerting a strong pulling power.

The value of the Indian software and services sector is projected at more than £15bn for the 2006-07 financial year. And a survey by the National Outsourcing Association shows that the perception of sub-continental Asia as an easy place to do business with is also holding up well, with 45% of respondents rating it as the easiest region.

However, the same survey shows nearshoring centres in Central and Eastern Europe treading on the Asian coat-tails, with 41% of respondents rating it as the easiest region to do business with.

The aim of nearshorers is to show users that they have something very different to offer by focusing not merely on cost, but on very high levels of technical expertise and creativity, combined with low staff turnover.

Not surprisingly, many European nearshorers focus on high-end technical business from companies in complex areas such as engineering and financial services.

"The outsourcing of complex IT functions in the finance sector is increasingly done for transformational reasons," said Martyn Hart, chairman of the National Outsourcing Association.

"The finance company does not want the supplier to conduct the process as it was conducted in-house. They want to harness the domain expertise of the suppliers to build systems that supersede anything that they could build themselves."

Nearshore operations such as Russia's Luxoft have founded their ambitions on this added-value approach.

Partnership is a much overused phrase in the business world to describe what is often a straightforward client-supplier relationship, but Dmitri Loschinin, CEO of Luxoft, claims that this is what can give nearshorers the edge.

To come up with innovative solutions rather than simply a cheaper offering of routine processing requirements depends on a high level of technical expertise - still at a considerable discount to Western rates.

This expertise is generated largely by a pool of talent educated to the highest technical standards - in Russia's case a legacy of the old Soviet system which still offers clout in today's highly capitalistic environment.

This means that clients can specify the problem or new business approach and then collaborate with the outsourcing supplier to come up with the solution, rather than specifying the technical issues and looking to an outsourcing supplier to implement the plan.

This relationship approach has borne fruit for Deutsche Bank, which hired Luxoft to work on the development of ClientFirst, a new client relationship management system used to provide real-time management of each client relationship by aggregating and centralising data from many internal and external sources.

Now the two companies are joining forces to market the system to other commercial organisations.

Daniel Marovitz, chief operating officer of technology for Deutsche Bank's global banking division, said that cost savings were only one reason for the success of the venture, and that this had been effectively combined with a pragmatic and creative approach. "Luxoft is prepared to lead rather than simply follow," Marovitz said.

Loschinin emphasised that "working with Deutsche Bank has been a truly collaborative partnership". He also said that "We are taking an almost unprecedented step by working with Deutsche to sell a product that was specifically developed for just one client."

But can Russian outsourcing suppliers really lay claim to a true cultural affinity with Western clients, especially given the bad publicity in Western media on president Putin's tightening of political and media control within Russia? And is language not another barrier?

Dmitri Milovantsev, Russia's deputy IT minister, believes that recent migrations to and from Russia provide the basis for an effective understanding of Western business processes. "The migration process has had a major effect on the culture of business in Russia," says Milovantsev.

"A lot of bright people left Russia in the 1990s and found work in the US and the UK. Now there is a trend for these people to return, and they bring with them valuable experience of working for Western companies."

For the CIO in the UK contemplating the increasing range of outsourcing possibilities - whether in terms of geography, cost, expertise or cultural and linguistic fit - the easy option remains India, with its huge and mature outsourcing operations. But it is worth taking the trouble to investigate whether looking closer to home can offer advantages.

In Marovitz's words: "It is horses for courses. The Indians have become brilliant at marketing their outsourcing services, but delivery is the key.

"A hybrid approach to insourcing and outsourcing is usually the best answer, but to be successful you need to be very clear about what are your core and non-core operations, and develop contracts and arrangements to match."

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Luxoft website >>

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