Outsourcing options in Eastern Europe

Creative thinking and a relatively close cultural and geographical fit are among the selling points for outsourcing to Eastern Europe. So how does it all stack up in practice?

Creative thinking and a relatively close cultural and geographical fit are among the selling points for outsourcing to Eastern Europe. So how does it all stack up in practice?

Locations such as Moscow, Krakow and Chisinau are the burgeoning capitals of the new software trail, as Eastern Europe becomes a popular destination for nearshoring.

The former Eastern bloc has many attractions for companies wishing to cut costs and develop their software overseas. It is a relatively short hop by plane, the time difference is not too great and last, but not least, it is brimming with computer and programming skills.

Management consultancy McKinsey cites several reasons for Eastern Europe's new-found appeal. Low wage levels are comparable to India, while slow wage inflation and abundant output of talent from local universities look likely to keep the region economically competitive for at least 15 years.

In addition, a reliable, existing infrastructure make it a low-risk location for investment, with geographical and cultural proximity to Western Europe.

These findings are echoed by two blue chip companies that Computer Weekly spoke to which rated the region highly, in particular for enabling the fast turnaround of smaller, creative projects.

Global investment bank Deutsche Bank has developed a customer relationship management system in Moscow, and has found the commute to be relatively painless. A trip to Moscow is three-and-a-half hours by plane, and when you get there the experience is of visiting a Western city, albeit a large and chaotic one.

"You can drink the water and you do not have to take the injections. These sound like small things, but when you have to go away and leave your family they become important," says Daniel Marovitz, chief operating officer of technology, global banking.

Global telecomms carrier Cable & Wireless is similarly impressed by the legacy of Soviet technical skills. Technical director John Candish outsourced development of a software hub to Moldova and has not needed to visit in one and a half years because the project runs so smoothly.

"There is a heritage of centralised management of technology factories that lost their funding, so now there are a lot of highly skilled people and a lack of jobs," he says.

Although only 1% of the world's total outsourcing spend - worth £15bn - is currently located in Eastern Europe, the region emerged as one of the favourite locations for Western European companies to invest in between 2004 and 2006.

Accordingly, McKinsey predicts that offshoring activity in Eastern Europe could triple to more than 130,000 jobs by the end of 2008.

Case study: Deutsche Bank

Deutsche Bank has its own nearshore facility in Moscow and also uses the services of indigenous supplier Luxoft. Marovitz has experience of outsourcing development work to both Russia and India, and picked the former for the ambitious CRM project.

"We are a really big firm and employ thousands of developers both in-house and offshore. Traditionally, we have used India extensively, but Russia has become pretty important to us recently," he says.

Both locations have distinct merits that have to be matched against the needs of an individual project, says Marovitz.

One of the biggest differences between India and Russia - travel time and time zones aside - is their education systems and the type of software engineer and programmer that they produce.

"The Russian education system is modelled on the Western system and is based on a model of theory and philosophy; a programmer likes to get deep into philosophy and principles of a system," Marovitz says.

By contrast, the Indian education system is built on the British model, with a much greater focus on detailed practical application of an existing plan. India is therefore a great choice for the execution of very precise specifications, whereas Russia has the edge in creative thinking, in Marovitz' opinion.

For this reason, Deutsche Bank looked to Russia for its latest generation CRM software. "We made a radical bet with Luxoft that we could build a new web-based CRM system that would meet our needs more cheaply than Siebel could. These large packages have a huge price tag for implementation, and Deutsche Bank believed it could address it more simply," says Marovitz.

"If you analyse CRM it is about taking data about revenues, who services customers and how, and putting all that in a safe place to work on. To us that felt like a web portal and not a big, fat client system."

For the investment bank the tricky aspect was complying with heavy regulation about how data is shared between divisions. "The stakes are high - if you get it wrong there are legal implications," says Marovitz.

"Deutsche Bank started the project with a small team of 15 programmers working in the New York and London offices. We quickly began to roll out development to Luxoft in Russia using an onshore consultant in the UK to manage this."

One of the more interesting aspects of working with very creative programmers is how to deal with their independent thinking and dissent. "Send them a spec, and you will likely get a candid e-mail questioning your ideas," says Marovitz.

Russia has other complexities that visiting Deutsche Bank staff need to work around. "There are things to be afraid of in Russia: Moscow has a criminal element and that is a real concern. We do not do armed guards, but there are precautions, including never picking up a taxi on the street."

With his vast experience of offshore computing in India, Marovitz is in a good position to judge the relative merits of the two. "India is an important part of our offshore strategy and we would never discount it." However, Marovitz thinks it best suited to long-term, large scale projects.

"If you want to dip a toe into offshoring and do a small project, India is not an easy option. The further distance and difference between time zones does not lend itself to quick one-off projects. The cost of flights and stays in Western-standard hotels can quickly erode any cost savings earned on small projects."

It can also be hard to get and keep staff for a small operation. The time difference in India means that developers need to work a night shift to be in synch for phone calls and messaging communication with the UK. It is unrealistic to expect a small, dedicated team to be able to deliver this kind of service on its own.

Instead, it is better to work on a bigger scale, where there is a large enough squad of developers to warrant a rota and take it in turns to do the night shift. Otherwise staff unhappiness could lead to a high employment churn, Marovitz believes.

"Wherever your offshore staff are located you have to help minimise your supplier's staff attrition, otherwise their problem can quickly become yours," he says.

Case study: Cable & Wireless

Cable & Wireless is another satisfied customer with Soviet legacy programmers. It chose to outsource an inherited software project to Moldova, a landlocked country sandwiched between Romania and the Ukraine, when it acquired specialist software company Extempus.

Candish said it picked the location because software developer Endava impressed the most. "Moldova is within our time zone (two-hour difference) and it takes just half a day to get there, door to door."

Crucially, the computer skills and ability to deliver determined the choice of offshore location. "There is a lot of resource there - Java, C++, Linux and database skills - and staff are highly motivated, at a quarter of the price," says Candish.

The project consisted of building a multimedia hub for delivering text, video, audio and photo messages between different carrier networks and generating a bill for participating operators. A key driver was that it would be flexible enough to accommodate future billing models of operators.

"The industry was just developing the concept of a hub instead of having peer-to-peer agreements. We started off billing a flat rate per message, which is straightforward to code, but had to have a system that could adapt to more complex billing models," says Candish.

Phone number portability was therefore a crucial element, but added complexity and performance issues. Additionally, the system called for a complex interface to the Cable & Wireless billing system in order to record and charge the various mobile networks.

However, the broader requirement to be flexible could not all be given in a cut and dried way within a specification. "At that stage we had no idea of how the future would pan out, but it was important to have a holistic conversation to support technical specifications."

That way, programmers would have the context in order to make the optimum design choice.

Another advantage of using a specialist nearshore provider such as Endava is that while Cable & Wireless only employs a small group of its personnel, they are greater than the sum of their parts. Over there, they are part of a larger team that can be used as a sounding board.

The pros and cons of nearshoring

Deutsche Bank Research report

Outsourcing megadeals dry up

Indian outsourcer posts big profits

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