Can India remain the offshore big shot?

This week's news that the big Indian offshore IT firms are looking to set up bases in Central and Eastern Europe indicates a shift in the offshoring market.

While India still dominates, a more mature global outsourcing model is beginning to emerge.

The focus is now on the former communist countries in Eastern Europe. The Czech Republic has had a head start over most and established something of a fledgling 'nearshore' industry for firms that want the offshore cost savings without going as far as India.

The big draw for the Czech Republic is the labour arbitrage and English language skills. The Czech universities have a history of turning out highly skilled technical graduates - a legacy of the communist era - and the gross monthly salary for an IT operator in Prague is around €600 compared to nearer €1800 in parts of the UK.

The downside for Prague is rising property prices, with monthly rents for businesses as high as €19 per square metre a month - on a par with any other western city. Still, lesser known Czech cities, such as Brno, continue to represent good value for the money.

Higher costs haven't put off some Indian IT firms, though, who see Eastern Europe and the new EU states as ideal low-cost bases to gain a foothold in the European outsourcing market. Indian firms are also tempted by generous government investment subsidies as high as 50 per cent in some countries.

A spokeswoman for Czech Invest, the Czech Republic government's foreign investment agency, said deals with two of the top Indian IT firms are currently being negotiated. Another Indian firm, Satyam, is opening up a centre in Hungary next month.

LogicaCMG is one UK outsourcing firm that has already established a base in Prague, where it offers internal product development and external IT services. Mike Stone, regional commercial director at LogicaCMG in Prague, said the company "eats its own dog food" when it comes to offshoring.

The cost savings can be over 30 per cent on projects done in Prague, according to Stone. "The reality is 30 per cent, plus or minus 10 per cent. If we get a government subsidy it is above 30 per cent. If it doesn't qualify then it is 20 per cent or a little less," he said.

But Stone warned firms not to underestimate the time needed to liaise between the onsite and offshore teams, a duty that can take up as much as 40 per cent of a manager's work week.

When it comes to other potential offshore locations, Vladimir Kroa, programme manager of IT and business services at IDC, points to the growth of countries such as Latvia, Slovakia and even the Ukraine.

"Membership of the EU is very important in the [offshoring] decision-making criteria," he said.

LogicaCMG has set a target of 20 per cent of revenues coming from offshore services by 2005 and the Czech Republic is just one part of this plan.

Like many other companies, the firm already operates rapidly expanding centres in Bangalore, which silicon.com visited in April, and the Philippines.

South Africa is another country that is gaining popularity among western businesses for offshoring. At a recent roundtable discussion in London, Gareth Morgan, global CIO for the Virgin Group, said the company is looking at South Africa for the offshoring of more customer-facing services because it offers a better cultural fit than India.

Of course China still lurks in the background and in terms of scale and IT skills it is the only place that offers serious competition for India at the moment. But the lack of English-speaking workers, as well as a lack of solid IP and information security laws will continue to hold it back.

Beyond the big offshore destinations, a host of countries are selling themselves as niche players in the market. One example is New Zealand, which focuses on R&D and innovative software products based around gaming and 3-D scanning, as well as various post-production technology services on the back of infrastructure built for the Lord of the Rings films.

While a choice of offshore locations generates competition, it also creates uncertainty as the cost advantage shifts swiftly from country to country.

It is a problem India will face as wage and land prices rise and other developing countries step in to undercut it.

This is why it's vital for firms to keep track of where the right skills and cost savings are. DHL, which just opened a huge purpose-built offshore centre for Europe in Prague after assessing other countries, admits it may have to undertake that assessment again in the next five to ten years because of the pace of change in the IT services market.

In the meantime India remains dominant but everyone else is catching up fast. Kevin Lloyd, CTO at Barclays Bank, said in a panel discussion at the recent silicon.com CIO Forum that he doesn't care where in the world the services are done as long as the cost and quality are right.