Outsourcing Blooms in Central Europe

Fillip Pejfar works in a sparkling new office tower here on the western edge of the Czech capital, using high-resolution scanners to enter accounting material into the computing systems of Accenture, the outsourcing experts. Pejfar's bookkeeping is not helping Czech clients. His expertise is meant for companies like the French chemical giant Rhodia and the German software group SAP (NYSE: SAP) .

Prague is turning into a center for outsourcing white-collar jobs like bookkeeping, data crunching and even research and development, leading the charge in Central European countries like Poland, Hungary and Slovakia that are clamoring to serve the needs of multinational corporations -- and themselves.

Growth Expectations Are High

The United States may turn to India to fill its call center jobs and the like. However, Western Europe is turning more frequently these days to its own back yard, transforming a few urban centers of the former Communist bloc into the Bangalores of Europe.

U.S. companies are cashing in, as well. In recent years, IBM (NYSE: IBM) , Dell (Nasdaq: DELL) and Morgan Stanley, among others, have outsourced services to Central Europe, or helped other American companies do so.

Central Europe, with an outsourcing business estimated at a little more US$2 billion this year, represents just a fraction of the global outsourcing market, estimated this year at nearly $386 billion.

Robert Brown, an outsourcing analyst at Gartner (NYSE: IT) Dataquest, expects growth there to outstrip the rest of the market over the next four years, expanding by close to 30 percent by 2010, compared to 25 percent growth for the global market.

What's unusual about Central Europe is that its most advanced cities offer a potent mix of attributes that even Bangalore cannot rival: a highly educated, multilingual pool of talent in an increasingly affluent consumer market -- all barely a stone's throw away from its prime clients.

Business Is Booming

Outsourcing is booming as this region is moving more quickly to integrate itself economically with its more affluent neighbors to the west, reflecting an economic advance that is reducing the high unemployment that plagued these countries for years after the fall of the Berlin Wall and the collapse of the Soviet empire.

It is also fueling a real estate boom in high-rise office space. Despite continued high unemployment in much of Europe, Western European companies are pressed by manpower shortages in several important occupations, encouraging them to turn increasingly to their eastern neighbors to ease the strain.

"Yes, there is a trend, and it started a few years ago," said Miroslaw Proppe, the director of KPMG's offices in Warsaw. He added that it was "not necessarily based on low labor costs, but on the potential of young Polish graduates."

Commerzbank of Germany does its data processing in Prague, and Siemens (NYSE: SI) , the Germany-based electrical engineering and electronics giant, does bookkeeping, research and development there.

Philips (NYSE: PHG) , the Dutch conglomerate, operates a shared services center outside Warsaw.

Last summer, Morgan Stanley announced that it was opening a business services and technology center in Budapest that would supplement a mathematical research center the firm established there in 2005.

The firm now employs about 200 people there, said Hugh Fraser, a spokesperson, and it will employ about 450 when fully up and running. He said the choice of Budapest in both cases was because of the "availability of high quality talent."

Untapped Markets

The reasons for Central Europe's new attractiveness for outsourcing are not limited to promising talent at cheap prices. Central European countries also remain some of the world's great untapped markets for services and consumer goods.

However, there is no doubt that low wages in the region have their appeal to Western companies. Employees in Hungary and the Czech Republic earn a quarter of what employees in Western Europe make; Slovakia's pay runs only one-fifth as much, according to the European statistical agency Eurostat.

If that does not make the area attractive enough, governments also offer incentives, from simplified tax structures to subsidies for new office construction.

Unlike other regions that compete for outsourcing, like India or the Philippines, where English is the sole operating language, employees in Accenture's Central European business speak a variety of languages, giving clients access to people who speak English, French, German, Russian and a host of local languages.

"The key thing is language," said Andrew Grech, an Australian native who directs Accenture's operations here. "The other factor is a stable political and economic environment. The Czechs are in the European Union and NATO."

Trends in Employment

The growth of these jobs is helping staunch a hemorrhaging of workers from Central and Eastern Europe to the West in search of jobs. It is exerting some influence on decreasing the unemployment rate across the region, Proppe said.

In the Czech Republic, unemployment had fallen by the start of this year to 7.1 percent, from 7.8 percent in 2002; in Poland joblessness dropped to 13.4 percent, from 20.2 percent five years ago, and in Slovakia, to 11.6 percent, from 19.7 percent, according to Eurostat.

Only Hungary bucked the trend; there the unemployment rate rose, despite an increase in outsourcing jobs, from 5.8 percent to 8.2 percent, mostly because of government austerity measures to cut jobs in the public sector.

Growth has been strong. Though Accenture will not disclose its employee count, the Rhodia account alone employs more than 110 people, and the firm occupies 13 stories in an 18-story skyscraper, plus two stories in an adjacent building. A fourth building is scheduled to go up in the brand new corporate park; Accenture plans to take some of the additional space, too.

"We're mostly serving Western European clients," Grech said, adding that the company was keen to expand the types of service they received, from bookkeeping and accounting, to computer services and even personnel services.