European IT nearshoring has been steadily increasing in popularity over the past few years. One of the most frequent reasons for IT nearshoring is that overseas companies are looking to increase their scalability and have greater access to talent, but they also want to reduce costs. While there are many who are still skeptical about the concept, there are some who have embraced it with open arms and claim that software development outsourcing can be a great way to grow your company without having to hire new employees.
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Why Do Companies Nearshore Software Development to Europe?
There are multiple reasons why more and more companies choose to nearshore software development to Europe. Software engineers who live in European countries often speak English, which can make it easier for the partners to communicate. In addition, there are countries that offer tax incentives for investing within their borders, while others have a significantly lower cost of living. That is why implementing a nearshore model can cost much less compared to onshoring or outsourcing to a Western country. Still, offshoring to countries like India is by far the cheapest way of outsourcing, though it comes with disadvantages.
In order to better understand the process of IT nearshoring and the benefits that companies have reaped from this type of arrangement, here is some compelling information.
Some of the primary reasons that companies choose to nearshore software development to Europe are:
One of the most common reasons for software development outsourcing to Europe is because many engineers in European countries speak English proficiently, which can make communication easier and smoother.
Some countries offer tax incentives for investing on their territory, which makes nearshoring to Europe an attractive option for some companies looking to save money. One of the states that offers this type of incentive is Poland, which has become a popular course of action for companies looking to conduct business with their European counterparts.
Cost of living
One of the primary reasons why European countries are becoming more attractive options for the nearshoring business model is because they have a lower cost of living than other parts of the world where IT labour may be abundant. For example, some cities in Europe have a cost of living that is 40% lower than that of Silicon Valley, which can make it easier for some companies to conduct business.
Another reason why some companies are choosing outsourcing software development to Europe is because they can be more flexible on the timing of projects that are being outsourced. In some cases, there can be a higher demand for IT labour in certain parts of the world, which can make it more difficult for companies to get projects completed in a timely manner. Contrary to traditional offshoring, with nearshoring to European countries, it is often easier because engineers are generally more skilled and more communicative.
Similar time zone
Another compelling reason why companies are deciding to nearshore their software project to Europe is because there is little physical distance between the teams, as opposed to farshoring. This type of arrangement can make it easier to communicate, allowing more time to focus on what matters. The same goes for time zones. All of Europe is in almost the same time zone.
What Countries in Europe are Most Popular for IT Nearshoring?
Software development, IT consulting, and IT services are the most common types of nearshoring services in Europe. The countries that typically engage in this practice include the Czech Republic, Hungary, Ukraine, Romania, and Poland.
On the other hand, countries that nearshore software development to these regions are ones that have a considerably higher cost of living. These include the Western European countries such as Germany, United Kingdom, France, and Italy, as well as the Nordic states — Denmark, Sweden, Finland, and Norway.
The difference between Eastern and Western Europe
While the culture and work ethic are similar, there’s still a vivid boundary between Eastern and Western Europe.
Eastern Europe – some of the most popular software hubs are in the Ukraine, Poland, Czech Republic, and Romania.
Western Europe – Germany is one of the top IT destinations. Other prominent countries are France, the UK, Italy, Portugal, Spain, Sweden, Switzerland, and the United Kingdom.
There is a difference between Eastern and Western Europe when it comes to IT nearshoring. Typically, it’s Western countries that outsource to Eastern ones. These have lower costs in relation to employee salaries than in Western Europe. Businesses that decide to nearshore can save up to 40% per year on employees by working with Eastern European companies. This makes it a great option for those looking to reduce costs, but who want to continue conducting business with their European counterparts.
Eastern Europe can be more expensive than outsourcing to offshore outsourcing locations, but there is also the time and culture difference between the two regions, which can impair information exchange. With nearshoring, the improved communication can actually lower overall project cost as well as improve quality and speed of delivery due to increased time available for work.
The balance between Eastern and Western Europe is changing, however. Eastern European programmers are on par with workers from the West, allowing them to make higher wages, which, in turn, steadily increases the prices.
How Can You nearshore your company’s IT operations to Europe?
There are many considerations when deciding to outsource your company’s software development. The first thing that you need to do is evaluate whether or not your organisation is better suited for nearshoring, onshoring, or offshoring.
Nearshoring has some distinct advantages over offshoring and onshoring, but the three methods are not mutually exclusive, so it’s often best for companies to get to know all of them before making a final decision.
The next step would be evaluating the culture within your organiszation and what type of workforce you’ll need on this project. Both work ethic and values should align, at least to a certain extent. Of course, communication is key. If English isn’t spoken fluently in the service provider’s organiszation, then it might be worth considering other options.
You may also want to take a look at your company’s timeline for performing a given project, as well as what types of costs are associated with it. Many companies that have adopted nearshoring in the past have found that this strategy can actually save them money in the long run by allowing them to access top talent in a close by location and oftentimes cut costs.
What Risks should you Consider before making a decision on whether or not to nearshore your business’ software development to Europe?
Since there are some uncertainties associated with nearshoring your project, you will need to evaluate the different options and the risks each one presents.
Before you start this process, it can be a good idea to consult with an experienced nearshore consultant who can help you come up with a timeline and steps for evaluating what type of risk might be best suited for your company’s needs.
If you’re not sure what type of risks to consider, there are some that come up more frequently than others. For example, cultural differences can become a problem when an organization is outsourcing their project to offshore locations, but this issue usually becomes apparent before the project gets started. This can create serious problems for projects, especially the software development ones. Since European countries are culturally alike, this obstacle becomes virtually nonexistent.
Another consideration is the length of time that it takes to complete a project, as this can factor into how well your team is able to integrate with their European counterparts.
The last thing you want if you’re offshoring or nearshoring a software development project is for people to become impatient. This can be a very serious issue. Oftentimes, resolving it requires employees to have an in-depth understanding of the culture of the people on their remote team, so this is something you’ll need to take into account before making a final decision.
The Future of European Outsourcing Trends, including what is predicted to be the most popular destination country by 2022
Qualified worker shortages in Western Europe
While the number of qualified IT workers has increased by 7.1% in 2019, the demand for IT skills is predicted to rise by more than 10% in the following years (1).
In the UK, the shortage is one of the highest at 70% (2). Nordic countries are also in a tough position. There is a deficit of 70,000 specialists only in Sweden (3), without much prospects for improvement. The rest of the Nordic countries are in a similar situation.
Countries like Czechia, Austria, Malta and Luxembourg had considerable trouble with hiring IT specialists. States like Bulgaria, Poland, and Lithuania are among the lowest, which correlates with them being great nearshoring destinations.
DACH countries are also in trouble when it comes to tech talent. In Germany, there’s a shortage of 70%.
In Austria, 83% of SMBs complain about the lack of skilled workers.
Top nearshore outsourcing destinations for 2022
Eastern European countries remain king when it comes to nearshore outsourcing. With their close proximity to Western Europe, convenient time zones and relatively low wages, the Eastern part of the Old Continent offers a great deal for companies looking to outsource their software development. Many of the top destinations in this region have been around for years with Poland being one of the most popular locations.
Poland has plenty of IT sector companies who are looking to take advantage of nearshoring. From the short distance, to the availability of highly-skilled workers, Poland is just as affordable as any other country in the East, albeit the technical skills of Polish developers are on par with the best. Poland offers not only financial benefits, but also the best quality possible.
Poland has quality ICT infrastructure, super-fast internet speed (1Gbps in some areas) in comparison to other European countries. Poland also specializes in services like testing, bespoke software development, and digital transformation services. There are plenty of freelancers and software houses available.
The Polish education system emphasizes STEM education which makes it easier for one to find educated people with strong fundamentals needed for roles that require technical proficiency such as developers with strong knowledge of computer science and programming languages like .NET and Java.
Poland is also close to most of the Western countries. There are plenty of direct flights from major cities.
Ukraine is a good nearshore destination for IT tasks due to the availability of educated professionals and competitive cost. In recent years, Ukraine has been changing its reputation from being a developing country, to a tech-savvy workforce with skilled engineers.
In addition, many Ukrainian outsourcing providers have highly sophisticated onshore facilities that offer European levels of quality and service with low pricing. Ukraine has been named one of the countries with the most engineers by the World Economic Forum.
The country has lots of people with English language skills and it’s cheaper for companies operating domestically or abroad because costs are lower than those found in highly developed economies like Germany or France.
Romania has great IT infrastructure, modern communication systems and it’s known as one of Eastern Europe’s best educated countries. Many multinational companies have set up their bases there. This means nearshoring in Romania can provide a stable pool of highly skilled professionals with an affinity for foreign cultures.
Belarus is a great choice for nearshoring because it has modern infrastructure and skilled IT professionals with extensive experience in the nuances of multicultural communications. Belarus’ location also provides great proximity to Eastern Europe, which makes it easy to establish connections to its old Soviet neighbor countries. Moreover Belarus has low operating costs relative to Western European countries, and one of the lowest in Eastern Europe. With all these benefits, Belarus is clearly one of the best places for IT nearshoring in Europe.
Bulgaria is an excellent choice for nearshoring because it has a highly educated and well-trained workforce, competitive costs and has a favorable business climate. One of the most attractive aspects of Bulgaria is that they offer incentives, such as lower taxes, for companies that want to operate there. The lack of natural resources and skilled labor force in Bulgaria means that wages are low, which attracts many multinational companies.
Who uses outsourcing the most in Europe?
DACH countries, Germany, Austria, and Switzerland, are among the regions with the highest technological shortage. Austria, after Luxembourg, was the second when it comes to difficulties in filling IT vacancies (4).
77% of German enterprises prefer nearshoring software development to Europe (5), which is by far the most popular. 18% chose Asia, and a meagre 5% chose Africa and South America.
73% and 70% of German and Swiss respondents respectively stated that they’re planning to outsource at the same amount or more (6). Swiss companies cite scalability, innovation, and cost reduction as the main reasons, whereas Germans argue that cost saving is the main motive.
Across all of the Nordic states (7), onshoring has fallen by five percentage points. Technological gap is steadily increasing, which is proven by the fact that access to resources/talent has become one of the main motivators for outsourcing, going up 18 percentage points compared to 2020. Finnish companies are the most likely to outsource their cybersecurity needs, with 43% of the respondents answering positively.
27% percent of Nordic respondents noted that they’re planning to increase their outsourcing efforts.
In Norway, public cloud popularity is increasing, which can lead to an influx of new nearshoring partnerships. 83% of Norwegian respondents predict that 50% of their new apps will be cloud-based.
65% of respondents confirmed that they will keep outsourcing at the same rate or more, with cost reduction being the main motivator (8).
In The Netherlands, 80% of respondents stated that they’re planning to outsource at the same rate or more (9), citing scalability as the primary argument for sourcing. Similarly to the UK, 89% of the partnerships are considered to be satisfactory.
Is nearshoring worth it for my company?
Eastern European IT nearshoring may be worth it for your company if you want to offset the costs that come with doing business in Europe. There are a number of reasons that companies decide to outsource their work to Eastern Europe, but cost is often a big factor. This is because Eastern European countries have a much lower cost of labor and don’t require as many investments in infrastructure as Western European countries. Furthermore, there are many skilled professionals available in Eastern Europe and they tend to be more affordable than their Western counterparts. If you’re looking to reduce the amount of money spent on software development and do business with European companies, nearshoring could be a good option for your company.
(4) (5) https://www.cbi.eu/market-information/outsourcing/trade-statistics