A preference by companies in Western Europe for contract IT staff is cutting into the business of outsourcing companies in these countries, according to a report by Forrester Research.
Companies in Western Europe -- excluding the U.K., where outsourcing is popular -- prefer to augment their internal IT staff with people who are supplied by outside contractors but based in their facilities, said Sudin Apte, a principal analyst at Forrester, on Friday.
Companies in Western Europe aren't in a hurry to cut costs by outsourcing overseas, according to Apte. Instead, their top priority is to be well integrated with the local social fabric, which includes avoiding cutting jobs in their countries, and adhering to local labor rules and other norms, he added.
India exports about €5 billion (US$6.8 billion) worth of IT services to Western Europe, excluding the U.K., representing about 5 percent of the total IT services market in the region, Forrester said.
Indian outsourcers prefer to manage the staff themselves, and offer delivery from offshore locations, which hasn't won them a lot of European business, Apte said.
Countries in Eastern Europe, which were expected to benefit from their geographical proximity and cultural similarity with Western Europe, are also not getting a lot of business from the region. Near-shore locations in Eastern Europe collectively export less than €500 million to Western European countries, excluding the U.K., Forrester said.
While many companies avoid outsourcing, large European multinational companies, with experience in operating in a large number of countries, already outsource to offshore locations like India, Apte said. They are outsourcing because they have to compete with large U.S. companies which already use low-cost offshore resources. But the trend isn't catching with companies that have their operations primarily in Western Europe, he said.
A number of Indian outsourcers have started to focus on growing their business in Europe, and these efforts were stepped up after the recession in the U.S. led to a slump in their revenue. Some of them, like Infosys Technologies and Wipro, have also set up near-shore facilities in Eastern Europe.
Even so, Europe accounts for a small share of the revenue of Indian outsourcers. In the quarter to Dec. 31, India's largest outsourcer, Tata Consultancy Services, derived 18.5 percent of its revenue from the U.K., and 10.7 percent from the rest of Western Europe, while the U.S. accounted for 52 percent of its revenue.
Some of their competitors, including multinational services providers, hire out staff to companies in Western Europe, if only to get a "foot-in-the-door" with these accounts, Apte said. They then progressively move to outsourcing projects in near-shore locations, and later some of these projects are moved to offshore locations, he said.
However, Indian companies have been relatively inflexible in their approach in Europe, Apte added.
Even if they change their approach, Indian outsourcing companies should not expect to see a dramatic boom in business from Western Europe, other than the U.K. Three to four years from now, exports from India will still account for about 12 to 15 percent of the total IT services market in Western Europe, excluding the U.K., he said.
Join the CIO Australia group on LinkedIn. The group is open to CIOs, IT Directors, COOs, CTOs and senior IT managers.