A look at outsourcing as recession looms

Analysts predict that unemployment will increase in Latvia already before the end of this year as the economy is slowing down, but outsourcing company Exigen Services believes this will be a great opportunity for companies in their line of business.

Exigen Services is a global leader in providing ‘Outsourcing 2.0', which focus on actual impact on the results of performance. The company provides technology driven application outsourcing services from multiple delivery centers across Central and Eastern Europe, the United States and the European Union. Guntis Urtans, who is responsible for Exigen's Baltic operations, told PRIME Match that a recession would be good for the outsourcing industry in Latvia since more companies would be looking at cutting staff and costs.

“It will have very good effects. In a recession, resources become more available, and it becomes possible to divert these free resources to outsourcing,” Urtans said and added that Latvia should start focusing more on outsourcing services towards other European countries.

People in the industry will agree that it is hard to say how popular it is with outsourcing in Latvia . In the private sector, many non-core business services in the banking sector have already been outsourced, and in the public sector IT solutions are usually outsourced.

“Very few ministries, for example, have their own programmers. Recently, even less have their own system administrators as all of these services are outsourced,” Urtans said but added that bigger companies in the private sector are gradually turning towards outsourcing.

Even though outsourcing as a business concept have not been around for very long, it has already evolved from what people in the industry call ‘Outsourcing 1.0' to ‘Outsourcing 2.0'. The “older” generation of outsourcing services focused more on reducing personnel costs while the upgraded “new generation” has an added bonus of sharing the risks for both the provider and user.

“The new generation of IT outsourcing, represented by Exigen Services, focuses on results and customer relations, and it shares the risks with the client. Also, the new generation outsourcing providers align the business objectives of their clients with those of their own companies. Therefore, it is quite fair to say that there are several benefits to the client – an outsourcing provider that provides much more than just a workforce at lower rates,” Urtans said.

Most companies who decide to opt for employing outsourcing services do so to cut costs but without sacrificing any of the core expertise. Another common reason is to raise the level of efficiency and speed of service. High expectations

The Latvian workforce has already been diminished severely by the exodus to richer European Union countries after Latvia joined in 2004. There is still no accurate statistics on exactly how many, but the Foreign Ministry estimates that as many as 200,000 people have left for working abroad. In the first quarter this year unemployment hit 6.5 percent, which compared to the same period in 2007 is a decrease from 6.9 percent, but this trend is likely to change in the coming months.

“A qualified workforce is what Latvia tries to use for positioning itself as a great outsourcing destination. We have good education, good knowledge of languages, quick learning skills and the wish to take advantage of all of that. However, a lot of this is still in the working process, and a lot of work still has to be done in order to provide a good range and quality of services,” Urtans said.

Nordea bank paints a rather grim outlook for Latvia in the coming years. Most noticeably, economic growth will pretty much come to a grinding halt while inflati on will continue to soar this year, which will lead to an increase of unemployment. The bank predicts that unemployment could reach 7.5 percent this year and 8.5 percent in 2009 as Latvia 's economy will continue to slow down. Still, Urtans said he thinks the economical climate in the country could lead to an increase in popularity of outsourcing services.

“A wave of increase in the popularity of IT outsourcing is expected, though. Latvia is not an exception, and we are expecting Latvia to become a country where services are outsourced to not only IT, but also in terms of business process outsourcing, e.g. call centers and support centers,” he said.

It is hard to say how many companies in Latvia are dealing with outsourcing in general and IT outsourcing in particular. One study published earlier this year by the Ukrainian Hi-Tech Initiative suggests that there are around 40 IT outsourcing companies in Latvia , employing some 600 people. According to the study it could cost anywhere from $28,000 to $55,500 to hire a Latvian IT specialist for one year, which would make Latvia the sixth most expensive country in Central and Eastern Europe in this respect. Most expensive is Poland where an IT specialist could cost from about $33,000 to $66,000 for a year. Still the entire IT outsourcing market in Poland is worth just $43 million while in Latvia it is $20 million. The leading country in the study was Ukraine where the market is estimated at $544 million while an IT specialist would cost between $26,000 and $49,600. The study concludes that: “ Latvia is a business friendly country, which makes it easy to outsource. The fastest GDP growth rates in Europe , low taxes (corporate income tax is 15 percent, fl at), but competitive labor costs and high productivity of Latvian professionals attract customers to this country.”

It is hard to say how many companies in Latvia employ outsourcing services, but analysts agree that it has been growing steadily over the years. Still, growth potential is very big.