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The Bangalores of Europe - IHT reports

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 big German software group, 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. The United States may turn to India to fill its call-center jobs and the like. But Western Europe is turning more frequently these days to its own backyard, transforming a few urban centers of the former Communist bloc into the Bangalores of Europe. US companies are cashing in as well. In recent years, IBM, Dell and Morgan Stanley, among others, have outsourced services to Eastern Europe, or helped other American companies do so. Eastern Europe, with an outsourcing business estimated at a little more $2 billion this year, represents just a fraction of the global outsourcing market, estimated this year at nearly $386 billion. But Robert Brown, an outsourcing analyst at Gartner Dataquest, expects growth in Eastern Europe to outstrip the rest of the market over the next four years, expanding by close to 30% by 2010, compared to 25% growth for the global market.

What's unusual about eastern and 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. 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 neighbors to the east to ease the strain. „Yes, there is a trend, and it started a few years ago,” said Miroslaw Proppé, 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, the electrical giant, does bookkeeping, research and development there. Philips, the Dutch electrical 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 spokesman, and 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.” The reasons for Central Europe's new attractiveness for outsourcing are not limited to promising talent at cheap prices.

 
Central and Eastern European countries also remain some of the world's great untapped markets for services and consumer goods. But 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.” The growth of these jobs is helping staunch a hemorrhaging of workers from Central and Eastern Europe to the west in search of jobs. And it is exerting some influence on decreasing the unemployment rate across Eastern Europe, Proppé said.

In the Czech Republic, unemployment had fallen by the start of this year to 7.1%, from 7.8% in 2002; in Poland joblessness dropped to 13.4%, from 20.2% five years ago, and in Slovakia, to 11.6%, from 19.7%, according to Eurostat. Only Hungary bucked the trend; there the unemployment rate rose, despite an increase in outsourcing jobs, from 5.8% to 8.2%, 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.

Indeed, so fast has the growth come that shortages are arising in some countries for specialists in finance and computer services, giving rise to head hunting services in Prague and elsewhere to sniff out potential local employees. Three years ago, Ilonka Jankovich started a head-hunting firm in Budapest to search out recruits for western companies shifting services to central Europe. „I had Hungarian roots,” said Jankovich, a lawyer by training whose father fled Hungary for the Netherlands after the unsuccessful 1956 uprising. „I wanted to come home, and I saw a need for professional recruitment services,” she said. „Many new companies are coming in, and they all need people.” The firm, called ProfiPower, now has 35 employees, and continues to expand. Jankovich's brother, Béla Jankovich, recently joined and is actively involved in plans to spread the business into Romania, and later Bulgaria and Poland. As the reservoir of capable labor in Central Europe dries up, companies are looking further east, even to Ukraine. „We have a regional vision,” Jankovich said. With many of the countries of central Europe now in the European Union, barriers to migration have been lowered a bit.

 
But most Western European countries, with the exception of Britain and Ireland, still maintain hurdles to migrants. So rather than move the people to jobs in Western Europe, the jobs are moving here. In 2004, when SAP chose to move accounting and personnel services to Prague, the company could hire five employees for the price of one in Germany. By now, the difference is down to three-and-a-half to one, but SAP continues to expand, expecting to increase its workforce to 450 by the end of this year, from about 350 now. The wave of outsourcing is raising sticky questions among Western European white collar workers and their union representatives. In 2005, when Unilever announced that it was seeking to outsource its Western European accounting, personnel and computer activities to Eastern Europe, company employees responded to calls from German labor leaders for a one-day walkout, fearing that as many as 4,000 jobs would be lost. Last year, Unilever awarded lucrative contracts for the outsourcing to IBM and Accenture, but assured the unions that jobs in the west would only be eliminated through attrition or voluntary job changes.

Still union leaders remain skeptical. „Until now it has not been a major problem,” said Jörg Reinbrecht, who is responsible for financial service employees at Verdi, a German union that represents many white collar workers. „But I think it will grow larger as Europe-wide banks and financial service companies form.” But for all the concerns of union leaders, business executives say that such outsourcing often offers benefits to both sides of the equation. „You cannot view it negatively,” said Bernard Bauer, the director of the Czech-German Chamber of Commerce. „It means a market for many companies - after all there are 12 million people in the Czech Republic alone.” The location here also serves western companies as a springboard to markets further east, he said, pointing to more slowly developing Romania, with its 22 million people; Bulgaria, with a population of 7.5 million; and one day, perhaps, even Ukraine, with 47 million people. There are limits to the movement, though, which will be shaped by the future availability of skilled and motivated workers in the countries that are now home to outsourcing. „We may face an enormous shortage of qualified personnel,” Bauer said. (iht.com)