When it comes to business process outsourcing (BPO), the message has always been clear: go east. Although the likes of India, China and the Philippines may be the big hitters in this market, Edward Murray asks if insurers are looking too far east and ignoring opportunities closer to home.
As a BPO centre, Eastern Europe is still dwarfed by the more mature territories it competes against, but it has a number of highly attractive aces up its sleeve.
According to Everest Group's study, Role of Global Sourcing in Financial Services BPO, the market is now worth between $16bn and $18bn. However, has revealed it has the potential to hit $250bn in the coming years, with Eastern Europe among the fastest growing territories in this developing market.
So just what has it got to offer and what should insurers be mindful of in making any BPO decisions?
The first trump card that Eastern Europe has is its strong base of multi-lingual people. Unlike in the Far East, where it can often be difficult to source multi-lingual operatives, Eastern European countries have a host of people that not only speak their mother tongue, but who are also fluent in the likes of English, German, French, Spanish, Italian and even Arabic.
“Eastern Europe has a number of highly attractive aces up its sleeve”
For insurers trying to service either offices or customers across different European territories, being able to set up multi-lingual centres in a single location is an attractive proposition.
Natasha Starkell, a director at consultancy Goal Europe, explains: “Since English or German or other such languages are secondary languages in Eastern Europe, it is possible to create a base of multi-lingual speakers. If companies are working on a pan-European basis then it can make sense to establish an office in an area where those multi-lingual skills are available. These skills do not tend to be as readily available in India or China.”
Linguistic talent is not the only thing at the heart of Eastern Europe’s attractiveness as a BPO centre. Being closer to Western insurers also has benefits in terms of the different time zones that are in play.
Although there have been many exponents of the ‘follow the sun’ model, where work is pushed out to territories that complete it overnight and send it back ready to be picked up again in the morning, this approach does not always work in practice.
Michael Heric, partner at consultancy Bain & Co, believes many processes are now so integrated that it is difficult to compartmentalise each of them in this way and says there often needs to be interaction between processing centres to keep them functioning at their best.
“Being able to set up multi-lingual centres in a single location is an attractive proposition.”
According to Mr Heric countries like India are trying to get around this problem by staffing up centres in the middle of the night so they can communicate with partners during their working day, but adds: “It is becoming increasingly difficult and there is a high staff attrition level.”
For Eastern Europe this simply is not a problem.
However, while Eastern Europe has numerous advantages to offer, there are also a number of issues that it has struggled to resolve – the biggest perhaps being scale. While companies like Accenture have tens of thousands of people working on the Indian sub continent, that number drops to hundreds when it comes to Eastern Europe.
This means that getting the right sort of numbers on the ground is challenging for insurers looking at a wholesale move of significant operations.
From a pure cost perspective, Eastern Europe is not able to better the potential wage savings from a move to the Far East. However setting up a BPO centre in an Eastern European country does give insurers the option to then develop that location into a fully fledged sales centre and make inroads into the local market.
With countries like Poland proving so attractive to insurers this is a way of expanding into new territories while also lowering existing operational costs and improving efficiencies.
For those focusing largely on cost savings, Robert Thomson, managing director of The Innovation Group, is quick to point out that relying on labour arbitrage is not an effective long term strategy and that wage inflation alongside currency movements is already having an impact on the savings available in overseas BPO territories.
“This is a way of expanding into new territories while also lowering existing operational costs and improving facilities.”
Mr Thomson said: “People often do not look past the short term cost savings and in a relatively small labour market where competition for high quality staff will be fierce, I think Eastern Europe could see significant wage increases.”
Whatever happens it is likely that labour cost savings will be available for a few years yet, but it is also worth considering that much of the worst wage inflation takes place not at entry level, but in middle management salaries and this could create problems for firms that have not factored this into their thinking.
Mr Heric continued: “If you look at wages, it is in the middle management layer that much of the inflation is happening. It is very difficult to get quality middle management. It is a fast growing industry and there just aren’t enough people with numerous years of experience who can manage operations.”
There is no doubt that Eastern Europe offers significant opportunities for insurers looking at overseas BPO and that as a centre for this sort of commercial activity it is growing incredibly quickly.
Eastern Europe offers insurers access to multi-lingual staff and a potential entry route into new territories. Its time zone also sits more comfortably with the Western European working day, but whether it can overcome the scalability issues it faces and attract insurers in significant volume remains to be seen. However, it will certainly be an increasingly attractive consideration for insurers continually struggling to reduce their cost bases and improve their margins.
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