Contracting rises, Outsourcing falls in EU

A recent report by Forrester research has shown that employers in Europe are turning more towards contract resources than outsourcing to deal with skills shortages. It is suggested this is due to compliance with labor laws, supporting local employment and social integration, and a desire to retain control over staff and projects. Whilst it is true that contractors are in high demand in Western Europe (Hurray!!) and that outsourcing has struggled to penetrate these markets, this report is very shortsighted in comparing use of contractors to outsourcing.

Contractors are fixed term workers brought in for specific project needs and specialist within their area. The financial benefits of employing contractors are primarily payroll flexibility and cash management. The overall costs of employment between contractor and permanent staff is, at best, even. Generally contractors are more expensive in the medium to long term - and is almost always a strategy to meet short term gaps in skill, manpower or hiring constraints. Contractors work onsite, they contribute expertise and knowledge, they supplement existing staff and then they move on.

Outsourcing - or more appropriately for this report "offshoring" follows a different model. It is typically a long term arrangement where skilled labour in an offshore location is used to replace existing staff. The benefits of offshoring are predominantly huge reductions in cost sustained over a long period and exceptional scalability. The model is relatively inflexible and is a long term commitment. Cost savings are most easily obtained by reducing expensive onshore resources and replacing them with offshore suppliers.

This inflexibility is also mirrored in the service offerings of traditional offshore suppliers. Their business model means relocating the work is greatly preferred, arguably because reducing onsite expertise leads to a greater reliance on the supplier. This poses problems when an organisation wants a substantial presence to be maintained onshore. Whilst a small number of lead workers may be established in the host country as a beach head, locating workers onsite greatly increases cost (higher salaryies, higher employer costs), compliance (EU labor & immigration laws) and reduces speed (relocation of resources into EU is slow).

Forrester Research are comparing two very different beasts. One is a long term solution to reducing labour costs by replacing onshore skills with offshore skills. The other is a short term solution to meeting demand for skills by supplementing existing resources.

However it does raise the interesting point of how can traditional offshore suppliers still assist clients in Europe? Veterans such as myself remember that before "offshoring" there was the trend of "bodyshopping". From an administrative point of view (by which I mean compliance with local immigration, employment and taxation regulations) there is very little difference between a consulting company and a bodyshop. Just as we've worked with many consultancies and software houses sending staff on international assignments, we've also assisted a number of  offshore suppliers establish local teams in Europe through using Contractor Management Companies.

This is not to say that Offshoring or Outsourcing doesn't have a strong market in Europe. It does! But these traditionally closed markets are slower and more sensitive to the moving jobs offshore. In the short to medium term the greatest opportunities lie in endemic skills shortages, high contract rates for skilled professionals and large projects driven by cost savings and productivity improvements. All good news for contractors!!

Lastly the report also claims that Eastern Europe nearshoring is not as successful as expected either. I'd point to the Deutsche Bank Research which showed that imports of IT-based services from Central and Eastern Europe into the EU grew by 13% every year from 1992 to 2004. And this isn't the real story, because most of the nearshoring is for jobs outside of IT. There is a huge transition for roles which utilise the cultural and language ties between CEE and EU. Anyway, that's for a different blog posting...