Blog

17.08.2018
New outsourcing models arise in Romania


Response to the increased volatility of the market

Outsourcing of IT Services is a flourishing business in Romania, no doubt. Its incredible dynamics has put the ideas of Romanian entrepreneur at work. Outsourcing and near-shoring models are constantly improved to keep up with the changes in the market. It is estimated that by the end of 2020, the outsourcing industry and business services will register a growth of 15-20%, reaching 4-5 % of Romania’s GDP.

From competition to collaboration

Collaboration among competing providers of IT services finally took up in Romania, one aspect of this collaboration being resource sharing. 

10 years ago, outsourcing companies were competing for clients in Western Europe and the US, focusing on offering competitive prices and differentiating mainly on expertise. Sharing resources was a taboo. Now that the pool of resources seems to be smaller and smaller and the salaries higher and higher, IT companies finally understand the power of collaboration. Resource rental has become so popular that many startups focus on this business model.

The emergence of tier II and III cities

Tier II and III cities (smaller cities with up to 500.000 inhabitants and university centres) have seen a sizeable jump in their outsourcing activities in the last 5 to10 years. Companies open branches in smaller towns, encouraged by modest wage demands of computer science graduates and relatively low operating costs. 

In a 2015 report by ABSL Romania, the distribution of BPO/Business Services per towns shows that Cluj-Napoca is the second biggest outsourcing development center in Romania after Bucharest, while other tier II cities like Timisoara, Iasi, Brasov and Craiova are quickly expanding their BPO activities. 

The new age of outsourcing 

The last few years have seen a total shift in focus. Price is no longer the main trigger. Outsourcing is now more about innovation and the possibility to raise competitive potential than about simply delivering IT Services, especially software development, at a low price. More and more tasks are being outsourced because they cannot be done in house due to the lack of resources andnot mainly for economic reasons. The challenges of Western European companies go beyond being competitive in their markets. Relocating Romanian developers at their premises becomes difficult, as Romanian salaries have gone up to the roof. The financial incentive can no longer convince the Romanian specialists to relocate. 

The drivers of outsourcing have switched consistently during the last 10 years, from reducing operating costs and improving process performance to innovation, differentiation and process re-engineering. The cost efficiency is no longer the main driver; what matters most these days is the resource pool, efficiency and innovation. 

The industry’s volatility calls for new outsourcing models 

There’s a human capital issue that has started to be felt in the last few years. The blazingly fast development of the industry has created a shortage in resources and the talent pool seems to be drying up to some extent, leading to low retention rates for the best talent. This in turn leads to knowledge transfer blockage and impacts productivity. These factors are already causing an obvious pain in the market, determining Romanian IT companies to develop new outsourcing models that can ensure the further development of the outsourcing industry. 

Most of the companies that investigate outsourcing possibilities worry just as much about transparency as about quality, meeting the time to market, improving performance, costs and access to modern architecture, technologies and methodologies. 

Transparency is one of the main concerns when it comes to a successful collaboration. And it’s justified. What can Romanian companies do so that their clients and partners have access to their books, to the IT professionals assigned to their projects and their work process? How can they make sure that their clients can see everything beyond the surface? 

Time & materials, project based, team rental, this is how far the outsourcing business has developed so far. So what are we missing?

Out-branching, the new revelation of the outsourcing industry

Out-branching is an outsourcing model based on a very simple matrix: the provider creates an incubator of developers at their premises, takes care of all the administrative and recruitment issues and the client pays Romanian salaries and taxes plus a commission for handling the resources and overseeing the success of their projects. Clients get 100% transparency due to the open book policy, as well as complete control over their resources. 

This is a simple, but efficient commission-based model, that provides stability and profitability for both sides. 

While this may sound just a bit too transparent, let’s look at it from the perspective of competitiveness in terms of resources, costs and stability. With full transparency, the business is profitable from day 1, the client can keep development costs competitive, focus on quality, attract the best talent with motivating packages, maintain high quality resources and provide excellent services to its customers while lowering costs, enjoying increased stability, low investment budgets, business growth in a safe, professional and ethical manner and the possibility to have a very high seniority level within the development teams, among other advantages. No wonder people call it “the Rolls Royce of outsourcing”. 

We asked Ulrich Engelhardt, entrepreneur in the IT Industry, founder of SHE Information Technology and promoter of this outsourcing model, what makes out-branching so appealing to small and medium companies , how he came up with the idea and what the main triggers were:

"As I was working for international corporates, I learned that a global delivery model (using outsourcing or global sourcing) is key to delivering best of class IT services to customers at competitive cost. So I was working with delivery centres in India, Poland, Morocco and Armenia to deliver services for customers in Central Europe.

Taking a look to SHE Information Technology finally, I recognised that small and medium businesses should also learn to use global sourcing to remain competitive, especially if you compete with international players or serve international clients. This is getting more and more important as in Central Europe the lack of specialists in IT is getting more dramatic every year."

So SHE started to build up a subsidiary in Cluj-Napoca, Romania, to be able to employ highly qualified resources at reasonable cost. 

"Soon after we saw how well this model worked for SHE, we had the idea to offer the same advantages to other SMB companies. Many of these companies face lack of contact, experience and size to start their own company in an offshore location. Having a team smaller than 10 to 15 people doesn’t really cover the overhead cost, so it might be much easier and cheaper to use a team which is still dedicated to the company but is part of SHE to benefit from the scale of business, local management skills and trust.

So we offer a so called cost-plus model or “out-branching” which makes all costs and profits transparent and gives the customer 100 % control of the business. This model is very similar to what is applied internally in global sourcing models of international corporates.

It actually looks like we have met the right point in demand, as we host teams from 2 to 12 specialists, each team fully dedicated to one customer only (like being the customer’s own employees) at a very competitive and transparent pricing”,

Ulrich concludes. 

Is this the future of IT outsourcing in a market challenged by the disproportion between supply and demand in terms of resources?

For details about out-branching and how to set up your own outsourcing team, please contact:

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