Many developed countries are facing labor shortages across all sectors, which is also driving up salaries for specialized positions. As a result, some companies have opted to move some or all of their business processes overseas (also known as offshoring.)
Along with Asian countries like India and the Philippines, countries in Eastern Europe have also become a popular offshoring choice among entrepreneurs.
But does offshoring to Eastern Europe make sense for your business?
In this article, we’ll dive into the various benefits and challenges of offshoring to Eastern Europe. We’ll also cover the top offshoring industries and countries in the region.
Table of Contents
- 4 Important Benefits of Offshoring to Eastern Europe
- 3 Potential Challenges of Offshoring to Eastern Europe
- 4 Key Industries for Offshoring to Eastern Europe
- Top 5 Destinations for Offshoring to Eastern Europe
4 Important Benefits of Offshoring to Eastern Europe
Offshoring is when you relocate some of your business processes to another country, typically to a different continent. Contrary to outsourcing where you transfer your work to a third-party entity, offshoring can be conducted in-house by your own employees.
To learn more about what offshoring is, check out these inspiring offshoring examples.
So, let’s understand four key advantages of offshoring to Eastern Europe.
1. Skilled Talent Pool
Eastern European countries consist of seven countries and three republics, including the Czech Republic, Belarus, Moldova, Bulgaria, Hungary, Slovakia, Poland, Romania, Ukraine, and the western part of the Russian Federation (the former Soviet Union).
The education system in CEE (Central and Eastern Europe) countries is robust, reliable, and highly advanced.
For example, 15-year old students in Poland performed higher than the OECD (Organization for Economic Co-operation and Development) average in science, math, and reading.
Additionally, most CEE candidates are fluent in English. For instance, Romania ranks 15th in the EF English Proficiency Index (2021) while Poland ranks 16th.
2. Growing Labor Market
Unlike the USA and western European countries, Eastern Europe doesn’t experience a shortage of IT and development staff.
Moreover, the region is known for advancements in science, technology, and engineering. Poland, Hungary, and the Czech Republic ranked among the top 10 countries in the world for their software programmers and developers.
So companies offshoring to these regions will benefit from a competitive and highly skilled labor market.
3. Lower Cost of Living
The cost of living in Eastern European countries is far lower than in most other developed countries. However, this doesn’t affect how competent professionals from this region are.
CEE countries can get high-quality work done at lower salaries. The net average monthly salary in Eastern Europe ranges from USD 1212/month (in Russia) to USD 2762/month (in Czech Republic). Compared to the average salary in the USA (USD 7,900), Eastern Europe has far lower labor costs.
4. Rigid Data Security and Privacy Laws
One of the primary risks when choosing an offshoring location or outsourcing destination is protecting your company data.
Fortunately, countries in Eastern Europe have very strict privacy and data security laws in place for businesses offshoring to the region.
For example, Eastern European countries in the EU (European Union) are subject to the General Data Protection Regulation (GDPR). This regulation is considered to be one of the most stringent privacy laws in the world and determines how personal data can be handled and stored. Moreover, failure to comply with these laws and breach of data can lead to heavy fines of millions of euros.
The Central and Eastern Europe Data Protection Authorities (CEEDPA) is another council that ensures accountability for businesses handling personal data.
So you know your company’s data is always in good hands.
Next, let’s look at the challenges of offshoring to Eastern Europe.
3 Potential Challenges of Offshoring to Eastern Europe
Offshoring your business to a distant country is bound to have some obstacles.
Fortunately, when you’re informed about these in advance, you can prepare for them and minimize the impact.
Here are three potential challenges of offshoring to Eastern Europe:
1. Differences in Tax Processes
Clients outside of the European Union countries need to familiarize themselves with these procedures.
For example, many software developers in Ukraine are freelancers or contractors who prefer working with offshoring companies on a contractual basis because of the tax benefits they receive. So when you engage the services of an offshore IT vendor, the vendor would then hire software developers as contractors or freelancers to work on your projects.
The related taxation process may be complicated, requiring careful research and hiring.
Alternatively, you could hire an accounting firm from your chosen offshoring destination to help.
Not sure where to start?
Check out the Best Offshore Accounting Services for businesses!
2. Ambiguous Payment Methods
No matter where you outsource your business, there may be a general lack of clarity in terms of payment methods and patterns.
Here are a few other points to keep in mind:
- The Standard Procedure May Differ: Some service providers may bill their clients on an hourly basis, while others charge a flat rate per month.
- Payment Systems May Vary: Some offshore partners may prefer Paypal, others Payoneer, etc.
- Conversion Rate Issues: You may also be unaware of the hidden conversion charges or double taxation rates.
- Currency Fluctuations: Cost-effectiveness of offshoring can be heavily affected by foreign exchange volatility.
So, it’s imperative to have a written agreement that clarifies your payment modes and rates for your vendors beforehand.
3. Difficulties in Communication and Collaboration
Insufficient communication is one of the top challenges of offshoring to any location. Especially when outsourcing software development services or telecommunications, you might have limited ways to supervise the team in real-time or implement any changes.
There may be a significant time difference between Eastern European countries and other business hubs in developed countries.
For example, EET (Eastern European Time Zone) is 7 hours ahead of New York (USA) and 5 hours behind the UK, which can make collaboration a challenge.
Additionally, EET is 6 hours behind Germany and the rest of central Europe.
So what can be done?
Ideally, you should have clearly defined communication plans in place before hiring a vendor. This will limit any collaboration issues and ensure top-quality service.
Next, let’s understand the key industries you can offshore to Eastern Europe.
4 Key Industries for Offshoring to Eastern Europe
Here are the top offshoring industries in Eastern Europe.
1. IT and Software Development
Eastern European software developers and software engineers are some of the most experienced and highly qualified in the world.
In fact, according to a 2021 survey by Whiteland Research, 38% of the companies in western Europe are planning to offshore software development to the CEE region.
Eastern Europe also has a large talent pool of software engineers.
For example, there are roughly half a million Polish employees working in the IT sector and over 200,000 qualified Ukrainian developers.
Learn more about software development outsourcing in this article.
2. Information and Communications Technology
ICT is the second-largest offshoring industry in all of Europe. In fact, telecom services are commonly outsourced to the region, with over 41% of CEE’s 2019 ICT spending attributed to the sector.
The total ICT spending and Foreign Direct Investment in Eastern Europe amounted to USD136.66 billion in 2019. As a result, it’s a rising industry in the region and offers several offshoring benefits to businesses.
Read more about call center outsourcing here.
3. Human Resources
Human Resources is an important part of every company. However, not all companies can allocate the necessary time and resources to their HR processes. As a result, offshoring HR to a developing country may be a better solution.
Human resources is a growing field in Eastern Europe, primarily because of its strategic location in relation to its developed European neighbors.
Moreover, most Eastern European countries have a good understanding of contemporary values, ethics, and the common communication models in the region, making it an ideal offshoring location for HR.
Learn more about HR Outsourcing with this guide!
Outsourcing a repetitive and mundane business process like payroll can result in significant cost reductions and save valuable time. Also, it ensures that your employees get paid on time, and lets you focus on business-driven activities.
So foreign and European companies often outsource their payroll processes to Eastern European countries, making it one of the top offshoring payroll destinations.
Learn more about offshoring finance here!
Next, what are the top locations to outsource in Eastern Europe?
Top 5 Destinations for Offshoring to Eastern Europe
Here are the most popular countries to offshore your business in the Eastern Europe region:
Ukraine is the second-largest country in Europe. It’s also a growing outsourcing and offshoring destination, especially in the IT industry. With over 1000 software development agencies, Ukraine is an ideal location for small businesses as well as large multinational companies.
In fact, according to the AT Kearney Global Services Location Index (2019), Ukraine ranked 20th in the world for its booming IT industry.
Ukrainian outsourcing service providers also offer back-office support, lead generation, customer support, telecommunications, etc. Moreover, Ukraine (especially Kyiv) is known for its large concentration of tech talent, low costs, and easy access to neighboring business centers.
Note: We stand in complete solidarity with Ukraine during this difficult period. Here’s a list of charities you can donate to if you wish to support Ukraine.
Discover the average salary in Ukraine in this article.
With a large skilled workforce, access to modern technology, lower costs of living, and average salaries, Poland is an attractive offshore location for a lot of businesses.
In fact, Krakow and Warsaw are known for their fintech and software development outsourcing industries.
Polish developers ranked 9th best in the world by TopCoder’s survey 2022. The country is also home to over 3000 startups and 430,000 IT service providers that can help streamline your company’s processes.
The low costs, ideal geographical location, and cultural proximity to Western Europe play a key role in attracting foreign investment to a lot of Polish cities. As a result, Poland is one of the top five locations in Eastern Europe for foreign businesses.
Learn more about the average salary in Poland here.
A large share of Hungary’s tech sector consists of foreign companies that have their R&D (Research and Development) centers in the country.
In fact, over 66% of Hungary’s IT revenue comes from international businesses located in the United Kingdom, United States, and Germany. Hungarian IT firms provide 24/7 support, a wide range of IT disciplines, cloud-based services, and a competitive labor market to their clients. So, it’s a booming offshoring industry in the region.
Apart from IT, Hungary is also a good destination for call center offshoring, payroll and accounting, and ICT outsourcing.
Discover the average salary in Hungary here.
This Eastern European country has one of the fastest-growing economies in Europe. In fact, it’s estimated that Romania’s GDP will grow by more than 4.5% in 2022 and 2023.
The country also scored 71.4 points in ‘Business Freedom’ in the 2022 Index of Economic Freedom. Additionally, it ranked 28Th in the list of 45 European countries for its growing economy, making it one of the best destinations for offshoring your business needs.
Romania is a central tech hub in all of East Europe. With over 100,000 Romanian IT professionals and 7000 tech students graduating every year, it’s no surprise that outsourcing software development is very popular in Romania.
Uncover the average salary in Romania in this article.
5. The Czech Republic
The Czech Republic ranked 41st among 190 countries on the global Ease Of Doing Business Scale (2019). It is home to the R&D centers for some of the top companies in the world, including Oracle, Microsoft, and IBM.
The Czech Republic is also one of the top CEE countries to outsource human resources and software development and ranked 32nd in the Global Competitiveness Report (2019).
Apart from these, countries like Belarus and Russia are also popular offshoring destinations due to their technological advancements and IT market.
Offshoring to Eastern Europe is a great idea for companies looking to benefit from cost-effective labor, strong data security, and a large talent pool trained in various offshoring industries.
Not to mention, Eastern Europe has a large number of qualified IT professionals.
If you’re looking to outsource your business, you should definitely consider a country in Eastern Europe. You can refer to this guide to make a more well-informed decision.
Andy is a technology & marketing leader who has delivered award-winning and world-first experiences.