By Ian Mihajlovic, Accenica
 

23 December 2009

Serbia is promoted as a premium offshore destination for outsourcing, but the sector looks set to experience a painful transition process that will be characterised by skills shortages and staff poaching.
As an outsourcing destination, Serbia is highly fragmented. Offshored IT and financial functions tend to be project-based and executed by small teams. Outsourced manufacturing operations are equally small-scale but offer high-quality and short delivery times which suit Western European clients.
Larger-scale outsourcing operations, however, are likely to emerge as Central and South East Europe becomes increasingly attractive as an offshoring location.

Serbia’s outsourcing revolution was set to begin in 2008 with the construction of a $600 million IT park by India’s Embassy Group, a Bangalore-based IT park and commercial building developer.
Located in the northern Serbian town of Indija, the park was intended for completion in 2013 and was set to cover a total surface area of 250,000m2, making it one of Europe’s largest IT parks and the biggest Indian investment in Europe’s IT industry.
Indeed, the park was to be home to IT services and technology providers employing up to 25,000 people and exporting up to $2 billion a year in products and services, according to the Embassy Group in 2007. But the project has suffered continued setbacks, blamed on the global crisis, and the most recent announcement in January 2009 indicated that construction would be delayed until autumn.

Prior to the Embassy Group, the largest outsourcing deal to be announced was a joint venture in 2005 between Bozic and Sinovi and the British Gowi group, worth ₤500,000 for software programming. There have been few announcements since, although many smaller project-based transactions are being implemented under the radar.

In the manufacturing arena, outsourcing activity is equally low-key. Several years ago parts of the textile industry were re-activated and Serbian companies secured agreements to fulfil high-quality time-critical orders for global brands including Diesel, Dolce & Gabbana, and underwear retailer La Perla.
Ikea has also been outsourcing manufacture of some products to Serbian Simpo for many years. Fiat’s part-acquisition of former state controlled Zastava, which has benefitted from government subsidies, is the latest catalyst for manufacturing outsourcing and is leading a rehabilitation of Serbia’s auto parts manufacturing sector.

But Serbia’s relevance for outsourcing functions is rising not because of any government initiatives, but because the entire Eastern Europe region has become more significant. With more than a decade’s experience of outsourcing in Asia, Western European companies are turning to Eastern Europe which offers competitive costs and closer cultural similarities.

The global crisis is focusing companies away from expensive long-term contracts to flexible project-based work. Manufacturing contracts in China, for example, are notoriously long term, often due to significant set-up costs. For the same reason, offshoring operations in India also tend to be major long-term investments.
Serbia and other regional countries have a key advantage. Short-term assignments, lower cultural boundaries and only minor time differences. Close proximity to Western Europe enables far quicker delivery times for high quality goods, enabling retailers to keep flexible inventories.

Research by the Boston Consulting Group published in 2007, found that for many product categories, the total landed costs were essentially equivalent whether the product was manufactured in China or Eastern Europe.
With the announcement last week that Serbia’s interim trade agreement with the EU is to be unfrozen, and with Serbia’s continuing re-industrialisation, the country is graduating into the list of favourable manufacturing destinations.

However, before Serbia’s outsourcing sector can properly grow, it will have to transition through a painful evolution process through which some other neighbouring countries have already passed.
“In Bulgaria and Romania in 2006 it was impossible to find committed people even for high salaries” says Tassos Topalis, Director of Eurofast Global, an accounting and tax consultancy that offers outsourcing solutions.
When a wave of outsourcing companies arrived in these countries, it created huge demand for skilled labour that led to an acute shortage for almost two years.

Since 2006, neighbouring markets have matured and the global crisis recently created a flood of skilled labour. But once large projects move in, Serbia is also likely to experience acute labour shortages. Indeed, Embassy Group’s plan to build a centre employing 25,000 in a sector which currently employs 60,000 workers is an indication of staff shortages to come.

“Serbia’s large pool of educated people is an advantage but there is a scarcity of international experience and skills for key functions” says Hanno Lindpere, a partner at Ernst & Young, which outsources some back office procedures to India but not yet to Eastern Europe.
Front office functions such as accounting and auditing that require interaction with the client remain a challenge to outsource. In fact, UK trained accountants in Serbia are sometimes paid more than their UK equivalents due to the scarcity of skills in certain employment categories here, according to Lindpere.

Partly for this reason, only 7 per cent of respondents in Ernst & Young’s 2009 global FDI survey would choose to locate share service centres in Serbia, against 22 per cent who might choose Croatia.

Challenges aside, Serbia has already covered tremendous ground in providing external services but the next large offshoring project is likely to shake the Serbian market, leading to a huge redistribution of labour.