Outsourcing August 20, 2009, 1:52PM EST

Europe: Indian Outsourcers' New Frontier

Having permeated the U.S. market, Indian outsourcers are looking to the EU for faster growth. But some impediments remain

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With a reputation for inflexible labor laws and Byzantine bureaucratic procedures, Europe might seem the last place outsourcing firms would look to expand. But having penetrated the U.S. and British markets, Indian outsourcing firms are increasingly turning to Continental Europe for growth.

Companies such as Tata (TCS.BO), Infosys (INFY), and Wipro (WIT) see opportunities in a business culture that has gradually become more open to outsourcing. Moreover, many recognize that the European economy is likely to recover more quickly than that of the U.S.

Outsourcing among European companies used to be limited to large banking and financial-services firms. But chemical, automotive, and telecom companies in Europe are following their lead, increasingly turning to Indian providers. A study released earlier this month by the consulting firm Everest Group showed that while outsourcing transaction volume increased by only 6% in North America in the second quarter compared to the first quarter of this year, it was up 10% globally. And global transaction volume in the financial-services sector grew by 25%, dominated by European deals. Overall in 2008, Europe signed a record number of outsourcing contracts, although the value of those deals fell by 50% in the second half of the year because of the recession.

"From a tech perspective, Europe has become the largest growth market [for Indian outsourcers]," says Ameet Nivsarkar, vice-president of the National Association of Software & Services Companies (NASSCOM), an outsourcing industry association based in New Delhi. NASSCOM has identified Germany as an emerging market for outsourcing firms and will release a report on its potential later this year.

Indeed, German technology firms are increasingly turning to outsourcing. Turnover generated through IT and business process outsourcing in Germany is expected to increase by 7.2%, to $21 billion in 2009, following a 7.4% increase the previous year, according to the Berlin-based German Association for Information Management, Telecommunications & New Media (BITKOM).

Europe has been slower than the U.S. to embrace outsourcing, analysts say, but the economic crisis has made it more attractive. "It took a while for European economies to accept the outsourcing business model. But with the economic slowdown, [European] companies are putting each and every inefficiency in question," says Friedrich Loeer, a partner in Frankfurt of Houston-based sourcing advisory firm TPI. "It's a significant change from 18 months ago. It's no longer a question if someone likes outsourcing; it's about whether they can afford not to do it."

Breaking the Language Barrier

In the past, language has been the biggest barrier. German and French companies, Loeer says, have been hesitant to hire Indian outsourcing firms, instead using global providers such as IBM (IBM), EDS, Hewlett-Packard (HPQ), and Accenture (ACN). "[Outsourcers] have to have a strong local footprint with local language capability," says Loeer.

That equation appears to be changing as Indian outsourcers make inroads into the European market. Take Indian conglomerate Tata. Today Tata's European operations account for just under $2 billion, nearly 30% of its global revenues.