Unlike enterprises in the US or the UK, continental European countries have been historically more reluctant to engage with offshore providers to support their business needs because of political sensitivity, labour laws, language requirements and cultural compatibility. Globalisation, however, is spawning new competition that European companies cannot ignore.

In the last few months of 2006, leading offshore providers in India released quarterly earnings announcements that signalled strong earnings in Europe. Despite these providers not specifically disclosing major client wins in Europe, these earnings announcements show how Indian service providers have achieved traction in the traditionally difficult continental European market. They also demonstrate how, especially outside the UK few European organisations are comfortable with the idea of publicly announcing the use of offshore outsourcing. This is because European business leaders still worry about offshoring''s effect on their company''s workforce and image.

"Tier 1 Indian offshore providers, without exception, have recorded outstanding growth rates since the first quarter of 2006. The three largest (TCS, Infosys and Wipro) have recorded year-on-year growth of more than 40 per cent, while Cognizant Technology Solutions (CTS) has enjoyed a 60 per cent growth rate. Although the US is still the largest market for these companies, their European divisions have shown the strongest growth, thanks to strong acceptance in the UK and an increasing number of customers in continental Europe," said Claudio Da Rold, vice president, Gartner''s IT sourcing group.

"These Indian offshore providers are recruiting staff in the European markets they sell into; not just sales staff, but consultants, project managers, engagement managers and, in some cases, personnel to staff their new nearshore delivery centers," added Ian Marriott, vice president, research for Gartner''s IT sourcing group. "However, Indian service providers must tread cautiously and first deal with further challenges before they can compete on an equal footing with the major traditional providers."

According to Gartner, Indian providers face three big challenges if they hope to be seen as equals with traditional European providers:

European providers enjoy entrenched mind share
Traditional European local or multinational providers enjoy greater mind share among European buyers. Their long-term presence and investments have demonstrated a commitment to each of the European countries and have underlined a European strategy. Until recently, with the exception of the UK, many European companies believed the Indian providers had an opportunistic approach to Europe. By increasing local hires, the Indian companies will take the first step on a long, slow path toward gaining European buyers'' trust and confidence. A growing number of providers are starting to demonstrate capabilities that will help organizations look beyond cost savings to achieve other benefits, including access to scarce skills, resource agility, productivity gains, process improvements or innovation.

European companies are reluctant to publicly acknowledge offshoring
Continental European buyers'' reluctance to acknowledge their use of offshore services does not help providers that want to leverage their success to win more deals, particularly when they are trying to gain traction in certain industries or countries. This silence about the use of offshore services also disguises the extent to which companies use offshore resources.

Some continental European companies have signed deals with traditional service providers for offshore services, so that it is not obvious to the market that they are moving work overseas. Many traditional service providers have decreased their European operations in favor of increased offshore delivery capability. Some offshore providers, therefore, are justified in claiming that they are the local employers of the future as they scale up their local network of skills.

Large labour pools can become unwieldy
Indian and traditional providers are building scale offshore, in India and elsewhere. For the Indian providers to continue their strong growth, they must move away from labor-intensive methods of responding to strong demand. Effective operations in the future must also be able to offer process automation, including repeatable solutions and utility delivery models, or these providers risk building up an unsustainable and unwieldy resource pool.

Gartner warns companies in Continental Europe that just because outsourcing deals are not being made public, it does not mean that they are not happening. Mature users are already enjoying value beyond cost savings and the more conservative companies should not lose out in the outsourcing race.

Gartner advises Indian offshore service providers to establish local (onshore and/or nearshore) delivery capabilities, not just sales offices. This is because buyers will seek consulting and delivery capabilities that understand their local markets and business environments, in addition to being able to address language and cultural issues. Indian offshore service providers must plan early to adapt their delivery model, taking into account nuances like automation of processes, more repeatable services and solutions, utility delivery approaches and true innovation.

For Continental European service providers, Gartner recommends a revamp of their service and delivery strategy against major trends, such as global delivery and industrialisation of services. Traditional Continental European service providers should evaluate the market, their value proposition and options, including partnerships, mergers and acquisitions, or dismissal; then act with a sense of urgency.