The contribution of North America to the Global R&D spend stands at 42 percent while the European market has a contribution of 35 percent, followed by Asia at 22 percent and the rest of the world at 1 percent. Companies are realigning their global strategies in the wake of the recent U.S. meltdown, and Europe continues to hold strong growth prospects for India and other countries in the region.
With the changed ecosystem in India and Europe, offshoring would show an aggressive growth trend and some of the drivers that are helping increase offshoring to India are the available talent pool in India, the increase in IT spend over time, cost arbitrage, the innovative capabilities of India and the current exchange rate. All these factors have resulted in a potential of over 8 to 10 billion Euros of addressable market for European companies’ R&D operations in India.
Software products and services constitute 8 percent of the European companies and account for 25.6 billion Euros of revenue. Despite a very slow adoption of offshoring by European companies with about 60 percent of the market still untapped, the top ten European software companies that contribute 65 percent of revenue have R&D operations in India. The number of European offshore centers in India has grown fourfold from a count of 4 in 2001 to 18 in 2008.
Though offshoring from Europe began in the early 90s, the momentum started picking up only in the last four years and the number of Software Product Development centers in India has doubled in such time. Till the year 2003, there were only five centers but subsequently the number of European companies setting up offshore centers in India has gone up by 200 percent.
Out of the top 100 European companies, 18 companies already have 23 offshore centers in India; Bangalore alone accounts for 50 percent of the companies and one-third of the offshore centers due to the presence of high IT infrastructure and large talent pool. NCR and Chennai are the other preferred locations for offshore centers of European companies in India.
Though a highly diverse continent, Europe has language and cultural compatibility issues from country to country, which results in limited options for offshoring work. This, coupled with the talent available in near-shoring destinations, did not present outsourcing as an attractive option, and near-shoring was preferred because of the comfort of proximity and ease of communication.
The other factor that favored near-shoring activities was the close cultural ties of the Central and Eastern European countries with markets of Western Europe. Strong reaction to instances of companies moving jobs offshore (loss of good will) was also the reason why European countries preferred near-shoring.
However, in the last decade, there has been a change in the ecosystem in Europe and India because of many micro and macro factors. The labor laws in Europe, which were very strict earlier, have been relaxed with changes in the Government Regulation & Labor laws. In the past, countries such as Germany and France had very rigid labor laws.
Recently, the Government of both these countries has taken huge initiatives to ease labor laws which will help them increase outsourcing/offshoring. The countries are now considering offshore service providers to handle government contracts. All these spell big opportunity for India despite the current economic slowdown.
Apart from this, the rise of English speaking population in India and Europe, the highly skilled talent pool capable of new product development in India, introduction of stringent data security laws to meet EU standards, the global cost pressure on European companies and the liberalization and tax incentives offered by the government of India are factors that have led to this evolving ecosystem both in India and in Europe.