Inflation pushes global companies east into Europe in search of savings

By on October 18, 2022 0

PRAGUE/WARSAW, Oct 18 (Reuters) – Central European firms that provide remote, low-cost business services to multinationals are accelerating expansion plans as high inflation pushes global firms to push more work in the region to reduce costs and strengthen margins.

From Prague and Warsaw to Budapest, Western companies have long sought to tap into a large pool of educated multinational workers for outsourced or offshore business services such as software development, administration, payroll and research for large European and American customers.

Today, despite a narrowing pay gap and rising costs faster than in Western Europe, Central European business service centers that have thrived during the pandemic are hiring more staff while others sectors such as manufacturers are shrinking due to the war in Ukraine and soaring energy costs.

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Take Silicon Valley-based Pure Storage (PSTG.N). The flash data hardware and software developer said in September it was doubling the number of engineers at its Prague center and plans to double them again in 2023 and again in 2024, Paul Melmon told Reuters, the head of the Czech center.

“It’s more profitable to hire an engineer in Prague than in Mountain View, even with inflation,” said Melmon, who said a diverse workforce was one of the attractions in Prague where Pure Storage employs a few hundred workers.

“If we started here as an experiment, the experiment works.”

INFLATION ATTRACTS NEW INVESTORS

The business services sector has grown from almost nothing 25 years ago to an industry employing almost 800,000 workers across Central and Eastern Europe, an increasingly important driver for local economies.

A survey by the Czech Association of Leaders in Business Services, the industry group representing the sector, pegs job growth at 11% in 2022 and 13% in 2023.

“With rising inflation in the West, this region is seeing more and more investors come in to set up centers and new types of services,” said Jonathan Appleton, managing director of ABSL Czech Republic.

The pay gap has narrowed in recent years, with economic growth in countries like Poland and the Czech Republic outpacing that of Western countries. But employment costs in the region still range around 30% to 50% lower depending on the role, according to companies and experts.

The ability to provide remote work has fueled the sector during the pandemic, and now soaring inflation in major markets like Britain, Germany and France is once again playing to the strengths of the region.

“New investments are coming because corporate shared service centers offer a way to generate more savings for the group in times of inflation and market pressure,” said Adam Jamiol, partner at Krakow-based PwC.

In Poland – which employs more than 400,000 people in business services – the sector is expected to reach an annual growth rate of almost 8% by the end of the first quarter of 2023 despite double-digit wage growth since February, inflation at 17.2% and war in neighboring Ukraine.

Czech inflation stands at 18%, also above the eurozone average which beat past forecasts to reach 10.0% in September, a new record high driven by food and energy which underlines the incentive for companies to reduce their costs.

“Strong wage pressure with wage increases in markets like Germany and France is driving up labor costs to levels that make it difficult to be efficient,” Lukasz Gebski, chief executive of the company, told Reuters. call center operator Teleperformance Polska.

“In Poland we have a lot of young people learning, studying and knowing foreign languages, so the potential for growth is great and it is also driven by high inflation in the West…”

CEE SURPASSES OTHER GLOBAL CENTERS

Other global outsourcing regions have started to struggle. In India, IT exporters such as TCS, Wipro and Infosys – which make up the bulk of the country’s business services sector – have faced squeezed margins in recent quarters as they try to retain employees. against a backdrop of higher talent turnover across the industry.

But in Central Europe, where Czech GDP is expected to reach 2.3% in 2022 before slowing to 1.1% in 2023 and the Polish economy is expected to slow from 4.7% in 2022 to 1.4% in 2023, Enterprise shared service providers offer an economic silver lining.

At Comdata, whose 1,500 workers in the Czech Republic and Hungary operate telephone service lines, rising inflation and Western business costs have kept the pace of business going. The company plans to increase its workforce by around 300 employees in 2022 and 2023, said the group’s regional head, Jan Nedelnik.

“As more and more companies try to reduce and reduce labor costs, they will move services from Western Europe,” Nedelnik told Reuters.

“I see that over the past two or three months there has been a rapid increase in calls for tenders for roles in German, French, Spanish and English. This trend will continue.”

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Additional reporting by Munsif Vengattil in Bangalore, editing by Mark John and Hugh Lawson

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