From Budapest to Beijing and Buenos Aires, cities across the world are claiming to have more in common with Bangalore, their Indian rival, than just the letter ‘B’.
Modern infrastructure, a plentiful supply of cheap, skilled IT professionals and a supposedly advantageous location have led Hungary, China, Argentina and a host of other contenders to attempt to copy the Indian model and promote themselves as low-cost bases for offshore software development. Like it or not, IT “offshoring” is booming. According to IDC, the worldwide market is set to grow at nearly 20 per cent a year to reach $17bn by 2008.
India is the undisputed leader and seems in little immediate danger of losing its crown. Microsoft announced this month a big expansion of its Indian facilities and a $15m deal with Infosys, one of the giants of Indian outsourcing. SAP also plans to boost its Indian presence.
But many more countries are now trying to convince software houses and IT-using organisations (ITOs) in developed economies that they no longer need to take the well-trodden road to Bangalore.
Their practiced pitches will be heard at the mammoth CeBIT fair in Hanover next March, which for the first time has an exhibition dedicated to outsourcing. The list of participating countries reads like a roll call of the United Nations: China, Malaysia, Russia, Philippines, Bulgaria, Indonesia and a long etcetera.
India may have been the only real choice five years ago, but the Bangalore region, where India's offshore industry is centred, risks becoming victim of its own success. Power cuts are common and pay rates are not as low as they once were.
“Salaries in Argentina are now probably less than in India,” says Carlos Pallotti, chairman of Cessi, a body that represents Argentina's IT industry. The collapse of the peso in 2002 caused wages to plummet and that has helped put Argentina on the offshoring map.
Lastminute.com, a big UK-based travel website, uses the services of Globant, a company based in Buenos Aires, to keep its Linux-based systems running.
While Argentinian workers may be cheap in dollar terms, Mr Pallotti recognises the devaluation effect may be short-lived.
“Our offshoring initiative predates the devaluation and we do not want to compete just on price,” he says.
The country boasts other advantages. It shares the same time zone as the eastern US, has a large pool of skilled, multi-lingual workers, and claims particular strengths in software for vertical markets.
Argentinian software exports today mainly go to Spain, the US and Latin America. But Cessi is trying to build close ties with China in areas such as healthcare software.
As well as offering big opportunities, China is also emerging as a potential threat for other offshore outsourcing regions. Beijing-based Shinetech, only three years old, has already handled more than 100 offshore projects for companies in Europe and Asia. It recently completed its first project for an unnamed US customer.
“China is poised to become the next low-cost software development region,” says Andrew Parker, research director at Forrester Research. “They have not yet created the business culture to support an IT industry, but if they can overcome this, they will be very competitive.”
Despite the publicity it attracts, IT offshore outsourcing is not common, particularly in continental Europe, which lags a long way behind the US. One reason for the poor take-up is language. Indian outsourcers have made biggest inroads in English-speaking countries; their fluency in other European languages is much weaker.
There are other problems: French companies are concerned about India's political stability; German business worries about the cultural differences and the problems that can create in big projects.
“Above all, German companies want clear communications,” says Mr Parker.
Because of the potential pitfalls, many ITOs are looking at outsourcing providers that are geographically and culturally closer to home - a trend called “nearshoring”.
In Europe, the former Soviet bloc countries are an obvious place to look. As well as low wages, Belarus, Hungary, Ukraine, the Czech Republic and Russia are playing up their former technological prowess and strong scientific traditions as reasons why ITOs should choose them.
Nevertheless, analysts warn about paying too much attention to these claims. For example, universities in eastern Europe may produce lots of good science graduates, but they may not make good computer programmers.
Kálmán Kovács, Hungary's IT minister, is well aware of the problems of harnessing his country's scientific strengths to develop a modern IT industry.
“Hungary has produced a high number of Nobel prize winners, but when it comes to conversion into high-tech products, we are much less successful,” he says. Because of the “brain drain”, most of the 18 Hungarian-born Nobel laureates received their prize as nationals of other countries.
However, a visit to Budapest's new Infopark a few kilometres down the Danube from the capital shows the country hard at work on making the high-tech vision a reality.
Alongside predictable names such as Hewlett-Packard and IBM, the latest tenant to take space in Infopark is less familiar: India's Satyam.
Hungary is placing a big emphasis on nearshoring to kick-start its fledgling IT economy. It wants other Indian outsourcing firms, too, to set up nearshoring centres on the banks of the Danube, using Hungarian workers to service clients in Europe.
At first sight, it is hard to see obvious synergies between Hungary and India. “Both countries like spicy food,” jokes Mr Ramalinga Raju, chairman of Satyam.
But the deal appears to benefit both countries. Hungary avoids having to build an IT industry from scratch, while India gains a beachhead that is located in the continental European time zone and, importantly, also now a member the EU.
Mr Raju says humdrum programming work will still be done in India, where pay rates are lower, but for tasks requiring contact with European clients Satyam's Hungarian workers will be used.
Not only do they have better language skills, but a Budapest-based worker can easily be flown in to a European client's site if the situation requires it - something that offshore outsourcing providers are obviously reluctant to do when the worker is in India.
“I want them to come and see my factories so this nearshoring model is very interesting,” says Gregory Bryan, European IT director for TRW Automotive, a large automotive supplier and Satyam user.
With the advent of nearshoring, the loneliness of the long-distance offshore user may be a thing of the past.