PRAGUE/WARSAW Central European companies that provide remote, lower-cost business services for multinationals are stepping up their plans to grow. This is because high inflation is forcing global companies to send more work to the region to cut costs and increase margins.
From Prague and Warsaw to Budapest, western companies have been looking for a large pool of educated, multilingual workers for business services like software development, administration, payroll processing, and research for large European and U.S. clients for a long time.
Even though the wage gap is getting smaller and costs are going up faster than in western Europe, the business service centres that did well during the pandemic are hiring more people. This is because other industries, like manufacturing, are cutting back because of the war in Ukraine and rising energy costs.
Take Pure Storage, a company in Silicon Valley (NYSE: PSTG). In September, the company that makes flash-data hardware and software said it was doubling the number of engineers at its Prague centre. The head of the Czech centre, Paul Melmon, told Reuters that the company planned to do it again in 2023 and again in 2024.
“Even with inflation, it is cheaper to hire an engineer in Prague than in Mountain View,” said Melmon. He added that one of the things he liked about Prague, where Pure Storage has a few hundred employees, was its diverse workforce.
“If we came here to try something out, the test is working.”
Inflation attracts new investors.
Business services were almost nonexistent 25 years ago, but now they employ nearly 800,000 people in Central and Eastern Europe and are becoming an increasingly important part of local economies.
According to a survey by the Czech Association of Business Service Leaders, which represents the sector, employment will grow by 11% in 2022 and 13% in 2023.
“As inflation rises in the West, more investors are coming to this region to set up new centres and services,” said Jonathan Appleton, the managing director of ABSL Czech Republic.
In recent years, the gap between wages has shrunk because countries like Poland and the Czech Republic have had faster economic growth than Western countries. Companies and experts say that, depending on the job, employment costs in the region are still 30% to 50% lower.
During the pandemic, the sector grew because people could work from home. Rising inflation in big markets like Britain, Germany, and France plays to the region’s strengths once again.
Adam Jamiol, a partner at PwC in Krakow, said that new investments are coming in because shared business service centres allow the group to save more money back home when there is inflation and market pressure.
In Poland, where more than 400,000 people work in business services, the industry is expected to grow by nearly 8% per year by the end of the first quarter of 2023. This is true even though wages have gone up by 10% since February, inflation is at 17.2%, and there is a war going on in neighbouring Ukraine.
The inflation rate in the Czech Republic is 18%, which is also higher than the average for the euro zone, which soared past predictions to reach 10% in September, a new record high driven by rising food and energy prices. This makes it even more important for companies to find ways to cut costs.
“Strong wage pressure and wage increases in markets like Germany and France raise the cost of labour to a point where it’s hard to be efficient,” said Lukasz Gebski, CEO of Teleperformance Polska, a company that runs call centres.
“In Poland, there are a lot of young people who learn, study, and speak foreign languages. Because of this, there is a lot of room for growth, which is also fueled by high inflation in the West.”
CEE is moving faster than other global hubs.
Other places around the world have started to have trouble with outsourcing. In India, IT exporters like TCS, Wipro (NYSE:WIT), and Infosys (NYSE:INFY), which make up most of the country’s business services sector, have seen their margins shrink over the last few quarters as they try to keep employees while the sector as a whole loses more workers.
But in central Europe, where the Czech economy is expected to grow by 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, shared business services providers offer an economic bright spot.
At Comdata, where 1,500 people in the Czech Republic and Hungary run telephone service lines, costs from Western companies and rising inflation have kept business going strong. Jan Nedelnik, the regional head of the group, said that the company plans to hire about 300 more people in 2022 and 2023.
“As more and more companies try to cut costs and lower labour costs, they will move services from western Europe,” Nedelnik told Reuters.
“I’ve noticed that in the last two or three months, the number of bids for German, French, Spanish, and English-speaking roles has grown very quickly. This will keep going on.”