The offshoring dilemna
From The Economist print edition
STEVE KEIL is a hotshot American boss hired by Sciant, a Bulgarian
software company, to make it internationally competitive. After three years, he
is crackling with frustration and has just opened an office in Vietnam. “My aim is to have four
employees there for every one in Bulgaria,” he says. It will be a big
shift: the firm has 150 employees in Bulgaria and just four in the new
office.
Mr Keil maintains that costs are crucial. And Bulgaria,
despite being one of the poorest post-communist countries of eastern Europe, is
losing ground. Outsourcing is close to being a commodity, Mr Keil explains, and
Sciant is losing out to Asian competitors, including nominally communist
Vietnam, where taxes are low or
negligible, officialdom actually helps, and qualified and willing labour is
plentiful.
The comparisons are striking. In Vietnam Mr Keil expects to pay no
taxes on monthly wages below $500; there is a VAT and customs duty exemption,
and eight years of no profits tax. By contrast, he pays heavy social and
health-insurance costs for his Bulgarian workers; profits are taxed at 15%; and,
worst of all, the administrative burden is huge. He has the equivalent of three
full-time employees dealing with the state bureaucracy. Their work includes
meeting arcane record-keeping requirements on workers' pay and conditions, and
getting the right stamps on the right bits of paper for the sleepy customs
service. It normally takes two days or longer to release an incoming shipment.
But Mr Keil counts his blessings: “I have a friend whose things were stuck in
customs for four months.”
Bulgaria's new government has set up
an office specifically to deal with the problems of small firms. But more
worrying is the education system. Teachers' skills are outdated and corruption
is rampant. The shortage of good people is chronic, as everywhere in eastern
Europe. The universities in Ho Chi Minh city, he
says, produce more computer-science graduates each year than the entire stock of
such geeks in (admittedly much smaller) Bulgaria.
The sole remaining advantage to doing business in eastern Europe, Mr Keil
reckons, is geographic proximity. Whereas American companies treat outsourcing
as a commodity, where all that matters is what you can get for how much,
European customers are relatively new to outsourcing, and tend to be somewhat
nervous. If something goes wrong, they want to be able to jump on a plane and
confront the problem in a couple of hours. For that privilege, Mr Keil reckons,
it is possible to charge European clients about 20% more than more distant
providers can extract. It is within that slender margin that Bulgaria's hopes
of competitiveness lie.
