Forget India, Let's Go To Bulgaria

Peter Kürpick vividly remembers his first trip to Bulgaria. Traveling into Sofia from the airport two years ago, the executive with German software giant SAP (SAP ) breathed air thick with coal smoke and saw laundry hanging from buildings on dirty, snow-covered streets. Then he pulled up to the gleaming glass-and-marble tower that houses SAP's Bulgarian research lab. It was like "an island of beauty," recalls Kürpick, who became the lab's managing director in 2002. Dedicated that year, SAP's facility has 180 engineers who write vital Java software for SAP's cutting-edge products around the world.

Wait -- isn't writing software for foreign companies India's specialty? By the numbers, yes. The outsourcing business there totaled an estimated $12 billion in 2003 out of $25 billion from low-cost locales worldwide. But Bulgaria, Romania, and other locations on the outskirts of Europe are plying a new twist on the craze for sending technology development offshore. They're pushing what pundits call "near-shoring," or shifting work to countries that cost less but are only a short hop away. Finnish companies farm out IT work to Estonia, Germans use contractors in Poland, and Italians ship projects to Serbia. For a lot of European companies, "India seems an awfully long way away," says information technology services analyst Ian Marriott of researcher Gartner Inc.

It was access to nearby talent that convinced SAP to set up its Bulgarian outpost, which has turned into a beacon of hope for a country struggling to lift itself out of communist-era poverty. But it's not the only one. Scattered around the capital are hundreds of small companies doing projects for an impressive list of clients, including Boeing (BA ), BMW, General Motors (GM ), and Siemens (SI ). "There is an exceptionally high level of talent in Eastern Europe," says Kasper Rorsted, managing director for Europe, Middle East, and Africa at Hewlett-Packard Co. (HPQ ).

It's not just distance and time zones that motivate the search for alternatives. India struck gold with U.S. and British clients in part because of its workers' English skills and interpersonal ties. But those assets don't hold the same sway for French or German customers. "Cultural, linguistic, and even ethnic connections are very important in near-shoring," says Erran Carmel, an associate professor at American University's Kogod School of Business in Washington. French companies are drawn to Romania, whose Latinate language and historic links make it an appealing alternative to Anglophone locales. German companies are likewise lured by the many German speakers in Hungary and the Czech Republic. "People want to be able to pick up the phone and resolve problems," Carmel says.

That's boosting places like Bucharest. Taking advantage of ample tech talent and engineering wages as low as $6,500 a year -- a tenth the norm in Western Europe -- companies including IBM (IBM ), HP, and Alcatel (ALA ) have set up shop there. On Feb. 17, software giant Oracle Corp. (ORCL ) announced three new centers in Bucharest to provide European and global support to customers.

As in the U.S., growing use of foreign workers could provoke political backlash. So many companies keep their outsourcing plans quiet -- or say they're merely adding employees elsewhere, not laying them off at home. What's more, the cost advantages of some countries -- especially those slated to join the European Union on May 1 -- will likely diminish as their living standards rise. But for now, Europe's poorest countries are looking to technology for an economic lift. If near-shoring keeps growing, many of them could soon sport software palaces as symbolic as Sofia's.

By Andy Reinhardt in Paris

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