Nearshoring in Eastern Europe has become an increasingly attractive option for technology companies seeking to optimise their operations and reduce costs while maintaining high-quality output. This trend has gained significant momentum in recent years, driven by a combination of factors including geopolitical shifts, regulatory pressures, and the need for greater supply chain resilience.
Eastern European countries have emerged as prime destinations for nearshoring, offering a compelling blend of skilled workforce, cost-effectiveness, and geographical proximity to Western European markets. Amongst these nations, Bulgaria has established itself as a significant location for nearshoring services. Let’s take a look at it for an example.
Focus on Bulgaria
Bulgaria’s IT sector has experienced remarkable growth in recent years, establishing itself as a key player in both the nearshoring landscape. The country boasts a robust ecosystem of over 10,000 technology companies, with the sector contributing significantly to the overall national economy. By 2022, IT outsourcing services were projected to account for 8.9% of Bulgaria’s national economy. The Bulgarian software development industry is expanding at a rate that outpaces the rest of the national economy. This growth is supported by a large and growing talent pool, with approximately 110,000 highly qualified IT specialists proficient in various programming languages such as JavaScript, C#, Java, C++, PHP, .NET, and Python, in addition to other tech skills.
Competitive Advantages
Bulgaria offers several competitive advantages that make it an attractive nearshoring destination:
- Cost-Effectiveness: While salaries are not the only concern for those looking to nearshore their tech assets, they are of course a significant factor. Bulgarian IT professionals command salaries that, while high for the region, are significantly lower than their counterparts in Western Europe and the United States. For instance, a senior AI engineer earns an average of $72,000 per year in Bulgaria, $92,000 in Germany, and more than $130,000 in the United States.
- Strategic Location: Bulgaria’s geographical position and EU membership provides easy access to European markets and aligns well with Western European time zones.
- Favourable Business Environment: Bulgaria offers the second-lowest corporate tax rate in the EU at 10%, making it financially attractive for outsourcing.
Nearshoring Trends in Eastern Europe
Poland, Romania, the Czech Republic, and Albania are also emerging as significant players in the IT outsourcing market. Ukraine had also established itself as a significant player in this market before the country became crippled by resisting Russia’s 2022 invasion.
Regional Performance
According to the Future of IT Report 2023, several Eastern European countries rank highly in global assessments of cost-effective and suitable locations for software development outsourcing:
- Poland ranks 3rd
- Romania ranks 8th
- Bulgaria ranks 11th
- Czech Republic ranks 12th
These rankings reflect the region’s strong performance in terms of tech talent and IT infrastructure.
Investment and Growth
Eastern European countries are making significant investments in their digital infrastructure to bolster their position as technology hubs. For example:
- Bulgaria has invested $256.8 million in high-speed internet
- Romania has allocated $2.08 billion to develop its Government Cloud and overall digital transformation
These investments are paying off, with countries like Poland, Hungary, and the Czech Republic leading in cloud infrastructure and AI-enabled software applications development.
Impact on the European Market
The growth of nearshoring in Eastern Europe is having a noticeable impact on the broader European market. As one industry expert from the consulting firm Mountpark said: “Analysis of leasing activity over the last 3 and 5 years suggests that markets in Europe have been bolstered by shoring trends. Central and Eastern Europe (CEE) has seen a significant increase in logistics leasing activity. It offers lower costs compared with Western Europe, whilst still providing access to skilled labour and the continent’s large consumer markets.” This trend is not only benefiting the IT sector but also having knock-on effects on related industries such as logistics and real estate.
Challenges and Considerations
Despite the numerous advantages, nearshoring to Eastern Europe is not without its challenges. Companies considering this option should be aware of potential issues:
- Competition for Talent: The high demand for skilled IT professionals is creating intense competition. As one source notes, “50% of global organisations say finding the IT professionals they need is particularly difficult.”
- Rising Costs: While still competitive, the increasing demand for Eastern European IT talent is gradually pushing up salaries in the region.
- Potential Skill Shortages: As demand grows, there’s a risk of skill shortages in certain specialised areas. Governments and businesses in the region are working to address this through education and training initiatives.
Future Outlook
The future of nearshoring in Eastern Europe looks promising, with continued growth expected in the coming years. As one industry report from ING says: “We expect these trends to continue driving the rebound in CEE growth rates well into 2025. However, the investment story is far more mixed – and surveys suggest that the lack of tax law predictability is one of the main concerns as is the tightness of labour markets.” This outlook suggests that while the overall trend is positive, companies will need to navigate challenges carefully to fully benefit from nearshoring opportunities in the region.
Nearshoring to Eastern Europe offers significant opportunities for technology companies looking to optimise their operations. The region’s combination of skilled workforce, cost-effectiveness, and strategic location makes it an attractive option for many businesses. As one industry expert summarises: “Nearshoring in Europe is not just a trend; it’s a strategic move that is unlocking growth, resilience, and sustainability for… clients.” However, companies must also be prepared to navigate challenges such as increasing competition for talent and potential skill shortages. As the nearshoring landscape continues to evolve, businesses that can effectively leverage the opportunities while mitigating the risks stand to gain significant competitive advantages in the global technology market.