Europe and its companies are in the midst of Digital Transformation, towards the Digital Economy, towards a Data Economy. But is clearly lagging behind the leaders USA and China. Among the key challenges that companies in Europe are confronted with: Shortage of AI experts, Data Scientists, no/few European champions to promote digital clusters such as the Silicon Valley, lack of venture capital and the like.

The hypothesis of this article: The systematic investment in IT offshoring can be a strategic move to accelerate the urgent digital transformation of European SME companies. I gave a keynote speech on this thesis in mid-September at the German-Indian Roundtable (GIRT) at the Würzburg Chapter; the Indian Consul General from Munich, Mr. Sugandh Rajaram, was also present at the event and discussion. In the following I’ll summarize the core elements of this thesis.

First, the lack of IT specialists is a critical bottleneck for the Digital Transformation of companies. The industry association bitkom has pegged the shortage of IT professionals in Germany for 2019 at around 124,000 – a significant increase on 2017, when the figure was 50,000. In the foreseeable future this gap can be covered partly by university graduates and training, and partly through immigration of skilled workers. But these measures will not suffice.

If Europe wants to catch up with the digital leaders (USA, China) in the digital transformation, this will require developers in droves. A look at the USA: As a classic immigration country, the country attracts brilliant minds from all over the world; in the Silicon Valley there’s countless Asian skilled workers. Satya Nadella (Microsoft) or Sundar Pichai (Google) are only the tip of the iceberg. And despite the fact that the USA has the highest number of IT developers in the world, the USA has pursued a consistent IT offshoring strategy to India since the early 1990s; this has gone so far that IBM employs more developers in India than in its home country (for political reasons, reports on the number of employees in the various regions of the world was stopped about 10 years ago). All major IT players are represented in the various offshoring hotspots (Bangalore, Hyderabad, Mumbai, Pune, Gurgaon, Madras and so on). This access to human resources has given the USA just that competitive edge in the IT industry.

Of course, of the hundreds of thousands of graduates in India, only a fraction are employable from the day they leave colleges and universities. That’s why fresh graduates generally undergo a trainee program to complement the theoretical training at Indian universities. So, after a few years on the job (and much on-the-job-training), the skill level converges with graduates from Western universities, supported by more and more online training opportunities (compare MOOC: Massive Open Online Courses).

Second, the IT hub India is still the most cost-efficient option compared to nearshoring options (Ukraine, Belarus, Romania, etc.) For specific requirements or technologies, nearshoring may be the better alternative, but viewed across all technologies, India is indisputably the more cost-effective location; this is also clearly confirmed by major IT players such as SAP – their massive presence in India testifies to that, as does the consistent growth of the Indian IT industry. Anyone wishing to outsource a project at WIPRO or Infosys can basically choose the location from these IT players – Accenture, WIPRO, Infosys & Co are represented in India as well as in Eastern Europe. However, with regard to cost savings, the following applies: Cost savings are only about half as large in Eastern Europe as in India.

This cost advantage in labour costs in India will be maintained in the long term, and there are numerous reasons for this. India is a country with an incredibly large population (in the year 2025 India will be the most populous country in the world, ahead of China); there’s an abundance of labour available, weakening the negotiating position of employees, especially in the unskilled sector. This low wage in services such as nanny, cleaning lady, cook (common in the Indian middle class), restaurant staff, construction workers keeps the cost of living low – and this in the long run, because this demographic situation won’t change in the foreseeable future. In addition, climatic conditions ensure that housing requires much less investment, because in a country without frost (at least in large parts of the country) neither deep foundations (frost) nor expensive insulation are required for buildings.

Of course, it is not advisable for a medium-sized (let alone a small) company to start a subsidiary in India with one or two developers; the job market and business culture in India comes with quite a couple of challenges, which require a good intercultural expertise and patience. But there are numerous IT companies who can provide medium-sized companies with project-related or long-term development resources in India. Another possible approach is Build-Operate-Transfer: Developers are set up for a medium-sized company, who initially remain employed by the service provider; as soon as the German company has gained sufficient experience in the Indian market, an own company can be spun off with the developers.

Third, digital transformation requires not only highly qualified IT professionals. We are currently in the age of so-called weak AI, where AI algorithms with vast amounts of data have to be trained. This is true in the area of Natural Language Programming (Siri, Google Assistant), as well as in the area of visual pattern recognition (analysis of X-ray images) and so on. Here, low-skilled employees are employed in the “transcripting” of voice recordings. Let’s take another example, Autonomous Driving: In order to train the AI to correctly assess the situation in traffic situations, video material must be prepared for the AI-algorithm: On every single image of a video stream the objects have to be marked, a tree, a bicycle, a pedestrian, etc. It’s called “labelling” of image/video material. Thousands of employees are also needed for this, since image material must be processed with pixel accuracy. For a video recording of one hour, about 60 X 60 X 25 images must be processed, that is: 90 000 images (!).

Even these low-skilled jobs can be relocated to India.

Four, India has a high technological affinity, the penetration with smartphones is very high. The good news is: Users of new applications and new apps are forgiving (and won’t ditch an app at the first bug the come across), it is therefore an ideal target market for trial runs, try out apps in a beta version. The business models for the Western target customers are not always congruent with the reasonable offers for a market like India: But there is some significant overlapping, because online shopping is also popular in India (especially in the urban area), there is car sharing, delivery services for food, mobile payment, online banking, demand for navigation services and so on. In short, India is a market where you can quickly generate relevant user numbers to get feedback on digital offerings.

Fifth, and this is my final point: It makes a huge difference whether a software is developed in the cultural context of Finland, Germany, Mexico or India. Software architects and software designers live in a cultural context, in a specific political system, where certain challenges exist and specific strategies of action are used in the face of such challenges. Now, India is known to be a country where you can find chaos, heterogeneity, diversity, unpunctuality. India is also a country with an extremely complex federal political system, where actors need a sophisticated strategy to push through political demands.

When Indian software developers design software, it is precisely these experiences from their own cultural environment that are incorporated. Developers who have no experience with unpunctuality in their own environment will not design their software in such a way that software covers the scenarios of unpunctuality of a user (if relevant for an application); if yes, then the software can deal with it or takes over the user’s time management.

A large German IT player with extensive development capacities in India has just discovered that “software made in India” has a completely different design due to the cultural context and is in many ways more robust and intelligent. This is another good reason to rely on India as an IT development location.

Sebastian Zang

The author is a manager in the software industry with international expertise: Authorized officer at one of the large consulting firms - Responsible for setting up an IT development center at the Bangalore offshore location - Director M&A at a software company in Berlin.