With less than 1 percent of the world’s $30 billion market for offshore IT and business process outsourcing (BPO), Eastern Europe lags far behind more prominent locations, including India, Ireland, Malaysia, and the Philippines (Exhibit 1). Our research suggests that this may soon change: demand for offshoring¹ among Western European companies rose by half from 2004 to 2006, with Eastern Europe emerging as a favorite destination.

Although Eastern Europe’s governments have not wooed business as effectively as those of the more established destinations, offshoring in that region offers three primary advantages: low wages comparable to India’s, a relatively low risk profile for key factors such as reliable infrastructure, and cultural and geographical proximity to Western Europe. McKinsey estimates that offshoring activity in Eastern Europe could triple, to more than 130,000 jobs, from 2005 to the end of 2008 (Exhibit 2). What’s more, given the relatively low pace of the region’s wage inflation (Exhibit 3), along with abundant output from local universities, this talent source could remain economically competitive for at least 15 years.