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What is the demand for Business Process Outsourcing services on the European market?

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The European business process outsourcing (BPO) market offers opportunities, despite disruption by the COVID-19 pandemic. BPO helps European companies focus on their core business and reduce costs, which is particularly relevant under the current circumstances. Northern and Western European countries are the main BPO markets. Your ideal target market also depends on factors such as openness to offshoring and the presence of diaspora. However, specialisation creates potential in any sector, particularly among medium-sized buyer companies. The most promising services for these companies include accounting and digital marketing.

1. What makes Europe an interesting market for BPO?

BPO refers to companies outsourcing business processes that are not their core activities to external service providers. It includes back-office processes related to running the company and front-office processes involving customer contact. Although the BPO market is under pressure due to the COVID-19 pandemic, Europe continues to offer relatively good opportunities. BPO allows European companies to focus on their core tasks and reduce costs. As prices in nearshore countries in for example Eastern Europe rise, offshoring to developing countries becomes more attractive. The presence of diaspora in Europe can provide a further basis for offshore BPO activities.

COVID-19 causes uncertainty on the BPO market

Determining the exact size of the European BPO market is difficult, as definitions and indicators differ greatly depending on the source. This makes the various values impossible to compare and combine. To present a coherent and consistent estimate across the European market, this study uses data from several global and European editions of the ISG Index. This index measures commercial outsourcing contracts with an annual contract value (ACV) of €5 million or more, and gives a good indication of the general BPO market.

Between 2015 and 2017, the European BPO market fluctuated around €2.5 billion worth of contracts per year. After a relatively low ACV of €1.8 billion in 2018, the market rebounded strongly in 2019. BPO contract values reached €2.9 billion, an annual increase of 61%. It should be noted however, that the average combined value of 2018 and 2019 is comparable to that of 2015-2017.

With global BPO contract values of €6.8 billion in 2019, the European market accounted for about 43%. This is a considerable increase from 2018 (29%) and 2017 (38%), thanks to the strong performance in 2019.

While developments in 2019 were promising, the COVID-19 pandemic has disrupted business on a global scale, affecting many BPO providers. Clients have scaled back their activities, cancelled non-essential activities, moved outsourced tasks back in-house, or even gone out of business altogether. Both clients and providers often turned out to be unprepared for the restricted movement of people. For example, as lockdowns forced thousands of contact centre agents worldwide to stay home, this caused many delays and even complete halts in contact centre activities.

Before the outbreak, forecasts for the 2020 BPO market were generally positive. Now, experts have adjusted their expectations. For example, Technavio has lowered its predicted growth of the global BPO market for 2020 from 9.1% (published in February 2020) to 1.7% (published in August 2020).

The effects of the COVID-19 pandemic are reflected in the annual BPO contract values for the first three quarters (Q1-Q3) of 2016-2020. At €1.2 billion, contract values in the first three quarters of 2020 are considerably lower than in 2019, when they reached €2.1 billion. However, the particularly strong performance in 2019 somewhat exaggerates the difference. Whether this growth would have continued in 2020 is debatable. To put 2020’s Q3 BPO contract values in perspective: they are around 15% lower than those in 2017 (€1.4 billion) and 2018 (€1.5 billion).

According to the ISG Index, the market mainly slowed down for contact centre and facilities management services. At the same time, demand for industry-specific BPO services is booming even now. In 2020’s Q3, the ACV for these specialised services surged by more than 90%.

How exactly the European offshore BPO market will develop in the coming year or years is uncertain, as the situation has yet to stabilise. Unfortunately, uncertainty is almost always bad for business. In general, the pandemic is making it difficult to renew contracts and/or find new buyers. Decision-making has often slowed down or even stalled, and buyers cannot visit the offices of their potential new providers.

Of those companies that are reconsidering their BPO strategies, some may move their offshored activities to nearshore or domestic providers in search of stability. Others may actually have become more interested in offshoring as a much-needed way to save costs. Another way for buyers to minimise risks is to diversify, by hiring providers from several locations. This strategy could offer opportunities for small and medium-sized enterprises (SMEs) like you.

Tips

BPO allows buyers to focus on their core business functions

A major advantage of outsourcing BPO services is that European end-user companies do not need to hire in-house expertise if they outsource these activities. Outsourcing allows them to focus on their core business. It also means they do not have to spend time and money on hiring and training staff for functions such as human resources (HR) or customer support, nor on providing the necessary infrastructure.

This is particularly relevant during the recovery from the COVID-19 pandemic. Companies need the staff they retained to perform their core activities, which may already include additional tasks from colleagues that were laid off or furloughed. There is also relatively little room in the budgets for new hires, making outsourcing an attractive solution.

Cost reduction continues to be a key motive for BPO

Cost reduction remains an important reason for European companies to outsource activities to providers abroad. Staff generally costs less per hour in developing countries than in Europe. This means that outsourcing can offer significant cost savings, especially for activities that are labour intensive. To attract European buyers, your pricing should be competitive, clear and transparent.

Although cost savings may not always be the main reason for outsourcing anymore, companies that are or have been affected by the COVID-19 crisis have tighter budgets than before. This could make offshoring to developing countries more attractive. Be aware however, that if your offer is “too cheap”, European buyers may think it must be too good to be true and assume your service quality is low.

Tips:

  • Emphasise how outsourcing will improve your customers’ business processes.
  • Offer competitive pricing, but do not compromise on the quality of your services. Try not to compete only on prices.
  • Clearly communicate that outsourcing BPO services does not only save money on labour costs, but can also reduce equipment expenses, such as communication and computer systems, and IT spending on development, deployment and maintenance of systems and networks.
  • Be transparent in your pricing. Clearly show what service clients get for what price. Make sure you include everything they might need in your offer to avoid hidden costs, such as costs they have to pay for extra services that were not mentioned beforehand.

Nearshoring versus offshoring

European companies prefer to outsource services to providers within the same country, a practice also known as domestic outsourcing. When outsourcing abroad, they prefer providers in nearshore locations because of language, proximity, cultural similarities and minimal time difference. However, for BPO activities such as contact centre services, a time difference can also be an advantage as it allows for 24/7 availability

The most popular nearshoring locations for Western European companies are Central and Eastern European (CEE) countries like Poland, Bulgaria and Romania. Not only do these countries offer the usual nearshoring benefits, but as they are members of the European Union, contracts and payments are governed and protected by the same European legislation as in the buyer countries.

However, prices in nearshore countries are rising, especially within the European Union. This makes service providers in these countries less price competitive than offshore service providers, which makes European companies more open to outsourcing to farther destinations. You can choose to form subcontracting partnerships with these nearshoring providers, or compete with them.

Tips:

  • Limit the possible disadvantages of being offshore. Provide excellent communication, availability in the required time zone, and good security and privacy measures.
  • Differentiate yourself from domestic and nearshore providers to remain competitive. Emphasise how you are different in your marketing message. Do not compete only on price, but also analyse what other advantages you can offer, such as access to skills or specialised industry expertise.
  • Research what your competitors are doing right and wrong to learn how you can differentiate yourself from them.
  • Partner with nearshore service providers, for example in CEE countries, that may be looking for cheaper providers with available workforce. Many service providers in developing countries have not yet recognised this opportunity.

Diversity brings opportunity

Europe is a large and diverse market for BPO services. The European Union (EU) and European Free Trade Association (EFTA) nations consist of 31 countries that speak 28 different official languages. Including the United Kingdom, Europe has a total population of around 527 million people. Although Europe is seen as one market from an economic perspective, each country has its own profile based on characteristics such as demographics, historical ties, business culture and etiquette. This diversity brings a variety of opportunities.

An important way to classify the hugely diverse range of BPO-services is by language dependence. For BPO sectors such as contact centre services, language is a particularly important factor. European companies generally select their contact centre service providers based on the availability of agents that are fluent in the required language or languages for their market.

The presence of different migrant communities also adds to the diversity of opportunities on the European market. These so-called diasporas can form the basis of outsourcing to (developing) countries of heritage, often through family, friends or business relations who can function as entry points to the market. Around 34 million people in Europe are members of diasporas from developing countries, which is about 6% of the European population. The largest of these communities reside in Germany, France, the United Kingdom, Italy, Spain and the Netherlands

Of the developing countries of origin in Figure 3, India and Ukraine are best known for their outsourcing potential. Other well-known outsourcing destinations with large migrant communities in Europe include Bosnia and Herzegovina, Albania, Pakistan and Serbia. The diverse diaspora in European countries means there are various opportunities for connections of which you can potentially benefit.

Tips:

2. Which European markets offer most opportunities for BPO?

Europe is not a uniform market for BPO providers. Northern and Western European countries are traditionally the largest BPO markets. In general, the most important factors that determine whether countries are promising target markets are market size and openness towards international outsourcing (offshoring).

United Kingdom, Germany and France are the largest European BPO markets

* DACH: Germany, Austria and Switzerland
** Nordics: Sweden, Denmark, Finland, Norway and Iceland

Figure 4 shows how different European regions compare to each other in terms of BPO ACV and annual growth between 2017 and 2019. It illustrates that Northern and Western European countries are traditionally the leading markets for BPO. While the largest countries offer opportunities based on their size, some of the smaller countries are relatively open to outsourcing. In addition, for some BPO services the language skills you are able to offer are a key factor in deciding which European markets you should target.

The United Kingdom remains attractive despite Brexit

The United Kingdom is the second-largest economy in Europe. Among its main sectors are finance and banking, which are included in the services sector, the biggest contributor to the British Gross Domestic Product (GDP). Outsourcing is a common practice in this sector, stimulating the demand for BPO services in the United Kingdom.

Of all European markets, the United Kingdom is the most open to offshore outsourcing and the least cautious about doing business with developing countries. This openness is due to the nation’s cost-saving business culture and historical ties to many countries across the globe. Language barriers are low, as the United Kingdom’s official language is English. This makes the British market relatively accessible for offshore providers.

While uncertainties related to the United Kingdom's withdrawal from the European Union seem to have led to cautiousness in 2018, the BPO market bounced back again in 2019. As the combined ACV in the United Kingdom and Ireland increased with 54% to €1.4 billion, it nearly returned 2017’s ACV of €1.7 billion. However, for the coming years the exact effects of Brexit combined with the recent outbreak of the coronavirus are unclear.

There are around 5 million migrants in the United Kingdom who have their origins in a developing country. That is about 7.6% of the total British population. The largest of these communities consist of people from India, Pakistan, Bangladesh, South Africa, China and Nigeria. Particularly India and Pakistan are well-known providers on the British BPO market.

Germany is Europe’s largest economy

Germany is the largest economy in Europe, home to 19% of the European Union’s population. The German economy is widely considered the stabilising force within the European Union, historically showing a higher growth rate than other member states. In fact, according to the Economist Germany will be the first major European economy to recover from the current crisis. This expectation is based on both the country’s healthy finances before the crisis and its large industrial sector, the reboot of which also benefits suppliers abroad.

The combined BPO market in the DACH region performed particularly well in 2019, strengthening its position as the second largest region for BPO in Europe. With an average annual growth rate of 43% since 2017, the ACV reached €670 million in 2019.

Although this makes Germany an interesting market, German companies are less open to offshore outsourcing than in countries like the United Kingdom. However, the COVID-19 pandemic may create more opportunities for you on the German market, as it has softened Germany’s generally stiff corporate culture and shown companies what is possible with remote working and outsourcing.

There could be some language barriers when providing BPO services to Germany. German companies generally prefer to do business in German, which is why they tend to prefer nearshoring when they outsource. Generally, you need an intermediary in Germany to communicate with (potential) clients for you. For language-based activities such as contact centre services, you need agents that are fluent in German. If you meet these criteria, you could also target German-speaking companies in the other DACH-countries Austria and Switzerland.

Germany is home to nearly 6 million migrants with origins in a developing country, adding up to around 7.3% of the total population. The largest of these communities are people with heritage from Turkey, Kazakhstan, the Syrian Arab Republic, Ukraine, Afghanistan and Iraq, as well as Bosnia and Herzegovina, and Serbia. As Germany has relatively strong ties to Central and Eastern Europe (CEE), opportunities on the Germany BPO market are particularly strong for countries from this region.

The Nordic economies show relatively modest declines

The Nordic countries individually are smaller than other European markets, but they can be relatively open to outsourcing their business processes. For example, back in 2003 Sweden already outsourced 20% of its call-centre services, which was double the European average at the time. With the highest contact centre agent salaries in Europe, Nordic companies can realise considerable cost savings by outsourcing their contact centre services, especially by offshoring to developing countries.

The Nordic BPO market was fairly stable in recent years, with a combined ACV fluctuating slightly around €160 million. In addition, the Nordic economies are expected to be among the less affected by the COVID-19 pandemic. In fact, Danish GDP is projected to be the first in Northern and Western Europe to return to its pre-pandemic level.

People from the Nordic countries are highly proficient in English, which makes doing business relatively easy. However, the region is no exception to the rule that your agents need to speak the national language to be able to perform language-based activities such as contact centre services.

Around 2 million migrants with origins in a developing country reside in the Nordic countries, more than half of whom in Sweden. This represents about 7.8% of the total Nordic population. However, the benefits of diaspora connections may be limited in this market as the largest of these communities (Syrian and Iraqi) do not originate from countries with a strong BPO sector.

France is particularly interesting for francophone African providers

As the third largest economy in Europe, France is another European market that is particularly interesting because of its size. However, the French economy is projected to need longer to recover from the pandemic than that of Germany, as it mainly relies on its large services sector (about 80% of GDP). The country’s GDP is not expected to reach its 2019-levels again until 2023.

The French ACV increased from €60 million in 2017 to €120 million in 2019, at an average annual growth rate of 26%.Although this is a decent market size, providing BPO services to French companies is difficult unless you speak French fluently. As French is the official language in 29 countries worldwide, for many service providers this requirement is not a barrier to market entry. Instead, it makes France a particularly interesting target market for providers from African countries such as Senegal. Offering services in French also allows you to target French-speaking companies in Belgium and Switzerland.

Many people from former French colonies attend university in France. This direct link to France can facilitate outsourcing when they return home. There are also nearly 6 million migrants in France with origins in a developing country, representing around 8.4% of the French population. The largest of these communities consist of people from Algeria, Morocco, Tunisia, Turkey, Vietnam, Madagascar and Senegal. This illustrates France’s connection to French-speaking countries, which generally have the greatest chances of success on the French BPO market.

The Netherlands is a relatively small but open market

The Netherlands has the sixth-highest GDP per capita in Europe. An impressive 60% of all Forbes 2000 IT-companies have established operations in the Netherlands, making the country a real IT-hotspot. The country’s general profile is similar to that of the Nordic countries. Like in the Nordic region, the Dutch economy seems to be among the less affected by the pandemic as Dutch GDP is expected to return to its 2019-level at the end of 2022.

Companies in the Netherlands are also traditionally fairly open towards outsourcing. For example, more than a third of Dutch companies outsource their customer service, with 8% outsourcing to providers outside of Europe. Another similarity is that language barriers for doing business in the Netherlands are generally low, as the Dutch are very proficient in English. However, again, to perform activities such as contact centre services you need agents that speak the national language. This also allows you to target Dutch-speaking companies in Belgium.

The Netherlands hosts about 1.4 million migrants with developing country origins, representing roughly 8% of the total Dutch population. The largest of these communities consist of people with heritage from Turkey, Suriname, Morocco, Indonesia, China and the Syrian Arab Republic. Most of these are countries that the Netherlands has strong historical ties to.

Spain offers opportunities for Latin American companies

Spain is another relatively large European market, with the fifth highest GDP after Italy. However, the country is highly affected by the current COVID-19 pandemic. So much so, that the Spanish economy is expected to experience the deepest contraction in Europe and be among the least recovered European economies by end-2021. Although this may lead to fewer opportunities on this market, it could also create a greater need for cost-saving strategies like offshoring essential business processes.

As the average level of English proficiency in Spain is moderate, language barriers are higher than for countries like the Netherlands. However, Spanish is the world’s second most common native language after Chinese Mandarin. It is the official language in 20 countries worldwide, 18 of which are in Latin America. This makes Spain a particularly interesting market for Latin American companies, who have a clear language-based competitive advantage.

There are nearly 4 million migrants with origins in a developing country in Spain, which translates to around 8% of the Spanish population. The largest of these communities originate from Morocco, Ecuador, Colombia, Argentina, Venezuela and Peru. Besides Morocco (Spain’s nearest non-European neighbour), these are all Latin American countries, which generally have the most potential on the Spanish BPO market.

Tips:

  • Consider your present network, the openness towards outsourcing, labour costs, language, and historical bonds when selecting your priority market.
  • Be aware that European partners may be sceptical of offshoring, so you need to earn their trust and work hard to keep it once you have it. Proving to be trustworthy, honest and transparent will make you stand out from your competition and add to your partner’s openness and willingness to outsource.
  • If you choose to work with a representative in your target market, keep in mind that they should be a well-connected expert. For example, your uncle who lives in Germany might not be the best intermediary for your company. See our study on the European intermediary landscape for ITO- and BPO-services for more information.

3. Which services from developing countries have the most potential on the European BPO market?

Medium-sized enterprises are the most suitable potential buyers. These companies are a good match for you when it comes to capacity and flexibility. They mainly outsource business processes that require specific (technical) skills and knowledge that they lack, such as accounting and IT services. Although the financial services sector is Europe’s largest BPO market, specialisation can create opportunities in any sector.

European SMEs are your most suitable buyers

As an SME, your best strategy is to focus on providing BPO services for your fellow SMEs in Europe. This generally ensures a good match between you and your buyer on characteristics such as capacity and flexibility. As 99% of businesses in the European Union are SMEs, this offers great potential.

While outsourcing business processes traditionally used to be reserved for large companies, SMEs are increasingly taking advantage of the benefits that BPO has to offer them. In 2018, 37% of SMEs outsourced a business process. For 2019, 52% of SMEs planned to do so. BPO is especially popular among medium-sized enterprises (>50 employees), where the percentage of BPO jumps to 66%. Smaller companies are often more hesitant to spend money on outsourcing and may prefer to hire individual freelancers to save costs.

Accounting and IT services are SMEs’ most outsourced business process

SMEs have varying motives for outsourcing their business processes. While cost reduction is important, this is usually no longer the main driver for outsourcing. The most common reasons are to increase their efficiency, available expertise and flexibility. This is reflected in the type of business processes that SMEs typically outsource.

The most commonly outsourced business processes among SMEs include accounting and IT services (such as an IT helpdesk). These types of BPO services are essential to company success, but they require specific (technical) skills and knowledge that SMEs often do not have in-house. By outsourcing these tasks, staff can focus on the company’s core business and budgets can be spent most efficiently.

Tips:

  • Be realistic when you look for clients and focus on those you can really serve. Do not pursue big names and large corporations unless you can offer them something they really need in terms of, for example, highly specialised skills.

Specialisation offers opportunities in any sector

The European BPO market can be segmented into various sectors or industries, the so-called horizontal markets. Figure 5 shows the total outsourcing ACV for 2019 per commercial sector. This combined value of €17 billion consists of around 17% BPO, 46% ITO and a further 37% Software- and Infrastructure-as-a-Service (SaaS and IaaS) contracts.

The largest market for BPO is the financial services sector, also known as BFSI: banking, financial services and insurance. Another large market is the manufacturing industry. Demand is expected to increase in sectors such as healthcare and pharma, and retail. The travel, transport and leisure industry, however, is severely affected by the COVID-19-related restrictions. As a consequence, demand from this industry may be limited in the coming years.

Although the financial services sector has the highest ACV on the European outsourcing market, other sectors offer good opportunities too. The key is to reduce competition by specialising in a specific sector, or even a specific service for that particular sector. This type of expertise gives you a competitive advantage in whichever sector you focus on. Although staff can be trained in a new field, existing knowledge and experience is generally preferred. This also makes it easier to provide a relevant reference when you are trying to find new buyers.

There is generally less competition in niche markets, which leads to higher (and more stable) prices and loyalty from buyers. For example, offering contact centre services for a bank requires a thorough knowledge and understanding of European financial legislation. In contrast, providing technical support for a manufacturer or recruitment services for an IT-company requires completely different skills and expertise. The more you invest in specialising and finding your comfortable niche market, the better your chances of finding clients and partners.

Tips:

  • Assess your opportunities in the various horizontal segments. Which industry are you most experienced in? Do you have access to talent in a particular sector?
  • When you have selected the niche market(s) you are focusing on, make sure to keep your expertise up-to-date and stay ahead of the competition.
  • See our studies per promising export service to determine the competition for specific services.
  • For more information on how to find and approach European SMEs, see our tips for finding buyers and tips for doing business.

This study has been carried out on behalf of CBI by Globally Cool B.V. in collaboration with Laszlo Klucs.

Please review our market information disclaimer.

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To enter the European market, you need some level of specialisation. Although you may be able to train staff relatively fast, buyers generally prefer it if you have previous experience in (and knowledge of) their type of business/sector. This also allows you to provide them with meaningful references from existing customers.

Peter Vogelaar

Peter Vogelaar, CBI outsourcing sector expert and director of Vogelaar Beheer B.V.