How COVID-19 both hurt and helped Croatia as a destination for outsourcing software development

How COVID-19 both hurt and helped Croatia as a destination for outsourcing software development

In mid-2019 a New York based startup came to Croatia in full force, looking to outsource some of their software development. They contacted our company to set up a meeting and I was happy to oblige. You’ll be shocked to learn that, especially at the time, startups from New York didn’t exactly flock to Croatia to outsource their software development. So, I naturally assumed they ended up here because of one of two scenarios: either a) the CEO spent the summer sailing on the Adriatic sea and loved the country, figuring they’ll set up shop here so they have an excuse to come more frequently, or b) some of them have ancestors who emigrated to the US from Croatia. Given the fact that Croatia has been recognized primarily as a top tourist destination for the last few years, and given the considerable Croatian community in the U.S., this seemed like a fair guess.

A small European country, of all places?

It turns out that it was neither a) nor b). They had no previous relationship with Croatia; they just sat down, looked at the map of the world, compiled a list of requirements, priorities and expectations of a country they would outsource their software development to, and ended up pointing their finger at one country in particular: Croatia.

Still half-expecting that the CEO’s maternal grandfather is Croatian and they’re just pulling my leg, I asked them to elaborate, so they did: while software development is traditionally often outsourced to the Far east, to countries like India, Pakistan or Vietnam, their previous experience with that was less than ideal. While that route is cheaper, high employee turnover and cultural differences made working with them difficult. They didn’t like the lack of pushback; while they could generally count on these workers to implement solutions required of them, they couldn’t be expected to propose better ones.

Not the cheapest, but the most cost-effective

So they looked at South America and eastern Europe next, which are both still substantially cheaper than the US. South America was appealing primarily due to smaller time zone differences and somewhat lower price. However, Europe took the lead, especially those eastern European countries which are now part of the European Union, for a few reasons:

  • Stable and predictable regulation. Being part of the European Union, countries are more stable and predictable in terms of regulation, which is especially important when handling sensitive customer data.
  • Great engineering education. Eastern Europe provides 5 of the top 20 countries listed on AT Kearney’s Global Services Location Index, with their principal stating that “Higher education systems [in Eastern Europe] are of high quality, with particular strength in STEM [science, technology, engineering, mathematics] areas”
  • English proficiency. Education First ranks Croatia at #14 out of 100 countries and says English proficiency is “very high”. My favourite anecdote to that effect is when a Project Manager at one of our US clients compared performance of one of our software architects to their own US-based team, and told his superior “not only do I not have people in my team which have such a strong technical background, I don’t have people who write English as well as he does”.
  • Time zone difference to the East coast of the US is five or six hours, depending on the part of the year, enabling daily coordinations within working hours on both continents.
  • Cost. When it comes to outsourcing to eastern European countries which are in the EU, countries like Poland have been on the radar of US companies for a few years already, given their large pool of tech talent – according to a 2015 report by McKinsey, Polish outsourcing-offshoring sector already employed almost 160,000 people back in 2014. Our guests referred to Poland as one of the “first wave” Eastern european countries for outsourcing and looked at Croatia as one of the “next wave” countries, and quoted lower prices in Croatia as one of the reasons for it.

The cherry on top

They were looking for a long term partnership and were aware that this implied frequent visits by their employees from the U.S. They wanted their employees to perceive these business trips to their partner as a perk, rather than a chore. So they began listing reasons for Croatia which I haven’t thought of before, but actually made a lot of sense:

  • Costs of living are significantly lower in Zagreb, Croatia’s capital, than in New York: consumer prices in Zagreb are on average about half of what they are in New York, and rent is almost 85% lower.
  • Safety: violent crime in Croatia is rare and overall crime levels are very low, making it extremely safe to travel to Croatia. In February 2020 the U.S. State Department gave Croatia its lowest travel advisory level, Level One, indicating that you should “exercise normal precautions” when traveling. In addition to being part of the EU, the country is also a member of the North Atlantic Treaty Organization (NATO), meaning it is protected by large multinational support structures. Croatia ranks 26th in the 2020 Global Peace Index, 95 places ahead of the United States.
  • Popular tourist destination: Croatia gained its global prominence around 2005, when it was picked by Lonely Planet as the top travel destination in the world. The trend continued over the last 15 years or so, with Croatia ending up on many people’s bucket lists.

So travelling to and staying in Croatia obviously has great appeal, or at least it did in the preCOVID-19 era.

Enter 2020

In 2020 the COVID-19 pandemic came, its effect on outsourcing two-fold. While Croatia did have early success in battling against COVID-19 – even The New York Times praised its response – the disease did make it more difficult to travel across country borders, much less continents. Clients and prospective clients who intended to visit us were discouraged from doing so and the whole “cherry on top” argument became much less relevant, at least for the time being.

However, something else also happened: a lot of U.S. companies I spoke with in mid-2020 had their employees work from home. Allowing their employees to work from home was no longer just a perk companies offered to make their employees happy, it became an essential part of these companies’ business continuity plans. For the first time ever on such a large scale, it was the best interest of these companies to prevent their employees from coming to the office. Work from home became the norm.

From there, the leap to outsourcing was much smaller. Once physical presence and face-toface meetings were no longer a requirement, whether a team member was a mile away or 4.000 miles away didn’t really matter, as long as they were available for regular online team meetings. Work from home turned out to be a stepping stone towards outsourcing.

Live and learn

Working in a custom software development agency does have its perks, one of the more interesting ones being the fact that we learn new stuff from each of our clients. Through developing software for them we’re in a position to learn about their challenges, their processes, their industries, their world view. We learn from each of them, but it took a startup from an ocean away to teach me just how much Croatian engineers can offer U.S. companies.

It you’re with a U.S. company looking to outsource some of its IT, we might be a good fit – reach out at hello@ingemark.com and let’s have a chat!

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