Can Outsourcing Companies in Eastern Europe Survive?

For years, outsourcing companies in Eastern Europe—especially in countries like Serbia, Bulgaria, and Romania—thrived as the demand for IT services boomed across the U.S. and Europe. Customers naturally flocked to them, and these companies grew rapidly, focusing primarily on acquiring skilled talent rather than marketing or sales. The business model was simple, yet highly effective.

However, the IT landscape has shifted. Companies are now scaling back their investments in IT, leading to staff reductions.

Cutting external costs is often an easier move than laying off internal employees, so outsourcing companies have seen many projects paused or canceled. This leaves them with highly trained staff but no work, forcing them to put employees on hold and assign them to internal projects, such as developing tools for HR, time management, or task tracking—often tools they need themselves.

These changes are pushing outsourcing companies to invest more heavily in sales and marketing—areas they haven't previously needed to focus on. Many are even trying to sell the internal products they created during downtime, but this strategy comes with its own set of challenges.

Challenges in Shifting from Outsourcing to Product Development

Transitioning from an outsourcing business model to selling proprietary software products is far from easy. Companies accumulate knowledge over the years and it's not just about the skills of their developers.

It's also about how the market perceives them. Being recognized as a specialist in a niche field takes time and effort. It took us 20 years to become recognized as a specialist and industry leader.

On the other side finding a niche is not an easy task for outsourcing companies. To do so, many focus on multiple areas in hopes of identifying their specialty. However, this approach can make it difficult for the company to establish a clear market position. For example, a company that provides software solutions for both the insurance industry and nuclear power sector will struggle to be seen as an expert in either. Specializing too broadly dilutes their credibility, making it harder to excel in a specific area and to attract clients who seek industry-specific expertise.

The Problem with Continuing Outsourcing

Continuing with outsourcing but enhancing sales and marketing strategies also has its difficulties. Marketing for outsourcing companies is traditionally focused on attracting skilled employees locally. Now, these companies need to switch to global strategies targeting clients — a completely different game. Their "product" is skilled labor, and marketing that can be tricky, especially in local markets where people don’t want to feel like they are the product.

Another issue is the wide range of potential clients, as any company needing software development could be a customer. Targeting such a broad market makes it difficult to create an effective strategy. Even with a well-defined marketing plan, global sales present challenges. It’s a long process, often requiring large investments of time and money. Plus, these companies face competition from outsourcing giants in countries like India, Bangladesh, and China, which offer highly skilled engineers at lower costs. 

Finally, AI poses a growing threat to outsourcing companies, as it is already reducing the demand for external resources. This trend will likely continue, making it even harder for outsourcing businesses to thrive.

What’s Next for Outsourcing Companies?

In my view, the only viable path for outsourcing companies is to transition into offering their own products within a specific niche. However, this transformation should not be abrupt at the beginning. A more effective approach might be to establish a new, dedicated team responsible for the product, isolating them from the rest of the organization to focus solely on this initiative.

This gradual transformation is something we experienced firsthand when transitioning from a distribution and service company to one that offers software solutions. Initially, we ran both in parallel, but eventually, a hard strategic shift was necessary.

We were first only distribution and service company, than we become a distribution and service company with a small software offering, and in one moment, we turned it around. we become a software company, with only a minimal focus on hardware distribution and service.

This approach allowed us to evolve organically while avoiding the risks of an abrupt shift. 

Maybe this would be a good way for outsourcing companies too.