Consultants miss East Europe yardsticks by a mile

By Edward Lucas

Date: 16/02/06

I recently saw a slick presentation, produced at vast expense by a very famous international consultancy, representing its distilled wisdom about outsourcing in Eastern Europe.

The trend analysis was quite good: manufacturing was the first phase, then came call centres, and the future is 'business process outsourcing', meaning payroll, accounting and other backroom jobs.

Then it got rather wobbly: there was a wildly inaccurate comparison of wage levels (ignoring the social charges that can almost double an employer's payroll costs) and a quite preposterous table of political risk, showing that Russia is no more risky than Poland.

But what really struck me was what the country-by-country analysis ignored.

The biggest omission was mentality, which sounds woolly but matters hugely in business. Take hierarchy, for example. Most international companies are not very hierarchical these days, particularly if they are from the English-speaking world. Most post-Communist countries, by contrast, are still tinged with the compounded effects of totalitarianism and foreign domination: if I'm the boss, you're an idiot, and vice versa. That clogs information flows and initiative. I've recently heard employers complaining about this a lot in Romania; it doesn't seem to be much of a problem in Poland.

Then there's rigidity: many people still have half a brain in the era of the five-year plan. But to compete with China and India, Eastern Europe must combine flexibility with its proximity to rich countries. Here Romania seems to score quite highly; by contrast I've rarely heard the Czechs or Lithuanians praised for flexibility.

The second big question is how countries are run: chiefly transparency, predictability and contestability. Businessmen (like everyone else) want to know who is really making decisions; they want those decisions to be based on comprehensible and stable principles, rather than whim and personal preference; and they want clear avenues of protest if things go wrong.

Businessmen hate going to politicians or the press with their complaints, and they like litigation even less. But it's vital to know that, when needed, these systems are fair. In countries where you buy press coverage and where politicians (and even judges) require compensation for their time and attention, those avenues are closed. Nowhere is perfect (not least rich countries: look at Italy), but Poland is trying hard to reform its justice system, and has an excellent media. Estonia scores pretty well on all counts, while Romania and Croatia still have a lot to prove.

In the longer run, the most important thing is education. The post-Communist countries that turn themselves into brain-powered economies will have a much brighter future than those that rely solely on being close and cheap.

That means ditching most of the Communist-era ideas about education (memorising huge amounts of stuff and regurgitating it, with or without cheating, to pass the exam). And it means teaching people to think. No post-Communist country has done this very well - most are sticking to the state-run education systems rather than a competitive mixed economy. And few have even begun to grasp the opportunities created by the globalisation of the higher education industry, though in theory they would be splendidly competitive: they are cheap, beautiful places for talented people to study and teach.

Bad government and addled brains don't doom a determined business. But they do add to its costs. So though it's harder to score countries on mentality, public administration and educational dynamism than it is on telephone penetration and language skills, if my money was at stake, it's those things that I'd want my expensive consultant to compare.

• Edward Lucas is Central and Eastern Europe correspondent for The Economist.

Comment feature about business culture in Central and Eastern Europe.