With Spain's civil service sparking an upsurge in outsourcing demand, the country's value as a nearshore destination is set to grow. Gonzalo Ulloa and Iban Diez break down this Spanish revolution

Bearing in mind the size of the Spanish economy – the world's eighth largest – it is safe to say that from an economic point of view, Spain is currently one of the world's most dynamic countries. One of the sectors of the Spanish economy that has revealed the highest growth rates in recent years – and which exhibits great potential for future growth despite the current worldwide economic deceleration – is without a doubt its outsourcing sector.

Due to the high degree of specialisation that has been reached, particularly by the IT sector, together with the many market niches that still need to be exploited and matured, Spain is becoming a focal point not only for sourcing opportunities, but also for service providers; traditional offshore outsourcing destinations wishing to expand their growth horizons; and local and foreign investors aiming to make a reliable investment.

Spain has one of the biggest IT services markets in western Europe. Well-known companies including Indra, Accenture, Everis and Atos Origin have, in recent years, gained intensive experience though the development of large and complex IT projects for local Spanish companies, which cover most of the areas of the Spanish economy including government, finance, telecommunications, energy and manufacturing.

The Spanish industry and business sectors, in general terms, is formed by a few large corporations and many small and medium-sized companies. A great deal of these companies are also embracing outsourcing services, which is a definite sign of the Spanish market's maturity.

Spain offers attractive sourcing opportunities for all companies, ranging from banking to the manufacturing sectors. Moreover, during the past decade, utilities industries, in particular the energy sector, have become highly competitive with many, such as Iberdrola and Repsol YPF, expanding throughout Latin America. Likewise, the Spanish telecommunications industry has become a key sector of the economy, mainly due to the expansion of Telefonica throughout Europe and Latin America. Finally, the Spanish manufacturing sector is becoming more and more powerful thanks to pioneering corporations such as Inditex, the founder of the Zara clothing line.

The Spanish outsourcing scenario has also been complemented with the emergence of other distinct companies in its economy, such as consultancy firms, law firms and other specialised companies that offer accurate advice, whether of a legal, financial or technical nature, to both ends of the outsourcing process.

The fact that these types of companies exist in the Spanish market demonstrates the mature and strong outsourcing market in Spain. In general terms the Spanish outsourcing market has experienced a strong boost during the past five years, growing by almost 60% between 2003 and 2007. Moreover, the value of the outsourcing market reached E3.8bn (£3.4bn) in 2007 – an increase of 16.3% compared to 2006.

Future trends in Spain's outsourcing market

Essentially, it seems clear that the Spanish outsourcing market will continue with the same growth tendency in the short- to mid-term, with outsourcing consolidating itself as a strategic alternative for Spanish companies. In fact, and according to forecasts, a growth rate of 14.8% and 14.5% is expected in the sector over 2008 and 2009. Although this last figure should probably be revised in the light of the new economic scenario, the fundamental conclusion is clear: the Spanish outsourcing market will maintain a considerably high growth rate. It appears that application and business process outsourcing services are the areas that are going to experience the greatest growth rates in upcoming years.

In view of the current worldwide economic deceleration, it could be predicted that the need to compete in the market could provoke traditional offshore outsourcing destinations into challenging nearshore destinations, or closer to home destinations, like Spain. Considering the potential, however, that can be reached through strategic alliances and direct investments, rather than being seen as a threat, nearshore destinations are going to be considered by service providers in offshore countries as a business opportunity, and a crucial element in their future strategic planning.

The emergence of Spain as an attractive nearshore destination is a result of several key elements. Primarily, Spain has skilled human resources, due to a robust education system, which makes it an attractive destination for complex IT projects. The maturity of the outsourcing market is also an important factor, as it is characterised by highly developed outsourcing service providers that have developed their expertise in projects with large firms, such as Telefonica, Iberdrola, Inditex and Grupo Santander. Last but not least, is Latin America's Spanish heritage, as it opens up significant possibilities for scale economies with Latin American offshoring resources.

On a more institutional level, Spanish public bodies have begun to take their first steps in the outsourcing of processes and services, with the purpose of giving priority to efficiency in the rendering of public services. The Spanish civil service, which is a complex system comprising three levels (state, autonomic and local), has become an especially attractive demander of outsourcing services.

Furthermore, and according to unofficial data, in 2007 the Spanish civil service contracted different services totalling a value of E500m (£442m). This is an important figure, which could be even greater if we bear in mind that the Spanish public sector has been traditionally reluctant to outsource services, particularly in respect of essential services such as healthcare and education. Nevertheless, the current trend points towards public bodies leaving behind their fear of losing control of services as a result of their externalisation.

In any case, all services related to the civil service are deemed particularly attractive for companies that render outsourcing services. As a direct consequence of this new trend, service providers are creating centres of excellence with the joint support of the civil service where companies with expertise are invited to join their knowledge and experience in order to attract top talent in each area. The existence of these centres, which can be currently found in Madrid, Barcelona, Vizcaya, Leon or Salamanca, is just another reason why Spain should be considered an attractive nearshore destination.

As for what the future holds for the Spanish outsourcing market, despite a global economic slowdown and financial difficulties, there is no reason to believe that a reduction of the country's demand for outsourcing services is in store. Yet, a change in the market's demand structure should be expected; specifically, a greater demand for outsourcing services for more integrated and competitive solutions.

Outsourcing is also beginning to find a space in small and medium-sized companies. It could be said that the great boost that is going to be experienced by the Spanish outsourcing market, from a demand point of view, is going to be led by the Spanish civil service as well as by small and medium-sized companies. These companies have made a giant leap from merely contracting IT maintenance and back-up services, to transforming business processes starting with the implementation of state of the art technology with the aim of achieving greater competitiveness and efficiency and, thus, becoming efficient organisations capable of confronting a dynamic and changing market.

We can safely conclude that Spain has very important potential clients for outsourcing services, that it is an attractive nearshore destination and, overall, that it constitutes a promising destination for mid-term investments. Based on our experience, both clients and suppliers of outsourcing services are very satisfied with project outcomes. Furthermore, the feedback that has been received at numerous international outsourcing events regarding Spain, as a nearshore destination with a potent economy and a positive and stable legal framework, has been truly remarkable. There is still a great deal of potential for growth and development in Spain, simply waiting to be exploited.

Gonzalo Ulloa is head of intellectual property and technology and Iban Diez an associate at Gomez-Acebo & Pombo.