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This chapter outlines the expert estimations of IT outsourcing market in
Central and Eastern European countries.
Analytical Survey by Natasha Starkell
In our advisory work at GoalEurope when IT executives came to us to help find the best possible location to outsource software development, we often recommended Ukraine. Our choice is explained by the fact that Ukraine has a large well-educated population, which provides a source of IT talent, and it is not an EU member state, an additional hurdle for labor migration. But in the last year the picture has changed: when the international IT community has learned about the advantages of outsourcing to Eastern Europe, the demand for IT professionals everywhere in the region sky-rocketed.
Now no matter how convincing the macroeconomic factors may sound, speak to any IT manager in Eastern Europe, and he or she will tell you about rising prices and difficulties to expand IT team. The comments such as “Don’t come to Romania if you need more than 100 developers”, “Another multinational is just the thing we need here in Sofia” and “Isn’t Ukraine getting expensive?” would not be uncommon. The result of this research proves the point by showing the diminishing gap in gross salaries of an IT developer across the region. According to this survey, the salary gap between Polish and Albanian developers is only 10 000 Euros: in Poland IT developer could expect 30% more than in Albania. At the same time Polish GDP Per Capita indicator (purchasing power parity) was almost 3 times higher than that in Albania (Euro 11200 versus Euro 3800, Source: CIA World Factbook est. 2007).
So the two critical elements of the offshore outsourcing: resource availability and affordable prices are at question. This didn’t stop Accenture, Logica CMG, EDB, Siemens, Nokia and a long list of other multinationals to establish and expand their presence in Eastern European countries. The quality of work, tolerable labor unions, proximity to Western Europe and a cultural compatibility are all the factors which contribute greatly to the interest in the local workers beyond cost arbitrage.
As for the IT industry, acquisitions of outsourcing companies have been happening across Eastern Europe for a few years but now there are signs of accelerated consolidation. In the portfolio of US outsourcing company Exigen Group is Dati Gruppa, a Latvian IT company, and Starsoft, a Ukrainian company. US- and India- based Global Logic merged with Ukrainian Bonus Technologies, whilst Kharkiv-based Telesens was sold for $2.7 million to NASDAQ-listed TTI Telecom in December 2007. Earlier that year Norwegian IT giant EDB bought Miratech and Infopulse, two Ukrainian outsourcing companies and there are a few other transactions there which are about to happen.
In Poland, the third largest country in the region after Russia and Ukraine there are few large specialized offshore outsourcing service providers, with majority focusing on the local market. Key IT players still offer software development services to their international customers but its prices perhaps match those in Western Europe by now. Here IT companies merge to survive fierce competition for resources and customers from the international corporations such as IBM and HP. In 2007 Computerland merged with Emax to form 3000-people strong Sygnity Group and in the end of the year Asseco merged with Prokom, creating Poland’s largest IT company. The labor migration to the countries such as UK and Ireland is also seen as a major problem affecting labor market in general.
In Romania, when the country entered the EU on the first of January 2007, its outsourcing industry was simply sold out. US-based Techteam acquired Akela, one of the oldest Romanian outsourcing companies; UK-based Endava acquired AGS; and Adecco bought IP Devel to expand its embedded development team. US-based Computer Generated Solutions bought EasyCall, the largest Romanian call center operator with 600 employees and Euro 1.8M revenue. Also in 2006 Adobe bought the Dreamweaver development experts InterAKT. Now 80 to 90 percent of the industry turnover is produced by the branches of ICT multinationals or joint ventures where the main shareholder is a foreign company according to Vasile Baltac, the president of ATIC – Romanian IT association.
In Bulgaria too the demand for the software developers is strong, and the local providers are fighting with Coca Cola, HP, SAP, and Siemens for the talent. One of the leading Bulgarian outsourcing suppliers Sciant has been recently sold to VM Ware, which retain most of its workers for internal development projects.
Even in Russia, the largest country out of the post-Socialist bloc, the IT workers are in short supply. One of the explanations is a growing local market: as its oil-fueled economy expanded, so did the demand for IT services. According to RosBalt, in 2007 the IT market in Russia grew by 25 percent not dissimilar to the growth in the previous years. Thus many software development companies have seen more success on the local IT market than abroad. Increasing local market need for IT professionals resulted in the first signs of the industry consolidation. In 2007 one of the largest Russian system integrators, IBS Group acquired Borlas, a consultancy and an IT services company. At about the same time Systematica acquired systems integrator TopS BI, whilst Verysell raised $50 million to acquire an IT services companies in preparation for an IPO.
The consolidation of the IT industry is set to continue, but the mismatch of supply and demand for IT workers is temporary if the governments of the Eastern European countries embrace their new source of economic growth.
The new policies, which in part are already being implemented, should include incentives to the businesses looking to establish knowledge-based operations in the region; growth of the education spending and simplified visa and work permit regimes.
Inevitably the long-term outsourcing industry will flourish in those countries which would be able to retain the cost of living for a long period of time and provide stable political environment.