Central and Eastern European IT Outsourcing Landscape Report 2011

Central and Eastern European
IT Outsourcing Landscape IT Sourcing Europe Limited

Report 2011
Nearshore IT Outsourcing
Market Research

Coventry, West Midlands
The United Kingdom
2011

2|Central and Eastern European IT Outsourcing Landscape Report 2011

Table of Content

Executive Summary................................................................................................................................................................................................................ 3
Introduction .......................................................................................................................................................................................................................... 4
European ITO: 2011 Expectations, Trends & Challenges .......................................................................................................................................................... 4
Most Promising ITO Destinations in the CEE Region ................................................................................................................................................................ 7
Ukraine, Romania, Hungary, Poland, Belarus and Czech Republic Compared ............................................................................................................... 8
Total Cost of Ownership: Nearshore versus In-House Development Team .................................................................................................................. 11
Ukraine’s ITO Profile 2011 .................................................................................................................................................................................................... 12
Belarus ITO Profile 2011 ....................................................................................................................................................................................................... 13
Conclusion ........................................................................................................................................................................................................................... 14

Copyright IT Sourcing Europe Limited. 2011. All Rights Reserved. www.itsourcing-europe.com


For close analysis within this Report six CEE countries were
Executive Summary
shortlisted based on the biggest IT outsourcing market share
IT Sourcing Europe’s 2011 Central and Eastern European (CEE) reached in 2010: Ukraine, Romania, Hungary, Poland, Belarus
IT Outsourcing (ITO) Landscape Report aims to analyze the and Czech Republic.
most prospective countries in Central and Eastern Europe in
This analytical Report proves Ukraine and Belarus to be
terms of their factual capability to supply Western European
holding the almost equal leading positions with regards to
and Nordic clients with appropriate low-cost IT resources and
qualified IT workforce available on the job market, innovation
skills missing/too expensive within own country, innovative
readiness, access to the newest technologies, R&D and tech
solutions and long-term value.
education excellence, favorable service rates and innovative
This Report’s key objective is to help Western European and business models offered to Western European outsourcing
Nordic corporate / IT decision makers benchmark current services buyers to help reach sustainability, flexibility and
trends and challenges of ITO and be aware of the factual strategic long-term IT / development cost savings.
capabilities of the most popular/ leading nearshore
Regarding the European Union (EU) member states analyzed
outsourcing destinations in the CEE region to deliver the state-
in the course of this study in terms of their IT outsourcing
of-the-art yet cost effective solutions able to meet the most
potential, Romania appears to be the best country for
critical challenges of the rapidly changing business
nearshore outsourcing in terms of low costs and IT resource
environments.
pool, while Czech Republic, Poland and Hungary are not yet
The Report is based on the following industry studies and ready to offer enough IT resources to be involved in
researches: Central and Eastern European IT Outsourcing sophisticated projects requiring access to innovative
Review by Central and Eastern European IT Outsourcing technologies and skills that are in short supply in Western and
Association, Gartner’s Research, Top 100 Global Outsourcing Northern Europe. However, all of these countries demonstrate
Locations List by Global Services, countries’ reviews by high levels of readiness to host and manage numerous
SourcingLine.Com, countries’ studies by World Economic complex IT functions. But since they have to fully comply with
Forum, Global Occupancy Costs - Offices 2010 Report by DTZ, the EU legislation, pay EU standard taxes etc, they are unable
industry publications in Business Week, Morrison & Foerster LLP, to offer reasonable cost arbitrage to the EU clients.
CFO Magazine, Computer World etc.



Introduction
o Cloud became a new business model in outsourcing,
although it was not easy for every company to adopt it. For
In 2009 the verdict for the global outsourcing was “it could have
instance, financial companies and banks were slow to turn to the
been much worse”. In 2010 outsourcing proved to be one efficient
cloud, as they were dependent on financial regulators having to
way for organizations to position themselves to capitalize on the
approve of cloud-based deals or provide appropriate guidance on
recovery and show that their overall strategy is about creating
how to avoid Cloud outsourcing risks2.
value, not merely preserving costs. In 2009 outsourcing rates
dropped significantly and this trend continued in 2010, however
o Quality of products and services delivered became the main
with much slower decline rates. In 2010 the global market activity
goal in the European outsourcing. Bigger service providers acquired
was busier, the deal cycles became shorter, a trend of Do-It-Yourself
slower achieving niche providers, while well-structures niche
(DIY) sourcing by internal teams with less reliance on the external
providers with good and timely market offerings survived the
help evolved and favored incumbent suppliers allowing them to win
competition and won a lot of long-term contracts from the
contract renewals of projects frozen / suspended in 2009 and
companies in the SME sector, so European outsourcing remained
boosting revenues even in spite of slim margins.
non-monopolized in 2010. The typical outsourcing transactions
became smaller in scale and did not involve any large
Overall, in 2010 the global outsourcing market in general and the
transformations. Project management and governance on vendor’s
European one in particular observed the following trends:
side became a key measurement of outsourcing success3.
o The worldwide IT spending totaled $3.4 trillion, up 5.4%
from 2009 levels1 European ITO: 2011 Expectations, Trends &
Challenges
o Renewed emphasis on shared services across the entire
sector, which led to increased competitors’ collaboration and
Gartner predicts that enterprise IT spending in Europe, the Middle
cooperation in terms of cost reduction in the shared costs areas.
East and Africa (EMEA) will recover in 2011, after two years of
decline4. However, government cutbacks mean that Western
o Financial services companies were back to the market after
Europe is not expected to return to stronger enterprise IT spending
having closed / putting on hold most of their outsourcing
transactions in 2009. With many insurance companies and banks
2
feeling more confident towards outsourcing, there was a significant Skinner, D., Chris Ford & Nigel Stamp, “Global Sourcing Trends in 2010”,
increase in the financial sector deals in 2010. Such companies Morrison & Foerster LLP, 2010
managed to rationalize their outsourcing contracts from numerous < http://www.mofo.com/docs/pdf/Global_Sourcing_Trends_in_2010.pdf >
3
mergers resulting from the financial meltdown. Ibid.
4
Nguyen, A. “Gartner Predicts 2011 IT Spending Rebound in Europe,”
Computer World, 2011 < http://www.computerworlduk.com/news/it-
1
Gartner, Inc., 2010 business/3247742/gartner-predicts-2011-it-spending-rebound-in-europe >



growth until 2012. The analyst house forecasts that IT spending will o Flexibility in processes and relationships
reach €579 billion in EMEA in 2011, up 1.3 percent from 20105.
Flexibility will be a key word in outsourcing deals over the next 12
According to Gartner, the UK’s public sector cuts, which aimed to months. Companies will be seeking to adopt much more flexible
reduce the nation’s debt, were a significant contributor to the commercial arrangements with their ITO service providers to reflect
declined outsourcing activity in Europe6. the different stages of the economic cycle. Outsourcing was used to
recapture innovation and provide flexibility in 2010, compared to
In 2011, the European IT outsourcing (ITO) industry will observe the simply saving money that was the top trend of 20097.
following trends:
Service flexibility is not just the ability to meet the client’s IT needs,
o Shorter deals cycles and DIY approach but the ability to flex the services to precisely cover the client’s
business outsourcing needs and make their outsourcing decision
In 2010, Europe saw a continuation of the trend for shorter deals, count. Although in the past years many European vendors labeled
shorter procurement processes, and an emphasis on making things their services as a “flexible offer” to ensure they get more
work actually rather than engaging in complex strategies. The DIY customers, they were not flexible at all in reality. In 2011, service
approach will be used even more intensively by the outsourcing providers are expected to understand the importance of change
prospects from Western and Northern Europe and this will result in acceptance in the process of setting up long-term relationships with
short-term transactional cost savings and less focus on establishing their clients. Therefore, they will tend to switch from a process-
long-term strategies. Overestimating their internal resources and packaged and bureaucratic approach to differentiation, quality and
abilities to do a high quality IT needs’ assessment, inexperienced innovation. In Central and Eastern Europe, more vendors are
purchasers of outsourcing services will suffer from longer-term beginning to change their business thinking and realize the
losses due to their inability to identify many of the key components importance of providing the clients with the right combination of
for the long-term outsourcing success. With the increased focus on services, while still bringing ease and effectiveness to their business
costs, Western European ITO buyers will save on governance costs objectives. So, in 2011 a hallmark of a true outsourcing professional
and overlook necessary governance functions. It will be especially will consist in the vendor’s ability to “get under the client’s skin” and
characteristic of customers engaging in multi-sourcing (i.e. suggest the services that can bring its ultimate business goal to life8.
distribution of tasks among several ITO providers in different
geographic locations). o Innovative business models
In 2011, an increased number of Western European ITO buyers will
be looking for opportunities to sell their captive operations to

5 7
Ibid. Ibid.
6 8
Ibid. PowerHomeBiz.Com <http://www.powerhomebiz.com>



traditional service providers and to release cash to their core Other innovative business models that will continue to evolve and
business. The captive centers proved to be cost inefficient in the catch on the European ITO market are those based on the Cloud
past years due to their complicated exit strategy and contracts’ Computing capabilities. Cloud abilities to distribute services to
inflexibility. multiple customers over local WANs and Intranet, avoiding
mainframes and/or midrange servers, will have the largest effects
Striving to evolve strategic long-term outsourcing relationships, on outsourcing since the very rise of this economic phenomenon.
Western clients express readiness to move from project-based And most of these tremendous effects will plug in in 2011. Cloud
services and staff augmentation to more effective business models, providers will deal with the key issues of data security, privacy
able to handle core software development. compliance and service level guarantees, but the market potential is
expected to be too great for solutions to these problems not to be
Although Offshore/Nearshore Development Centers (ODC/NDC)
forthcoming in 2011. In 2010, the European outsourcing industry
with their strict project management hierarchy continue to expand
began to seriously address many of these issues and will continue to
in the CEE region, the innovative engagement models emerge as a
do so in 2011 until cloud solutions become not just economically
response to tougher competition in the IT market, requiring more
tantalizing, but within the bounds of acceptable risk for customers.
transparent and value-added relationships between the clients and
If nothing else, the dramatically lower costs on offer from cloud
executors supplied by ITO vendors. One example of such innovative
providers will push customers to question charges by traditional
partnerships is a Managed/Client Own Team model, in which the sourcing providers, and the cloud will be used as a lever in
local supplier locates the client’s project team in its office and solves negotiations9.
all of the clients’ administrative and HR issues, while the client has
100% management of its vendor-supplied development team(s), its Gartner anticipates that the global services market for cloud
members’ salaries and career growth opportunities. This model has computing will reach an approximate revenue of €110 billion within
a better potential to maintain/increase employee retention and the next four years. Consequently IT service providers are busily
achieve better quality of delivery, compared to traditional ODC or upgrading their service offerings to match the cloud needs of their
project-based models, in which the client communicates with IT existing customer base and to enable the access to an entirely new
staff through vendor’s project management and incurs losses in customer segment - the SME market.
case of project staff turnover.

This service delivery model is equivalent to the client’s in-house Furthermore, the rise of smart phones and 4G technology will open
development team, but for a considerably lower cost. While clients up new business areas for these service providers, who have the
focus on production and core business lines, the supplier takes care
of HR management as well as legal, administrative and
infrastructure issues that the client company would have to deal
with if it chose to start its own operations in a low-cost 9
Skinner, D., Chris Ford & Nigel Stamp, “Global Sourcing Trends in 2010”,
neighborhood. Morrison & Foerster LLP, 2010
< http://www.mofo.com/docs/pdf/Global_Sourcing_Trends_in_2010.pdf >



expertise with the technologies and will be able to handle profitably Most promising ITO destinations in the CEE
millions of transactions at very low revenues per transaction10.
region
o Mergers and acquisitions will hit the
This year IT Sourcing Europe shortlisted 6 CEE countries for
outsourcing mainstream in 2011
comparison and analysis based on the 2010 forecast on the ITO
In Central and Eastern Europe, ITO service providers will be looking market volume13, as this indicator reflects well each certain
to more opportunities to raise capital and to buy niche ITO players. country’s progress towards innovation, flexibility, IT resource pool
Tier 1 providers will focus on enhancing their creditworthiness and enlargement and improvement of global delivery. So, based on the
seek ways to leverage costs by pointing to lower counter-party risk, assessment by the CEE Outsourcing Association, in 2011 the
sustainability, financial stability and dedication to market. Smaller following 6 countries will lead the region’s ITO competition:
Tier 2 providers will thus be challenged to overcome counter-party
Ukraine, Romania, Poland, Hungary, Belarus and Czech Republic.
risk and provide greater cost saving options in order to persuade
prospects to partner with them. Overall, in 2011 the Tier 1 providers Fig. 1: ITO Market Volume: 2009 vs. 2010
14

are expected to tale a considerable ITO market share11.

However, smaller niche providers, focused on long-term benefits
637
and relationships with the clients, will be able to lead the market for Ukraine 508
small outsourcing contracts. In 2010, the average size of ITO 536
Romania 429
projects fell from multi-billion dollar deals, as the companies started
to look at niche services rather than global delivery, so in 2011 small 461
Hungary 346
niche providers will have a good chance to win contracts that fall
434
below the size at which Tier 1 providers are able to compete Poland 328
successfully12. 348
Belarus 279
308
Czech Republic 270

0 200 400 600 800
10 2010 (Mln €) 2009 (Mln €)
Prieler, C. in “Central and Eastern European ITO Review 2010” by the CEE
ITO Association, 2010
11
Skinner, D., Chris Ford & Nigel Stamp, “Global Sourcing Trends in 2010”,
Morrison & Foerster LLP, 2010
13
< http://www.mofo.com/docs/pdf/Global_Sourcing_Trends_in_2010.pdf > CEE ITO Review 2010 by the CEE ITO Association
12 14
Ibid. Ibid.



16
Note: The forecast of market volumes for 2010 was calculated based on the Fig. 3: Capacity for innovation (2011)
final values of market volumes in 2009, and weighted with the average
assessment of revenue growth for 2010 as reported by CEE companies.

Ukraine, Romania, Hungary, Poland, Belarus and
Czech Republic Compared
15
Fig. 2: Growth of ITO service export market (2009-2010)

35,00%

30,00%

25,00%

20,00%

15,00% 2009 (%)

10,00% 2010 (%)

5,00%

0,00%

15 16
CEE ITO Review 2010 by the CEE ITO Association World Economic Forum 2011



17 18
Fig. 4: Labor Market Efficiency (2011) Fig. 5: Flexibility (2011)

17 18
World Economic Forum 2011 World Economic Forum 2011


10 | C e n t r a l a n d E a s t e r n E u r o p e a n I T O u t s o u r c i n g L a n d s c a p e R e p o r t 2 0 1 1

19 20
Fig.6: Companies’ Spending on R&D (2011) Fig. 7: Number of IT Specialists Employed in ITO (2009-2011)

25000

20000

15000

10000
2009
5000 2010
0

Fig. 8: Minimum vs. Maximum IT Rates by Country (in $ per man hour)

Ukraine 40,1
12,8
Romania 46
14
Hungary 54,5
16,3
Poland 54
16,7
Belarus 37,7
12,2
Czech Republic 53,1
16
Note: Belarus is excluded from analyses shown on Figures 3 through 6 due
to the lack of industry data 0 10 20 30 40 50 60

Max Rate Min Rate

19 20
World Economic Forum 2011 CEE ITO Review 2010 by the CEE ITO Association



Total Cost of Ownership: Nearshore versus In-House Development Team

This is a rough calculation of the Total Cost of Ownership (TCO) for running a 2-person software development team in the developed
European countries such as the United Kingdom, Germany (representing Western Europe) and Denmark (representing Scandinavia) versus TCO
of the same team located in Ukraine, Belarus, Poland, Romania, Hungary and Czech Republic.

United Germany Denmark Ukraine Belarus Poland Romania Hungary Czech
Kingdom Republic
Senior software
developer’s average 3,500 4,500 4,077 1,700 1,600 1,800 1,700 1,900 1,875
salary + bonuses (€ /
month)
IT Project Manager’s
average salary + 5,300 5,000 4,750 1,900 1,850 2,100 1,950 2,200 2,100
bonuses (€ / month)
Office occupancy
cost (in € per 2 1886 1194 1150 798 774 780 852 800 820
workstations/month,
primary rent +
outgoings)
Total 10,686 10,694 9,977 4,398 4,224 4,680 4,502 4,900 4,795

This is a simplified and rough calculation of TCO21. Normally, TCO is comprised of a greater number of indicators such as, for instance, long-term
expenses (employee replacement, scalability), risk/change management expenses, travel costs etc, but they should be estimated individually for
every project and team size, and do not differ significantly amongst the analyzed countries.

Of the six CEE countries surveyed, two appear to be the most attractive and promising ones for Western European ITO buyers who look out to
achieve significant cost arbitrage and gain access to vast IT resources – they are Ukraine and Belarus. Both weigh equally in terms of readiness to
provide state-of-the-art and cost effective innovative solutions and bring factual value to Western European and US clients in the long-term
perspective.

21
Sources used: PayScale.Com, ITjobswatch.Co.Uk, Developers.Org.Ua, Diz-By.Biz, DTZ's 13th annual Global Office Occupancy Costs Survey 2010



According to the 2010 Global Services 100 list22, Ukraine is 11th and o Western-oriented government policies encourage
Belarus is 13th among 20 leading countries in the area of ITO and partnership and close business ties with the US and EU
high tech services. They are ahead of Poland, the fourth CEE country companies25
including Russia (12th position), that took the 20th position. Other
CEE countries surveyed in this study did not enter the global list of o Ukraine has one of the most comprehensive laws on
Top Outsourcing Locations. Based on this evaluation, the top Intellectual property and copyright protection in the world26
leading locations that IT Sourcing Europe would recommend for
primary consideration by Western European companies looking out o The ITO Industry is rapidly transforming: new business /
to outsource their IT function / software development are Ukraine service delivery models and approaches come to the scene, i.e
and Belarus. Cloud Computing, Managed/Own Team etc

o The Ukrainian hi-tech sector which began to form itself
Ukraine’s ITO Profile 2011 since Ukraine gained independence (first ITO contract signed in
1991) just for several decades developed in the strong and
dynamic industry, which value by skeptical analysts exceeded 1
billion in 201027
o Ukraine is a triple holder of the first position among CEE
countries in terms of market value, number of IT outsourcing
o The year 2010 ended with a huge confrontation between
companies and number of professionals involved in IT outsourcing
the Ukrainian small and mid-sized entrepreneurs and the
services23
government with regards to unfair modifications to the new Tax
Code. Many local IT companies and ITO services providers united
o According to the 2010 Global Services 100 list, Ukraine
in an attempt to persuade the government of the seriousness of
ranks 1st among all CEE countries and 11th among the world’s Top
consequences of the new Tax Code for the future of the most
20 leading countries in the area of ITO and high tech services (by the
dynamic industry [IT]. Fortunately to the industry, the government
number of qualified IT resources available)24
came to hear the appeal and harmoniously upgraded and adopted
the new Tax Code28.
o Ukrainian software /ITO vendors through their professional
alliances including the Ukrainian Hi-Tech Initiative are working
together to introduce a brand new, favorable position for the IT
industry, with provisions in the new Tax Code aimed to assist IT
companies sustain and move ahead of the competition. 25”
Outsourcing To CEE. Country Overview: Ukraine,” a webinar by the
Ukrainian High-Tech Initiative, 2010
22 26
Global Services 100 Outsourcing Locations List 2010 Ibid.
23 27
CEE ITO Review 2010 by CEE ITO Association Levi9 Global Sourcing < www.levi9.com>
24 28
Global Services 100 Outsourcing Locations List 2010 Ibid.



As a result of close cooperation between government and IT sector Belarus ITO Profile 2011
representatives, the Ukrainian IT Association is currently preparing a
proposal for government to establish an economical experiment for
4 years to facilitate the development and growth of the IT industry.
o In recent years the Lukashenko government was opening the
door to investment as never before. Since 2007 it has enacted
regulatory reforms and tax relief measures that have vaulted Belarus
Fig. 9: Modern ITO trends in Ukraine
from 129th place to 58th on the World Bank's ranking of the "ease of
doing business" in 183 countries29

o In H1 2010 foreign investment in the Belarusian economy
84% reached $4.4 billion, up 4.4% over the same period last year30
growth of IT services export
o According to Dataquest, the Belarusian ICT market is ranked
increase in IT infrastructure 66%
support among the ten largest in Eastern Europe, Belarus' share being about
2%, Ukraine's - 4% and Russia's - 26%31
increase in skilled specialists' 55%
shortage
o Belarus has one of the best developed High-Tech Parks in
increase in ITO consumption in 49% Europe. It is government-supported and, unlike similar parks in Europe
the internal market and Asia, is virtual. It means that the laws and rules of the Park are
increse in market consolidation valid all over Belarus regardless of the Park member’s current location
38%
processes (whether it is a province or a capital city). It allows to fully utilize R&D,
educational, professional and infrastructural potential of the whole
increase of in-house 25% country. 95% of software products developed within the High-Tech
development Park are exported: 45% are exported to the United States and Canada,
improvement of IT industry
30% to Western Europe and 20% - to Russia and CIS countries32.
19% Residents of Hi-Tech Park are exempt from many dues and taxes
support by government
including: non-budgetary funds, income tax, VAT, customs dues for
9% imported products etc.
market decentralization

0% 20% 40% 60% 80% 100% 29
Business Week
<http://www.businessweek.com/magazine/content/10_16/b41740587013
% 85.htm>
30
Export.By 2010
31
Development.By 2011
32
Park.By 2011



Fig. 10: Modern ITO trends in Belarus
Conclusion
This CEE ITO Landscape Report 2011 compiled the most credible
data obtained in the course of numerous industry studies and
surveys including those by Gartner, IT Sourcing Europe, Global
growth of IT services export 91% Services, Business Week, Sourcing Line etc. For this study six CEE
countries with the biggest ITO market volumes were selected and
increase in IT infrastructure 56% analyzed in terms of their factual capability to deliver innovative
support and cost effective solutions and long-term value to Western and
Northern European companies looking out to outsource their IT /
increase in skilled specialists' 70% software development and gain access to the global IT resources.
shortage

increase in ITO consumption in 37% Within this Report all six selected countries were compared and
the internal market contrasted in terms of growth of ITO service export market, capacity
for innovation, labor market efficiency, operational flexibility,
increse in market consolidation 45%
processes spending on R&D, number of IT specialists employed in ITO industry,
Total Cost of Ownership and IT rates for the outsourced software
increase of in-house 21% development. Although CEE EU member states such as Poland,
development Hungary, Romania and Czech Republic demonstrated better IT
improvement of IT industry infrastructure and outsourcing flexibility options, the non-EU states
76%
support by government such as Ukraine and Belarus came to be two leading countries in
terms of low service rates / IT salaries and office occupancy costs,
market decentralization 6% vast IT resource pool and transparent and flexible service delivery
models tailored to excellent R&D and project management
0% 20% 40% 60% 80% 100%
capabilities.

According to our final assessment, Ukraine is the most attractive
% outsourcing location in terms of R&D potential, innovative business
models offered by local ITO providers and IT workforce / people
with high-tech education able to solve the most challenging IT tasks.
Belarus is the leading ITO location in CEE in terms of low service
rates / IT salaries and low workstation costs.



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Central and Eastern European IT Outsourcing Landscape Report 2011

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