Presentatation at Culminatum Alumni meeting 30.5.2008

1. Software R&D and Nearshoring in Central and
South Eastern Europe -
Still Unknown Opportunity in the Finnish ICT
Business?
Tommi Pelkonen
Business Consultant
Finpro © Finpro ry /
/
Hungary

2. Software R&D and Nearshoring in Central and
South Eastern Europe
★ Introduction and definitions
★ Outsourcing basics
★ CEM as market area
★ Conclusions and recommendations
/ © Finpro ry /

3. Eastern Europe?
History gives us keys to understand current situation in the area / © Finpro ry /

4. Eastern Europe?
History gives us keys to understand current situation in the area / © Finpro ry /

5. Eastern Europe?
History gives us keys to understand current situation in the area / © Finpro ry /

6. Eastern Europe?
History gives us keys to understand current situation in the area / © Finpro ry /

7. Outsourcing?
• A company’s / organisation’s
process such as product design
or manufacturing, carried out by
a third-party company.
• The decision to outsource is
often made in the interest of:
• lowering firm costs, redirecting
• conserving energy directed at
the competencies of a
particular business, or
• to make more efficient use of
labor, capital, technology and
resources.
Source: Roland Berger, 2008 Outsourcing is now a common IT practice / © Finpro ry /

8. Outsourcing?
• A company’s / organisation’s
process such as product design
or manufacturing, carried out by
a third-party company.
• The decision to outsource is
often made in the interest of:
• lowering firm costs, redirecting
• conserving energy directed at
the competencies of a
particular business, or
• to make more efficient use of
labor, capital, technology and
resources.
Source: Roland Berger, 2008 Outsourcing is now a common IT practice / © Finpro ry /

9. How does it look like (for example)?
Trend: from simple functions into complex operation sourcing / © Finpro ry /

10. How does it look like (for example)?
Trend: from simple functions into complex operation sourcing / © Finpro ry /

11. Nearshoring?
• Sourcing service activities to a
foreign, lower-wage country
that is relatively close in
distance or time zone (or
both).
• The customer expects to
benefit from one or more of
the following constructs of
proximity:
• geographic,
• temporal,
• cultural
• linguistic
• economic
• political
• historical
Nearshorers are seeking for better control and trust / © Finpro ry /

12. Nearshoring?
• Sourcing service activities to a
foreign, lower-wage country
that is relatively close in
distance or time zone (or
both).
• The customer expects to
benefit from one or more of
the following constructs of
proximity:
• geographic,
• temporal,
• cultural
• linguistic
• economic
• political
• historical
Nearshorers are seeking for better control and trust / © Finpro ry /

13. Challenges in South-East Asia?
/ © Finpro ry /

14. Software R&D and Nearshoring in Central and
South Eastern Europe
★ Introduction and definitions
★ Outsourcing basics
★ CEM as market area
★ Conclusions and recommendations
/ © Finpro ry /

15. Some facts about outsourcing...
Outsourcing is constantly increasing and reaching new areas / © Finpro ry /

16. Some facts about outsourcing...
Outsourcing is constantly increasing and reaching new areas / © Finpro ry /

17. Some facts about outsourcing...
Outsourcing is constantly increasing and reaching new areas / © Finpro ry /

18. Rationale for outsourcing
Cost, quality and ease of management / © Finpro ry /

19. Rationale for outsourcing
Cost, quality and ease of management / © Finpro ry /

20. How to outsource?
1.Deciding to outsource
(board decision, only with a created business case)
2.Supplier proposals (RFPs)
3.Supplier competition (face-to-face)
4.Negotiations (can take time)
5.Contract finalisation (lawyers needed)
6.Transition (staff transfer, service level increases etc.)
7.Transformation (SLAs, standardisation, centralisation)
...
8.Ongoing service delivery
...
9.Termination / renewal of contract
Simple process, yet so many challenges and pitfalls / © Finpro ry /

21. What to outsource?
R&D outsourcing via Build-Operate-Transfer is gaining ground / © Finpro ry /

22. What to outsource?
R&D outsourcing via Build-Operate-Transfer is gaining ground / © Finpro ry /

23. Outsourcing benefits difficult to realise...
Focus should be put more on total costs, not nominal values / © Finpro ry /

24. Software R&D and Nearshoring in Central and
South Eastern Europe
★ Introduction and definitions
★ Outsourcing basics
★ CEM as market area
★ Conclusions and recommendations
/ © Finpro ry /

25. The Emerging Europe?
23 countries
Total population of
76 million internet users.
At EU’s homefront there is a major emerging market! / © Finpro ry /

26. Attractive Business Region
New and coming EU members
• Growing economic interdependence with
Western Europe
• Improving business climate
• Rising living standard
• Lower transaction costs
• Developing infrastructure
• Less regulatory barriers
• Cultural similarities
• EU funds to development of knowledge
based economies
Favorable Location
• Central location in Europe Cost advantages
• Geographic proximity to Finland • Employment costs 30-40 % lower than in the Western Europe
• Good transportation possibilities • Centralization of supporting activities bring cost advantage e.g.
buying of goods, services or logistics
Fast growing markets Westernization of customer behavior
• GDP growth rates 4-9 % • Appreciation of western products and life-style
Attractive location for IT operations! / © Finpro ry /

27. High-tech scene and popularity also catching up
Internet Penetration
+50% +40% +30% +20% < 20%
Slovenia Slovakia Lithuania Romania Ukraine
Czech Latvia Croatia Bulgaria Macedonia
Estonia Poland Cyprus Bosnia Serbia
Greece Turkey Albania
Hungary Moldova
Broadband
+60% of all connections
Malta Montenegro
Belarus
Online Advertising Share (2006)
+4% +2% +1% +0.2%
Hungary Poland Lithuania Bosnia
Estonia Slovenia Romania Turkey
Czech Slovakia Belarus
Bulgaria Latvia Croatia
Greece Ukraine
Macedonia
Serbia
Albania
Moldova
Montenegro
(source InternetWorldStats, CIA) / © Finpro ry /

28. Constant supply of IT talent
Yearly graduates in ICT sector
Yearly graduates, all engineers
(source Finpro & Tekes, 2007)
/ © Finpro ry /

29. Salary levels are on the rise, yet still competitive
EUR
24,1%
Latvia
1700
33% Latvia
Gross salaries and employer side Estonia
1346-1679EUR
1500
costs (tax %) per country 33,5%
1085-1353EUR
Hungary
35% 1330EUR
Czech rep.
36,67%
1300 34,4%
Ukraine
1202-1335EUR
Slovakia Estonia
21,28% 1080-1283EUR
Hungary
26% Poland
1079EUR
1100 31% St.Petersburg 739-1267EUR
Czech rep.
1000EUR
Ukraine
Lithuania 900-1000EUR
909EUR Poland Slovakia
800-950EUR
40.25% 756-882EUR
900 29.55% 790EUR
Romania 737-825EUR St.Petersburg
750EUR 550-950EUR
Bulgaria Lithuania
700 420-841EUR 600-700EUR
389-777EUR Romania 550-630EUR
Junior Software Developer
300-600EUR 300-600EUR POLAND: Total labor cost 19.83% -22.72% of gross wage,
500 depending on the accident insurance chosen level.
Case Poland used average 21.28%
300
(source Finpro & Tekes, 2007)
/ © Finpro ry /

30. Salary levels are on the rise, yet still competitive
EUR
35%
Czech rep.
2200 33,5%
34,4%
Gross salaries and employer side Hungary
Slovakia
1350-2835EUR
2000
costs (tax %) per country 33%
1277-2688EUR
1802-2002EUR
Estonia
36,67% 24,1%
Ukraine Latvia
1800 26% 21,28%
1729EUR
Czech rep.
St.Petersburg Poland
1640EUR 1679EUR
Slovakia
Hungary
1600 31%
1134-1890EUR 1516EUR
1000-2100EUR
Latvia
Lithuania Estonia
950-2000EUR
1350-1500EUR
Poland
St.Petersburg Ukraine
1400 1140-1520UR 1300EUR
1353EUR
40.25%
1250EUR
29.55% 900-1500EUR 1200EUR
Romania
1200 Bulgaria Lithuania
777-1296EUR
841-1403EUR
870-1160UR Senior Software Developer
Romania
1000 POLAND: Total labor cost 19.83% -22.72% of gross wage,
depending on the accident insurance chosen level.
Case Poland used average 21.28%
600-1000EUR 600-1000EUR
800
(source Finpro & Tekes, 2007)
/ © Finpro ry /

31. Salary levels are on the rise, yet still competitive 33,5%
Hungary
EUR 35%
34,4%
Slovakia
Gross salaries and employer side Czech rep.
2336-2870EUR
21.28%
Poland
2600 costs (tax %) per country
40.25%
1747-3360EUR
Romania 1620-3375EUR
33% 26%
1819-3032EUR
Estonia St.Petersburg
36,67%
2400 1122-3506EUR
Ukraine
2261EUR 1890-2646EUR
Poland
2200 31%
2159EUR
Hungary
Slovakia
Lithuania 24,1%
Czech rep. 1500- 2500EUR
Latvia
St.Petersburg
2000 1300-2500EUR
1750-2150EUR
1520-2279UR
Estonia
1200-2500EUR
29.55% 1862EUR
Romania 1500-2100EUR
Bulgaria
1800 1700
Ukraine
Latvia
800-2500EUR
1250-1943EUR Lithuania
1600 1500EUR
1580EUR
Project manager
1160-1740EUR
Bulgaria
1400 POLAND: Total labor cost 19.83% -22.72% of gross wage,
1000-1500EUR depending on the accident insurance chosen level.
Case Poland used average 21.28%
1200
(source Finpro & Tekes, 2007)
/ © Finpro ry /

32. Market vary on their attractiveness
Source: Roland Berger, 2008
/ © Finpro ry /

33. EXAMPLES OF REAL LIFE
Romania Ukraine
High level of corruption, low level of English
skills.
“Foreign investors are increasingly worried that Getting car insurance may be impossible
they won't be able to find necessary
qualified personnel for projects that they wish Little success cases by Finnish companies.
to develop in Romania, Ana Maria Cristina
declared, the president of ARIS.
Hungary
quot;One of the main worries of foreign investors is
linked to the existence of average Manpower adequately skilled but needs re-
qualification labor force, knowing that many training on project management and quality
Romanians are searching for jobs that are management of IT projects.
better paid outside the countryquot;
Taking responsibility of the projects is not as
good of a level as in Finland.
Motivation and dynamic behavior are lacking in
many employees.
Extremely unstable taxation.
(source Finpro & Tekes, 2007)
/ © Finpro ry /

34. EXAMPLES OF REAL LIFE
Czech Rep. + Slovakia Bulgaria
Rising labor and living costs.
The administrative burden is huge. Company
Intellectual property rights uncertainty. The has the equivalent of three full-time employees
lack of clear definitions of rights, dealing with the state bureaucracy. Their work
responsibilities and liabilities in the intellectual includes meeting arcane record-keeping
property sphere is a potential weakness. requirements on workers' pay and conditions,
and getting the right stamps on the right bits of
Under-developed service culture. paper for the sleepy customs service.
Brain drain and lack of marketing skills But more worrying is the education system.
Teachers' skills are outdated and corruption is
rampant.
The shortage of good people is chronic
(source Finpro & Tekes, 2007)
/ © Finpro ry /

35. Software R&D and Nearshoring in Central and
South Eastern Europe
★ Introduction and definitions
★ Outsourcing basics
★ CEM as market area
★ Conclusions and recommendations
/ © Finpro ry /

36. How to succeed?
• Own processes must be clearer than ever before when
working with partners: specifications and definitions must be
clear
• Nearshoring requires investments before it can bring profits
and results
• When working with a partner you must remember
• B-to-B has it’s perks but also downsides
• E.g. rewards do not always reach the staff
• Do you get the best resources or is it the other client?
• Tight communication, plenty of traveling and personal
contact are required
• Outsource clear and well defined modules
• Provide “Finnish view” or business information yourself
• Treat your partner and their staff as well as your own staff
• Agree on rewards and getting own named and accepted
persons for your work
/ © Finpro ry /

37. Critical outsourcing questions
• What is to be outsourced and why?
• What is the optimal sourcing model?
• Who is the best partner?
• What is the region/country/area operation should focus on?
• What issues must be covered by the contract?
• How is the project to be managed and by whom?
• Who has to do what and by when?
• How are we going to monitor target compliance?
• What is the acceptable level of cost savings and can these
be realised, also in the long term?
Sound business thinking should always drive outsourcing operations
Source: Roland Berger, 2006 / © Finpro ry /

38. Few conclusions
• Offshore outsourcing is a complex process with political,
social, cultural, ethical and economic implications
• Offshore outsourcing not a “mechanical“ operation, it
is a social process of company restructuring.
• CEM offers attractive business opportunities for
Finnish sofware companies, also in R & D
• Making offshore outsourcing sustainable:
• It is ambitious, yet it is possible !
/ © Finpro ry /

39. Questions, thoughts,
comments...

41. For more
information
tommi.pelkonen@finpro.fi
+36 -20 - 250 10 77