central and eastern european it outsourcing landscape report 2011

Central and Eastern European

IT Outsourcing Landscape

Report 2011

IT Sourcing Europe Limited

Nearshore IT Outsourcing

Market Research

Coventry, West Midlands

The United Kingdom

2011

2 | 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

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

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



Executive Summary

IT Sourcing Europe’s 2011 Central and Eastern European (CEE)

IT Outsourcing (ITO) Landscape Report aims to analyze the

most prospective countries in Central and Eastern Europe in

terms of their factual capability to supply Western European

and Nordic clients with appropriate low-cost IT resources and

skills missing/too expensive within own country, innovative

solutions and long-term value.

This Report’s key objective is to help Western European and

Nordic corporate / IT decision makers benchmark current

trends and challenges of ITO and be aware of the factual

capabilities of the most popular/ leading nearshore

outsourcing destinations in the CEE region to deliver the state-

of-the-art yet cost effective solutions able to meet the most

critical challenges of the rapidly changing business

environments.

The Report is based on the following industry studies and

researches: Central and Eastern European IT Outsourcing

Review by Central and Eastern European IT Outsourcing

Association, Gartner’s Research, Top 100 Global Outsourcing

Locations List by Global Services, countries’ reviews by

SourcingLine.Com, countries’ studies by World Economic

Forum, Global Occupancy Costs - Offices 2010 Report by DTZ,

industry publications in Business Week, Morrison & Foerster LLP,

CFO Magazine, Computer World etc.

For close analysis within this Report six CEE countries were

shortlisted based on the biggest IT outsourcing market share

reached in 2010: Ukraine, Romania, Hungary, Poland, Belarus

and Czech Republic.

This analytical Report proves Ukraine and Belarus to be

holding the almost equal leading positions with regards to

qualified IT workforce available on the job market, innovation

readiness, access to the newest technologies, R&D and tech

education excellence, favorable service rates and innovative

business models offered to Western European outsourcing

services buyers to help reach sustainability, flexibility and

strategic long-term IT / development cost savings.

Regarding the European Union (EU) member states analyzed

in the course of this study in terms of their IT outsourcing

potential, Romania appears to be the best country for

nearshore outsourcing in terms of low costs and IT resource

pool, while Czech Republic, Poland and Hungary are not yet

ready to offer enough IT resources to be involved in

sophisticated projects requiring access to innovative

technologies and skills that are in short supply in Western and

Northern Europe. However, all of these countries demonstrate

high levels of readiness to host and manage numerous

complex IT functions. But since they have to fully comply with

the EU legislation, pay EU standard taxes etc, they are unable

to offer reasonable cost arbitrage to the EU clients.



Introduction

In 2009 the verdict for the global outsourcing was “it could have

been much worse”. In 2010 outsourcing proved to be one efficient

way for organizations to position themselves to capitalize on the

recovery and show that their overall strategy is about creating

value, not merely preserving costs. In 2009 outsourcing rates

dropped significantly and this trend continued in 2010, however

with much slower decline rates. In 2010 the global market activity

was busier, the deal cycles became shorter, a trend of Do-It-Yourself

(DIY) sourcing by internal teams with less reliance on the external

help evolved and favored incumbent suppliers allowing them to win

contract renewals of projects frozen / suspended in 2009 and

boosting revenues even in spite of slim margins.

Overall, in 2010 the global outsourcing market in general and the

European one in particular observed the following trends:

o The worldwide IT spending totaled $3.4 trillion, up 5.4%

from 2009 levels1

o Renewed emphasis on shared services across the entire

sector, which led to increased competitors’ collaboration and

cooperation in terms of cost reduction in the shared costs areas.

o Financial services companies were back to the market after

having closed / putting on hold most of their outsourcing

transactions in 2009. With many insurance companies and banks

feeling more confident towards outsourcing, there was a significant

increase in the financial sector deals in 2010. Such companies

managed to rationalize their outsourcing contracts from numerous

mergers resulting from the financial meltdown.

1 Gartner, Inc., 2010

o Cloud became a new business model in outsourcing,

although it was not easy for every company to adopt it. For

instance, financial companies and banks were slow to turn to the

cloud, as they were dependent on financial regulators having to

approve of cloud-based deals or provide appropriate guidance on

how to avoid Cloud outsourcing risks2.

o Quality of products and services delivered became the main

goal in the European outsourcing. Bigger service providers acquired

slower achieving niche providers, while well-structures niche

providers with good and timely market offerings survived the

competition and won a lot of long-term contracts from the

companies in the SME sector, so European outsourcing remained

non-monopolized in 2010. The typical outsourcing transactions

became smaller in scale and did not involve any large

transformations. Project management and governance on vendor’s

side became a key measurement of outsourcing success3.

European ITO: 2011 Expectations, Trends &

Challenges

Gartner predicts that enterprise IT spending in Europe, the Middle

East and Africa (EMEA) will recover in 2011, after two years of

decline4. However, government cutbacks mean that Western

Europe is not expected to return to stronger enterprise IT spending

2 Skinner, D., Chris Ford & Nigel Stamp, “Global Sourcing Trends in 2010”,

Morrison & Foerster LLP, 2010

< http://www.mofo.com/docs/pdf/Global_Sourcing_Trends_in_2010.pdf > 3 Ibid.

4 Nguyen, A. “Gartner Predicts 2011 IT Spending Rebound in Europe,”

Computer World, 2011 < http://www.computerworlduk.com/news/it-

business/3247742/gartner-predicts-2011-it-spending-rebound-in-europe >



growth until 2012. The analyst house forecasts that IT spending will

reach €579 billion in EMEA in 2011, up 1.3 percent from 20105.

According to Gartner, the UK’s public sector cuts, which aimed to

reduce the nation’s debt, were a significant contributor to the

declined outsourcing activity in Europe6.

In 2011, the European IT outsourcing (ITO) industry will observe the

following trends:

o Shorter deals cycles and DIY approach

In 2010, Europe saw a continuation of the trend for shorter deals,

shorter procurement processes, and an emphasis on making things

work actually rather than engaging in complex strategies. The DIY

approach will be used even more intensively by the outsourcing

prospects from Western and Northern Europe and this will result in

short-term transactional cost savings and less focus on establishing

long-term strategies. Overestimating their internal resources and

abilities to do a high quality IT needs’ assessment, inexperienced

purchasers of outsourcing services will suffer from longer-term

losses due to their inability to identify many of the key components

for the long-term outsourcing success. With the increased focus on

costs, Western European ITO buyers will save on governance costs

and overlook necessary governance functions. It will be especially

characteristic of customers engaging in multi-sourcing (i.e.

distribution of tasks among several ITO providers in different

geographic locations).

5 Ibid.

6 Ibid.

o Flexibility in processes and relationships

Flexibility will be a key word in outsourcing deals over the next 12

months. Companies will be seeking to adopt much more flexible

commercial arrangements with their ITO service providers to reflect

the different stages of the economic cycle. Outsourcing was used to

recapture innovation and provide flexibility in 2010, compared to

simply saving money that was the top trend of 20097.

Service flexibility is not just the ability to meet the client’s IT needs,

but the ability to flex the services to precisely cover the client’s

business outsourcing needs and make their outsourcing decision

count. Although in the past years many European vendors labeled

their services as a “flexible offer” to ensure they get more

customers, they were not flexible at all in reality. In 2011, service

providers are expected to understand the importance of change

acceptance in the process of setting up long-term relationships with

their clients. Therefore, they will tend to switch from a process-

packaged and bureaucratic approach to differentiation, quality and

innovation. In Central and Eastern Europe, more vendors are

beginning to change their business thinking and realize the

importance of providing the clients with the right combination of

services, while still bringing ease and effectiveness to their business

objectives. So, in 2011 a hallmark of a true outsourcing professional

will consist in the vendor’s ability to “get under the client’s skin” and

suggest the services that can bring its ultimate business goal to life8.

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

7 Ibid.

8 PowerHomeBiz.Com <http://www.powerhomebiz.com>



traditional service providers and to release cash to their core

business. The captive centers proved to be cost inefficient in the

past years due to their complicated exit strategy and contracts’

inflexibility.

Striving to evolve strategic long-term outsourcing relationships,

Western clients express readiness to move from project-based

services and staff augmentation to more effective business models,

able to handle core software development.

Although Offshore/Nearshore Development Centers (ODC/NDC)

with their strict project management hierarchy continue to expand

in the CEE region, the innovative engagement models emerge as a

response to tougher competition in the IT market, requiring more

transparent and value-added relationships between the clients and

executors supplied by ITO vendors. One example of such innovative

partnerships is a Managed/Client Own Team model, in which the

local supplier locates the client’s project team in its office and solves

all of the clients’ administrative and HR issues, while the client has

100% management of its vendor-supplied development team(s), its

members’ salaries and career growth opportunities. This model has

a better potential to maintain/increase employee retention and

achieve better quality of delivery, compared to traditional ODC or

project-based models, in which the client communicates with IT

staff through vendor’s project management and incurs losses in

case of project staff turnover.

This service delivery model is equivalent to the client’s in-house

development team, but for a considerably lower cost. While clients

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

neighborhood.

Other innovative business models that will continue to evolve and

catch on the European ITO market are those based on the Cloud

Computing capabilities. Cloud abilities to distribute services to

multiple customers over local WANs and Intranet, avoiding

mainframes and/or midrange servers, will have the largest effects

on outsourcing since the very rise of this economic phenomenon.

And most of these tremendous effects will plug in in 2011. Cloud

providers will deal with the key issues of data security, privacy

compliance and service level guarantees, but the market potential is

expected to be too great for solutions to these problems not to be

forthcoming in 2011. In 2010, the European outsourcing industry

began to seriously address many of these issues and will continue to

do so in 2011 until cloud solutions become not just economically

tantalizing, but within the bounds of acceptable risk for customers.

If nothing else, the dramatically lower costs on offer from cloud

providers will push customers to question charges by traditional

sourcing providers, and the cloud will be used as a lever in

negotiations9.

Gartner anticipates that the global services market for cloud

computing will reach an approximate revenue of €110 billion within

the next four years. Consequently IT service providers are busily

upgrading their service offerings to match the cloud needs of their

existing customer base and to enable the access to an entirely new

customer segment - the SME market.

Furthermore, the rise of smart phones and 4G technology will open

up new business areas for these service providers, who have the

9 Skinner, D., Chris Ford & Nigel Stamp, “Global Sourcing Trends in 2010”,


< http://www.mofo.com/docs/pdf/Global_Sourcing_Trends_in_2010.pdf >



expertise with the technologies and will be able to handle profitably

millions of transactions at very low revenues per transaction10.

o Mergers and acquisitions will hit the

outsourcing mainstream in 2011

In Central and Eastern Europe, ITO service providers will be looking

to more opportunities to raise capital and to buy niche ITO players.

Tier 1 providers will focus on enhancing their creditworthiness and

seek ways to leverage costs by pointing to lower counter-party risk,

sustainability, financial stability and dedication to market. Smaller

Tier 2 providers will thus be challenged to overcome counter-party

risk and provide greater cost saving options in order to persuade

prospects to partner with them. Overall, in 2011 the Tier 1 providers

are expected to tale a considerable ITO market share11.

However, smaller niche providers, focused on long-term benefits

and relationships with the clients, will be able to lead the market for

small outsourcing contracts. In 2010, the average size of ITO

projects fell from multi-billion dollar deals, as the companies started

to look at niche services rather than global delivery, so in 2011 small

niche providers will have a good chance to win contracts that fall

below the size at which Tier 1 providers are able to compete

successfully12.

10

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”,


< http://www.mofo.com/docs/pdf/Global_Sourcing_Trends_in_2010.pdf > 12

Ibid.

Most promising ITO destinations in the CEE

region

This year IT Sourcing Europe shortlisted 6 CEE countries for

comparison and analysis based on the 2010 forecast on the ITO

market volume13, as this indicator reflects well each certain

country’s progress towards innovation, flexibility, IT resource pool

enlargement and improvement of global delivery. So, based on the

assessment by the CEE Outsourcing Association, in 2011 the

following 6 countries will lead the region’s ITO competition:

Ukraine, Romania, Poland, Hungary, Belarus and Czech Republic.

Fig. 1: ITO Market Volume: 2009 vs. 201014

13

CEE ITO Review 2010 by the CEE ITO Association 14

Ibid.

0 200 400 600 800

Czech Republic

Belarus

Poland

Hungary

Romania

Ukraine

270

279

328

346

429

508

308

348

434

461

536

637

2010 (Mln €) 2009 (Mln €)



Note: The forecast of market volumes for 2010 was calculated based on the

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

Fig. 2: Growth of ITO service export market (2009-2010)

15

15

CEE ITO Review 2010 by the CEE ITO Association

Fig. 3: Capacity for innovation (2011)16

16

World Economic Forum 2011

0,00%

5,00%

10,00%

15,00%

20,00%

25,00%

30,00%

35,00%

2009 (%)

2010 (%)



Fig. 4: Labor Market Efficiency (2011)17

17


Fig. 5: Flexibility (2011)18

18




Fig.6: Companies’ Spending on R&D (2011)19

Note: Belarus is excluded from analyses shown on Figures 3 through 6 due

to the lack of industry data

19


Fig. 7: Number of IT Specialists Employed in ITO (2009-2011)20

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

20

CEE ITO Review 2010 by the CEE ITO Association

0

5000

10000

15000

20000

25000

2009

2010

0 10 20 30 40 50 60

Czech Republic

Belarus

Poland

Hungary

Romania

Ukraine

16

12,2

16,7

16,3

14

12,8

53,1

37,7

54

54,5

46

40,1

Max Rate Min Rate



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

Kingdom

Germany Denmark Ukraine Belarus Poland Romania Hungary Czech

Republic

Senior software

developer’s average

salary + bonuses (€ /

month)

3,500

4,500

4,077

1,700

1,600

1,800

1,700

1,900

1,875

IT Project Manager’s

average salary +

bonuses (€ / month)

5,300

5,000

4,750

1,900

1,850

2,100

1,950

2,200

2,100

Office occupancy

cost (in € per 2

workstations/month,

primary rent +

outgoings)

1886

1194

1150

798

774

780

852

800

820

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

Belarus is 13th among 20 leading countries in the area of ITO and

high tech services. They are ahead of Poland, the fourth CEE country

including Russia (12th position), that took the 20th position. Other

CEE countries surveyed in this study did not enter the global list of

Top Outsourcing Locations. Based on this evaluation, the top

leading locations that IT Sourcing Europe would recommend for

primary consideration by Western European companies looking out

to outsource their IT function / software development are Ukraine

and Belarus.

Ukraine’s ITO Profile 2011

o Ukraine is a triple holder of the first position among CEE

countries in terms of market value, number of IT outsourcing

companies and number of professionals involved in IT outsourcing

services23

o According to the 2010 Global Services 100 list, Ukraine

ranks 1st among all CEE countries and 11th among the world’s Top

20 leading countries in the area of ITO and high tech services (by the

number of qualified IT resources available)24

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.

22

Global Services 100 Outsourcing Locations List 2010 23

CEE ITO Review 2010 by CEE ITO Association 24

Global Services 100 Outsourcing Locations List 2010

o Western-oriented government policies encourage

partnership and close business ties with the US and EU

companies25

o Ukraine has one of the most comprehensive laws on

Intellectual property and copyright protection in the world26

o The ITO Industry is rapidly transforming: new business /

service delivery models and approaches come to the scene, i.e

Cloud Computing, Managed/Own Team etc

o The Ukrainian hi-tech sector which began to form itself

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 The year 2010 ended with a huge confrontation between

the Ukrainian small and mid-sized entrepreneurs and the

government with regards to unfair modifications to the new Tax

Code. Many local IT companies and ITO services providers united

in an attempt to persuade the government of the seriousness of

consequences of the new Tax Code for the future of the most

dynamic industry [IT]. Fortunately to the industry, the government

came to hear the appeal and harmoniously upgraded and adopted

the new Tax Code28.

25”

Outsourcing To CEE. Country Overview: Ukraine,” a webinar by the

Ukrainian High-Tech Initiative, 2010 26

Ibid. 27

Levi9 Global Sourcing < www.levi9.com> 28

Ibid.



As a result of close cooperation between government and IT sector

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.

Fig. 9: Modern ITO trends in Ukraine

Belarus ITO Profile 2011

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

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

reached $4.4 billion, up 4.4% over the same period last year30

o According to Dataquest, the Belarusian ICT market is ranked

among the ten largest in Eastern Europe, Belarus' share being about

2%, Ukraine's - 4% and Russia's - 26%31

o Belarus has one of the best developed High-Tech Parks in Europe. It is government-supported and, unlike similar parks in Europe and Asia, is virtual. It means that the laws and rules of the Park are valid all over Belarus regardless of the Park member’s current location (whether it is a province or a capital city). It allows to fully utilize R&D, educational, professional and infrastructural potential of the whole country. 95% of software products developed within the High-Tech Park are exported: 45% are exported to the United States and Canada, 30% to Western Europe and 20% - to Russia and CIS countries32. Residents of Hi-Tech Park are exempt from many dues and taxes including: non-budgetary funds, income tax, VAT, customs dues for imported products etc.

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

0% 20% 40% 60% 80% 100%

market decentralization

improvement of IT industry

support by government

increase of in-house

development

increse in market consolidation

processes

increase in ITO consumption in

the internal market

increase in skilled specialists'

shortage

increase in IT infrastructure

support

growth of IT services export

9%

19%

25%

38%

49%

55%

66%

84%

%



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

Services, Business Week, Sourcing Line etc. For this study six CEE

countries with the biggest ITO market volumes were selected and

analyzed in terms of their factual capability to deliver innovative

and cost effective solutions and long-term value to Western and

Northern European companies looking out to outsource their IT /

software development and gain access to the global IT resources.

Within this Report all six selected countries were compared and

contrasted in terms of growth of ITO service export market, capacity

for innovation, labor market efficiency, operational flexibility,

spending on R&D, number of IT specialists employed in ITO industry,

Total Cost of Ownership and IT rates for the outsourced software

development. Although CEE EU member states such as Poland,

Hungary, Romania and Czech Republic demonstrated better IT

infrastructure and outsourcing flexibility options, the non-EU states

such as Ukraine and Belarus came to be two leading countries in

terms of low service rates / IT salaries and office occupancy costs,

vast IT resource pool and transparent and flexible service delivery

models tailored to excellent R&D and project management

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.

0% 20% 40% 60% 80% 100%

market decentralization

improvement of IT industry

support by government

increase of in-house

development

increse in market consolidation

processes

increase in ITO consumption in

the internal market

increase in skilled specialists'

shortage

increase in IT infrastructure

support

growth of IT services export

6%

76%

21%

45%

37%

70%

56%

91%

%



About IT Sourcing Europe

IT Sourcing Europe Limited is a UK-based company specializing in

nearshore IT outsourcing market analysis and consultancy. Our

services include:

• Independent IT Outsourcing market research and analysis

• Independent surveys of Western European outsourcers and

their IT outsourcing demand

• Independent surveys of Central and Eastern Europe's IT

Outsourcing services providers and their factual capability

to deliver top quality products and services on time and on

budget

• Consultancy and recommendations to companies planning

to change their current outsourcing strategies

• Consultancy and recommendations to companies planning

to outsource their IT function nearshore

• Custom market and competition research and surveys

We have access to more than 100 CEE ITO providers. To link to

them, fill out our FindVendor Form available on IT Sourcing Europe’s

website.

Contact Us:

IT Sourcing Europe Ltd

The Meridian, 4 Copthall House, Station Square, Coventry,

West Midlands,

CV1 2FL United Kingdom

Email: [email protected]

Tel.: +44(0)2476992505

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