Nov 2nd, 2006, Bucharest, RCI ANNUAL FORUM

1. Competitive Armenian Private Sector Program (CAPS) Armenia’s Example of Integration in Global Industry GAREGIN CHUGASZYANIT Cluster Coordinator Nov 2nd, 2006, Bucharest, RCI ANNUAL FORUM

2. Armenia2020_Nikosia_Presentation_040605 Armenia’s IT Industry Software and IT services sector: GDP share – nominal, percent, 2003 • 8.62 • More than 100 companies, with approximately 5000 employees… • Large, multinationals (Synopsis, Alcatel, Sun etc)consider this a place they need to be. • Brainbench – ranked 20th in the world in terms of IT certifications (among top ten per capita) • World Excellency in R&D and Creativity (WSA awards)… • Turkey* • US • Ireland* • Israel* • India • Russia • Estonia* • Armenia • Georgia* • Iran • Germany • CIS • countries • Neighbor • countries • IT high growth countries • Western • Countries * 2002 data, Georgia 2001 data Source: US Census Bureau, RUSSOFT, NASSCOM, Enterprise Ireland, IASH, Bitkom, ANCI, ASIROS, Bilisim, Datamonitor, Sanaray, Global Insight

3. Armenia2020_Nikosia_Presentation_040605 ARMENIA SHOWS A GOOD PRODUCTIVITY PERFORMANCE GIVEN QUITE YOUNG AND RATHER FRAGMENTED SECTOR Software and IT services sector: productivity – PPP, percent of US level, 2003 • n/a • US • Germany* • Ireland** • Israel** • India* • Russia* • Estonia • Armenia** • Western countries • IT high growth countries • CIS countries * MGI values: Germany scaled with GDP PPP = 2.06, India and Russia from in-depth MGI studies ** Ireland scaled with GDP PPP = 1.10; Israel playing equally on global market with US  PPP=1, Armenia: Exports at PPP = 1.5, domestic at PPP = 5.6 Source: US Census Bureau, RUSSOFT, NASSCOM, Enterprise Ireland, IASH, Bitkom, Datamonitor, Global Insight, MGI

4. Armenia2020_Nikosia_Presentation_040605 SECTOR EMPLOYS SIGNIFICANT SHARE OF WORKFORCE Software and IT services sector: employee share of workforce, percent, 2003 • US • Germany • Ireland* • Israel* • India • Russia • Estonia* • Armenia • Western countries • IT high growth countries • CIS countries * 2002 data Source: US Census Bureau, RUSSOFT, NASSCOM, Enterprise Ireland, IASH, Bitkom, Datamonitor, Global Insight

5. Balkan States • Established captive communities • Skilled labour with experience abroad Armenia2020_Nikosia_Presentation_040605 OFFSHORING FRAMEWORK FOR EASTERN EUROPE Only captive Captive or provider • Baltics • Well established provider landscape (Scandinavia oriented) • Limited risk • Limitations in talent pool already visible (circle size indicates IT labour pool) • Political stability • EIU rating • Czech Republic • High • Poland • Estonia • Lithuania • Latvia • Hungary • Romania • Bulgaria • Slovakia • Belarus** • Medium • Near-shore countries • Well established, inward oriented provider landscape • Sufficient pool and experience for captive offshoring • India • Former Soviet Union • Mostly oriented towards US, not Western Europe • Developed provider landscape and captive community • Armenia • Ukraine • Turkey • Russia • Low • Low • Medium • High • Cost advantage • Monthly wages in EUR for IT specialists* * For programmers with up to 2 years experience 2003 ** Political stability high, but very low transparency and fairness of legal system Source: McKinsey

6. 1 IT consulting 2 Systems integration 3 Networking consulting and integration 4 Customized applications development 5 IT education and training 6 Software support and implementation 7 Hardware support and implementation 8 IT outsourcing 9 Network infrastructure management services 10 Processing services 11 Applications outsourcing 12 Business Process Outsourcing (BPO) 13 Vertical business applications 14 Cross industry business applications 15 Consumer applications 16 Information and data management 17 Application design and construction tools 18 Network management and security 19 Systems management 20 Operating systems 21 Middleware and serverware 22 Embedded software Armenia2020_Nikosia_Presentation_040605 ARMENIA’S GLOBAL EXPORT FOCUS SHOULD BE ON CUSTOMIZED APPLICATION DEVELOPMENT AND EMBEDDED SOFTWARE Suggested first priority areas Potential second priority areas IT services • High • 12 • 10 • 22 • 18 • 8 • 16 • 14 • 6 • 13 • Attractiveness of industry segment • Global market size • Market growth rate • Industry profitability • 9 • 20 • 5 • 11 • 3 • 19 • 15 • 1 • 2 • 21 • 7 (Packaged) software • 4 • 17 • Low • Low • High • Armenia's ability to be a significant player(scale indicates "absolute" ability) • Technical skills • Customer relationship/marketing skills • Market concentration (only Packaged Software) • Language skills Note: Size of bubble indicates global market size Source: McKinsey

7. Armenia2020_Nikosia_Presentation_040605 What we are already doing….examplesIT Policy CAPS In-house Research Example: Growth Dynamics of the Number of Graduates and Enrolled First Year Students in IT related Departments during 2000-2006(right axis – number of enrolled, left axis – number of graduated)

8. Armenia2020_Nikosia_Presentation_040605 BOTH FOREIGN SUBSIDIARIES AND DOMESTIC COMPANIES ALREADY REACH GLOBALLY COMPETITIVE LEVELS OF PRODUCTIVITY • Foreign owned companies • INTERVIEW BASED ESTIMATES • Only comparison of programming productivity possible (at PPP) (further value creation steps executed abroad) • Productivity split • Armenia programming productivity • Tax, admin and regulatory issues • Process manage- mentand staff qualification • US programming productivity • Programming • productivity • 50% value proportional to salary difference • Product generation and marketing/ sales productivity • Domestically owned companies • Comparison of total productivity (at PPP) • Armenia programmingproductivity • Tax, admin and regulatory issues • Process manage-ment and staff qualification • Armeniaproduct generation and marketing/ salesproductivity • Product mix (small domestic market) • Strategic manage- ment • Brandingdiscount • US total productivity Source: McKinsey, Company interviews

9. Armenia2020_Nikosia_Presentation_040605 BUSINESS CASE SHOWS EVEN HIGHER SAVINGS POTENTIAL THAN OFFSHORING TO INDIA • ESTIMATES • RECURRING COSTS Percent of total process cost • -57% • ~ 45 • Total costs WesternEurope/US (~ USD 5 million/ year) • Labor cost savings* • Additio-nal mgmt. resour-ces** • Facility costs • Telecom-muni-cation costs and IT infra-structure • Travel costs*** • Cost level after offshoring to • Armenia • Cost level after offshoring to India * Offshore location with 50 developers ** Duplication of project management staff (5 people) at onshore costs *** For project business requiring significant coordination Source: McKinsey, interviews

10. 2,450 Armenia2020_Nikosia_Presentation_040605 BUSINESS CASE* SHOWS PAYBACK AFTER ONE AND A HALF YEARS USD thousands • CONSERVATIVE ESTIMATES • 1500 • 2850 • 200 • 600 • 300 • 100 • 3000*** • 2850 • Duration for setup ~ 6-9 months • 4200 • Location selection** • Location setup** incl. recruiting • Equip-ment • Training • Severance • costs • Total set-up • invest- • ment • First year savings(~57%of ~USD5 million) • Second year savings • Net benefitsafter two • years • Setup investments * For offshoring of 50 developers ** Including travel *** Severance costs at USD 60,000 per developer at home location Source: McKinsey

11. Armenia2020_Nikosia_Presentation_040605

12. Armenia2020_Nikosia_Presentation_040605 For IT to continue to grow, we need: • Still better collaboration among cluster companies, and between public and private players – particularly in marketing and in forming alliances to bid on large IT projects • Access to a workforce with appropriate skills • Better management of existing workers so that companies can attract and retain the best professionals • Three levels of intervention: • Cluster level, Subcluster level, company level

13. Armenia2020_Nikosia_Presentation_040605 ICT Cluster Development: Vision • Our Vision is: • To develop a self-directing and mutually supporting cluster of businesses and other partners, which brings measurable competitive advantage to ICT businesses and wider economic benefits for Armenia. • Clustering is a process not a goal

14. Armenia2020_Nikosia_Presentation_040605 Stages of Cluster Development

15. Armenia2020_Nikosia_Presentation_040605 Developing a Strategy for Cluster Development

16. Armenia2020_Nikosia_Presentation_040605 What we are already doing….. • Capacity Building • Cluster and working group meetings – revitalizing the ITDSC for better public-private communication and embedding an IT cluster approach • Business Service Provider training –BSPs trained to improve offerings in IT marketing, particularly in attracting more outsourcing, and more to be trained. These BSPs will provide mentored company assistance starting in September • Association strengthening sessions (to expand their membership and provide new services to small and medium sized IT companies)– services, training, business plan • Expanding Capable Workforce for IT Growth • Awards and competitions to stimulate creativity in programming, microelectronics • Assessment of supply of IT workers from Armenian higher education institutions • Regional IT Camps

17. Legitimacy: Accountability and involvement The wider Partnership and its Working Groups E.g. the sector Oversight: Strategic leadership The Advisory Board Taskforces Execution: Making it happen & core delivery CAPS Implementation, Approval & Contracting USAID Delivery: Project management Delivery Agent Delivery Agent Delivery Agent Linking & Disseminating to wider Partners Armenia2020_Nikosia_Presentation_040605 What we are already doing….examplesTHE CLUSTER APPROACH IMPLEMENTATION STRUCTURE :WORKING GROUPS AND ADVISORY BOARD

18. Armenia2020_Nikosia_Presentation_040605 What we are already doing….examplesMarketing & Promotion • A pilot training session carried out on May 24-25th for eight participants • CAPS ICT Marketing Website (www.globaltrade.net/caps)

19. Armenia2020_Nikosia_Presentation_040605 What we are already doing….examplesWorkforce development • IT Camps in Six Regions – 67 students in week-long summer courses in six regions across the country. Achieved goals of expanding skills in IT, building capacity of local NGOs to offer training ,and promoting IT as attractive career.(Charentsavan, Goris, Sisian, Kapan, Berd, Sevan)

20. Armenia2020_Nikosia_Presentation_040605 What we are already doing….examples(see www.itmonth.am) IT Month- The first truly countrywide cluster activity • IT Month • Active Industry Involvement, Competitions, Involvement at • Conferences, Awards) • IT Contest and IT school • “Microelectronics 2006”, the first Armenian Olympiad • Presidential Award to the best students • “IT Entrepreneurship in Armenia”, • international conference within the • rameworks of Armenia-Diaspora Business Forum • Open Source Marathon • All-Armenian E-content Contest • Global E-content Summit • DigiTecExpo 2006 • Armenia-Egypt Business Forum • Internet Quick Search Capabilities Contest • UN IT Conference • Interuniversity IT Contest • IT Month PR and Promotion Campaign • Annual RA Presidential Awards in IT Sector • First Armenian Microelectronics Olympiad • Booklet Publication • Global E-content Summit

21. Armenia2020_Nikosia_Presentation_040605 What is in the pipeline….. • Create multi-media communications and marketing plan in cooperation with IT associations • Develop strategic investment and supplier relationships • IT Cluster Assessment and analysis of legal and regulatory environment • Market studies and support for new market penetration • Workforce curriculum development • Improve (and institutionalize) data collection

22. Armenia2020_Nikosia_Presentation_040605 ICT Cluster Development Diagnostics: SWOT, GAP, Workforce, Etc. • Action Initiatives • Action A • Action B • Action C • Etc. Value Chain Analysis Competitive Positioning Diamond Analysis Market and Industry Analysis Many other tools, as needed Competitiveness Objectives and Strategy

23. Armenia2020_Nikosia_Presentation_040605 Proposed Cluster Map Basic Components CURRENT INDUSTRY ACTIONS (GAP) MARKET DEMAND SUPPORT STRUCTURES

24. Armenia2020_Nikosia_Presentation_040605 • THANK YOU !