Outsourcing to Eastern Europe: Financial Services Industry Perspective. Alex Golod, VP, Global Delivery • Georgy Li, Area Manager, Canada and the U.S.
Eastern Europe – Attractive Outsourcing Destination • More then 500 offshore outsourcing centers • By the end of 2008, the Central and Eastern European ITO market exceeded $3.5 billion, with Russia also exporting over $3.6 billion of IT and business services. • Notable market growth, despite challenging world economy environment • Growing portfolio of outsourcing services Source: McKinsey
Region Overview • Eastern Europe: • Belarus, • Bulgaria, • Czech Republic, • Hungary, • Moldova, • Poland, • Romania, • Russia, • Slovakia, • Ukraine. • Services provided: • Back Office or "Non-Core" Functions, such as F&A and HR • (Poland, Czech Republic, Hungary) • Call Centers and Customer Support Services (Poland, Romania) • IT Outsourcing (Ukraine, Russia, Belarus, Romania) • R&D Outsourcing (Russia, Hungary, Czech Republic)
Industry Growth: Comparison to India Source: McKinsey
Trends • The CEE countries are notable for technology-oriented educational system and a solid Research & Development foundation. • The engine of rapid growth of outsourcing industry in the CEE region in recent years were countries of Eastern Europe (Ukraine, Belarus), as well as new EU members (Bulgaria, Romania). • More established players, such as the Czech Republic, Poland and Hungary have smaller pool of available specialists, but they can rely on significant experience, A+ rated customer list and well developed infrastructure. • While the countries of Eastern Europe are engaged mainly in ITO, with first baby steps in BPO, the Central European countries demonstrate certain maturity in BPO market with captive centers of large multinational companies.
Labor Cost and Country Risks • Although many countries in EE are no longer "low cost", their value proposition still holds true due to cultural, regulatory and geographic proximity to Western Europe and USA. • High-skilled multilingual labor force with good engineering and R&D talent and with competitive cost structure remains a trademark of the region. • 11 Eastern European cities are included in the top 25 safest outsourcing destinations by Black Book of Outsourcing.
Crisis Impacton Industry • Beyond quick wins, Western companies will continue to face structural cost pressures. • Global decrease in demand due to shrinking economies and political influence to keep skilled work force “in house” are serious concerns among outsourcing services providers. • Recession and growth slowdown invokes more – and more targeted – government support for O&O industry in the region. • Major transformations of Western companies make managers focused first of all on immediate savings not on long-term development programs and projects.
Crisis Impacton Outsourcing Industry • Depreciation of local currencies improves the economics of moving to EE • Crisis increases attractiveness of locations • ▪ Reduced attrition • ▪ Increased labor supply at all qualification levels • ▪ Reduced salary expectations • ▪ Reduced cost of running business Source: McKinsey and Belarusian Ministry of Statistics
Industry Trends • Captives continue to be the favored operating mode for EE offshoring, while the presence of top outsourcing companies and number of their development centers is growing steadily. “The death of captives” trend prevalent elsewhere in the world, is not really a threat in EE yet. • Growth of outsourcing in the smaller established EE countries (Czech Republic, Hungary) slowing down due to higher costs and “heated” labor market. • Overall business process outsourcing expected to grow quite rapidly due to region’s untapped potential to offer sophisticated BPO and KPO services. • Ukraine can become the engine of this process as a country possessing large talent pool with very slow adoption of BPO services. • Poland, Romania and other current BPO leaders will continue to attract new centers, particularly in less established locations. • Russia: only country able to scale up existing centers to several thousand FTEs, but will not attract many newcomers. Also, growth of R&D outsourcing is expected.
F&A Outsourcing to Eastern Europe Prominent financial services industry leaders already established their outsourced service centers in EE region F&A Outsourcing capabilities of Eastern Europe attract leading companies to build accounting captive centers in the region Total number of FTE working in Eastern Europe in F&A outsourcing sphere reached 6000
Country Overview UKRAINE - THE LARGEST COUNTRY IN EASTERN EUROPE • Population: 46 million. • Languages: Ukrainian (official), Russian, others. • Education: Adult Literacy Rate – 99,4%. About 75% of adult Ukrainians have secondary or higher education. • Work force: 22,4 million. Industry and construction – 25,6%; agriculture and forestry – 23,1%; health, education, and culture – 14%; transport and communication – 6,5%.
Overview of Economy • Ukraine is an emerging free market, with a gross domestic product that has experienced rapid growth in recent years. • Western-oriented government policies encourage partnerships and closer business ties with US and EU companies. • In 2008 Ukraine joined the World Trade Organization. • Ukraine now has the potential to be one of the region’s leaders in volume of foreign direct investment and portfolio investment • In 2003-2008 Ukraine had the highest IT industry growth rate among Central and Eastern European countries. Ukrainian IT market ranked fourth after Russia, Poland and the Czech Republic.
Main Economic Indicators GDP(third quarter of 2009 vs second quarter 2009) Industrial Output (November 2009 vs November 2008) Gross Agricultural Output (Jan- Nov 2009 vs Jan-Nov 2008) Retail Turnover of Goods (Jan- Nov 2009 vs Jan-Nov 2008) Real State Budget Revenues (January-July 2009) Real Disposable Incomes of Population (January-September 2009) Consumer Price Index (November 2009 vs November 2008) Manufacturer Price Index(November 2009 vs November 2008) Hryvna depreciated to USD in 2009 3.7% 8.6% - 0.0% ↓ 16.5% ↓ 17.8% ↓ 8.3% 13.6% 12.9% 0.2% Source: Ministry of Economy of Ukraine • First quarter of 2010 will be the first quarter of GDP growth after a prolonged recession. However, experts from the World Bank believe that the process will be slow, and GDP growth in 2010 will not exceed 2,5%, while GDP growth in 2011 is predicted around 3,8%.
Ukrainian Outsourcing Industry • Human Resources. Growing pool of qualified human resources as well as European mentality and competitive rates turned Ukraine into an exciting emerging outsourcing destination. • Intellectual Property. Ukraine has recently ungraded IP laws, making them compatible with Western tradition. Contrary to popular belief, Intellectual Property is highly respected among IT providers in Ukraine. • Basic Operational Commodities. Reliable infrastructure, solid telecommunications and a sound legal system are now widely available throughout the country.
Industry Growth Rate The Ukrainian offshore outsourcing market has experienced steady growth in 2003-2007 as a result of strong interest and demand from both US and EU markets. The world economic crisis severely affected the industry, but unlike other segments of the local IT market, as well as other industries of the Ukrainian economy in general, offshore outsourcing industry survived with the minimal losses. • While ITO remains the main force of Ukrainian outsourcing, high-quality small and mid-size BPO projects have started to appear recently.
Market Acknowledgement The achievements of the Ukrainian outsourcing industry are noted by the market experts: • Ukraine is included in Gartner’s top 30 locations for offshore services in both 2007 and 2008. • Kyiv was included by Tholons in Top 50 Global Emerging Outsourcing Cities list. • Ukraine now appears in Gaming Industry’s top 12 European Countries. • Ukraine is among A.T. Kearney Top 50 Global Services Locations as of 2009, inching up 5 positions, but still only on the 42nd place. There is definitely room to grow in rankings!
Financial Services Industry Specific Trends • Growing talent pool. Eastern Europe is increasingly able to provide a stable pool of trained resources with critical financial industry knowledge, despite previous lack of tradition and internal markets compatible with Western financial systems. • Increasing market sophistication. Industry specific knowledge expanding in local markets: • 1) Local banks and financial institutions have been investing in modern technology systems 2) Global banks entered local markets, bringing established work schemes and systems. • Expanding product development. Many popular products, including portfolio systems, FIX engines, and analytical and risk management packages have been developed in Ukraine, Russia and Belarus. (Unfortunately, product vendors still wary of telling clients they used engineers in Ukraine or Russia.),
Financial Services Industry Specific Trends • In Eastern European countries within the EU, the base of outsourcing industry are captive offices and development centers of global outsourcing giants. • In Ukraine, Belarus and Russia, industry is represented by local providers with headquarters in US or Western Europe and with all development facilities in Eastern Europe. • Local firms working with Western financial companies are focused primarily on IT and technology R&D work, which is the vast majority of outsourcing in the region. • Quantitative analytics/KPO represents the second, and fast-growing, area of interest. • Custom software development services are rendered on a project basis or via creation of dedicated teams and centers.
Financial Services Industry Outsourcing in Ukraine and Russia Leading financial services industry outsourcing providers with development centers in Ukraine, Belarus & Russia • Luxoft • DataArt • EPAM Systems Partial List of their clients • AIG • Deutsche Bank • BNP Paribas • HedgeSpeedTechnologies • InfoHedge Technologies • Orbian • Thomson Reuters • Visa International • World Bank Group • Deutsche Bank Received Innovation Award For Breakthrough CRM System Built With Luxoft. • More than 250 Luxoft employees are working on Deutsche Bank projects, and this number is growing. • DataArthas five leading American hedge-fund clients.
Talent Pool • Over 20,000 Ukrainians are employed in ITO and BPO areas. • Ukraine’s rapidly improving engineering skills have been a key factor in attracting foreign companies and direct investments. • Ukraine’s traditions of physical, mathematical, and programmingschoolsarevery strong.The main source for qualified IT labor is universities with 50-70% of the labor pool composed of computer science and math graduates. However, the quality of education varies, from low to outstanding. • With only 1% of the world’s population, the country has 6% of the world’s physicists, mathematicians, computer programmers and other highly trained professionals. • College graduates with non-technical degrees and foreign language skills attract attention of BPO firms.
Ukrainian Outsourcing Industry Trends • Software development rates in Ukraine are still globally competitive. At the same time, the quality of IT services and products is increasing, along with the qualifications of IT specialists. • Large qualified work force in Ukraine is gathering attention from BPO segment of market. More EU and US companies are considering Ukraine as the preferred location for their BPO operations in Eastern Europe. • Acquisition of several successful Ukrainian service providers by such global players as EDB and GlobalLogic confirms growing interest in Ukraine from industry leaders. • The continuing decentralization of the outsourcing industry in Ukraine remains a positive factor for market development. • Due to crisis, escalation of wages stopped, at least temporarily, and most industry observers believe that going back to double-digit growth rate will take some time.
Conclusions Combination of large talent pool and various value-added factors make Ukraine one the most promising outsourcing hubs in Eastern Europe. World crisis stopped rapid growth of outsourcing industry, but in 2010 growth should resume. Both offshore outsourcing and local outsourcing markets should benefit from this trend. As any other crisis, this recession led to “the survival of the fittest”, as the strongest companies are able to distinguish from competition and grow, while bringing value to their client base. Stagnant wage growth and decreased prices on commercial real estate make Ukraine more attractive for establishing ITO and BPO centers and long-term partnerships. Watch out for Ukraine to gain more worldwide recognition and prominence as both ITO and BPO destination in next 3 to 5 years.
About Intetics Co. Intetics Co. is a leading global outsourcing company focused on creation and operation of remote IT business units for application development, software testing, system administration and data processing. Since 1995 Intetics has been successfully acting as a technology partner for more than 200 Clients worldwide, demonstrating passion towards innovation and change. Our professional services are designed to provide expert resources, leading-edge technologies and well-established processes to help our Clients realize their most complex business visions. The company is ISO 9001:2000 certified and Microsoft Gold Certified Partner. The company’s innovation and growth achievements are reflected in winning prestigious Deloitte Technology Fast 50, Inc 500 and CRN 100 awards and inclusion into the Top 100 Global Emerging Service Providers and Top 100 Global Outsourcing Companies lists. See more information at www.intetics.com