central eastern europe outsourcing
DESCRIPTION
Presentatation at Culminatum Alumni meeting 30.5.2008TRANSCRIPT
/ / © Finpro ry
Software R&D and Nearshoring in Central and South Eastern Europe -
Still Unknown Opportunity in the Finnish ICT Business?
Tommi Pelkonen Business Consultant
Finpro Hungary
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Software R&D and Nearshoring in Central and South Eastern Europe
★ Introduction and definitions
★ Outsourcing basics
★ CEM as market area
★ Conclusions and recommendations
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Eastern Europe?
History gives us keys to understand current situation in the area
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Eastern Europe?
History gives us keys to understand current situation in the area
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Eastern Europe?
History gives us keys to understand current situation in the area
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Eastern Europe?
History gives us keys to understand current situation in the area
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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
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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
How does it look like (for example)?
Trend: from simple functions into complex operation sourcing
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How does it look like (for example)?
Trend: from simple functions into complex operation sourcing
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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
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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
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Challenges in South-East Asia?
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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
Some facts about outsourcing...
Outsourcing is constantly increasing and reaching new areas
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Some facts about outsourcing...
Outsourcing is constantly increasing and reaching new areas
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Some facts about outsourcing...
Outsourcing is constantly increasing and reaching new areas
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Rationale for outsourcing
Cost, quality and ease of management
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Rationale for outsourcing
Cost, quality and ease of management
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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
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What to outsource?
R&D outsourcing via Build-Operate-Transfer is gaining ground
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What to outsource?
R&D outsourcing via Build-Operate-Transfer is gaining ground
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Outsourcing benefits difficult to realise...
Focus should be put more on total costs, not nominal values
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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
The Emerging Europe?
23 countriesTotal population of76 million internet users.
At EU’s homefront there is a major emerging market!
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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• Geographic proximity to Finland• Good transportation possibilities
Fast growing markets• GDP growth rates 4-9 %
Cost advantages• Employment costs 30-40 % lower than in the Western Europe• Centralization of supporting activities bring cost advantage e.g.
buying of goods, services or logistics
Westernization of customer behavior• Appreciation of western products and life-style
Attractive location for IT operations!
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+50%SloveniaCzechEstonia
+40%SlovakiaLatviaPoland
+30%LithuaniaCroatiaCyprusGreeceHungaryMalta Belarus
+20%RomaniaBulgariaBosniaTurkey
< 20%UkraineMacedoniaSerbiaAlbaniaMoldovaMontenegro
Internet Penetration
Broadband+60% of all connections
+4%HungaryEstonia
+2%PolandSloveniaCzechBulgaria
+1%LithuaniaRomania SlovakiaLatvia Greece
+0.2%BosniaTurkeyBelarusCroatiaUkraineMacedoniaSerbiaAlbaniaMoldovaMontenegro
Online Advertising Share (2006)
(source InternetWorldStats, CIA)
High-tech scene and popularity also catching up
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Constant supply of IT talent
Yearly graduates in ICT sectorYearly graduates, all engineers
(source Finpro & Tekes, 2007)
/ / © Finpro ry
Junior Software Developer500
700
900
300
1100
1300
1500
EUR
300-600EUR
Bulgaria
389-777EUR
29.55%
Romania
300-600EUR
Romania
420-841EUR
40.25%
St.Petersburg
756-882EUR
26%
Lithuania
550-630EUR
Lithuania
737-825EUR
31%
24,1%
Czech rep.
800-950EUR
Czech rep.
1080-1283EUR
35%
1700
St.Petersburg
600-700EUR
36,67% Ukraine
1079EUR
Ukraine
790EUR
Hungary
900-1000EUR
Hungary
1202-1335EUR
33,5%
Estonia
1000EUR
Estonia
1330EUR
33% Latvia
1085-1353EUR
Latvia
1346-1679EUR
Slovakia
739-1267EUR
Slovakia
550-950EUR
34,4%
Gross salaries and employer side costs (tax %) per country
POLAND: Total labor cost 19.83% -22.72% of gross wage, depending on the accident insurance chosen level. Case Poland used average 21.28%
Poland
750EUR
Poland
909EUR
21,28%
Salary levels are on the rise, yet still competitive
(source Finpro & Tekes, 2007)
/ / © Finpro ry
Senior Software Developer1000
1200
1400
800
1600
1800
2000
EUR
600-1000EUR
Bulgaria
777-1296EUR
29.55%
Romania
600-1000EUR
Romania
841-1403EUR
40.25%
St.Petersburg
1134-1890EUR
26%
Lithuania
870-1160UR
Lithuania
1140-1520UR
31%
Czech rep.
1000-2100EUR
Czech rep.
1350-2835EUR
35%
2200
St.Petersburg
900-1500EUR
Slovakia
950-2000EUR
36,67% Ukraine
1640EUR
Ukraine
1200EUR
Hungary
1350-1500EUR
Hungary
1802-2002EUR
33,5%
Estonia
1300EUR
Estonia
1729EUR
33%
Latvia
1353EUR
1679EUR
24,1%Latvia
Slovakia
1277-2688EUR
34,4%
POLAND: Total labor cost 19.83% -22.72% of gross wage, depending on the accident insurance chosen level. Case Poland used average 21.28%
Poland
1250EUR
Poland
1516EUR
21,28%
Gross salaries and employer side costs (tax %) per country
Salary levels are on the rise, yet still competitive
(source Finpro & Tekes, 2007)
/ / © Finpro ry
Project manager1400
1600
1800
2000
2200
2400
EUR
1000-1500EUR
Bulgaria
1250-1943EUR
29.55% Romania
800-2500EUR
Romania
1122-3506EUR
40.25%
St.Petersburg
1890-2646EUR
26%
Lithuania
1520-2279UR
31% Poland
1500- 2500EUR
36,67% Ukraine
2159EUR
Czech rep.
1200-2500EUR
Czech rep.
1620-3375EUR
35%
2600
St.Petersburg
1500-2100EUR
Slovakia
1300-2500EUR
Ukraine
1580EUR
Hungary
1750-2150EUR
Hungary
2336-2870EUR
33,5%
Estonia
1700
Estonia
2261EUR
33%
Latvia
1500EUR
1862EUR
24,1%Latvia
Slovakia
1747-3360EUR
34,4%
1200
Lithuania
1160-1740EUR
POLAND: Total labor cost 19.83% -22.72% of gross wage, depending on the accident insurance chosen level. Case Poland used average 21.28%
Poland
1819-3032EUR
21.28%
Bulgaria
Gross salaries and employer side costs (tax %) per country
Salary levels are on the rise, yet still competitive
(source Finpro & Tekes, 2007)
/ / © Finpro ry
Market vary on their attractiveness
Source: Roland Berger, 2008
/ / © Finpro ry
“Foreign investors are increasingly worried that they won't be able to find necessary qualified personnel for projects that they wish to develop in Romania, Ana Maria Cristina declared, the president of ARIS.
"One of the main worries of foreign investors is linked to the existence of average qualification labor force, knowing that many Romanians are searching for jobs that are better paid outside the country"
RomaniaHigh level of corruption, low level of English skills.
Getting car insurance may be impossible
Little success cases by Finnish companies.
Ukraine
Manpower adequately skilled but needs re-training on project management and quality management of IT projects.
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.
Hungary
EXAMPLES OF REAL LIFE
(source Finpro & Tekes, 2007)
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Rising labor and living costs.
Intellectual property rights uncertainty. The lack of clear definitions of rights, responsibilities and liabilities in the intellectual property sphere is a potential weakness. Under-developed service culture.
Brain drain and lack of marketing skills
Czech Rep. + Slovakia
The administrative burden is huge. Company has the equivalent of three full-time employees dealing with the state bureaucracy. Their work includes meeting arcane record-keeping requirements on workers' pay and conditions, and getting the right stamps on the right bits of paper for the sleepy customs service.
But more worrying is the education system. Teachers' skills are outdated and corruption is rampant.
The shortage of good people is chronic
Bulgaria
EXAMPLES OF REAL LIFE
(source Finpro & Tekes, 2007)
/ / © Finpro ry
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
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
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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?
Source: Roland Berger, 2006
Sound business thinking should always drive outsourcing operations
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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 !
Questions, thoughts, comments...
