outsourcing to eastern europe: financial services industry perspective

8/9/2019 Outsourcing to Eastern Europe: Financial Services Industry Perspective

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Outsourcing to Eastern Europe: Financial Services

Industry Perspective.

Alex Golod, VP, Global DeliveryGeorgy Li, Area Manager, Canada and the U.S.


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Eastern Europe Attractive Outsourcing Destination

More then 500 offshore outsourcing centers

By the end of 2008, the Central and Eastern European ITO marketexceeded $3.5 billion, with Russia also exporting over $3.6 billion of IT andbusiness services.

Notable market growth, despite challenging world economy environment

Growing portfolio of outsourcing services

0

50,000

100,000

150,000

200,000

250,000

2005 2006 2007 2008 2009 (est.)

O&O jobs in Eastern EuropeFTEs, thousands, cumulative

Source: McKinsey


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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 SupportServices (Poland, Romania)

IT Outsourcing (Ukraine, Russia,Belarus, Romania)

R&D Outsourcing (Russia, Hungary,Czech Republic)


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Industry Growth: Comparison to India

BPO(F&A, HR, CC) ITO R&D, ESO Overall

India 12% % 8% 11%

Eastern Europe 25% 22% 1 % 22%

0%

5%

10%

15%

20%

25%

30%

Outsourcing industry growth in the Eastern Europe andIndia 2008 to 2007, %

Source: McKinsey


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Trends

The CEE countries are notable for technology-oriented educationalsystem and a solid Research & Development foundation.

The engine of rapid growth of outsourcing industry in the CEE region inrecent years were countries of Eastern Europe (Ukraine, Belarus), as wellas new EU members (Bulgaria, Romania).

More established players, such as the Czech Republic, Poland andHungary have smaller pool of available specialists, but they can rely onsignificant experience, A+ rated customer list and well developedinfrastructure.

While the countries of Eastern Europe are engaged mainly in ITO, withfirst baby steps in BPO, the Central European countries demonstratecertain maturity in BPO market with captive centers of large multinationalcompanies.


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Labor Cost and Country Risks

Although many countries in EE are nolonger "low cost", their valueproposition still holds true due tocultural, regulatory and geographicproximity to Western Europe andUSA.

High-skilled multilingual labor forcewith good engineering and R&Dtalent and with competitive coststructure remains a trademark of theregion.

11 Eastern European cities areincluded in the top 25 safest

outsourcing destinations by BlackBook of Outsourcing.


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Crisis Impact on Industry

Beyond quick wins, Western companies will continue to face structuralcost pressures.

Global decrease in demand due to shrinking economies and politicalinfluence to keep skilled work force in house are serious concernsamong 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 focusedfirst of all on immediate savings not on long-term development

programs and projects.


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Crisis Impact on Outsourcing Industry

-40 -30 -20 -10 0 10

kr i

Pol d

Hu g ry

B l rus

Russi

Rom i

Cz ch R public

Salary level change in EUR

Since January 2008, %

-50 -40 -30 -20 -10 0

kr i

Pol d

Hu g ry

B l rus

Russi

Rom i

Cz ch R publ ic

Local currencydevaluation vs. EUR

Mar 2009/Jan 2008, %

Depreciation of localcurrencies improves theeconomics of moving to EE

Crisis increasesattractiveness of locations

Reduced attrition

Increased labor supply at allqualification levels

Reduced salary expectations

Reduced cost of runningbusiness

Source: McKinsey and Belarusian Ministry of Statistics


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Industry Trends

Captives continue to be the favored operating mode for EE offshoring, whilethe presence of top outsourcing companies and number of theirdevelopment centers is growing steadily. The death of captives trendprevalent elsewhere in the world, is not really a threat in EE yet.

Growth of outsourcing in the smaller established EE countries (CzechRepublic, Hungary) slowing down due to higher costs and heated labormarket.

Overall business process outsourcing expected to grow quite rapidly due to

regions untapped potential to offer sophisticated BPO and KPO services.

Ukraine can become the engine of this process as a country possessing largetalent pool with very slow adoption of BPO services.

Poland, Romania and other current BPO leaders will continue to attract newcenters, 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.


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F&A Outsourcing to Eastern Europe

Prominent financial services industry leaders alreadyestablished their outsourced service centers in EE region

F&A Outsourcing capabilities of Eastern Europe attractleading companies to build accounting captive centers inthe region

Total number of FTE working in Eastern Europe in F&Aoutsourcing sphere reached 6000


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Country Overview

Population: 46 million.

Languages: Ukrainian (official), Russian, others.Education: Adult Literacy Rate ,4%. About 5% of adult Ukrainianshave 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%.

UKRAINE - THE LARGEST COUNTRY IN EASTERN EUROPE


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Overview of Economy

Ukraine is an emerging free market, with a gross domestic productthat has experienced rapid growth in recent years.

Western-oriented government policies encourage partnerships andcloser 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 regions leaders involume offoreign direct investment and portfolio investment

In 2003-2008 Ukraine had the highest IT industry growth rate amongCentral and Eastern European countries. Ukrainian IT market rankedfourth after Russia, Poland and the Czech Republic.


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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 2009o

8.6%8.6%

0.0%0.0%

1 .8%1 .8%

8.3%8.3%

12. %12. %

0.2%0.2%

3. %3. %

13.6%13.6%

16.5%16.5%

Source: Ministry of Economy of Ukraine

o

o

o

-

o

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 GDPgrowth in 2010 will not exceed 2,5%, while GDP growth in 2011 is predicted around 3,8%.


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Ukrainian Outsourcing Industry

HumanR

esources. Growing pool of qualified human resources as wellas European mentality and competitive rates turned Ukraine into anexciting emerging outsourcing destination.

Intellectual Property. Ukraine has recently ungraded IP laws, makingthem compatible with Western tradition. Contrary to popular belief,Intellectual Property is highly respected among IT providers in Ukraine.

Basic Operational Commodities. Reliable infrastructure, solidtelecommunications and a sound legal system are now widely availablethroughout the country.


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Industry Growth Rate

The Ukrainian offshore outsourcing market has experienced steady growth in2003-200 as a result of strong interest and demand from both US and EUmarkets. The world economic crisis severely affected the industry, but unlikeother segments of the local IT market, as well as other industries of theUkrainian economy in general, offshore outsourcing industry survived with theminimal losses.

While ITO remains the main force of Ukrainian outsourcing, high-qualitysmall and mid-size BPO projects have started to appear recently.

0

100

200

300

400

500

600

2003 2004 2005 2006 200 2008 200 (est.)

Ukrainian Outsourcing Services Exports Growth, in $ mil.

Accoding to IDC, Market Visio and Ukrainian Hi-tech Initiatice researches


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Financial Services Industry Specific Trends

Growing talent pool. Eastern Europe is increasingly able to provide astable pool of trained resources with critical financial industry knowledge,despite previous lack of tradition and internal markets compatible withWestern financial systems.

Increasing market sophistication. Industry specific knowledgeexpanding in local markets:

1) Local banks and financial institutions have been investing inmodern technology systems2) Global banks entered local markets, bringing established workschemes and systems.

Expanding product development. Many popular products, includingportfolio systems, FIX engines, and analytical and risk managementpackages have been developed in Ukraine, Russia and Belarus.

(Unfortunately, product vendors still wary of telling clients they usedengineers in Ukraine or Russia.),


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Financial Services Industry Specific Trends

In Eastern European countries within the EU, the base of outsourcingindustry are captive offices and development centers of global outsourcinggiants.

In Ukraine, Belarus and Russia, industry is represented by local providerswith headquarters in US or Western Europe and with all developmentfacilities in Eastern Europe.

Local firms working with Western financial companies are focused primarilyon IT and technology R&D work, which is the vast majority of outsourcing inthe region.

Quantitative analytics/KPO represents the second, and fast-growing, areaof interest.

Custom software development services are rendered on a project basis orvia creation of dedicated teams and centers.


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Financial Services Industry Outsourcing in Ukraine andRussia

Leading financial servicesindustry outsourcing providerswith development centers inUkraine, Belarus & Russia

Luxoft

DataArt

EPAM Systems

Partial List of their clients

AIG

Deutsche Bank

BNP Paribas

HedgeSpeed Technologies

InfoHedge Technologies

Orbian

Thomson Reuters

Visa International

World Bank Group

Deutsche Bank Received Innovation Award For Breakthrough CRM System BuiltWith Luxoft.

More than 250 Luxoft employees are working on Deutsche Bank projects, and thisnumber is growing.

DataArt has five leading American hedge-fund clients.


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Talent Pool

Over 20,000 Ukrainians are employed in ITO and BPO areas.

Ukraines rapidly improving engineering skills have been a key factor inattracting foreign companies and direct investments.

Ukraines traditions of physical, mathematical, and programming schools arevery strong. The main source for qualified IT labor is universities with 50-0% 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 worlds population, the country has 6% of the worldsphysicists, mathematicians, computer programmers and other highly trainedprofessionals.

College graduates with non-technical degrees and foreign language skills

attract attention of BPO firms.


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Ukrainian Outsourcing Industry Trends

Software development rates in Ukraine are still globally competitive. At thesame time, the quality of IT services and products is increasing, along withthe qualifications of IT specialists.

Large qualified work force in Ukraine is gathering attention from BPOsegment of market. More EU and US companies are considering Ukraine asthe preferred location for their BPO operations in Eastern Europe.

Acquisition of several successful Ukrainian service providers by such globalplayers as EDB and GlobalLogic confirms growing interest in Ukraine fromindustry leaders.

The continuing decentralization of the outsourcing industry in Ukraineremains a positive factor for market development.

Due to crisis, escalation of wages stopped, at least temporarily, and mostindustry observers believe that going back to double-digit growth rate willtake some time.


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Key Outsourcing Centers

CityPopulation,

Millions

Part of

Outsourcing

Industry

Resources

(Mostly IT) %

Average

Salary

Relative to

Kyiv

Property Price

Level Relative

to Kyiv

Kyiv 2.8 45 1 1

Lviv 0. 18 0.66 0.38

Kharkiv 1. 1 0.63 0.45

Dnipropetrovsk 1.2 8 0.6 0.50

Odessa 1.1 3 0.6 0. 0


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Conclusions

Combination of large talent pool and various value-added factors makeUkraine one the most promising outsourcing hubs in Eastern Europe.

World crisis stopped rapid growth of outsourcing industry, but in 2010growth should resume. Both offshore outsourcing and local outsourcingmarkets should benefit from this trend.

As any other crisis, this recession led to the survival of the fittest, as thestrongest 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 estatemake Ukraine more attractive for establishing ITO and BPO centers andlong-term partnerships.

Watch out for Ukraine to gain more worldwide recognition and prominenceas both ITO and BPO destination in next 3 to 5 years.


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About Intetics Co.

Intetics Co. is a leading global outsourcing company focused on creation andoperation of remote IT business units for application development, softwaretesting, system administration and data processing.

Since 1 5 Intetics has been successfully acting as a technology partner formore than 200 Clients worldwide, demonstrating passion towards innovation andchange. Our professional services are designed to provide expert resources,

leading-edge technologies and well-established processes to help our Clientsrealize their most complex business visions.

The company is ISO 001:2000 certified and Microsoft Gold Certified Partner.The companys innovation and growth achievements are reflected in winningprestigious Deloitte Technology Fast 50, Inc 500 and CRN 100 awards andinclusion into the Top 100 Global Emerging Service Providers and Top 100

Global Outsourcing Companies lists.See more information at www.intetics.com


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Thank you!

outsourcing to eastern europe: financial services industry perspective

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