Transcript Outsourcing to Eastern Europe: Financial Services

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
O&O jobs in Eastern Europe
FTEs, thousands, cumulative
250,000
200,000
150,000
100,000
50,000
0
2005
2006
2007
Source: McKinsey
2008
2009 (est.)
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
Region Overview
Eastern Europe:
Belarus,
Bulgaria,
Czech Republic,
Services provided:
Back Office or "Non-Core" Functions,
such as F&A and HR
(Poland, Czech Republic, Hungary)
Hungary,
Moldova,
Call Centers and Customer Support
Services (Poland, Romania)
Poland,
Romania,
Russia,
IT Outsourcing (Ukraine, Russia,
Belarus, Romania)
Slovakia,
Ukraine.
R&D Outsourcing (Russia, Hungary,
Czech Republic)
Industry Growth: Comparison to India
Outsourcing industry growth in the Eastern Europe and
India 2008 to 2007, %
30%
25%
20%
15%
10%
5%
0%
India
Eastern Europe
BPO (F&A, HR,
CC)
12%
25%
ITO
R&D, ESO
Overall
9%
22%
8%
17%
11%
22%
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 Impact on 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 Impact on Outsourcing Industry
Salary level change in EUR
Since January 2008, %
Depreciation of local
currencies improves the
economics of moving to EE
Czech Republic
Romania
Crisis increases
attractiveness of locations
Russia
Belarus
▪ Reduced attrition
Hungary
Poland
Ukraine
-40
-30
-20
-10
0
10
▪ Increased labor supply at all
qualification levels
▪ Reduced salary expectations
Local currency
devaluation vs. EUR
Mar 2009/Jan 2008, %
▪ Reduced cost of running
business
Czech Republic
Romania
Source: McKinsey and Belarusian Ministry of Statistics
Russia
Belarus
Hungary
Poland
Ukraine
-50
-40
-30
-20
-10
0
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)
 3.7%
Industrial Output (November 2009 vs November 2008)
 8.6%
Gross Agricultural Output (Jan- Nov 2009 vs Jan-Nov 2008)
-
0.0%
Retail Turnover of Goods (Jan- Nov 2009 vs Jan-Nov 2008)
↓
↓
↓
16.5%
Real State Budget Revenues (January-July 2009)
Real Disposable Incomes of Population
17.8%
8.3%
(January-September 2009)
Consumer Price Index (November 2009 vs November 2008)
 13.6%
Manufacturer Price Index (November 2009 vs November 2008)
 12.9%
Hryvna depreciated to USD in 2009

Source: Ministry of Economy of Ukraine
0.2%
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
Ukrainian Outsourcing Services Exports Growth, in $ mil.
600
500
400
300
200
100
0
2003
2004
2005
2006
2007
2008
2009 (est.)
Accoding to IDC, Market Visio and Ukrainian Hi-tech Initiatice researches
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
HedgeSpeed Technologies
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.
DataArt has 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 programming schools are
very strong. The main source for qualified IT labor is universities with 5070% 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.
Key Outsourcing Centers
City
Population,
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
0.9
18
0.66
0.38
Kharkiv
1.7
17
0.63
0.45
Dnipropetrovsk
1.2
8
0.67
0.50
Odessa
1.1
3
0.67
0.70
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
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