2009 - Software and IT Services UE

CBI MARKET SURVEY: THE SOFTWARE AND IT SERVICES MARKET FOR OFFSHORE AND NEARSHORE OUTSOURCING IN THE EU

CBI MARKET SURVEY

THE SOFTWARE AND IT SERVICES MARKET FOR OFFSHORE AND NEARSHORE OUTSOURCING IN THE EU
Publication date: December 2008

CONTENTS REPORT SUMMARY INTRODUCTION 1 2 3 4 5 6 7 8 DEMAND: THE SOFTWARE AND IT SERVICES MARKET IN THE EU SUPPLY THE OFFSHORE/NEARSHORE OUTSOURCING MARKET FOR SOFTWARE AND IT SERVICES IN THE EU OFFSHORE/NEARSHORE LOCATIONS TRADE STRUCTURE PRICE DEVELOPMENTS MARKET ACCESS REQUIREMENTS OPPORTUNITY OR THREAT 2 5 5 12 16 24 30 35 38 40

APPENDICES A PRODUCT CHARACTERISTICS B INTRODUCTION TO THE EU MARKET C LIST OF DEVELOPING COUNTRIES D METRICS USED IN AT KEARNEY INDEX This survey was compiled for CBI by Facts Figures Future in collaboration with Mr Laszlo Klucs. Disclaimer CBI market information tools: http://www.cbi.eu/disclaimer 41 46 47 49

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CBI MARKET SURVEY: THE SOFTWARE AND IT SERVICES MARKET FOR OFFSHORE AND NEARSHORE OUTSOURCING IN THE EU

REPORT SUMMARY
CEE countries are closing the gap Demand for software and IT services in Central and Eastern Europe (CEE) was booming between 2005 and 2007. While in general the EU market for software products grew by nearly 6%, countries such as Poland, the Czech Republic and Hungary recorded double-digit growth rates for software. More and more CEE companies are adopting ICT solutions to close the gap with their Western European competitors. In the years to come, growth rates are expected to accelerate as CEE markets mature. SME market opening up European SMEs have become tired of being under equipped when it comes to software packages. As competition in several industry sectors heats up, Customer Relation Management (CRM) and Enterprise Resource Planning (ERP) are no longer vague terms for SME managers. These applications are increasingly purchased to manage companies in an efficient manner. Furthermore, companies increasingly purchase security software for the protection of Intellectual Property Rights and to cope with all forms of digital threats. The latest buzzword in the IT services market is Software as a Service (SaaS); this software delivery model has much to offer SMEs from DCs. SaaS adoption among EU companies stood at 16% in 2007, but is expected to increase by 35% over the next two years. Especially CRM applications are in demand, and with the Internet as trade channel the barrier for DCs to enter this market is relatively low. IT services in search of IT skills Integration projects of CRM and ERP solutions were driving the IT services market in recent years. For the future European companies face difficulties to provide these services as they have to cope with a shortage of IT professionals. In the UK, the Netherlands, Germany and France, this shortage is most critical. Companies increasingly look for ways to handle this problem and offshoring/nearshoring is increasingly the answer. As a result, it has become common practice, particularly in large-scale projects, for IT service providers to work with a subcontractor (or even multiple subcontractors) who performs specific tasks. Changing competition The EU market is characterised by the increasing presence of Indian companies like Infosys, Wipro, TCS and Genpact. These companies are expanding their European operations in order to become true multinationals. In addition they are increasingly presenting themselves as innovative players and not as merely standard service providers. Partner up! According to European experts, the best way to enter the EU market is via a partnership, such as a joint venture, with a EU software developer or system integrator. Working with brokers and consultants should also provide you with the assistance to successfully enter the EU market. Keep in mind that as a DC provider it is crucial to present your company as a professional player that offers high quality services. Once you can prove that you already do work for a EU company it is much easier to get other offshoring projects. Gain the trust of your customer Chances for DC exporters are high in several segments; however, outsourcing and especially offshoring/nearshoring is quite an unexplored terrain for European SMEs. Before you can turn this opportunity into reality you have to gain the trust of your potential customers. In today’s market, data security plays an increasingly important role and companies are only willing to outsource work to a reliable provider. Therefore, it is important to have the right certificates and to adopt European business practices.

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CBI MARKET SURVEY: THE SOFTWARE AND IT SERVICES MARKET FOR OFFSHORE AND NEARSHORE OUTSOURCING IN THE EU Price developments According to several research institutes, the wage gap between the EU and offshore/nearshore locations is getting smaller. Especially India is increasingly focusing on added value and quality instead of low costs. For IT services with low requirements for skills and experience the opposite is the case, as a moderate price pressure can be noticed here. In addition, prices are declining in the traditional software market (supply of standard software), up to 35% by 2008 and another expected 15% by 2010. Therefore, IT service providers face a challenge to either find new ways of avoiding the competitive pressure on prices, or deal with it by lowering costs. New developments in the field of IT, such as open source software and by focusing on added value services, may help meet these challenges. The UK leads the way, the others follow For companies in the most mature EU market, the UK, offshoring/nearshoring is already widely adopted. SMEs in the Netherlands, Germany and Nordic countries are expected to follow the example of the UK in the years to come. Their demand is driven by the shortage of skilled labour and the need for more efficient processes. As a result they increasingly look beyond their own borders for new opportunities. As a DC exporter you should emphasise the fact that your company can offer a solution to their problems. Southern Europe is less active in the field of offshoring/nearshoring; however, large and medium-sized companies from Southern European countries are also starting to see the benefits. For them, Latin American countries have most to offer. From outsourcing to offshoring/nearshoring While outsourcing is increasingly adopted as common business practice, new offshore and nearshore destinations are emerging. When offshore activities are planned, it is clear that India remains the most attractive destination for EU companies. China follows in second place, although the maturity of Chinese service providers is not at the level of their Indian competitors yet. Beside India, several other DCs are emerging as offshore destinations, for example South East Asian countries like Indonesia and Vietnam, as well as Latin American countries such as Argentina, Brazil, Chile and Mexico. When companies in Western European countries consider nearshore activities, the first region within their reach is the fast developing CEE region, offering high quality in combination with relatively low costs. A DC with good chances to perform nearshore activities is the Ukraine. Companies in the Nordic countries are looking to benefit from the presence of an increasingly mature market in the Baltic States.

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CBI MARKET SURVEY: THE SOFTWARE AND IT SERVICES MARKET FOR OFFSHORE AND NEARSHORE OUTSOURCING IN THE EU

INTRODUCTION
This CBI market survey profiles the market for software and IT services in the EU. The emphasis of this survey lies on the potential for offshoring and nearshoring these services to developing countries (DCs), as this is the best opportunity for small and medium-sized companies (SMEs) from DCs that offer software and IT services. The role of and opportunities for DCs are highlighted. This market survey discusses the following service groups, as they are the most interesting for DC exporters: • Application software • System software • Outsourcing services • Project services • Hardware maintenance For detailed information on the selected services, please consult appendix A. More information about the EU can be found in appendix B. CBI market surveys covering the market in specific EU member states, specific product (group)s or documents on market access requirements can be downloaded from the CBI website. For information on how to make optimal use of the CBI market surveys and other CBI market information, please consult ‘From survey to success - export guidelines’. All information can be downloaded from http://www.cbi.eu/marketinfo. Go to ‘Search CBI database’ and select your market sector and the EU.

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CBI MARKET SURVEY: THE SOFTWARE AND IT SERVICES MARKET FOR OFFSHORE AND NEARSHORE OUTSOURCING IN THE EU

1

DEMAND: THE SOFTWARE AND IT SERVICES MARKET IN THE EU

In this Section the demand side of the EU market is discussed. It gives an idea of the developments and structure of the market for software and IT services. Subsection 1.1 discusses the market size and Subsection 1.2 deals with the main trends for the EU market. Subsection 1.3 then follows with the opportunities and threats for DC suppliers wanting to enter the EU market and Subsection 1.4 contains useful sources for further research. Please note that this section combined with Section 2 is a background for the main part of this survey, Section 3, where offshore and nearshore outsourcing is discussed. 1.1 Market size

This section deals with the EU market for software and IT services. First the total market is described to give an indication of growth of the sector as a whole in recent years and the expectations for the near future. Second, a closer look is taken at developments of the individual segments software and IT services. Information about the market for offshore and nearshore outsourcing of these segments can be found in Section 3. Total EU demand software and IT services Table 1.1 shows the value of the total market for software and IT services in the EU. In 2007, the total market amounted to €207.2 billion. Compared to 2005 this means an annual increase of 6%. As can be seen, IT services is the largest of the two segments and the value of this segment was three times as high as the EU software market in 2007. In the years to come, growth rates of the total market for software and IT services will be slightly lower (+5.6% per year), and the market is expected to reach a value of €231.2 billion in 2009. However, this forecast is highly uncertain as a result of the current global credit crisis. The effect of this crisis could be that companies face difficulties getting loans to fund IT investments such as new hardware or large IT projects. Table 1.1 Total EU market for software and IT services, € million, 2005-2009
2005 184,218 134,576 49,642 2007 2008* 2009* 2006 194,853 207,176 218,686 231,184 142,272 151,537 160,137 169,561 52,581 55,639 58,549 61,623 CAGR** 05-07 6% 6.1% 5.9%

Total market IT services Software * forecast ** Compound Annual Growth Rate Source: EITO (2008)

Software As can be seen from Table 1.2, the total demand for software products in the EU amounted to €55.6 billion in 2007. This means an annual increase of 5.9% compared to 2005. The top four countries, consisting of Germany, the UK, France and Italy, accounted for almost 70% of total consumption in the EU. The market can be divided into system software (€25.2 billion in 2007) and application software (€30.5 billion in 2007). Please note that system software involves both system infrastructure software and tools. Both product groups recorded an annual increase of around 6% between 2005 and 2007.

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CBI MARKET SURVEY: THE SOFTWARE AND IT SERVICES MARKET FOR OFFSHORE AND NEARSHORE OUTSOURCING IN THE EU Table 1.2 EU software market, by segment, € million, 2005-2009
2005 49,642 27,081 22,561 11,335 11,226 2006 52,581 28,713 23,869 12,118 11,751 2007 55,639 30,452 25,188 12,938 12,250 2008* 58,549 32,148 26,400 13,721 12,679 CAGR 2009* ‘05-‘07 61,623 5.9% 33,982 6% 27,641 5.8% 14,542 6.9% 13,099 4.7%

Total software Application software System software Tools System infrastructure software * forecast Source: EITO (2008)

Application software In 2007, the largest EU markets for software were Germany, the UK, France and Italy. These countries accounted for nearly 70% of all EU software sales in 2007. Most Western European countries saw an annual increase in the consumption of application software of more than 5.5% between 2005 and 2007. Italy was the major exception with an annual increase of just 1.8%. This was, to some extent, caused by the current economic slowdown in Italy. Refer to Table 1.3 for an overview of the demand for application software in the individual EU countries. Table 1.3 EU demand for application software, by country, € million, 2005-2009
2005 27,081 7,127 5,095 4,270 2,420 1,482 1,236 917 634 625 540 553 459 398 324 249 227 139 115 96 66 2007 30,452 7,956 5,848 4,774 2,509 1,692 1,404 1,049 719 694 638 613 530 464 360 274 273 172 159 111 75 CAGR CAGR 2009* ‘05-‘07 ‘07-‘09 33,982 6.0% 5.6% 8,870 5.7% 5.6% 6,441 7.1% 4.9% 5,309 5.7% 5.5% 2,669 1.8% 3.1% 1,896 6.9% 5.9% 1,581 6.6% 6.1% 1,172 7.0% 5.7% 798 6.5% 5.4% 780 5.4% 6.0% 769 8.7% 9.8% 688 5.3% 5.9% 608 7.5% 7.1% 524 8.0% 6.3% 415 5.4% 7.4% 301 4.9% 4.8% 327 9.7% 9.4% 205 11.2% 9.2% 238 17.6% 22.3% 134 7.5% 9.9% 83 6.6% 5.2%

EU 27 Germany UK France Italy Netherlands Spain Sweden Denmark Austria Poland Belgium Finland Ireland Portugal Greece Czech Republic Hungary Romania Slovakia Luxembourg * forecast Source: EUTO (2008)

The main driver today is the demand from European SMEs. These companies are still rather under equipped and are expected to start investing more in application software. The market for upgrades and new installations of Enterprise Resource Planning (ERP) performed well and is expected to continue its growth in the years to come. Between 2005 and 2007, growth was mainly driven by product categories such as financials, human capital management and procurement. In the field of customer relationship management (CRM), especially the banking and insurance sector boosted the demand. This will also be the case in the years to come. Due to the increased competition in this sector, companies have to be proactive when it comes to interacting with their customers. Therefore financial service companies increasingly invest in innovative solutions that help them interact better with customers. Growth of the CRM segment was further boosted by European SMEs who are increasingly adopting this solution. In the manufacturing sector there a strong trend towards the use of supply chain management (SCM) was noticed.
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CBI MARKET SURVEY: THE SOFTWARE AND IT SERVICES MARKET FOR OFFSHORE AND NEARSHORE OUTSOURCING IN THE EU Central and Eastern European (CEE) countries recorded the highest growth rates with regard to demand for application software in the EU. The largest software market in this region is Poland with a value of €638 million in 2007. Software demand in Poland increased by nearly 9% in the period 2005-2007. The markets in other CEE countries that performed even better than Poland were Romania (+17.6%), Hungary (+11.2%) and the Czech Republic (+9.7%). Demand in this region was boosted by, among other things, the increasing number of computers within companies and in the public sector in these countries. In the years to come, demand in CEE countries is expected to remain strong and even accelerate in Poland, Romania and Slovakia. System software (system infrastructure software + tools) For system software, the same countries account for the largest EU shares as for application software. Growth rates in this segment are on average lower than in the application software segment. Table 1.4 shows the EU demand for system software between 2005 and 2009. EU demand was mainly boosted by CEE countries, such as Romania (+27.9%), the Czech Republic, Slovakia (both +11.8%) and Hungary (10.9%). Poland, the largest system software market in CEE, recorded an annual growth of nearly 10%. Demand in this region is driven by sales of operation systems for companies and by the public sector in these countries. Table 1.4 EU demand for system software, by country, € million, 2005-2009
2005 22,561 5,502 4,492 3,679 1,832 1,344 1,122 737 538 516 453 419 397 358 246 196 206 144 99 95 84 2007 25,188 5,995 5,062 4,068 2,018 1,541 1,245 815 585 575 526 505 437 390 269 245 231 177 162 108 105 CAGR CAGR 2009* ‘05-‘07 ‘07-‘09 27,641 5.7% 4.8% 6,563 4.4% 4.6% 5,456 6.2% 3.8% 4,440 5.2% 4.5% 2,233 5.0% 5.2% 1,705 7.1% 5.2% 1,349 5.3% 4.1% 878 5.2% 3.8% 632 4.3% 3.9% 624 5.6% 4.2% 588 7.8% 5.7% 589 9.8% 8.0% 471 4.9% 3.8% 415 4.4% 3.2% 297 4.6% 5.1% 291 11.8% 9.0% 253 5.9% 4.7% 203 10.9% 7.1% 251 27.9% 24.5% 120 6.6% 5.4% 128 11.8% 10.4%

EU 27 Germany UK France Italy Spain Netherlands Sweden Austria Belgium Ireland Poland Finland Denmark Portugal Czech Republic Greece Hungary Romania Luxembourg Slovakia * forecast Source: EITO (2008)

As for the Western European countries, Ireland (+7.8%), Spain (+7.1%) and the UK (+6.2%) were the top performing countries in the period 2005-2007. Services Oriented Architecture (SOA) was in high demand in this segment because of the cost savings it offers and due to the growing need for faster development of new business solutions. Security is an important issue in this segment as many EU companies and central and local governments are increasingly looking for ways to protect sensitive data. For this reason, upgrades of infrastructure software, anti virus protection and firewalls will see significant demand. A factor that has negatively affected demand in this segment is the increasing use of open source software. For the period up to 2009, growth in nearly all countries is expected to slow down. This is mostly due to a lower demand for system infrastructure software as a result of consolidation in the operation systems market and the growing adoption of open source software.
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CBI MARKET SURVEY: THE SOFTWARE AND IT SERVICES MARKET FOR OFFSHORE AND NEARSHORE OUTSOURCING IN THE EU Within the tools segment, demand was boosted by the increasing need for virtualisation tools (the use of multiple operating systems simultaneously) and the consolidation of data centres. Especially Italy recorded strong growth rates in this segment as a result of investments in tools for automation and virtualisation. Future investments will be focused on collaboration and content tools such as Web 2.0 and business intelligence tools. This last solution is expected to show healthy growth in the years to come in especially the financial services, retail, manufacturing and public sector. It is mainly the larger and medium-sized companies that invest in this type of solution. Business intelligence tools can either be standalone tools or incorporated in CRM solutions. IT services Table 1.5 shows that the total market for IT services in the EU valued €151.5 billion in 2007. This means a growth of 6.1% per year compared to 2005. The segment outsourcing services recorded the highest growth rate between 2005 and 2007 (+8%) and demand for project services was high as well. The market for hardware maintenance has decreased and it is expected that this trend will continue in the years to come. Table 1.5 EU IT services market, by segment, € million, 2005-2009
CAGR 2006 2007 2008* 2009* ‘05-‘07 2005 134,576 142,272 151,537 160,137 169,561 6.1% 52,969 56,777 61,736 66,292 71,283 8.0% 68,027 71,894 76,239 80,353 84,859 5.9% 13,580 13,601 13,561 13,492 13,419 -0.1%

Total IT services Outsourcing services Project services Hardware maintenance * forecast Source: EITO (2008)

An important issue in the IT services market is the fact that many countries in Western Europe have to cope with an increasing shortage of IT professionals. Some of the causes are the decreasing number of IT graduates and the overall ageing population in countries like the UK, the Netherlands, Belgium, Germany and France. In the Netherlands, for example, there were 13,000 unfilled job vacancies in the beginning of 2008. In the UK, the shortage of IT professionals has already stimulated both companies and local governments to search for resources in offshore destinations. In the other countries mentioned, companies prefer to outsource the work to larger local providers who still have the availability of IT personnel to provide the service. More information on jobs moving offshore can be found in Section 3. Outsourcing services Since outsourcing services is the segment in which most exporters in DCs are active, Table 1.6 gives an overview of the demand for this segment in the individual EU countries. In 2007 the total EU market for outsourcing services amounted to €61.7 billion. Between 2005 and 2007, this market segment increased by 8% per year. The UK is by far the largest market for outsourcing services, almost twice the size of Germany and far ahead of France. The top three countries accounted for over 70% of the total EU market in 2007. Table 1.6 EU demand for outsourcing services, by country, € million, 2005-2009
2005 52,969 20,541 10,579 7,007 2,917 2,639 1,786 1,621 1,378 2007 61,736 23,619 12,662 8,168 3,501 2,836 2,021 2,013 1,531 2009* 71,283 26,633 14,861 9,615 4,071 3,040 2,334 2,428 1,763 CAGR ‘05-‘07 8.0% 7.2% 9.4% 8.0% 9.6% 3.7% 6.4% 11.4% 5.4% CAGR ’07-‘09* 7.5% 6.2% 8.3% 8.5% 7.8% 3.5% 7.5% 9.8% 7.3%
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Country EU25 UK Germany France Netherlands Italy Sweden Spain Denmark

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CBI MARKET SURVEY: THE SOFTWARE AND IT SERVICES MARKET FOR OFFSHORE AND NEARSHORE OUTSOURCING IN THE EU

Country Belgium Finland Ireland Austria Portugal Poland Greece Czech Republic Hungary Luxembourg Slovakia Romania * Forecast Source: EITO (2008)

2005 982 1,034 759 565 341 206 190 115 125 79 26 14

2007 1,206 1,161 912 645 445 298 218 149 140 92 36 19

2009* 1,454 1,349 1,081 767 555 422 249 201 181 106 52 38

CAGR ‘05-‘07 10.8% 6.0% 9.6% 6.8% 14.2% 20.3% 7.1% 13.8% 5.8% 7.9% 17.7% 16.5%

CAGR ’07-‘09* 9.8% 7.8% 8.9% 9.0% 11.7% 19.0% 6.9% 16.1% 13.7% 7.3% 20.2% 41.4%

As was the case with the IT services market in general, the highest growth rates were recorded by CEE countries. However, the markets in several Western European countries, such as Portugal, Spain, Belgium, the Netherlands, Ireland and Germany were flourishing as well. In the years to come, demand in Western European countries is expected to remain strong. Countries in Eastern Europe are expected to show even higher growth rates than in the period between 2005 and 2007. The UK market for outsourcing services is in a different phase than the rest of Western Europe. The market in the UK has reached a much higher level of maturity and is beginning to adopt new delivery models, such as Software as a Service (SaaS). This service, where software is delivered on a subscription basis, is already gaining widespread adoption in the UK. As a result of the limited implementation costs of SaaS, SMEs form an important demand driver (refer to textbox). Another important growth driver is the growing complexity of application platforms. The implementation of these systems usually requires the assistance of IT experts.
EU companies plan their SaaS investments The use of SaaS in Western Europe is currently still modest, but there is strong growth potential. According to research agency Forrester, 16% of the EU companies under review adopted SaaS in 2007, compared to 12% in 2006. In the years to come this trend is expected to continue. Within Western Europe, the UK, Nordics and Benelux are typically first to adopt new solutions, closely followed by Germany and France. Analyst firm IDC (http://www.idc.com) performed a survey among 2,077 IT decision makers in organisations with more than 20 employees in Western Europe. 35% of the respondents indicated they would invest in SaaS in the next 24 months to replace or supplement existing CRM systems. A similar number plans to use SaaS for ERP solutions. An interesting fact is that SaaS models for ERP are still in a developing phase and lag four to five years behind CRM solutions. The high demand is a result of the more widespread adoption of ERP in general.

Project services The project services market in the EU is the largest segment of the IT services market. On average this market increased by 5.9% in the period 2005-2007. In most Western European countries this rate was reached; however, in Italy demand increased by only 0.7%. Especially medium-sized and large companies invest in project services like integration projects and software development. As a result of the increasing demand for ERP and CRM, integration projects incorporating these solutions will be the main driver of this segment. The main focus in these areas is on business efficiency. Large companies are in the process of renewing these applications, while medium-sized companies adopt new solutions to replace their old systems. The main drivers to renew these systems are security issues and data protection. As a result of the current credit crisis, investments in services that are further away from the company’s core business, such as IT training, will be impacted first in the years to come.
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CBI MARKET SURVEY: THE SOFTWARE AND IT SERVICES MARKET FOR OFFSHORE AND NEARSHORE OUTSOURCING IN THE EU Furthermore, several large projects will be shelved or even cancelled. In the public sector, IT service providers can only provide a service when they tender for these projects. Hardware maintenance As can be seen in Table 1.5, demand for hardware maintenance in the EU is stagnating. The most important reasons for this trend are the decreasing prices and longer modernisation cycles for hardware. Furthermore, hardware maintenance is increasingly included in infrastructure outsourcing contracts. In most CEE countries, hardware maintenance accounts for approximately a quarter of the IT services market. However, also in these countries this share is declining as a result of decreasing prices and the growing reliability of devices. 1.2 Trends and characteristics

This section discusses the main trends and characteristics in the EU software and IT services market. • In the years to come the IT sector is expected to feel the effects of the current credit crisis. EU companies can face difficulties in getting a loan to fund IT investments, such as new hardware or large IT projects. If this is really going to happen is difficult to predict as of yet. • European SMEs are the main demand driver in the application software market as they are still under equipped when it comes to CRM and ERP software. These types of solutions are popular among larger companies as well. • SCM software is increasing in popularity fast, especially in the manufacturing sector. • CEE countries recorded the highest growth rates in the application software segment as a result of the rapidly increasing number of computers in companies and the public sector. • The system software market is driven by demand for security software to protect sensitive data and the increasing popularity of SOA. Furthermore, business intelligence tools are gaining popularity fast among large and medium-sized companies in especially financial services, retail and manufacturing companies, as well as in the public sector. • Increasing shortage of skilled labour is forcing companies in several Western European countries to outsource and/or offshore their IT services. • Outsourcing services remains the fastest growing market segment of IT services. Main growth drivers are the growing adoption of SaaS and the increasing complexity of application platforms. SaaS is especially popular among SMEs, thanks to the limited implementation costs. • As a result of the focus on business efficiency, consulting and system integration drive the market for IT projects. • The hardware maintenance market is negatively influenced by decreasing prices and the longer modernisation cycles for hardware. In addition, the increased quality of hardware has lowered the need for maintenance. 1.3 Opportunities and threats

Trends and market developments offer opportunities and threats to exporters. A given trend can be a threat to some and an opportunity to others at the same time. The following trends should, therefore, always be analysed in relation to your specific circumstances. + Within software applications CRM, ERP and SCM offer good opportunities for DC exporters that want to export these applications. + Security software, business intelligence solutions and SOA offer good chances in the system software segment. DC exporters could benefit when they are able to meet the needs of EU customers in these areas. + Outsourcing services have a high potential for DC exporters. Especially SaaS offers good chances as this service can be delivered independent of time and place and at low costs. + CEE markets recorded very high growth rates in all software and IT services segments and could therefore be a good region to start your EU activities. − Obligatory tendering for projects of governmental institutions makes it difficult for SMEs from DCs to generate business in this sector.
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CBI MARKET SURVEY: THE SOFTWARE AND IT SERVICES MARKET FOR OFFSHORE AND NEARSHORE OUTSOURCING IN THE EU
−

The credit crisis has created an uncertain situation for the IT sector as companies could face difficulties in receiving a loan for their new investments. Useful sources

1.4

The following sources can be used to obtain more information on the EU software and IT services market. • EUROITX – http://www.euroitx.com - CBI supported website. Go to ‘ITO market information’ and click on ‘Market Watch 2008’ for the latest ITO news. • European Information Technology Observatory (EITO) – http://www.eito.com - provides data on the IT market in the EU. • European Software Association - http://www.europeansoftware.org - publishes an interesting white paper on the EU software market. • Equaterra - http://www.equaterra.com - IT advisory company which publishes many useful articles and researches. • VNUnet.com - http://www.vnunet.com - IT news website.

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CBI MARKET SURVEY: THE SOFTWARE AND IT SERVICES MARKET FOR OFFSHORE AND NEARSHORE OUTSOURCING IN THE EU

2

SUPPLY

This section discusses the supply side of the software and IT services market in the EU. Subsection 2.1 discusses the supplier landscape, in Subsection 2.2 the major developments on the supply side are discussed and Subsection 2.3 gives the most important opportunities and threats that are the result of these trends. Useful sources to find further information are given in Subsection 2.4. 2.1 Supplier landscape

This subsection describes the supply side of the EU market for software and IT services. For more information on software and IT services providers, please refer to the CBI market surveys covering the market in individual EU countries. These surveys include, among other things, tables that list the top software and IT service providers per country. Software Generally speaking, the EU software market is less consolidated than the IT services market. Still, the software industry is very concentrated with the top 23 providers accounting for 80% of revenues. The software supplier landscape is dominated by local subsidiaries of US companies and the omnipresence of SAP. These strong players operate in a market with many local software producers. In some countries, domestic players successfully compete with the large providers. Good examples are Dassault Systemes (http://www.3ds.com) in France, Telvent (http://www.telvent.com/es) and IECISA (http://www.ieci.es) in Spain and Sage (http://www.sage.es) in the UK. However, in most cases local software producers focus on industry specific solutions or niche markets. Some of the largest software providers to the EU market are: • HP (US) - http://www.hp.com - supplies application, virtualisation and desktop management software. • IBM (US) - http://www.ibm.com - wide range of system software and application software. • Microsoft (US) - http://www.microsoft.com - Operating systems/tools, end-user application and ERP. • Oracle (US) - http://www.oracle.com - system integration solutions. • SAP (GER) - http://www.sap.com - global leader of business solutions such as SCM, CRM, product life-cycle management, and supplier relationship management. • Symantec (US) - http://www.symantec.com - market leader for internet security and antivirus software. For an overview of the top 100 European software vendors in 2007 you can visit http://www.truffle100.com/europe/2007/ranking-2.php. IT services The IT services market in the EU has entered a phase of globalisation. Despite this trend, most EU countries are still home to leading local service providers. The IT services market is characterised by more national leaders (ranking in the top three) than the software segment. The main reason for this situation is that especially for services it is necessary to have a local IT expert, who preferably speaks the country’s language. In the software segment this is not so much an issue. Some of the largest providers of IT services to the EU market are: • Accenture (UK) - http://www.accenture.com - global management consulting, technology services and outsourcing company. • Atos Origin (FR) – http://www.atosorigin.com - full range of services for manufacturing, telecom, energy, retail and financial services companies. • Cap Gemini (FR) - http://www.capgemini.com - IT services and business consultancy. • Capita (UK) – http://www.capita.com - web-based marketing and business solutions. • Fujitsu (JP) – http://www.fujitsu.com - management consulting, systems integration, IT infrastructure management. • HP (US) – www.hp.com - business applications, infrastructure, outsourcing and support services. • IBM (US) – http://www.ibm.com - security, architecture, server and outsourcing services.
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CBI MARKET SURVEY: THE SOFTWARE AND IT SERVICES MARKET FOR OFFSHORE AND NEARSHORE OUTSOURCING IN THE EU Ordina (NL) - http://www.ordina.nl - one of the largest software and IT services providers in the Netherlands. • Siemens (GER) – http://www.siemens.com - full range of services for the industry, energy, healthcare sectors. For an overview of the top service providers in the world, see http://www.outsourcingprofessional.org/content/23/152/1619. 2.2 Developments on the supply side •

The EU supplier landscape is influenced by a number of developments that are discussed below. Consolidation in the IT services sector Triggered by the long-lasting economic downturn after the end of the dot-com boom, rivalry in the IT services market has significantly increased in the past years. This can be seen by the increasing number of mergers and acquisitions in the IT services market. A prominent example of this development was the takeover of EDS by HP in the first half of 2008. HP used this takeover to extend their line of services and their geographical focus in order to remain competitive. Along with other providers to the EU market, the company is facing increased competition from new players, such as WincorNixdorf, BT, Orange Business Services and several Indian companies. Indian players increase EU presence Whereas EU companies increasingly aim to extend their geographical focus, the same can be said for the Indian competitors. The EU market is characterised by the increasing presence of Indian companies like Infosys, Wipro, TCS and Genpact. These companies are expanding their Western operations in order to become true multinationals. In addition they increasingly present themselves as innovative players instead of standard service providers. The establishment of their own offshore centres in Europe should be regarded as the first step in their evolution. Another reason why Indian companies shift to the EU is that they regard it as a safer place to conduct business. Currently US customers generate 60% of their revenues. Especially now the financial services sector in the US has to cope with the effects of the credit crisis, Indian players target the EU market to spread their risk. For example, Tata Consultancy Services (TSC) has more than 3,000 staff in the UK. Furthermore, Infosys is recruiting UK graduates to expand its European operations. Labour shortage drives demand for subcontracting The shortage of IT professionals in several EU countries is not only a problem for EU companies in various industry sectors as mentioned in Section 1, but it increasingly becomes a barrier for IT service providers as well. These companies depend heavily on the knowledge of professionals when providing high quality services. As a result, it has become common business practice, particularly in large-scale projects, for IT service providers to work with a subcontractor (or even multiple subcontractors) who perform(s) certain tasks. For example, a system integrator may subcontract a programme specialist to develop software customisations for their customer. There are also examples of integrators that hire hardware maintenance companies to maintain the hardware used in the customer's system. Software and service providers target SMEs European SMEs used to have only limited demand when it came to their software and IT services needs. In addition, the available number of solutions for this type of companies was limited. This situation is changing as a result of new technological developments and high demand from the side of SMEs. The SME market is definitively opening up for IT solutions. IT companies are increasingly targeting the SME market by developing affordable, smaller-sized solutions, such as ERP and CRM applications.

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CBI MARKET SURVEY: THE SOFTWARE AND IT SERVICES MARKET FOR OFFSHORE AND NEARSHORE OUTSOURCING IN THE EU Innovation of delivery models Business models for the purchase of software services are beginning to change. The range of products and service models from which companies can choose has increased. Software providers are no longer merely selling the software to their customers, but put more focus on the service component. The increasing use of open source software components is strengthening this trend. With open source the costs for developing new models are much lower than with ‘paid’ software. A delivery model that has been a buzzword in the sector for a while now is SaaS. With this service the application is purchased on a subscription basis and over the Internet. Shift towards nearshore outsourcing Companies in CEE countries such as Ukraine, Romania, Hungary, Poland and the Czech Republic are becoming important providers of software and IT services. The main drivers of this trend are the lower costs for developing software and providing services, a large number of qualified IT professionals and the growing maturity of the domestic markets. The countries in the CEE region with the largest number of IT companies are Ukraine, Romania, Belarus, Poland and Bulgaria. Refer to Figure 2.1 for a more detailed overview. Figure 2.1
900 800 700 600 600 480 400 400 360 300 200 170 110 90 70 60 40 30 Latvia Slovenia 800

Number of IT companies in CEE countries

Number

500 400 300 200 100 0

10 Albania

Hungary

Ukraine

Czech Republic

Lithuania

Belarus

Slovakia

Romania

Bulgaria

Estonia

Poland

Croatia

Serbia

Source: Central & Eastern Europe Outsourcing review (2007) Increasing popularity of open source software The use of open source software is increasing in popularity fast and is even promoted by governments in different EU countries. A good example is the growing market share of operating system Linux over the “paid” system Microsoft Windows. Open-source applications have won some acceptance within large corporations, although ERP applications from vendors like Oracle and SAP still predominate. Within SMEs the adoption process goes much faster due to the more flexible environment, and major cost saving. For SMEs, software licensing takes up a higher percentage of their total costs than is the case for large companies.

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Moldova

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CBI MARKET SURVEY: THE SOFTWARE AND IT SERVICES MARKET FOR OFFSHORE AND NEARSHORE OUTSOURCING IN THE EU 2.3 Opportunities and threats

Trends and market developments offer opportunities and threats to exporters. A given trend can be a threat to some and an opportunity to others at the same time. The following trends should, therefore, always be analysed in relation to your specific circumstances. + Software and service providers increasingly target European SMEs to meet their specific needs. The opening up of the SME segment offers good opportunities for DC providers. + The shortage of IT professionals is increasingly driving IT service providers to subcontract a portion of their work to foreign service providers in offshore/nearshore locations. + Innovative delivery models such as SaaS offer good opportunities for DC providers as the application can be delivered over the Internet. ± The shift towards nearshore destinations poses a threat for DCs in offshore destinations, as it increases competition. Naturally, it is an opportunity for DCs in nearshore destinations. ± Open source software can serve as a replacement for (paid) software solutions, the market in which most DC suppliers are active. On the other hand, DC suppliers can use open source software to reduce the costs of their own software developing process and become even more competitive. − Indian IT service providers increase their presence on the EU market. This competition could limit the chances for providers from other DCs. However, the fact that this DC is accepted as a reliable partner offers opportunities for other DCs as well. − For small DC suppliers, increased competition in the IT services market due to market consolidation can be a threat. 2.4 Useful sources

The following useful sources can be used to obtain more information on software and IT services suppliers. • Ebusinesswatch - http://www.ebusiness-watch.org - publishes EU e-Business reports. • European Information & Communications Technology Industry Association (EICTA) http://www.eicta.org • European Software Association - http://www.europeansoftware.org - website contains a number of interesting press releases and links. • ITO news - http://itonews.eu - portal with a focus on the ITO market in Eastern Europe. • Outsourcing center - http://www.outsourcing-suppliers.com - website of research firm Everest with research on ITO and BPO suppliers.

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CBI MARKET SURVEY: THE SOFTWARE AND IT SERVICES MARKET FOR OFFSHORE AND NEARSHORE OUTSOURCING IN THE EU

3

THE OFFSHORE/NEARSHORE OUTSOURCING MARKET FOR SOFTWARE AND IT SERVICES IN THE EU

In addition to Section 1 and 2, which discussed the demand and supply of software and IT services in general, this section specifically focuses on offshore/nearshore outsourcing of software and IT services. As stated in Appendix A “service characteristics”, reliable and recent statistics on imports of software and IT services are hardly available. Therefore, this section gives an overview of the main developments and trends in software and IT services based on the result of market surveys and case studies. These sources may be coloured, either positively or negatively, by the specific interests of the agencies. Estimates of the impact on Europe are vague, especially in relation to offshoring to smaller Asian and Eastern European countries. But almost all sources agree: the European offshore/nearshore market is booming. In Subsection 3.1 an overview is provided of the current offshore/nearshore market in the EU. It also zooms in on the demand per segment and per country. Subsection 3.2 then discusses the decision making process of your potential EU customer. In Subsection 3.3 the most important trends and characteristics are summarised and Subsection 3.4 informs you about the opportunities and threats regarding offshore/nearshore outsourcing to the EU. With the sources mentioned in Subsection 3.5 you can search for more information. 3.1 EU offshore/nearshore outsourcing market

Offshore/nearshore outsourcing is rapidly increasing in importance in the EU. According to research agency Forrester, the EU market for offshoring/nearshoring records steady growth rates. European spending will achieve an average annual growth of 6% between 2006 and 2011. Currently, application related services are most common to offshore/nearshore. However, as large parts of system software can be offshored as well and providers have already obtained a high level of experience in this field, this area is also expected to grow in importance. The UK and Ireland already spend a large part of their IT-budgets on offshoring/nearshoring. This is mainly due to the language barrier with India when compared to Germany and France. Therefore, the largest increase is expected to come from these countries in the near future. According to Forrester, the UK will account for 75% of all European offshore outsourcing by 2011. Continental Europe is a relative newcomer to offshoring/nearshoring, and currently the percentage of IT work offshored is not at the level of the US yet. In France, for example, offshoring/nearshoring of software and IT services made up between 2% and 2.5% of total revenues in the IT industry in 2006. This share is expected to reach approximately 5% in 2010. In Germany and the Netherlands the shares will be slightly higher. The majority of EU companies prefers a service provider with a local presence, even when the work, such as software application development, does not require a high level of local language knowledge. To solve this problem, more and more IT service providers have adopted the Multi Vendor model, which means they use a mix of offshore (e.g. India) and onshore (e.g. Eastern Europe member states) providers. With this model, companies are able to benefit from low labour cost and retain local skills and knowledge at the same time. This model also leads to smaller sized contracts that are renewed more often. Multi Vendor outsourcing could lower the barrier for companies to engage in offshoring/nearshoring, and more widespread adoption of this model is expected in the years to come. In order to manage these different types of contracts, demand for project management services is expected to increase. Forrester expects EU companies to spend a total of €146 billion on offshoring/nearshoring software and IT services in 2011. The heavy competition in several industrial sectors in the EU and the current economic slowdown is expected to increase the overall EU demand for offshoring/nearshoring. Companies increasingly look for IT solutions to reduce their costs. The current credit crunch, however, might put a brake to growth in the sector. New IT projects and
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CBI MARKET SURVEY: THE SOFTWARE AND IT SERVICES MARKET FOR OFFSHORE AND NEARSHORE OUTSOURCING IN THE EU services that are not of the utmost importance could be shelved or even cancelled. However, in what way the crisis will influence the offshore/nearshore potential is still difficult to say. IT jobs going offshore IT jobs will move offshore most rapidly from the UK with continental European countries matching that trend, but at a lower level of impact. Across the whole of Europe, Forrester expects that over 150,000 IT jobs will move offshore by 2015 (see Table 3.1). Although this research was performed in 2004, the table gives a good overview of the current situation as well. Table 3.1 IT jobs moving offshore by country, 2005-2015
2005* 2010* 2015* 37,482 85,731 150,304 26,728 48,597 87,474 2,733 10,163 17,091 1,480 9,051 15,447 1,475 5,511 9,236 853 1,771 2,807 861 3,127 5,358 310 1,082 1,910 424 1,456 2,604 420 1,548 2,620 345 677 1,132 313 1,218 1,980 285 1,012 1,762 127 231 416 79 162 259 34 67 111 16 58 98

Total UK Germany France Netherlands Italy Sweden Belgium Switzerland Denmark Spain Austria Finland Ireland Portugal Greece Luxembourg * forecasts Source: Forrester (2004)

Table 3.2 shows that not only low level IT jobs face displacement offshore/nearshore, but IT professionals are affected as well. Table 3.2 European IT jobs moving offshore by job type, 2004-2015
2004 30,855 24,151 6,705 2010* 85,731 65,951 19,780 2015* 150,304 118,712 31,592

Information Technology total IT professionals Junior computing staff and operatives * Forecast Source: Forrester (2004)

Which companies offshore/nearshore? For most large European companies, outsourcing and offshoring/nearshoring is increasingly becoming common ground. This is not yet the case for most SMEs in the EU. Although still developing slowly, there is a trend in the Northern European countries (such as Sweden, the Netherlands, Denmark and Germany) and the UK towards a greater involvement of SMEs in outsourcing software and IT services. Offshoring/nearshoring of software and IT services will be the next step for these SMEs and the increasing shortage of IT personnel is expected to drive this demand to some extent. Nevertheless, European SMEs are hesitant to adopt this model as they fear to lose control over the process and have doubt about the level of security in offshore/nearshore destinations. In the UK, the European centre for offshore development (ECODE) and the National Outsourcing Association (NOA) are already emphasising the benefits of offshoring/nearshoring for SMEs, but so far they have only had moderate success. Most European SMEs that are active in offshoring or nearshoring were already used to the international environment in their sector (e.g. transportation). Other SMEs still have the old fashioned, and mostly negative image of offshoring. Their view of DCs is rather negative and based on poor experiences of other companies.
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CBI MARKET SURVEY: THE SOFTWARE AND IT SERVICES MARKET FOR OFFSHORE AND NEARSHORE OUTSOURCING IN THE EU Reasons and barriers to offshore/nearshore The most important reasons for EU companies to consider offshoring/nearshoring are: • Cost reduction • Shortage of IT personnel • Increasing flexibility • Quality improvement • Concentrating on core business • Entering new markets (large companies) The initial and still most important reason for companies to offshore their business processes is cost reduction. In several sectors of EU industries, such as financial services and manufacturing, companies are increasingly forced on cutting back their costs to remain competitive. A way of doing so is by implementing IT solutions that increase their efficiency. In recent years the shortage of skilled IT professionals has become an increasingly important factor. The number of IT graduates is decreasing in several countries and new employees are not replacing the older generation of workers. This shortage of skilled professionals increases the salaries in EU countries and forces companies to start looking for professionals in offshore or nearshore destinations. Larger EU companies that have adopted offshoring/nearshoring indicate that increasing flexibility is an important driver. In the more mature and competitive UK market, the quality of the work of offshore/nearshore providers is becoming an increasingly important factor. The most important barriers for EU companies when considering offshore/nearshore outsourcing are: • Successful local providers • Fear of losing control • Security and IPR protection • Cultural and language differences • Negative public opinion on job losses In most EU countries, the local software and especially IT service suppliers are quite successful and have already gathered a solid client base. They benefit from the demand for local presence and language capabilities. Therefore, the standards and expectations for quality delivery by an offshore/nearshore supplier are high. Another important barrier for companies to use offshoring/nearshoring is the fear of losing control over the process. However, as the years go by this factor is expected to become less important. Major barriers for SMEs to engage in offshoring are increasingly based on security issues, such as the protection of Intellectual Property Rights (IPR) and other sensitive data. The cultural and language barriers that often exist with the offshore/nearshore destination pose a barrier as well. In certain EU countries, such as Germany and Sweden a trend can also be seen towards a fear of major job losses as a result of offshoring and nearshoring. In these countries, there is pressure from unions and politics to preserve jobs. Offshore potential by EU country Customers in Western European countries are becoming more used to the fact that operations can take place offshore and nearshore than companies in Southern European countries. For companies in the most mature EU market, the UK, offshoring is common practice. As a result, there are currently hundreds of offshore and nearshore providers targeting this market to find a suitable partner. In smaller EU markets that are opening up to offshoring and especially nearshoring, such as Germany and the Netherlands, competition is less fierce. However, companies in these countries are not very familiar with working with a foreign service provider yet. In the Netherlands a large number of companies that has worked with such a provider is unsatisfied with the quality of the offshored IT service. This could make it more difficult for offshore companies to cater to the Dutch market.

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CBI MARKET SURVEY: THE SOFTWARE AND IT SERVICES MARKET FOR OFFSHORE AND NEARSHORE OUTSOURCING IN THE EU It is important to know that companies in Germany and France prefer nearshoring to offshoring as a result of language and cultural similarities in nearshore destinations. In the Netherlands and the UK these factors are less important. Southern Europe is less active in the field of offshoring/nearshoring; however, large and medium-sized companies from Southern European countries are also starting to benefit from the opportunities it offers. The companies in the Nordic countries are more attracted to nearshoring. The main reason is the presence of an increasingly mature nearshore market in Eastern Europe and the Baltic States. In Sweden, however, demand for offshoring/nearshoring is influenced by the negative public opinion on this matter. In Belgium, companies are not ready for offshoring and nearshoring yet; the SME market has only recently opened up to onshore outsourcing of software and IT services. Spain is a special country as it is profiling itself as a nearshore destination for other EU countries. Chances for providing offshore service to Spanish companies are therefore rather low. Some possibilities might arise in Spanish service providers subcontracting certain tasks. Offshore/nearshore potential by segment Based on the information in Section 1 and on interviews with EU experts, we will now discuss the potential for offshoring/nearshoring of the following segments of the software and IT services market (as described in the product characteristics): • Application software • System software (system infrastructure software + tools) • Outsourcing services • Project services • Hardware maintenance Application software Application software is the software segment that offers the best chances for offshoring/nearshoring. The potential depends on the level of end-user interaction that is needed during the development process. Development projects with little need for end-user interaction are easier to offshore or nearshore. A factor that is to be taken into account is the fact that application software is very sensitive to Intellectual Property Rights protection (IPR). Application software development is expected to be one of the quickest growing categories of software services in the next five years. Financial service firms in countries like the UK, Scandinavian countries and the Netherlands will be responsible for the major part of spending here. There is no real difference between the potential for offshoring and nearshoring. Which country the EU buyer will choose to offshore/nearshore their application software development will depend on the need for domain knowledge. System software The potential for offshoring and nearshoring of this type of software services is high, although lower than application software. CBI expert Mr Klucs states that there are few companies in DCs that are capable of providing system software services. With the increasing attention for data security, good opportunities arise in the field of security systems. The main problem is the need for domain knowledge. Currently the main providers of system software to the EU are based in the US. For system software nearshore destinations are slightly more popular because communication is a more vital factor for these kind of IT projects. Outsourcing services The potential for offshoring and nearshoring of IT services depends on the extent of client interaction that is needed. This is linked to trust and cultural differences. With regard to outsourcing services, the fastest growing segment of the IT services market, services such as web hosting and SaaS offer the best chances in most EU countries. The main benefit when offering this service is that it does not require any physical contact with the customer, although this is more and more appreciated by EU customers.

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CBI MARKET SURVEY: THE SOFTWARE AND IT SERVICES MARKET FOR OFFSHORE AND NEARSHORE OUTSOURCING IN THE EU In implementation services there are chances in offshoring and nearshoring for configuration, development, testing and application management. Although these services have a good potential for offshoring and nearshoring, according to Mr Klucs, there are only very few SMEs from DCs that are capable of providing these services. The same goes for operations management. Although the potential for offshoring and nearshoring is good, there are only very few SMEs in DCs that offer these services. Project services When it comes to project services, chances for offshoring/nearshoring are relatively low. As a result of the current credit crunch, the potential is expected to become even lower in the years to come. For ERP implementation projects and IT training, most EU companies prefer having a EU consultant or a person from the developed countries; therefore, the potential for offshoring and nearshoring of consultancy is not very high. Hardware maintenance Chances for offshoring/nearshoring in these services are the lowest within software and IT services. These services depend more on languages and the physical presence of a maintenance man. In nearshore destinations the language barrier could be lower. These nearshore destinations, therefore, have better chances for support IT services, but the overall potential for offshoring/nearshoring still remains low. The overall declining market for this service is also lowering chances in this segment. 3.2 Outsourcing decision making process in EU companies

To give the exporter an idea on how decisions are made by EU companies that offshore/ nearshore, this section discusses some of the most important decisive factors for EU companies to offshore/nearshore. Cost saving As mentioned before, cost saving is an important concern for EU companies to survive. The price is, therefore, an major factor, although this does depend on the nature of the product or service. In addition, for most EU companies the extent to which costs are saved will always be compared to the quality of the delivered product or service. Availability of skilled professionals The nature of the service determines the demand for specific skills. In general, the more complex the services, the higher the demand for skilled professionals. As a result of the ageing population and the lack of popularity of technical studies, the number of skilled professionals is decreasing in Europe. This is in contrast to some nearshore and offshore outsourcing destinations such as Ukraine, Romania and India. Language and culture Language is important for both the provider and the client to be able to communicate efficiently. Furthermore, culture is a very important factor. In the past, differences in culture led to problems during the execution of projects. As mentioned above, language is a tremendous asset for some IT service providers. For some other services, like software application development and software systems, language is a less important issue. Table 3.3 gives an overview of the language abilities of possible offshore/nearshore locations (excluding English because this is a world language and does not usually form an obstacle to offshore a project). Table 3.3
Language French German Spanish Italian Swedish

Possible offshore/nearshore destinations and language skill availability
Possible destinations Algeria, Lebanon, Mauritius, Morocco, Romania, Senegal and Tunisia Bulgaria, Czech Republic, Hungary, Poland, Romania, Slovakia and Turkey Argentina, Chile, Mexico, Colombia, Ecuador and Morocco Croatia and Romania Baltic States
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CBI MARKET SURVEY: THE SOFTWARE AND IT SERVICES MARKET FOR OFFSHORE AND NEARSHORE OUTSOURCING IN THE EU
Language Possible destinations Dutch Antilles, South Africa and Surinam Source: McKinsey (2005) adapted by Facts Figures Future

Many companies in Europe see language and cultural differences as a possible source of problems. As shown in Figure 3.1, the Netherlands and Germany perceive the most hindrance from these differences; even in a typical offshoring country like the UK, 56% of the companies still see these differences as a problem. The relatively low level of hindrance perceived by French companies is the result of the fact that most French companies offshore their processes to French speaking regions in Northern Africa. Figure 3.1 Cultural and language problems as obstacles for offshoring, % of companies per country

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% France Germany the Netherlands UK 40% 56% 85% 80%

Source: Deutsche Bank research (2004) from Forrester (2006)

Domain expertise Expertise in specialised technologies can be an important asset for some service providers. In both software and IT services this is a very important requirement. The availability of specific domain knowledge and expertise highly influences the choice for a certain company. Personal contact One of the most important factors driving outsourcing decisions is the existence of a personal connection between the European company and the foreign company. A fellow countryman who is an officer within the EU company could very well favour outsourcing. For more information on the use of your diaspora (your ethnic community outside the homeland), please also refer to CBI’s “From survey to success. Guidelines for exporting software and IT services to the EU”. Time zone difference In projects where communication is important, time zone differences could be an obstacle. This is the opposite for services like software development where being located in another time zone is regarded as one of the major benefits. The customer can leave his remarks with the service provider and will find the improved version on his desk the next day. Western business practices EU companies tend to select a company whose management team is trained and conducts business according to Western business practices and standards. Western companies value providers who are flexible and can think along with the customer.

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CBI MARKET SURVEY: THE SOFTWARE AND IT SERVICES MARKET FOR OFFSHORE AND NEARSHORE OUTSOURCING IN THE EU Telecommunications infrastructure Almost all IT services depend on voice and data telecommunication services. An EU company will look for an outsourcing provider that has the availability of a reliable infrastructure. Moreover, the bandwidth and its costs are important issues as well as. Nowadays broadband Internet is gaining widespread adoption in Europe. Government support India has become an important player in the outsourcing industry because the Indian government has supported and stimulated it to a large extent. This support ranges from providing education, investment in infrastructure facilities and technology parks, to setting up a Ministry of Information Technology, and promoting the sector in a structured manner. Egypt is another good example since their government supports companies to a large extent in their efforts to become active in the EU market. Country image One of the largest barriers for a developing country to be successful in the ITO market may be the country image. Companies that are located in a country with a poor reputation have to present themselves as a reliable partner. Decision-making authority One of the major issues that EU companies could consider is where the decision-making authority is allocated within the offshore service provider. For example, many Indian firms are still Indian-centric, forcing delays when major decisions must be made. Some customers may consider it necessary to get fast decisions under certain circumstances, without having to wait for eight or sixteen hours. Political stability Political stability within the company is an important issue for outsourcing decisions. This is especially the case for services, as contractual relationships are often for a longer period of time. 3.3 Trends and characteristics

One of the most important trends in Europe is nearshoring. Many European companies have started adopting this model because of the geographical and cultural advantages. Another important issue is the greater sense of control over the outsourced process that EU companies feel in a nearshore destination. Research agency Gartner divides nearshore suppliers into three categories: • Group 1 - Long standing EU members (Ireland, Northern Ireland and Spain). • Group 2 - New EU members (the Czech Republic, Hungary, Latvia, Poland, Romania and Slovakia). • Group 3 - Non-EU members (North Africa, Russia and other former Soviet states). Although these destinations might be more expensive than certain Asian countries, cost savings is no longer the only important factor. As mentioned before, the available workforce in these countries is becoming increasingly important. Developing countries that are based in offshore locations (Asia, Africa and South America) have to compete with these nearshore countries, although they could also cooperate with them by offering specific knowledge and expertise. For more information on offshore and nearshore destinations please refer to Section 4. Other trends and characteristics • In order to spread risk, EU buyers are dispersing their offshoring/nearshoring contracts among multiple providers. • As a result of the Multi Vendor model, demand for project management services to is expected to increase, since companies want to have a good overview over different contracts.
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CBI MARKET SURVEY: THE SOFTWARE AND IT SERVICES MARKET FOR OFFSHORE AND NEARSHORE OUTSOURCING IN THE EU • • • • • • • 3.4 The current economic downturn in several EU countries is expected to increase the overall EU demand for offshoring/nearshoring as companies are looking for IT solutions to work more efficiently. The effect of the current credit crunch is still unclear. The effects could be that companies shelve or even cancel their IT projects. On the other hand it could drive the demand for IT systems and software that focus on efficiency control. The availability of a skilled labour force and the need for more efficient processes are becoming increasingly important demand drivers beside cost savings. Security and Intellectual Property Protection are becoming increasingly important issues for EU buyers of software and IT services. Application software is expected to be one of the fastest growing segments of IT services in the years to come, mainly fuelled by financial services firms. Regarding outsourcing services, web hosting and SaaS offer the best chances in most EU countries. Potential for offshoring/nearshoring is highest in Western European countries like the UK, the Netherlands, Germany and France. Opportunities and threats

Trends and market developments offer opportunities and threats to exporters. A given trend can be a threat to some and an opportunity to others at the same time. The following trends should, therefore, always be analysed in relation to your specific circumstances. + Heavy competition in several industrial sectors and the overall economic slowdown is driving the demand for cost efficient businesses, providing opportunities for low cost companies in DCs. + The increasing importance of Multi Vendor sourcing offers opportunities for DCs as companies want to spread risks and divide projects into pieces that are each managed by one of the companies. + The increasing shortage of skilled labour drives the demand for offshoring/nearshoring by EU companies. This creates chances for offshore destinations and therefore also for DCs. ± The nearshoring trend offers good opportunities in Eastern Europe and Northern Africa, but means heavy competition for other DCs in offshore destinations. ± Price is no longer the only demand driver for EU companies. This can be an opportunity for companies that can offer high quality but not the lowest prices. It can also be a threat for companies that can only offer the lowest price and are unable to meet the higher quality requirements. ± India’s strong position is an opportunity for Indian companies but a threat for companies from other DCs. − The increasing attention of EU buyers for the protection of intellectual property rights and the fear to lose control raise the barrier for DC providers wishing to cater to the EU market. − Negative political and social views on offshoring/nearshoring (e.g. in Sweden and Germany), and language or cultural dependence in countries such as France and Italy make it difficult to enter the EU market for SMEs from DCs. 3.5 • • • • • • • Useful sources CIO magazine - http://www.cio.com/topic/1521/Offshoring - offers an aggregation of articles focused on offshoring. EUROITX – http://www.euroitx.com - CBI supported website with many useful sources and news articles on offshoring/nearshoring. Forrester – http://www.forrester.com - mostly paid reports, but interesting information in summaries are available for free. Gartner – http://www.gartner.com - both paid and free reports on information technology. NeoIT – http://www.neoit.com - go to “knowledge center” to view the free “white papers”. Offshore Outsourcing Best Practices - http://www.oobp.org/default.aspx Outsourcing center - http://www.outsourcing-center.com - website by research firm Everest Group which publishes many white papers on offshoring/nearshoring.
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CBI MARKET SURVEY: THE SOFTWARE AND IT SERVICES MARKET FOR OFFSHORE AND NEARSHORE OUTSOURCING IN THE EU

4

OFFSHORE/NEARSHORE LOCATIONS

This section provides an overview of the leading and emerging offshore countries for software and IT services. India is still the number one in the offshore market, but many other locations are emerging fast. The main characteristics, not only of India, but also of China, the Philippines, Russia and the Eastern European countries are discussed in Subsection 4.1. Exporters from DCs could use this information in order to get a indicative view of their competitive environment. Subsection 4.2 zooms in on nearshore locations, as these are increasing in popularity. Furthermore, the main trends, and opportunities and threats are discussed in Subsections 4.3 and 4.4 respectively. Subsection 4.4 provides you with useful sources. 4.1 Overview offshore/nearshore locations

This subsection shows a global overview of offshore locations by using the following sources: • Global ranking by AT Kearney • NeoIT Offshore Attractiveness Index. These sources give their view on the most interesting countries for offshoring and nearshoring in general. This means they are not solely focused on software and IT services specifically, but can be applied to these service groups. AT Kearney global ranking Table 4.1 shows a global overview of the main offshore supplying countries, based on a study by AT Kearney (2007). The A.T. Kearney Global Services Location Index analyses the top 50 services locations worldwide against 40 measurements in three major categories: cost, people and skills availability, and business environment. These categories reflect the main drivers for offshoring decisions. The table can help DC exporters in determining their competitive position. As shown in Table 4.1, countries from Southeast Asia (like India, China, Thailand and Malaysia) have the highest total score. These are considered to be the top services locations in the world. Some European nearshore destinations, such as Estonia, the Czech Republic and Poland, can be found in the middle of the list. They still have a much better position than most Western European countries. Please refer to appendix D ‘Metrics of the AT Kearney global services location’ for an introduction on which characteristics have been considered to measure. Table 4.1 A.T Kearney attractiveness of global services locations, 2007
Business Financial People and skills Total score availability environment attractiveness 3.22 2.93 2.84 3.19 2.64 3.29 2.65 3.26 3.16 2.63 1.65 2.79 3.22 3.09 2.44 2.34 2.25 1.26 1.21 1.78 1.47 1.18 1.23 1.04 1.49 1.51 1.04 1.14 0.98 0.96 1.44 1.38 2.02 1.62 1.47 1.06 1.93 1.26 1.56 1.61 2.53 1.79 1.25 1.54 2.20 7.00 6.56 6.12 6.02 5.89 5.82 5.76 5.75 5.75 5.73 5.68 5.62 5.61 5.60 5.60
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Country India China Malaysia Thailand Brazil Indonesia Chile Philippines Bulgaria Mexico Singapore Slovakia Egypt Jordan Estonia

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CBI MARKET SURVEY: THE SOFTWARE AND IT SERVICES MARKET FOR OFFSHORE AND NEARSHORE OUTSOURCING IN THE EU
Country Czech Republic Latvia Poland Vietnam United Arab Emirates United States (tier two) Uruguay Argentina Hungary Mauritius Tunisia Ghana Lithuania Sri Lanka Pakistan South Africa Jamaica Romania Costa Rica Canada Morocco Russia Israel Senegal Germany (tier two) Panama United Kingdom (tier two) Spain New Zealand Australia Portugal Ukraine France (tier two) Turkey Ireland Source AT Kearney (2007) Business Financial People and skills Total score availability environment attractiveness 2.43 2.64 2.59 3.33 2.73 0.48 2.95 2.91 2.54 2.84 3.03 3.27 2.60 3.18 3.23 2.52 2.83 2.88 3.00 0.77 2.92 2.61 1.97 3.19 0.46 2.88 0.50 1.18 1.53 0.89 1.59 2.76 0.45 2.06 0.40 1.10 0.91 1.17 0.99 0.86 2.74 0.98 1.30 0.95 1.04 0.90 0.90 0.83 0.96 1.00 1.18 0.96 0.87 0.86 2.09 0.90 1.38 1.27 0.82 2.19 0.75 2.16 1.71 1.12 1.69 1.14 0.98 2.07 1.31 1.54 2.05 2.00 1.79 1.22 1.92 2.29 1.54 1.26 1.98 1.56 1.50 1.25 1.98 1.22 1.11 1.60 1.49 1.53 1.36 2.30 1.33 1.16 1.86 1.05 2.40 1.40 2.35 2.06 2.25 2.31 2.11 1.09 2.27 1.41 2.29 5.57 5.56 5.54 5.54 5.51 5.51 5.47 5.47 5.47 5.44 5.43 5.42 5.42 5.36 5.34 5.30 5.29 5.28 5.22 5.16 5.14 5.14 5.10 5.06 5.05 5.02 5.01 4.95 4.91 4.89 4.84 4.83 4.79 4.78 4.18

Additional findings • India remains the highest rated location with a wide margin, although wage inflation and the emergence of lower-cost countries reduces its overall lead. • China has made extraordinary progress in the past few years and is rated as the second most attractive offshore destination in the world. Despite China’s strong growth, the maturity level of service providers by Chinese suppliers is not taken into account. In general these processes do not yet meet international best practice. However, the intense competition in the country will eventually force local providers to invest in upgrading the quality of their processes to international standards. • The relative cost advantage of the leading offshore destinations declined almost universally, while scores for people skills and business environment rose significantly between 2005 and 2007. This shows that the key to maintaining and enhancing long-term competitiveness lies in skills development, infrastructure investment and the regulatory environment, not in attempts to control wages.
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CBI MARKET SURVEY: THE SOFTWARE AND IT SERVICES MARKET FOR OFFSHORE AND NEARSHORE OUTSOURCING IN THE EU • • • Thailand jumped from 6th to 4th place and also other Southeast Asian countries as Indonesia (jumped to 6th place), Vietnam (jumped to 19th place) performed well. Latin America is also a good performer, with Argentina, Brazil, Chile, Mexico and Uruguay rising in the rankings. In the top 20, only EU countries from Central and Eastern Europe are present. Slovakia, Estonia, the Czech Republic, Latvia and Poland occupy the 12th, 15th, 16th, 17th en 18th spots respectively. The Middle East and Africa appear to be the next frontier in offshoring as countries such as Egypt, Jordan, the United Arab Emirates and Ghana perform well. Egypt and other North African nations stress their unique combination of European language skills, technical proficiency and low wages. Especially French companies appreciate the language skills in Northern Africa and see this as their most important nearshore destination. The increasing importance of offshore destinations is to some extent facilitated by technological developments in the field of communication such as video conferencing and voice over IP (e.g. Skype). These developments lower the barrier for EU buyers to communicate with software and IT services suppliers in offshore destinations. The performance of Turkey is surprisingly poor, despite its emerging success as an offshore destination. Its relatively high costs compared to other emerging markets are not compensated by a correspondingly higher education level or business environment rating. Russia scores well in areas like financial attractiveness and skills availability, but as the Russian business environment is currently the lowest in this survey, a high ranking is out of reach. Nevertheless, Russia is developing a niche for higher-value global IT outsourcing, research and development and software development. Especially low cost university cities like St Petersburg, Nizhny Novgorod and Samara offer good potential.

•

• •

ITO competency-destination matrix Another way to find out more about competing countries is Table 4.2. It shows the suitability of each country in detail for a variety of competences. As shown, India offers practically every kind of ITO service mentioned in the table; there is no other DC with the capacity to offer the same number of ITO services. When looking at the CEE countries, it can be said that they primarily focus was on low value services; however, in recent years they have developed more sophisticated services as well. When looking at services alone, it shows that all countries offer CAD services. Practically every country present in the table also offers application management & support, multimedia & animation and web-based applications. Table 4.2 ITO competency-destination matrix, 2005
Philippines Romania Malaysia Czech Republic Hungary Canada Ireland Mexico Poland Russia

CAD QA/testing Application Management & Support IT Consulting System Integration/ EAI Packaged S/W Implementation S/W Localisation Infrastructure Management Services E-business Embedded

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●

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●

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South Africa

Brazil

China

India

●

CBI MARKET SURVEY: THE SOFTWARE AND IT SERVICES MARKET FOR OFFSHORE AND NEARSHORE OUTSOURCING IN THE EU
Philippines

Romania

Malaysia

Czech Republic

Hungary

Canada

Ireland

Mexico

Poland

Russia

Technology Multimedia & Animation Web-based Applications Wireless technology EA (ERP, CRM, SCM, DW/DI, KM)

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Source: neoIT (2005)

4.2

Overview of nearshore destinations

Nearshore destinations in Eastern Europe are gaining in popularity among European companies that want to outsource their software and IT services. These nearshore destinations have certain advantages over offshore destinations like Asian countries. Especially German and French companies mention the cultural and language aspects in Eastern Europe as important factors for choosing these countries as a destination for their outsourcing projects. According to CBI expert Mr Klucs, nearshore destinations are also especially interesting for SME companies. They feel more comfortable with these nearshore destinations because of the geographical closeness and a better understanding of the EU culture. Central and Eastern Europe The region that has gained most in popularity over the past decade is Central and Eastern Europe (CEE). As mentioned in Section 2, CEE countries such as Ukraine, Romania, Belarus, Poland and Bulgaria are home to a large number of IT companies. These companies are centralised in a rather small area. The main advantages of CEE countries compared to the more offshore destinations are the geographical and cultural proximity to Western Europe, lowering the barrier for EU buyers and the multilingual workforce. In addition, the growing markets in these countries (refer to Section 1) can also provide opportunities for EU buyers. The Czech Republic, Hungary, Poland and Slovakia will profit from the advantage of low costs, strong skills, the implementation of EU regulations and solid infrastructure. Romania, Bulgaria and the Baltic States will offer the same skills at an even lower price and are consequently expected to see a flow of new investments in nearshoring from the EU. Romania, for instance, is the country with the most bilingual workforce in Europe. Moreover, Russia is also developing a niche in global IT and R&D offshoring, based on its strong human resources. Countries outside the Central and Eastern European region will face heavier competition. Table 4.3 shows the number of IT professionals in the different CEE countries. Please note that only IT specialists involved in IT outsourcing services are taken into account. Table 4.3
Country Ukraine Romania Belarus Hungary Bulgaria Poland Czech Republic Serbia Estonia Slovakia

Number of IT professionals in CEE countries
IT professionals 14,000 12,500 9,500 9,000 8,000 7,800 7,500 4,000 3,700 2,500
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South Africa

Brazil

China

India

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CBI MARKET SURVEY: THE SOFTWARE AND IT SERVICES MARKET FOR OFFSHORE AND NEARSHORE OUTSOURCING IN THE EU
Country IT professionals

Moldova 1,440 Lithuania 1,300 Croatia 1,000 Latvia 600 Slovenia 450 Albania 100 Source: Central & Eastern Europe Outsourcing Review 2007

4.3

Trends

This section gives some main trends within offshore / nearshore ITO. • Several parts of the world are emerging as offshore/nearshore destinations. The most important destinations for EU countries are Central and Eastern Europe, Southeast Asia and North Africa. The main reason for this trend is the unique combination of available language skills, technical proficiency and low wages in these countries. • The relative cost advantage of the leading offshore destinations declined almost universally, while people skills and business environment increased significantly. • Technological developments in the field of communication, such as video conferencing and voice over IP, lower the barrier for EU buyers to communicate with ITO suppliers in offshore destinations. 4.4 + + ± − Opportunities and threats Offshore destinations such as the Middle East and Southeast Asia are emerging due to the available language skills, technical proficiency and low wages in these areas. Companies in offshore DCs can benefit from new ways of communicating with EU buyers. Applications such as voice over IP and video conferencing are efficient means for communicating. SMEs from DCs in offshore destinations have to compete with the growing importance of nearshore destinations. For SMEs from DCs in nearshore destinations such as Eastern Europe and North Africa, chances on the EU market look very good. The fact that the focus on low costs is becoming less important in offshore/nearshore countries such as India poses a threat for DC suppliers as this is their main competitive edge. Useful sources AT Kearney - http://www.atkearney.com CIO magazine - http://www.cio.com/archive/071506/2006_global_outsourcing_guide.pdf ITONews - http://itonews.eu - IT outsourcing news from Central and Eastern Europe. EIU - http://graphics.eiu.com/files/ad_pdfs/eiuOffshoringWP.pdf NeoIT – http://www.neoit.com

4.5 • • • • •

Associations The following associations can also provide you with useful price information. EU • • • • associations Czech Republic - Asociace pro poradenství v podnikání - http://www.asocpor.cz Hungary - Hungarian Software Alliance (HSA) - http://www.h-s-a.hu Poland - American Chamber of Commerce in Poland - http://www.amcham.com.pl Polish - Chamber of Information Technology and Telecommunications http://www.piit.org.pl

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CBI MARKET SURVEY: THE SOFTWARE AND IT SERVICES MARKET FOR OFFSHORE AND NEARSHORE OUTSOURCING IN THE EU

Other associations • China Software Industry Association (CSIA) – http://www.csia.org.cn • NASSCOM – http://www.nasscom.org • Outsource2india - http://www.outsource2india.com • European I.T. Service Center (EITSC) – http://www.eitsc.com • Foundation for Information Technology Education and Development (FIT-ED) http://www.fit-ed.org • Outsourcephillipines - http://www.outsourcephilippines.org • Outsourcing-Russia - http://www.outsourcing-russia.com

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CBI MARKET SURVEY: THE SOFTWARE AND IT SERVICES MARKET FOR OFFSHORE AND NEARSHORE OUTSOURCING IN THE EU

5

TRADE STRUCTURE

This section discusses the trade structure for software and IT services. Section 5.1 contains information on the distribution channels for DC exporters. The distribution channels are divided into channels for software and IT services, although in practice these channels mix. This is because some major companies provide both software and IT services to their customers. For the purpose of this survey, both channels have been separated to give the DC exporter an idea of the possible distribution channels. In Section 5.2 the trade channels for software outsourcing are discussed and Subsection 5.3 focuses on channels for IT services. Useful sources for more information can be found in Subsection 5.4. 5.1 Distribution channels

In general, the best possibilities for DC exporters in software and IT services definitely lie in offshore and nearshore outsourcing. Supplying software products for the EU market would demand such a huge investment of resources and marketing costs that no company or group of companies could afford it. It is very difficult to build distribution and support channels. However, this is different for niche products. A specialist firm that can supply a specific piece of software for a key sector could have a chance of success. But even then, marketing costs will be huge. Some important success factors would include: • Specialised software for a niche market. • A solid and proven global client base. • High-level support services. • Competing (on price, features, quality, reliability) against global market leaders in their own category. From practice it becomes very clear that multinationals and other large companies perform their outsourcing processes on their own. They set up their own offices (captive offshoring) or make agreements with major outsourcing providers. The trend towards multi-sourcing as a way to spread risk makes exceptions to this rule more and more common. Offshore-nearshore contracts are increasingly allocated to several best-in-breed service providers to achieve the highest quality possible and minimise the risks of the operation. As mentioned before, a distinction in the trade structure for DC-suppliers in the offshoring/nearshoring of software and IT services should be made. First, the level of education differs. Developing software requires advanced technical knowledge, while only basic training is needed for IT services. Second, language proficiency is a requirement in IT services and to a lesser extent for software. Although English is the primary language in demand, the demand for outsourcing services in languages such as German and French is increasing (again especially in IT services). An example of the need for language proficiency is on-line support. In addition to education and language, the nature of both areas of outsourcing differs. Software offshoring/nearshoring is a communication intensive business, in which some programmers spend about 50% of their time interacting with others. It involves an interactive process of building, checking, revising and testing. Almost every project is unique, requiring the same time-intensive attention. This differs from IT services. For IT services, the complexity is in the start-up process. Once the process has been established, there is far less need for communication. Furthermore, the end consumers for software are mostly EU software companies, while for IT services end users can be both EU IT services companies but also other EU companies in need of IT services. The level of education, language proficiency and communication that is needed will influence the trade structure of software and IT services.

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CBI MARKET SURVEY: THE SOFTWARE AND IT SERVICES MARKET FOR OFFSHORE AND NEARSHORE OUTSOURCING IN THE EU 5.2 Trade structure software outsourcing Figure 5.1 shows the most common distribution channels for DC offshore/nearshore service providers in the EU software industry. Offshore and nearshore service providers in DCs that are considering entering the EU market generally have five options: • Partnership with an EU (software) company • Broker/Consultant • To EU company directly • Your own sales office in the EU • Captive offshoring Figure 5.1 Distribution channel software offshoring/nearshoring
DC software developer

Middle man (Broker / Consultant)

Own office / Captive offshoring

partnership

European (software) company Source: FFF (2009)

Any industry

Partnership with an EU (software) company This is the best trade channel for SMEs from DCs, according to CBI expert Mr Klucs and industry experts in various EU countries. Since entering a market in the EU is very difficult for SMEs from DCs, having a joint venture (or any other partnership with an EU company) can make the market entrance much easier. A joint venture is the establishment of cooperation with a software provider in an EU country. This provider then offshores work to an SME from a DC. Once you can prove that you already perform work for a company from the EU it is much easier to get other offshoring projects. In the case of a joint venture, it is the SME from a DC that actively needs to search for possibilities to cooperate. Broker/consultant Another possibility is to cooperate with an intermediary, a specialised broker and/or outsourcing consultant. In practice, there are differences between these two, as brokers more or less focus on matchmaking. They typically establish relationships with multiple offshore providers, and then channel work to these firms as they acquire business. A disadvantage of a broker is that results are not guaranteed. In the case of no results the broker still has to be paid. Outsourcing consultants have in-depth knowledge of the outsourcing business, as well as extensive business networks that they utilise to secure new contracts. Beside matchmaking, consultants advise and provide a wide range of support services on the whole outsourcing process. An interesting example of a broker is the European Information Technology exchange (EuroITX). It is a European one-stop-shop that provides information for both buyers and suppliers of offshore / nearshore software and IT (enabled) services outsourcing. Their website http://www.euroitx.com has three units: Intelligence, Marketing and Supply-Demand. The
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CBI MARKET SURVEY: THE SOFTWARE AND IT SERVICES MARKET FOR OFFSHORE AND NEARSHORE OUTSOURCING IN THE EU Intelligence unit contains, creates and maintains all the information, papers, external resources and news. The Marketing unit promotes the associated service providers from DCs. The Supply-Demand unit manages and develops the database of company profiles. This database contains both suppliers and buyers. It focuses on suppliers from DCs and buyers from Europe. EuroITX is sponsored and supported by CBI (http://www.cbi.eu), the homepage of this website can be seen in Figure 5.2. Figure 5.2 EuroITX

Source: http://www.euroitx.com (2007)

Working with an EU company directly Although almost any industry could be a potential outsourcer of software development projects, in direct outsourcing EU software companies themselves are the most interesting target group for the DC exporter. Industries in Europe do not turn directly to service providers in DCs very often. In some cases, EU industries contact a EU software company that in turn outsources the project partially or fully to DCs. This model could become more important in the years to come. Sales office in the EU Establishing a sales office in an EU member country is another option. It could be wise to do this in a joint effort. For example, the government or the industry association might contribute to such a presence, allowing several companies at a time to profit from the office and facilities. Captive offshoring Especially larger European software companies set up businesses in DCs themselves. This is called captive offshoring. In this model, European companies establish subsidiaries abroad. This is useful if large amounts of software need to be created. For this purpose, companies such as Philips, Vanenburg and Invensys/Baan have set up subsidiaries in India. The ABN Amro Bank (recently taken over by a consortium of companies) operates a software facility in Lahore (Pakistan). Another IT-firm recently set up an office in Kathmandu (Nepal).

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CBI MARKET SURVEY: THE SOFTWARE AND IT SERVICES MARKET FOR OFFSHORE AND NEARSHORE OUTSOURCING IN THE EU
Practical tips for software and IT service providers from DCs The most important tools for DC suppliers to promote their outsourcing services are: • Focus on one area and specialise in this in order to supply the client with an outstanding service and specific expertise. • Focus marketing on core sectors and niches and look to visit specific outsourcing events and seminars rather than big events. • Explore cooperation possibilities with other companies, trade and/or promotion organisations. • A website proposing well-defined services, clear prices, competitive advantages (e.g. USP, cost reduction and service quality) and a client list as reference helps create a trustworthy environment. • Establish strong linkages with overseas diaspora networks, universities, private sector leaders and foreign trade authorities. A fellow countryman within the client company in the EU could very well favour outsourcing. More practical tips and information can be found in CBIs “From survey to success. Guidelines for exporting software and IT services to the EU.”

5.3 Trade structure IT services outsourcing Figure 5.3 shows the most common distribution channels for DCs within the IT services outsourcing industry. It has the same options as software, although there are some differences in extra possibilities. For outsourcing IT services -as in software-, local presence by having a sales office, a partnership with a EU IT services company or using an intermediary (brokers/consultants) are the three most common channels as well. Figure 5.3 Distribution channel outsourcing IT services
IT service provider DC

Broker/ Consultant Own office European IT company

End-user organisation Source: FFF (2008)

In general, it has been difficult for companies in DCs to enter into partnerships with large service providers (system integrators) in Europe directly, such as CMG and Cap Gemini or other large professional services companies like Accenture, Ernst & Young, Dimension Data, EDS, IBM and PWC Consulting. Although these companies may not actively promote their offshore capabilities, they will make use of DC suppliers in order to reduce project costs and shorten delivery time scales. Contrary to the software outsourcing industry, exporters of IT services from DCs could contact the end-user organisations, such as banks and financial institutions, directly. Some of these already use services from DCs. These include, for example, companies that outsource data entry (BPO). They also tend to be larger and are frequently multinational corporations.
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CBI MARKET SURVEY: THE SOFTWARE AND IT SERVICES MARKET FOR OFFSHORE AND NEARSHORE OUTSOURCING IN THE EU However, this is probably not a viable model for new entrants into the outsourcing field, since most European companies enter into their outsourcing relationships through a European-based company. This is especially true for smaller companies. According to Sampath (2004) and exhibitors from CeBIT 2005, the following pattern can be distinguished in the purchasing strategy of European companies divided by size: • Multinationals do business directly with offshore suppliers or have their own company. • The large companies (companies with a turnover of over €300 million) do business with offshore suppliers, local intermediaries or local suppliers. • Large companies and medium-sized companies do business with local intermediaries and local suppliers. Over the last decade, leading IT services firms relied on growth from the inside of the company. Through the 1990s, the IT services firms set up global delivery centres bit-by-bit, on their own. Over the last four years, the IT services firms have changed tack and are scaling up these centres to provide customers with a blended model: an onshore, nearshore and offshore capability, depending on what customers want. Additional possibility As an addition, outsourcing service providers of software and IT services could use the following model as well. Local offices of multinationals in the home country of the service provider could be used as a bridge to get into contact with its other offices spread all over the world. For example: once a service provider has worked for Shell in DC X, it could do the same job for Shell in EU country Y. 5.4 • Useful sources

European Information & Communications Technology Industry Association (EICTA) http://www.eicta.org • Offshore Outsourcing Best Practices - http://www.oobp.org/default.aspx • Ventoro – http://www.ventoro.com/Offshore2005ResearchFindings.pdf More information about names and websites of interesting players, as well as sources to find those players can be found in the CBI market surveys covering the market in individual EU countries.

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CBI MARKET SURVEY: THE SOFTWARE AND IT SERVICES MARKET FOR OFFSHORE AND NEARSHORE OUTSOURCING IN THE EU

6

PRICE DEVELOPMENTS

This section describes the prices for software and IT services in Europe. Subsection 6.1 discusses current trends in prices for these services. Subsection 6.2 focuses on wage costs in Europe and in Subsection 6.3 these costs can be compared to wages in offshore/nearshore destinations. Subsection 6.4 deals with the margins in the main trade channels and useful source for price information are given in Subsection 6.5. 6.1 Prices

NeoIT predicts that prices for offshore/nearshore software and IT services will increase slightly. This is a result of the higher added value services offshore/nearshore providers are able to offer nowadays. According to CBI expert Mr Klucs, the EU market will tolerate a small price increase as price is no longer the only focal point for EU companies that want to offshore/nearshore their software or IT services. The emphasis is also on quality and security of the projects. For IT services with low requirements on skills and experience some moderate price pressure can be noticed. In addition, the consulting company Meta Group expects declining prices in the traditional software market (supply of standard software) of up to 35% by 2008 and another 15% by 2010. Therefore, IT service providers face a challenge to either find new ways of avoiding the competitive pressure on prices, or deal with it by lowering costs. New developments in the field of IT and e-business may help meet these challenges. The integration of open source components or the outsourcing of development tasks to offshore providers, for example, are strategies for focusing on core competencies and lowering costs. 6.2 European wages

To give an indication of the IT salary levels in Europe and in order to compare them with offshore/nearshore destinations, Table 5.1 shows the salary levels of junior and senior software engineers in different EU countries. Table 6.1
EU country

IT Salary levels in EU countries, € per year, 2007
IT manager 29,485 56,300 29,400 38,430 38,300 43,200 44,200 50,460 55,280 software engineer 18,313 22,500 23,300 26,920 29,070 32,100 34,000 39,516 41,300

Italy United Kingdom Spain Belgium Sweden The Netherlands France Germany Denmark Source: PayScale (2008)

In several EU countries wages for IT managers are increasing. This is a direct result of companies outsourcing technical support to low wage countries such as India. The gap between low and high skilled IT salaries has widened as a result of the growing demand for skilled professionals to manage the increasing number of offshored IT projects. In the UK for example, the average wage increase (in British Pounds) amounted to 3.5% in 2007. Regional differences Beside differences between EU countries, regional differences must be taken into account as well. An average difference between the capital of a country and the smaller cities can be around 10-15%. In France the difference between Paris and the south of France is as much as 20-30%. This means that it can be very interesting (even more so than in other EU countries) for a French company in Paris to outsource part of the work to the south of France, since this

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CBI MARKET SURVEY: THE SOFTWARE AND IT SERVICES MARKET FOR OFFSHORE AND NEARSHORE OUTSOURCING IN THE EU already saves them a lot of money. It is therefore a good idea to not only look at the capital of a country for the wage level, but also at other regions. 6.3 Offshore/nearshore wages The salary levels mentioned in Table 6.1 can be compared to wages in offshore/nearshore destinations by using Table 6.2. Table 6.2 IT Salary levels in offshore/nearshore countries, € per year, 2007
IT manager* 21,600 28,040 17,540 17,510 14,950 12,180 26,580 19,680 19,555 15,292 20,400 20,503 29,680 20,800 28,250 31,377 50,500 45,355 49,925 85,200 84,650 Software engineer** 6,590 8,144 8,383 8,796 8,969 9,171 9,870 10,597 10,790 11,582 13,626 15,094 15,344 16,033 16,725 17,990 18,432 19,215 22,050 34,039 43,410 Outsourcing destination Indonesia Malaysia Philippines Bulgaria Thailand Vietnam China (Shanghai) India Romania Poland Slovakia South Africa Mexico Hungary Czech Republic Russia South Korea Singapore Brazil Ireland US

Sources:

* Mercer (2007) and PayScale (2008) ** PayScale (2008)

Table 6.2 shows that countries in South East Asia are the least expensive outsource destinations; this also counts for popular destinations like India and the Philippines. However, as the industries in those destinations mature, labour costs will also rise. Countries in CEE countries are generally more expensive, but they still offer a lot of cost-saving opportunities and the gap with Asian countries is narrowing slowly. According to research by Everest, wages for IT outsourcing service providers in key offshore markets, including India, China and Poland, are increasing by an average 8 to 11% per year. This is a lower rate than generally expected. With one or two exceptions, growth figures in most other countries in Table 6.2 for 2005 until 2010 are below 8% and therefore on a moderate level. The lower figures for India, China and Poland shows that the efforts offshore outsourcing suppliers have been making to control rising labour costs have been successful. These initiatives include the expansion of their operations into lower-cost cities and countries. Despite salary increases in key offshore markets, the idea that India and other key markets will price themselves out of the outsourcing business in the short run is unfounded. 6.4 Margins in main trade channels

An indication of the use of margins within the most important trade channels is given below. Partnership with EU company The investment needed here is not very high. The partner’s network in the EU can be used to find customers and to get acquainted with the EU market. This is a real advantage over the other entry strategies. However, the problem with a partnership is in finding the right partner and, when a partner has been found, to make sure that the price that is paid for your services is fair. Please bear in mind that this process can be rather expensive.
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CBI MARKET SURVEY: THE SOFTWARE AND IT SERVICES MARKET FOR OFFSHORE AND NEARSHORE OUTSOURCING IN THE EU Intermediaries Generally speaking, the contracts that brokers and especially consultants negotiate could have tight pricing and somewhat lower margins than the current industry levels. These brokers/consultants have a clear understanding of the detailed cost structure of the provider and, moreover, have relationships with several service providers. As a result, they are in a position to negotiate the best deal for the client in the EU. In most cases, service providers are asked to work out their breakeven costs (even excluding the sales and marketing overheads), and offer a 20-25% mark-up on these costs, meaning a net margin of 17-20% on sales. Some practical examples: in general, consultant NeoIT (http://www.neoit.com) is known as price aggressive and will negotiate the lowest possible price for its clients. On the other hand, consultants such as McKinsey (http://www.mckinsey.com) and Gartner (http://www.gartner.com) are more likely to emphasise the qualitative aspects of the service providers. Brokers/consultants often recommend customers to adopt a multi-vendor strategy to have at least one leading provider and one mid-size vendor, in order to put pressure on the prices of both service providers. Local sales office In general, margins will be higher when a middle man is not needed. The first start-up of your own sales office is a very large investment that cannot be made by the majority of the SMEs in DCs. 6.5 Useful sources of price information

As it is quite difficult to give exact prices for software and IT services, it is also hard to obtain information about current price levels. The licence prices are usually found on the websites of the software suppliers. Information on implementation costs can be found in reports concerning business software, also giving ranges of costs for software and implementations. Outsourcers/exporters have access to this information by using several sources. The main ones are: • Everest Research Institute - http://www.everestresearchinstitute.com • Industry associations in EU countries. • Mercer – http://www.mecer.com - IT pay around the world survey 2007. • NeoIT - Offshore and Nearshore ITO and BPO Salary Report – http://www.neoit.com • PayScale – http://www.payscale.com – choose Salary Research Centre and the country to see the salary levels. • Statistical offices in different EU countries, such as CBS (http://www.cbs.nl) in the Netherlands. • Trade fairs and trade press. • Websites of competitors.

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7

MARKET ACCESS REQUIREMENTS

As a service provider in a developing country preparing to access EU markets, you should be aware of the market access requirements of your trading partners and the EU governments. Requirements are demanded through legislation and through labels, codes and management systems. These requirements are based on working conditions and social concerns. You need to comply with EU legislation and have to be aware of the additional non-legislative requirements that your trading partners in the EU might request. For information on legislative and non-legislative requirements, go to ‘Search CBI database’ at http://www.cbi.eu/marketinfo, select ‘IT outsourcing’ and the EU in the category search, click on the search button and click on market access requirements. Tariffs and quota Software and IT services outsourcing is a service, therefore it is not subject to import duties. However, for outsourcing services VAT needs to be paid in the EU. VAT is a tax, levied by the individual member countries in the European Union. It is added to the price of products and services and will therefore influence the price consumers and companies have to pay. VATrates differ per EU-country and are shown in Table 7.1. Table 7.1 VAT-rates applied in the EU-member states (2008)

Austria 20 Belgium 21 Bulgaria 20 Cyprus 15 Czech Republic 19 Denmark 25 Estonia 18 Finland 22 France 19.6 Germany 19 Greece 19 Hungary 20 Ireland 21 Italy 20 Latvia 18 Lithuania 18 Luxembourg 15 Malta 18 Netherlands 19 Poland 22 Portugal 21 Slovakia 19 Slovenia 20 Spain 16 Sweden 25 UK 17.5 Source: http://ec.europa.eu/policies/index_en.htm (2008)

In the IT outsourcing industry, VAT is paid in the country where the service is actually rendered. Most companies in the EU can deduct their VAT. However, companies in the financial sector (like banks and insurance companies) and public sector cannot do so. This offers an opportunity for DC exporters that cooperate with such companies. Two examples: 1) A UK financial company that outsources software development activities to a local UK company should pay VAT; 2) A UK financial company that outsources software development to a service provider in India does not have to pay VAT. The VAT rules within India apply for the service provider.

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CBI MARKET SURVEY: THE SOFTWARE AND IT SERVICES MARKET FOR OFFSHORE AND NEARSHORE OUTSOURCING IN THE EU This means that service providers from developing countries have a competitive advantage compared to service providers in the EU. Currently, there is some discussion within the EU to change this. Electronic services In 2002, the Council of the European Union adopted a VAT directive, which includes regulations on the levy of VAT for electronic services. Under this regulation, effective from July 1st, 2003, electronically supplied services are taxed in the country where the service is consumed. The regulation affects suppliers of electronic services, such as software development, both in EU countries and in non-EU countries.

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8

OPPORTUNITY OR THREAT

An overview of the opportunities and threats in the EU market for software and IT services is given at the end of Section 1, 2 and 3 of this market survey. Opportunities and threats relevant to an individual EU country can be found in Section 1 and 2 of the CBI market surveys covering the market in individual countries. Please note that these opportunities and threats are general and are only provided in relation to some general trends. There is a large number of different services in the software and IT services market. Within one service, every contract is different and company specific. Beside the wide services range in the software and IT services market, the market is also very dynamic. This causes trends, conditions and requirements for software and IT services to change very quickly. Hence, it is important to continuously analyse the market and country that you are active in, to be able to react to the changes in that market. You also have to remember that a trend may be an opportunity for one company but at the same time represent a threat to another company. A good example of this can be given by analysing the current nearshoring trend that exists in the EU. The growing importance of nearshore destinations such as Eastern Europe and Northern Africa is an opportunity for SMEs from DCs in those areas. Their opportunities in the EU market increase. However, for SMEs in offshore destinations such as Asian countries this is a threat, as they might experience more competition from nearshore destinations. This diminishes their chances in the EU market. The same counts for the trend towards better quality, added value and expertise. SMEs that can offer these high quality services have good opportunities in the EU, while SMEs that only rely on offering services against low costs, with less focus on quality requirements, will face the threat of being left out. In order to make sure that your company knows what a certain trend means for the company, it is important to analyse the possible consequences of this trend for your company. This gives you the possibility to maximise your profits when taking advantage of an opportunity and to take the right approach when responding to threats for your company. By analysing current trends it might even be possible to forecast future developments in the market. Generally speaking, every opportunity becomes a threat if your company is not able to respond to this trend and your company is losing terrain to others that can respond to the trend successfully. By doing thorough and continuous market research you will be able to discover the trends in a certain country or market. For more practical tips please also refer to CBIs “From survey to success. Guidelines for exporting software and IT services to the EU”.

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APPENDIX A PRODUCT CHARACTERISTICS
As a result of an increasing lack of skilled personnel in the software and IT-services sector in most EU countries, combined with an increasing need for skilled but competitively priced labour, companies in the EU have to start looking for other solutions for their software development and IT-services. Outsourcing, offshoring and nearshoring are solutions that can be used. Participation in the global software and IT services market provides a good opportunity for growth for companies from DCs. These companies can offer the competitively priced labour and at the same time these countries have an increasing number of technically trained and skilled people. The advantages these countries have are very attractive for EU companies that are continuously looking to reduce costs and improve quality. In this appendix, first a definition is given of what software products and IT services are, as there are many different classifications. Then, definitions are given of outsourcing. The focus will be on offshore and nearshore outsourcing as this is the market where SMEs from DCs have a chance in the EU. Definitions software and IT services In this survey, the definitions for software products and IT services from the European Information Technology Observatory (EITO) are used. This is a well-reputed source in the industry that has very detailed and up to date information. Table 1 presents the different product groups within software products and IT services. Table 1
Software products

System infrastructure software Application tools IT services • Outsourcing services • Project services • Hardware maintenance Source: EITO, modified by Facts Figures Future (2008)

Product group definition software products and IT services • Application software • System software

Software products According to EITO, software products are ‘commercially available packaged programmes for sale or lease from systems services and Independent Software Vendors (ISVs)’. Value includes the packaged software fees plus related non-consulting revenue, such as fees for maintenance and/or support. It includes licence fees for software maintenance, services, and/or support. Other forms of software support would be counted within the support services category. As mentioned in Table I software products can be categorised into two segments: • Application software • System software (consisting of system infrastructure software and tools) Application software Application software includes consumer, commercial, industrial and technical programmes and code sets designed to automate specific business processes in an industry or business function. Application software increases productivity and supports entertainment, education and data processing. Application software products can be either out-of-the-box solutions, such as most productivity software products and business applications for the SME market, or more complex/ process-oriented solutions that require implementation and customising services, such as business applications for the mid-market and for large enterprises.

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This segment covers the following applications: Office automation, business applications and other applications. The office automation software market includes, for example, software for word-processing, data spreadsheet, and presentation software. Business applications are process-oriented applications that include horizontal applications such as financials, HRM, CRM, SCM as well as industry-specific solutions such as billing (telecom, utilities), core banking systems, etc. Other applications include graphical software, embedded systems, and other technical software. • Application software products are often sold as packaged solutions including hardware and services, e.g. implementation services. The value of the hardware and services resold is excluded if it can be determined. All related revenues from implementation services (consulting, implementation/ customisation, training) are recorded as project services revenues. Software as a Service (SaaS) revenues are not included under application software products as they are typically billed on a subscription basis and do not license actual software. Such revenues are included in the outsourcing/processing segment.

•

System software For this survey, the segments application tools and system infrastructure tools are combined and referred to as system software. By doing so a better comparison can be made with application software. System infrastructure software System infrastructure software includes: • proprietary as well as open operating system and system-level software; network, system, storage, and security management software for all types of hardware (from mainframe to PC). Application tools • collaboration and content tools, database engines, business intelligence infrastructure, development tools and integration platforms. Application tools include information and data management software, application design and construction tools, application lifecycle management, application deployment platforms, middleware, other development tools and information access and delivery tools. Examples include database engines, 4GL (fourth generation programming language. Class of computer languages closest to human languages), AMD (Analysis, Modelling and Design) and 3GL (third generation programming language e.g. C, C++, and Java). IT services As • • • mentioned in Table 1, the IT services segment is divided into the following product groups: Outsourcing services Project services Hardware maintenance

Outsourcing services This segment of ITO is very important for exporters from developing countries as the market for outsourcing services gives a very good indication of offshore outsourcing as well. Therefore, this segment will be described to a larger extent than other, less important, segments. The outsourcing services segment can be divided into four sub segments; complete outsourcing, application-related outsourcing, infrastructure-related outsourcing and application management (AM). Captive IT outsourcing activities (activities of IT suppliers with their parent or sister companies) are not included in the IT services spending figures.

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CBI MARKET SURVEY: THE SOFTWARE AND IT SERVICES MARKET FOR OFFSHORE AND NEARSHORE OUTSOURCING IN THE EU Complete outsourcing Outsourcing of a company’s "central infrastructure and central application management" including the data centre as well as the operating and software development staff. Application-related outsourcing Including web hosting and ASP/SaaS; application outsourcing (outsourcing of an application chain, incl. server and basic system operation, and further development in part of the application); Business Process Outsourcing (BPO), i.e. assumption of responsibility for an entire business process (or parts of it), also including specialised administrators in addition to the related infrastructure and application management. In most cases, assets and/or staff are taken over. Only processes that to a significant degree are supported by IT (e.g. accounting, human resources, logistics, billing, card processing, etc.) are considered as BPO. Infrastructure-related outsourcing Data centre management, desktop outsourcing, and other infrastructure-related outsourcing. Application Management (AM) AM describes the maintenance and enhancement of existing applications, sometimes even their initial development, under a long-term (multi-year) contract with a commitment to fulfilling pre-defined Service Level Agreements (SLAs) on a fixed-price basis. Often, staff are transferred. Only “stand-alone application management” is considered in this segment. Embedded AM in complete or application outsourcing deals is included elsewhere in the corresponding segments. Project services This segment covers all Professional services and systems integration and is divided into sub segments IT consulting, contract staff, fixed-price development and systems integration, and IT training. IT consulting Planning, specification, and design of information systems. In addition to purely IT-related services (audit of the information system, design, selection of technologies and products) this also includes the "process consulting" (BPR and similar services) component of projects such as ERP implementation. The IT consulting market is divided into three main sub-segments: consulting on technologies and infrastructures, consulting on Management Information Systems (MIS) applications, and consulting on scientific, technical, and embedded information systems and applications. Contract staff (time and materials) Software development and maintenance, implementation/ customisation of software products (applications and/or tools), on both a time and materials basis. Note that revenues of IT staffing companies working for other IT services suppliers are not taken into account, as this would involve double booking. Fixed-price development and systems integration Software development and maintenance, implementation/customisation of software products (applications and/or tools), both on a fixed-price basis, and also including large and complex projects in real-time and other complex environments. IT training IT training can focus on either end users or IT professionals, and includes two types of delivery: standard training, including all multi-customer seminars, and customised training, including on a one-on-one basis.

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CBI MARKET SURVEY: THE SOFTWARE AND IT SERVICES MARKET FOR OFFSHORE AND NEARSHORE OUTSOURCING IN THE EU Hardware maintenance Hardware and system software installation, repair and support for all types of hardware (from mainframe to PC) and related system software (proprietary or open systems). Note that this segment does not include maintenance services within the framework of an outsourcing contract. Definitions of outsourcing, onshoring, offshoring and nearshoring A famous saying states: ‘if you want something done right, do it yourself’. This is still true for many industries, but not for the increasingly cost-conscious and core-focused international business of software and IT services. Companies in advanced, ‘high-cost’ economies are increasingly looking to contract out software and IT services work to companies in ‘low-cost’ nations or regions that can offer a skilled workforce and high quality solutions. The contracting out of parts of a business is called outsourcing. The specific outsourcing of ICT is called Information Technology Outsourcing (ITO). This is by far the most promising ICT segment for companies in DCs. There are different types of outsourcing, namely: • Onshore outsourcing • Nearshore outsourcing • Offshore outsourcing Onshore outsourcing For the EU study onshore outsourcing concerns outsourcing within EU member states. For the market surveys covering the ITO market in individual EU countries, this definition of outsourcing concerns outsourcing a project within your own country. This means that one company in country X outsources a project to another company in the same country. Often onshore outsourcing is meant when “outsourcing” is mentioned. Nearshore outsourcing Outsourcing to nearshore destinations is an important trend. For the EU market survey, nearshoring concerns outsourcing to non-EU member states in Eastern Europe, and to North Africa. For the surveys covering the markets in individual EU countries, nearshoring includes outsourcing services to countries in Europe, which in most cases are countries in Eastern Europe (Romania, Hungary) and the Balkan (Bosnia, Albania). Offshore outsourcing This includes outsourcing services to countries outside Europe, typically overseas. The most important offshore destination for EU companies is India. Software and IT services outsourcing In this CBI survey on the EU market for software and IT services outsourcing we mainly focus on the possibilities for nearshoring and offshoring as these are the areas that are interesting for companies from DCs. IT services offshore/nearshore outsourcing The core interest consists of custom development solutions, web application development, system integration, database management and IT consultancy services (re-engineering, localisation, maintenance, testing, coding, IT security services, web enablement, migration). Outsourcing services that are IT driven or require the help of IT infrastructure and resources are called business process outsourcing (BPO). A few examples of BPO are medical (legal) transcription, online education, online training, data processing (data entry), data digitisation and the call centres. It is important to understand that IT services and BPO have overlapping areas. Some examples are data centres, network management, desktop PC management, helpdesk support, IT facility management, imaging and engineering.

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CBI MARKET SURVEY: THE SOFTWARE AND IT SERVICES MARKET FOR OFFSHORE AND NEARSHORE OUTSOURCING IN THE EU In general, the following activities can be considered as IT-activities with a high potential for offshore outsourcing: • Activities with a high degree of commoditisation. • Activities with a low degree of customer intimacy. Software development offshore/nearshore outsourcing In many cases, application software is already partly produced in a DC, but it is owned and marketed by an (often well-known) American or European company. Only very few firms in DCs are able to build and market application software themselves. Success in their domestic market is essential and without any local market for packaged software it is almost impossible to finance export marketing. Software development, large programming projects and maintenance are activities with a high (offshore/nearshore) outsourcing potential. To be more specific, the actual development of software could be outsourced more easily than design, specification, and receiving and testing. Figure I shows this in a simplified manner. Figure I Software development process
Onshore Onshore Applying If errors

Design

Specifications

Receiving

Testing

Receive specifications

Construct

Coding

Offshore/ nearshore

Source: Hee, van (2004)

Statistical product classification Measuring trade in software and IT services for business purposes is very complicated, due to limitations in definitions and challenges in measuring the data. There are no well-defined classifications in 6 or 8 digits HS-codes, as is the case with trade in goods. Software Although software is included in international merchandise trade statistics, relevant trade data are difficult to gather. This is because only the trade in the medium that contains the software is measured. As this mainly concerns consumer products, software for business purposes is hardly dealt with. IT services In general, international (trade) statistics of services are also hard to measure. This is the case for imports as well as for exports of IT services. As an indication, IT services are included in the trade in services statistics of the Balance of Payments (BOP) of many countries. IT services appear in the following sections of the BOP-system (source UNCTAD): • Computer services (263) • Royalties and license fees (266).

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APPENDIX B INTRODUCTION TO THE EU MARKET
The European Union (EU) is the current name for the former European Community. In January 1995 the EU consisted of 15 member states. Ten new countries joined the EU in May 2004. In January 2007 two more countries – Bulgaria and Romania - joined the EU. Negotiations are in progress with a number of other candidate member states. In this survey, the EU is referred to as the EU27, unless otherwise stated. Cultural awareness is a critical skill in securing success as an exporter. The enlargement of the EU has increased the size of the EU, and also significantly increased its complexity. With more people from culturally diverse backgrounds, effective communication is necessary. Be aware of differences in respect of meeting and greeting people (use of names, body language etc.) and of building relationships. There are also differences in dealings with hierarchy, presentations, negotiating, decision making and handling conflicts. More information on cultural differences can be found in Section 3 of CBI’s export manual ‘Exporting to the EU (2006)’. General information on the EU can also be found at the official EU website http://europa.eu/abc/governments/index_en.htm or the free encyclopaedia Wikipedia http://en.wikipedia.org/wiki/Portal:Europe. Monetary unit: Euro On 1 January 1999, the Euro became the legal currency within twelve EU member states: Austria, Belgium, Finland, France, Germany, Italy, Ireland, Luxembourg, The Netherlands, Spain, and Portugal. Greece became the 12th member state to adopt the Euro on January 1, 2001. Slovenia adopted the Euro in 2007. Since 2002 Euro coins and banknotes replaced the national currency in these countries. Denmark, the UK and Sweden have decided not to participate in the Euro. In CBI market surveys, the Euro (€) is the basic currency unit used to indicate value. Exchange rates of EU currencies in €, average yearly interbank rate
Country Name Code BGN CZK DKK EEK HUF LVL LTL PLN ROL SKK SEK GBP 2007 0.513 0.036 0.134 0.064 0.004 1.435 0.290 0.264 0.301 0.030 0.108 1.469 Bulgaria Lev Czech Republic Crown Denmark Crown Estonia Crown Hungary Forint Latvia Lats Lithuania Litas Poland Zloty Romania Lei (new) Slovakia Crown Sweden Crown United Kingdom Pound Source: Oanda (October 2008) October 2008 0.513 0.040 0.134 0.064 0.004 1.431 0.293 0.290 0.262 0.033 0.103 1.275

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APPENDIX C LIST OF DEVELOPING COUNTRIES
OECD DAC list - January 2006 When referring to developing countries in the CBI market surveys, reference is made to the group of countries on this OECD DAC list of January 2006.
Afghanistan Albania Algeria Angola Anguilla Antigua and Barbuda Argentina Armenia Azerbaijan Bangladesh Barbados Belarus Belize Benin Bhutan Bolivia Bosnia & Herzegovina Botswana Brazil Burkina Faso Burundi Cambodia Cameroon Cape Verde Central African Rep. Chad Chile China Colombia Comoros Congo Democratic Rep. Congo Rep. Cook Islands Costa Rica Cote d’Ivoire Croatia Cuba Djibouti Dominica Dominican Republic Ecuador Egypt El Salvador Equatorial Guinea Eritrea Ethiopia Fiji Gabon Gambia Georgia Ghana Grenada Guatemala Guinea Guinea-Bissau Guyana Haiti Honduras India Indonesia Iran Iraq Jamaica Jordan Kazakhstan Kenya Kiribati Korea Rep. of Kyrgyz Rep. Laos Lebanon Liberia Libya Macedonia Madagascar Malawi Malaysia Maldives Mali Marshall Islands Mauritania Mauritius Mayotte Mexico Micronesia, Fed. States Moldova Mongolia Montenegro Montserrat Morocco Mozambique Myanmar Namibia Nauru Nepal Nicargua Niger Nigeria Niue Oman Pakistan Palau Palestinian Admin. Areas Panama Papua New Guinea Paraguay Peru Philippines Rwanda Samoa Sao Tome & Principe Saudi Arabia Senegal Serbia Seychelles Sierra Leone Solomon Islands Somalia South Africa Sri Lanka St. Helena St. Kitts Nevis St. Lucia St. Vincent & Grenadines Sudan Suriname Swaziland Syria Tajikistan Tanzania Thailand Timor-Leste Togo Trinidad & Tobago Tunisia Turkey Turkmenistan Turks & Caicos Islands Tuvalu Uganda Ukraine Uruguay Uzbekistan Vanuatu Venezeula Vietnam Wallis & Futuna Yemen Zambia Zimbabwe

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CBI MARKET SURVEY: THE SOFTWARE AND IT SERVICES MARKET FOR OFFSHORE AND NEARSHORE OUTSOURCING IN THE EU CBI countries – January 2008: CBI supports exporters in the following Asian, African, Latin American and European (Balkan) countries: Afghanistan Albania Armenia Bangladesh Benin Bolivia Bosnia-Herzegovina Burkina Faso Burundi Colombia Ecuador Egypt El Salvador Ethiopia Georgia Ghana Guatemala Honduras India Indonesia Jordan Kenya Kosovo Macedonia Madagascar Mali Moldova Montenegro Morocco Mozambique Nepal Nicaragua Pakistan Peru Philippines Rwanda Senegal Serbia South Africa Sri Lanka Suriname Tanzania Thailand Tunisia Uganda Vietnam Zambia

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APPENDIX D METRICS USED IN AT KEARNEY INDEX
The metrics in Table 1 have been used to compile the scores for financial attractiveness, people skills and business environment in the A.T. Kearney Global Services Location Index. Table 1 Index metrics
Compensation costs
• •

Financial Attractiveness (40%)

Average wages Median compensation costs for relevant positions Rental costs Commercial electricity rates International telecom costs Travel to major customer destinations Relative tax burden Costs of corruption Currency appreciation or depreciation Size of existing IT and BPO sectors Contact centre and IT centre quality certifications Quality ratings of management schools and IT training Total workforce University educated workforce Workforce flexibility Scores on standardised education and language tests Relative IT and BPO sector growth and unemployment rates Investor and analyst rating of overall business and political environment AT Kearney Foreign Direct Investment Confidence Index Security risk Regulatory burden and employment rigidity Government support for the information and communications technology (ICT) sector Overall infrastructure quality Quality of telecom, Internet, and electricity infrastructure Personal interaction score from AT Kearney/Foreign Policy Globalisation Index Investor ratings of IP protection and ICT laws Software piracy rates Information security certifications

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Infrastructure costs

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Tax and regulatory costs

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People skills and Remote services sector availability experience and quality (30%) ratings

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Labour force availability Education and language Attrition risk Business environment (30%) Country environment

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•

•

•

•

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Infrastructure

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Cultural exposure Security of intellectual property Source: A.T.Kearney (2007)

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Source: CBI Market Information Database • URL: www.cbi.eu

• Contact: [email protected]

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