2009 - Software and IT Services UE

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CBI MARKET SURVEY: THE SOFTWARE AND I T SERVICES MARKET

FOR OFFSHORE AND NEARSHORE OUTSOURCING IN THE EU

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

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Contact: [email protected] www.cbi.eu/disclaimer

CBI MARKET SURVEY

THE SOFTWARE AND IT

SERVICES MARKET FOROFFSHORE AND NEARSHORE

OUTSOURCING IN THE EU

Publication date: December 2008

CONTENTS

REPORT SUMMARY 2INTRODUCTION 5

1 DEMAND: THE SOFTWARE AND IT SERVICES MARKET IN THE EU 523 THE OFFSH

SUPPLY 12ORE/ NEARSHORE OUTSOURCING MARKET FOR SOFTWARE

AND IT SERVICES IN THE EU 1624

HREAT

P

ARKET

METRICS USED IN AT KEARNEY INDEX 49by Facts Figures Future in collaboration with

zlo Klucs.

ools: http://www.cbi.eu/disclaimer

4 OFFSHORE/ NEARSHORE LOCATIONS5 TRADE STRUCTURE 306 PRICE DEVELOPMENTS 357 MARKET ACCESS REQUIREMENTS 388 OPPORTUNITY OR T 40APPENDICES

RODUCT CHARACTERISTICS 41AB INTRODUCTION TO THE EU M 46

LIST OF DEVELOPING COUNTRIES 47CD

This survey was compiled for CBIMr Las

Disclaimer CBI market information t


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REPORT SUMMARY

CEE countries are closing the gapDemand for software and IT services in Central and Eastern Europe (CEE) was boomingbetween 2005 and 2007. While in general the EU market for software products grew by nearly6%, countries such as Poland, the Czech Republic and Hungary recorded double-digit growthrates for software. More and more CEE companies are adopting ICT solutions to close the gapwith their Western European competitors. In the years to come, growth rates are expected toaccelerate as CEE markets mature.

SME market opening upEuropean SMEs have become tired of being under equipped when it comes to softwarepackages. 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 ofIntellectual Property Rights and to cope with all forms of digital threats. The latest buzzword inthe 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 isexpected to increase by 35% over the next two years. Especially CRM applications are indemand, and with the Internet as trade channel the barrier for DCs to enter this market isrelatively low.

IT services in search of IT skillsIntegration projects of CRM and ERP solutions were driving the IT services market in recentyears. For the future European companies face difficulties to provide these services as theyhave to cope with a shortage of IT professionals. In the UK, the Netherlands, Germany andFrance, this shortage is most critical. Companies increasingly look for ways to handle thisproblem and offshoring/nearshoring is increasingly the answer. As a result, it has becomecommon 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 orderto become true multinationals. In addition they are increasingly presenting themselves asinnovative 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, suchas a joint venture, with a EU software developer or system integrator. Working with brokersand 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 aprofessional player that offers high quality services. Once you can prove that you already dowork 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 especiallyoffshoring/nearshoring is quite an unexplored terrain for European SMEs. Before you can turnthis opportunity into reality you have to gain the trust of your potential customers. In todaysmarket, data security plays an increasingly important role and companies are only willing tooutsource work to a reliable provider. Therefore, it is important to have the right certificatesand to adopt European business practices.


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Price developmentsAccording to several research institutes, the wage gap between the EU and offshore/nearshorelocations is getting smaller. Especially India is increasingly focusing on added value and qualityinstead of low costs. For IT services with low requirements for skills and experience theopposite is the case, as a moderate price pressure can be noticed here. In addition, prices aredeclining 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 eitherfind 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 addedvalue services, may help meet these challenges.

The UK leads the way, the others followFor companies in the most mature EU market, the UK, offshoring/nearshoring is already widelyadopted. SMEs in the Netherlands, Germany and Nordic countries are expected to follow theexample of the UK in the years to come. Their demand is driven by the shortage of skilledlabour and the need for more efficient processes. As a result they increasingly look beyondtheir own borders for new opportunities. As a DC exporter you should emphasise the fact thatyour 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 SouthernEuropean countries are also starting to see the benefits. For them, Latin American countrieshave most to offer.

From outsourcing to offshoring/ nearshoringWhile outsourcing is increasingly adopted as common business practice, new offshore andnearshore destinations are emerging. When offshore activities are planned, it is clear thatIndia 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 Indiancompetitors yet. Beside India, several other DCs are emerging as offshore destinations, forexample South East Asian countries like Indonesia and Vietnam, as well as Latin Americancountries such as Argentina, Brazil, Chile and Mexico.

When companies in Western European countries consider nearshore activities, the first regionwithin their reach is the fast developing CEE region, offering high quality in combination withrelatively 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 increasinglymature market in the Baltic States.


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INTRODUCTION

This CBI market survey profiles the market for software and IT services in the EU. Theemphasis of this survey lies on the potential for offshoring and nearshoring these services todeveloping countries (DCs), as this is the best opportunity for small and medium-sizedcompanies (SMEs) from DCs that offer software and IT services. The role of and opportunitiesfor DCs are highlighted.

This market survey discusses the following service groups, as they are the most interesting forDC exporters: Application software System software Outsourcing services Project services Hardware maintenanceFor detailed information on the selected services, please consult appendix A. More informationabout 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 CBIwebsite. For information on how to make optimal use of the CBI market surveys and other CBImarket information, please consult From survey to success - export guidelines. All informationcan be downloaded from http://www.cbi.eu/marketinfo. Go to Search CBI database andselect your market sector and the EU.
http://www.cbi.eu/marketinfohttp://www.cbi.eu/marketinfo


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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 thedevelopments 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 toenter the EU market and Subsection 1.4 contains useful sources for further research. Pleasenote that this section combined with Section 2 is a background for the main part of thissurvey, 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 isdescribed to give an indication of growth of the sector as a whole in recent years and theexpectations for the near future. Second, a closer look is taken at developments of theindividual 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 I T servicesTable 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 increaseof 6%. As can be seen, IT services is the largest of the two segments and the value of thissegment 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% peryear), and the market is expected to reach a value of 231.2 billion in 2009. However, thisforecast is highly uncertain as a result of the current global credit crisis. The effect of this crisiscould be that companies face difficulties getting loans to fund IT investments such as newhardware or large IT projects.

Table 1.1 Total EU market for software and IT services, million, 2005-2009

2005 2006 2007 2008* 2009*

CAGR**05-07

Total market 184,218 194,853 207,176 218,686 231,184 6%IT services 134,576 142,272 151,537 160,137 169,561 6.1%Software 49,642 52,581 55,639 58,549 61,623 5.9%* forecast** Compound Annual Growth RateSource: EITO (2008)

SoftwareAs 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 fourcountries, consisting of Germany, the UK, France and Italy, accounted for almost 70% of totalconsumption 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 involvesboth system infrastructure software and tools. Both product groups recorded an annualincrease of around 6% between 2005 and 2007.


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Table 1.2 EU software market, by segment, million, 2005-2009

2005 2006 2007 2008* 2009*CAGR05-07

Total softw are 49,642 52,581 55,639 58,549 61,623 5.9%Application software 27,081 28,713 30,452 32,148 33,982 6%System software 22,561 23,869 25,188 26,400 27,641 5.8%

Tools 11,335 12,118 12,938 13,721 14,542 6.9%System infrastructure software 11,226 11,751 12,250 12,679 13,099 4.7%

* forecastSource: EITO (2008)

App l i ca t i on sof tw a re In 2007, the largest EU markets for software were Germany, the UK, France and Italy. Thesecountries accounted for nearly 70% of all EU software sales in 2007. Most Western Europeancountries saw an annual increase in the consumption of application software of more than5.5% between 2005 and 2007. Italy was the major exception with an annual increase of just1.8%. This was, to some extent, caused by the current economic slowdown in Italy. Refer toTable 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 2007 2009*CAGR

05-07CAGR

07-09

EU 27 27,081 30,452 33,982 6.0% 5.6%Germany 7,127 7,956 8,870 5.7% 5.6%UK 5,095 5,848 6,441 7.1% 4.9%France 4,270 4,774 5,309 5.7% 5.5%Italy 2,420 2,509 2,669 1.8% 3.1%Netherlands 1,482 1,692 1,896 6.9% 5.9%Spain 1,236 1,404 1,581 6.6% 6.1%Sweden 917 1,049 1,172 7.0% 5.7%Denmark 634 719 798 6.5% 5.4%

Austria 625 694 780 5.4% 6.0%Poland 540 638 769 8.7% 9.8%Belgium 553 613 688 5.3% 5.9%Finland 459 530 608 7.5% 7.1%Ireland 398 464 524 8.0% 6.3%Portugal 324 360 415 5.4% 7.4%Greece 249 274 301 4.9% 4.8%Czech Republic 227 273 327 9.7% 9.4%Hungary 139 172 205 11.2% 9.2%Romania 115 159 238 17.6% 22.3%Slovakia 96 111 134 7.5% 9.9%Luxembourg 66 75 83 6.6% 5.2%* forecast

Source: EUTO (2008)

The main driver today is the demand from European SMEs. These companies are still ratherunder equipped and are expected to start investing more in application software. The marketfor upgrades and new installations of Enterprise Resource Planning (ERP) performed well and isexpected to continue its growth in the years to come. Between 2005 and 2007, growth wasmainly driven by product categories such as financials, human capital management andprocurement. In the field of customer relationship management (CRM), especially the bankingand insurance sector boosted the demand. This will also be the case in the years to come. Dueto the increased competition in this sector, companies have to be proactive when it comes tointeracting with their customers. Therefore financial service companies increasingly invest ininnovative solutions that help them interact better with customers. Growth of the CRMsegment was further boosted by European SMEs who are increasingly adopting this solution. Inthe manufacturing sector there a strong trend towards the use of supply chain management(SCM) was noticed.


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Central and Eastern European (CEE) countries recorded the highest growth rates with regardto demand for application software in the EU. The largest software market in this region isPoland with a value of 638 million in 2007. Software demand in Poland increased by nearly9% in the period 2005-2007. The markets in other CEE countries that performed even betterthan 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, Romaniaand Slovakia.

Sys t e m so f t w a r e ( syst e m i n f r a st r u c t u r e so f t w a r e + t o o l s)For system software, the same countries account for the largest EU shares as for applicationsoftware. Growth rates in this segment are on average lower than in the application softwaresegment. Table 1.4 shows the EU demand for system software between 2005 and 2009. EUdemand was mainly boosted by CEE countries, such as Romania (+27.9%), the CzechRepublic, Slovakia (both +11.8%) and Hungary (10.9%). Poland, the largest system softwaremarket in CEE, recorded an annual growth of nearly 10%. Demand in this region is driven bysales 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 2007 2009*CAGR

05-07CAGR

07-09

EU 27 22,561 25,188 27,641 5.7% 4.8%Germany 5,502 5,995 6,563 4.4% 4.6%UK 4,492 5,062 5,456 6.2% 3.8%France 3,679 4,068 4,440 5.2% 4.5%Italy 1,832 2,018 2,233 5.0% 5.2%Spain 1,344 1,541 1,705 7.1% 5.2%Netherlands 1,122 1,245 1,349 5.3% 4.1%Sweden 737 815 878 5.2% 3.8%

Austria 538 585 632 4.3% 3.9%Belgium 516 575 624 5.6% 4.2%Ireland 453 526 588 7.8% 5.7%Poland 419 505 589 9.8% 8.0%Finland 397 437 471 4.9% 3.8%Denmark 358 390 415 4.4% 3.2%Portugal 246 269 297 4.6% 5.1%Czech Republic 196 245 291 11.8% 9.0%Greece 206 231 253 5.9% 4.7%Hungary 144 177 203 10.9% 7.1%Romania 99 162 251 27.9% 24.5%Luxembourg 95 108 120 6.6% 5.4%Slovakia 84 105 128 11.8% 10.4%* 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 thegrowing need for faster development of new business solutions. Security is an important issuein this segment as many EU companies and central and local governments are increasinglylooking 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 negativelyaffected 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 inthe operation systems market and the growing adoption of open source software.


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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 toolsfor automation and virtualisation. Future investments will be focused on collaboration andcontent tools such as Web 2.0 and business intelligence tools. This last solution is expected toshow 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 thatinvest in this type of solution. Business intelligence tools can either be standalone tools orincorporated 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 servicesrecorded the highest growth rate between 2005 and 2007 (+8%) and demand for projectservices was high as well. The market for hardware maintenance has decreased and it isexpected that this trend will continue in the years to come.

Table 1.5 EU IT services market, by segment, million, 2005-2009

2005 2006 2007 2008* 2009*CAGR05-07

Total IT services 134,576 142,272 151,537 160,137 169,561 6.1%Outsourcing services 52,969 56,777 61,736 66,292 71,283 8.0%Project services 68,027 71,894 76,239 80,353 84,859 5.9%Hardware maintenance 13,580 13,601 13,561 13,492 13,419 -0.1%* forecastSource: EITO (2008)

An important issue in the IT services market is the fact that many countries in Western Europehave to cope with an increasing shortage of IT professionals. Some of the causes are thedecreasing 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 ITprofessionals has already stimulated both companies and local governments to search forresources in offshore destinations. In the other countries mentioned, companies prefer tooutsource the work to larger local providers who still have the availability of IT personnel toprovide the service. More information on jobs moving offshore can be found in Section 3.

Outsourc ing serv icesSince outsourcing services is the segment in which most exporters in DCs are active, Table 1.6gives an overview of the demand for this segment in the individual EU countries. In 2007 thetotal 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 foroutsourcing 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

Country 2005 2007 2009*CAGR

05-07CAGR

07-09*

EU25 52,969 61,736 71,283 8.0% 7.5%UK 20,541 23,619 26,633 7.2% 6.2%Germany 10,579 12,662 14,861 9.4% 8.3%France 7,007 8,168 9,615 8.0% 8.5%Netherlands 2,917 3,501 4,071 9.6% 7.8%Italy 2,639 2,836 3,040 3.7% 3.5%Sweden 1,786 2,021 2,334 6.4% 7.5%Spain 1,621 2,013 2,428 11.4% 9.8%Denmark 1,378 1,531 1,763 5.4% 7.3%


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* ForecastSource: EITO (2008)

As was the case with the IT services market in general, the highest growth rates wererecorded by CEE countries. However, the markets in several Western European countries, suchas Portugal, Spain, Belgium, the Netherlands, Ireland and Germany were flourishing as well. Inthe 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 periodbetween 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 adoptnew delivery models, such as Software as a Service (SaaS). This service, where software isdelivered on a subscription basis, is already gaining widespread adoption in the UK. As a resultof the limited implementation costs of SaaS, SMEs form an important demand driver (refer totextbox). 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 investmentsThe 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 WesternEurope, the UK, Nordics and Benelux are typically first to adopt new solutions, closely followed byGermany and France.

Analyst firm IDC (http://www.idc.com) performed a survey among 2,077 IT decision makers inorganisations with more than 20 employees in Western Europe. 35% of the respondents indicated theywould invest in SaaS in the next 24 months to replace or supplement existing CRM systems. A similarnumber 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 themore widespread adoption of ERP in general.

Pro ject serv icesThe project services market in the EU is the largest segment of the IT services market. Onaverage this market increased by 5.9% in the period 2005-2007. In most Western Europeancountries this rate was reached; however, in Italy demand increased by only 0.7%. Especiallymedium-sized and large companies invest in project services like integration projects andsoftware development. As a result of the increasing demand for ERP and CRM, integrationprojects incorporating these solutions will be the main driver of this segment. The main focusin these areas is on business efficiency. Large companies are in the process of renewing theseapplications, 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 thecompanys core business, such as IT training, will be impacted first in the years to come.

Country 2005 2007 2009*

CAGR

05-07

CAGR

07-09*

Belgium 982 1,206 1,454 10.8% 9.8%Finland 1,034 1,161 1,349 6.0% 7.8%Ireland 759 912 1,081 9.6% 8.9%

Austria 565 645 767 6.8% 9.0%Portugal 341 445 555 14.2% 11.7%Poland 206 298 422 20.3% 19.0%Greece 190 218 249 7.1% 6.9%Czech Republic 115 149 201 13.8% 16.1%Hungary 125 140 181 5.8% 13.7%Luxembourg 79 92 106 7.9% 7.3%Slovakia 26 36 52 17.7% 20.2%Romania 14 19 38 16.5% 41.4%
http://www.idc.com/http://www.idc.com/


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Furthermore, several large projects will be shelved or even cancelled. In the public sector, ITservice providers can only provide a service when they tender for these projects.

Hardw are m a in tenance As can be seen in Table 1.5, demand for hardware maintenance in the EU is stagnating. Themost important reasons for this trend are the decreasing prices and longer modernisation

cycles for hardware. Furthermore, hardware maintenance is increasingly included ininfrastructure outsourcing contracts. In most CEE countries, hardware maintenance accountsfor approximately a quarter of the IT services market. However, also in these countries thisshare 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 servicesmarket. 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 newhardware 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 arepopular 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 aregaining popularity fast among large and medium-sized companies in especially financialservices, retail and manufacturing companies, as well as in the public sector.

Increasing shortage of skilled labour is forcing companies in several Western Europeancountries to outsource and/or offshore their IT services. Outsourcing services remains the fastest growing market segment of IT services. Maingrowth drivers are the growing adoption of SaaS and the increasing complexity ofapplication platforms. SaaS is especially popular among SMEs, thanks to the limitedimplementation costs.

As a result of the focus on business efficiency, consulting and system integration drive themarket for IT projects.

The hardware maintenance market is negatively influenced by decreasing prices and thelonger modernisation cycles for hardware. In addition, the increased quality of hardwarehas lowered the need for maintenance.

1.3 Opportunities and threats

Trends and market developments offer opportunities and threats to exporters. A given trendcan be a threat to some and an opportunity to others at the same time. The following trendsshould, 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 theneeds of EU customers in these areas.

+ Outsourcing services have a high potential for DC exporters. Especially SaaS offers goodchances 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 andcould therefore be a good region to start your EU activities.

Obligatory tendering for projects of governmental institutions makes it difficult for SMEsfrom DCs to generate business in this sector.


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

1.4 Useful sourcesThe 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.
http://www.euroitx.com/http://www.eito.com/http://www.europeansoftware.org/http://www.equaterra.com/http://www.vnunet.com/http://www.vnunet.com/http://www.equaterra.com/http://www.europeansoftware.org/http://www.eito.com/http://www.euroitx.com/


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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 onthe supply side are discussed and Subsection 2.3 gives the most important opportunities andthreats that are the result of these trends. Useful sources to find further information are givenin Subsection 2.4.

2.1 Supplier landscapeThis subsection describes the supply side of the EU market for software and IT services. Formore information on software and IT services providers, please refer to the CBI marketsurveys covering the market in individual EU countries. These surveys include, among otherthings, tables that list the top software and IT service providers per country.

SoftwareGenerally 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 UScompanies and the omnipresence of SAP. These strong players operate in a market with manylocal software producers. In some countries, domestic players successfully compete with thelarge 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 onindustry specific solutions or niche markets. Some of the largest software providers to the EUmarket 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 visithttp://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, mostEU 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 localIT expert, who preferably speaks the countrys language. In the software segment this is notso 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.
http://www.3ds.com/http://www.telvent.com/eshttp://www.ieci.es/http://www.sage.es/http://www.hp.com/http://www.ibm.com/http://www.oracle.com/http://www.sap.com/http://www.symantec.com/http://www.truffle100.com/europe/2007/ranking-2.phphttp://www.accenture.com/http://www.atosorigin.com/http://www.capgemini.com/http://www.capita.com/http://www.fujitsu.com/http://www.hp.com/http://www.ibm.com/http://www.ibm.com/http://www.hp.com/http://www.fujitsu.com/http://www.capita.com/http://www.capgemini.com/http://www.atosorigin.com/http://www.accenture.com/http://www.truffle100.com/europe/2007/ranking-2.phphttp://www.symantec.com/http://www.sap.com/http://www.oracle.com/http://www.ibm.com/http://www.hp.com/http://www.sage.es/http://www.ieci.es/http://www.telvent.com/eshttp://www.3ds.com/


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Ordina (NL) - http://www.ordina.nl - one of the largest software and IT services providersin 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, seehttp://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 discussedbelow.

Consolidation in the IT services sector

Triggered by the long-lasting economic downturn after the end of the dot-com boom, rivalry inthe IT services market has significantly increased in the past years. This can be seen by theincreasing number of mergers and acquisitions in the IT services market. A prominent exampleof this development was the takeover of EDS by HP in the first half of 2008. HP used thistakeover 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 increasedcompetition from new players, such as WincorNixdorf, BT, Orange Business Services andseveral Indian companies.

Indian players increase EU presenceWhereas EU companies increasingly aim to extend their geographical focus, the same can besaid for the Indian competitors. The EU market is characterised by the increasing presence ofIndian companies like Infosys, Wipro, TCS and Genpact. These companies are expanding theirWestern operations in order to become true multinationals. In addition they increasinglypresent themselves as innovative players instead of standard service providers. Theestablishment of their own offshore centres in Europe should be regarded as the first step intheir evolution.

Another reason why Indian companies shift to the EU is that they regard it as a safer place toconduct business. Currently US customers generate 60% of their revenues. Especially now thefinancial services sector in the US has to cope with the effects of the credit crisis, Indianplayers 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 toexpand its European operations.

Labour shortage drives demand for subcontractingThe shortage of IT professionals in several EU countries is not only a problem for EUcompanies in various industry sectors as mentioned in Section 1, but it increasingly becomes abarrier for IT service providers as well. These companies depend heavily on the knowledge ofprofessionals when providing high quality services. As a result, it has become commonbusiness practice, particularly in large-scale projects, for IT service providers to work with asubcontractor (or even multiple subcontractors) who perform(s) certain tasks. For example, asystem integrator may subcontract a programme specialist to develop software customisationsfor their customer. There are also examples of integrators that hire hardware maintenancecompanies to maintain the hardware used in the customer's system.

Software and service providers target SMEsEuropean SMEs used to have only limited demand when it came to their software and ITservices needs. In addition, the available number of solutions for this type of companies waslimited. This situation is changing as a result of new technological developments and highdemand from the side of SMEs. The SME market is definitively opening up for IT solutions. ITcompanies are increasingly targeting the SME market by developing affordable, smaller-sized

solutions, such as ERP and CRM applications.
http://www.ordina.nl/http://www.siemens.com/http://www.outsourcingprofessional.org/content/23/152/1619http://www.outsourcingprofessional.org/content/23/152/1619http://www.siemens.com/http://www.ordina.nl/


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Innovation of delivery modelsBusiness models for the purchase of software services are beginning to change. The range ofproducts and service models from which companies can choose has increased. Softwareproviders are no longer merely selling the software to their customers, but put more focus onthe service component. The increasing use of open source software components isstrengthening 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 awhile now is SaaS. With this service the application is purchased on a subscription basis andover the Internet.

Shift towards nearshore outsourcing

Companies in CEE countries such as Ukraine, Romania, Hungary, Poland and the CzechRepublic are becoming important providers of software and IT services. The main drivers ofthis trend are the lower costs for developing software and providing services, a large numberof qualified IT professionals and the growing maturity of the domestic markets. The countriesin 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 Number of IT companies in CEE countries

800

600

480

400400360

300

200170

11090

70 60 40 3010

0

100

200

300

400

500

600

700

800

900

Ukraine

Romania

Belarus

Poland

Bulgaria

CzechRepublic

Hungary

Serbia

Slovakia

Estonia

Lithuania

Croatia

Moldova

Latvia

Slovenia

Albania

Number

Source: Central & Eastern Europe Outsourcing review (2007)

Increasing popularity of open source softwareThe use of open source software is increasing in popularity fast and is even promoted bygovernments in different EU countries. A good example is the growing market share ofoperating system Linux over the paid system Microsoft Windows. Open-source applicationshave won some acceptance within large corporations, although ERP applications from vendorslike Oracle and SAP still predominate. Within SMEs the adoption process goes much faster dueto the more flexible environment, and major cost saving. For SMEs, software licensing takes upa higher percentage of their total costs than is the case for large companies.


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2.3 Opportunities and threats

Trends and market developments offer opportunities and threats to exporters. A given trendcan be a threat to some and an opportunity to others at the same time. The following trendsshould, 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 opensource software to reduce the costs of their own software developing process and becomeeven more competitive.

Indian IT service providers increase their presence on the EU market. This competitioncould limit the chances for providers from other DCs. However, the fact that this DC isaccepted as a reliable partner offers opportunities for other DCs as well.

For small DC suppliers, increased competition in the IT services market due to marketconsolidation can be a threat.

2.4 Useful sources

The following useful sources can be used to obtain more information on software and ITservices 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 anumber 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.
http://www.ebusiness-watch.org/resources/ict_itservices/SR10a_ITS_2005_web.pdfhttp://www.eicta.org/http://www.eicta.org/http://www.europeansoftware.org/http://itonews.eu/http://www.outsourcing-suppliers.com/http://www.outsourcing-suppliers.com/http://itonews.eu/http://www.europeansoftware.org/http://www.eicta.org/http://www.ebusiness-watch.org/resources/ict_itservices/SR10a_ITS_2005_web.pdf


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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 ITservices in general, this section specifically focuses on offshore/nearshore outsourcing of

software and IT services. As stated in Appendix A service characteristics, reliable and recentstatistics on imports of software and IT services are hardly available. Therefore, this sectiongives an overview of the main developments and trends in software and IT services based onthe result of market surveys and case studies. These sources may be coloured, eitherpositively or negatively, by the specific interests of the agencies. Estimates of the impact onEurope are vague, especially in relation to offshoring to smaller Asian and Eastern Europeancountries. 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 discussesthe decision making process of your potential EU customer. In Subsection 3.3 the mostimportant trends and characteristics are summarised and Subsection 3.4 informs you about

the opportunities and threats regarding offshore/nearshore outsourcing to the EU. With thesources mentioned in Subsection 3.5 you can search for more information.

3.1 EU offshore/ nearshore outsourcing marketOffshore/nearshore outsourcing is rapidly increasing in importance in the EU. According toresearch agency Forrester, the EU market for offshoring/nearshoring records steady growthrates. European spending will achieve an average annual growth of 6% between 2006 and2011. Currently, application related services are most common to offshore/nearshore.However, as large parts of system software can be offshored as well and providers havealready obtained a high level of experience in this field, this area is also expected to grow inimportance.

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 by2011. Continental Europe is a relative newcomer to offshoring/nearshoring, and currently thepercentage 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 totalrevenues in the IT industry in 2006. This share is expected to reach approximately 5% in2010. 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 thework, 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 adoptedthe 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 fromlow labour cost and retain local skills and knowledge at the same time. This model also leadsto smaller sized contracts that are renewed more often. Multi Vendor outsourcing could lowerthe barrier for companies to engage in offshoring/nearshoring, and more widespread adoptionof this model is expected in the years to come. In order to manage these different types ofcontracts, demand for project management services is expected to increase.

Forrester expects EU companies to spend a total of 146 billion on offshoring/nearshoringsoftware and IT services in 2011. The heavy competition in several industrial sectors in the EUand 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. Thecurrent credit crunch, however, might put a brake to growth in the sector. New IT projects and


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Reasons and barriers to offshore/ nearshoreThe 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 iscost reduction. In several sectors of EU industries, such as financial services andmanufacturing, companies are increasingly forced on cutting back their costs to remaincompetitive. 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 importantfactor. The number of IT graduates is decreasing in several countries and new employees arenot replacing the older generation of workers. This shortage of skilled professionals increasesthe salaries in EU countries and forces companies to start looking for professionals in offshore

or nearshore destinations. Larger EU companies that have adopted offshoring/nearshoringindicate that increasing flexibility is an important driver. In the more mature and competitiveUK market, the quality of the work of offshore/nearshore providers is becoming an increasinglyimportant factor.

The most important barriers for EU companies when considering offshore/nearshoreoutsourcing are: Successful local providers Fear of losing control Security and IPR protection Cultural and language differences Negative public opinion on job lossesIn most EU countries, the local software and especially IT service suppliers are quite successfuland have already gathered a solid client base. They benefit from the demand for local presenceand language capabilities. Therefore, the standards and expectations for quality delivery by anoffshore/nearshore supplier are high.

Another important barrier for companies to use offshoring/nearshoring is the fear of losingcontrol over the process. However, as the years go by this factor is expected to become lessimportant. Major barriers for SMEs to engage in offshoring are increasingly based on securityissues, 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 destinationpose a barrier as well. In certain EU countries, such as Germany and Sweden a trend can alsobe seen towards a fear of major job losses as a result of offshoring and nearshoring. In thesecountries, there is pressure from unions and politics to preserve jobs.

Offshore potential by EU countryCustomers in Western European countries are becoming more used to the fact that operationscan take place offshore and nearshore than companies in Southern European countries. Forcompanies 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 finda suitable partner. In smaller EU markets that are opening up to offshoring and especiallynearshoring, 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 provideryet. In the Netherlands a large number of companies that has worked with such a provider isunsatisfied 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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It is important to know that companies in Germany and France prefer nearshoring tooffshoring as a result of language and cultural similarities in nearshore destinations. In theNetherlands and the UK these factors are less important. Southern Europe is less active in thefield of offshoring/nearshoring; however, large and medium-sized companies from SouthernEuropean countries are also starting to benefit from the opportunities it offers. The companiesin 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 onthis matter.

In Belgium, companies are not ready for offshoring and nearshoring yet; the SME market hasonly recently opened up to onshore outsourcing of software and IT services. Spain is a specialcountry as it is profiling itself as a nearshore destination for other EU countries. Chances forproviding offshore service to Spanish companies are therefore rather low. Some possibilitiesmight arise in Spanish service providers subcontracting certain tasks.

Offshore/nearshore potential by segmentBased 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 ITservices market (as described in the product characteristics): Application software System software (system infrastructure software + tools) Outsourcing services Project services Hardware maintenanceApp l i ca t i on sof tw a re Application software is the software segment that offers the best chances foroffshoring/nearshoring. The potential depends on the level of end-user interaction that isneeded 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 thefact 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 ofsoftware 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 spendinghere. There is no real difference between the potential for offshoring and nearshoring. Whichcountry the EU buyer will choose to offshore/nearshore their application software developmentwill depend on the need for domain knowledge.

Sys t e m sof t w a r e The potential for offshoring and nearshoring of this type of software services is high, althoughlower than application software. CBI expert Mr Klucs states that there are few companies inDCs that are capable of providing system software services. With the increasing attention fordata security, good opportunities arise in the field of security systems. The main problem isthe need for domain knowledge. Currently the main providers of system software to the EU arebased in the US. For system software nearshore destinations are slightly more popular becausecommunication is a more vital factor for these kind of IT projects.

Outsourc ing serv icesThe potential for offshoring and nearshoring of IT services depends on the extent of clientinteraction that is needed. This is linked to trust and cultural differences. With regard tooutsourcing services, the fastest growing segment of the IT services market, services such asweb hosting and SaaS offer the best chances in most EU countries. The main benefit whenoffering 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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In implementation services there are chances in offshoring and nearshoring for configuration,development, testing and application management. Although these services have a goodpotential for offshoring and nearshoring, according to Mr Klucs, there are only very few SMEsfrom DCs that are capable of providing these services. The same goes for operationsmanagement. Although the potential for offshoring and nearshoring is good, there are onlyvery few SMEs in DCs that offer these services.

Pro ject serv icesWhen it comes to project services, chances for offshoring/nearshoring are relatively low. As aresult of the current credit crunch, the potential is expected to become even lower in the yearsto come. For ERP implementation projects and IT training, most EU companies prefer having aEU consultant or a person from the developed countries; therefore, the potential for offshoringand nearshoring of consultancy is not very high.

Hardw are m a in tenance Chances for offshoring/nearshoring in these services are the lowest within software and ITservices. These services depend more on languages and the physical presence of amaintenance man. In nearshore destinations the language barrier could be lower. These

nearshore destinations, therefore, have better chances for support IT services, but the overallpotential for offshoring/nearshoring still remains low. The overall declining market for thisservice is also lowering chances in this segment.

3.2 Outsourcing decision making process in EU companiesTo 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 EUcompanies to offshore/nearshore.

Cost savi ngAs 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 orservice. In addition, for most EU companies the extent to which costs are saved will always becompared to the quality of the delivered product or service.

Ava i lab i l i ty o f sk i l led p ro f essiona ls The nature of the service determines the demand for specific skills. In general, the morecomplex the services, the higher the demand for skilled professionals. As a result of the ageingpopulation and the lack of popularity of technical studies, the number of skilled professionals isdecreasing in Europe. This is in contrast to some nearshore and offshore outsourcingdestinations such as Ukraine, Romania and India.

Language and cu l tu r e Language is important for both the provider and the client to be able to communicateefficiently. Furthermore, culture is a very important factor. In the past, differences in cultureled to problems during the execution of projects. As mentioned above, language is atremendous asset for some IT service providers. For some other services, like softwareapplication development and software systems, language is a less important issue. Table 3.3gives an overview of the language abilities of possible offshore/nearshore locations (excludingEnglish because this is a world language and does not usually form an obstacle to offshore aproject).

Table 3.3 Possible offshore/ nearshore destinations and language skill availabilityLanguage Possible destinations

French Algeria, Lebanon, Mauritius, Morocco, Romania, Senegal and TunisiaGerman Bulgaria, Czech Republic, Hungary, Poland, Romania, Slovakia and Turkey

Spanish Argentina, Chile, Mexico, Colombia, Ecuador and MoroccoItalian Croatia and RomaniaSwedish Baltic States


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Language Possible destinations

Dutch Antilles, South Africa and SurinamSource: McKinsey (2005) adapted by Facts Figures Future

Many companies in Europe see language and cultural differences as a possible source ofproblems. 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 companiesstill see these differences as a problem. The relatively low level of hindrance perceived byFrench companies is the result of the fact that most French companies offshore their processesto French speaking regions in Northern Africa.

Figure 3.1 Cultural and language problems as obstacles for offshoring, % ofcompanies per country

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

Doma in expe r t i se Expertise in specialised technologies can be an important asset for some service providers. Inboth software and IT services this is a very important requirement. The availability of specificdomain knowledge and expertise highly influences the choice for a certain company.

Persona l con tact One of the most important factors driving outsourcing decisions is the existence of a personalconnection between the European company and the foreign company. A fellow countrymanwho is an officer within the EU company could very well favour outsourcing. For moreinformation on the use of your diaspora (your ethnic community outside the homeland), please

also refer to CBIs From survey to success. Guidelines for exporting software and IT servicesto the EU.

Time zone d i f fe rence 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 timezone is regarded as one of the major benefits. The customer can leave his remarks with theservice provider and will find the improved version on his desk the next day.

Wester n bus iness p ract icesEU companies tend to select a company whose management team is trained and conductsbusiness according to Western business practices and standards. Western companies value

providers who are flexible and can think along with the customer.

40%

85%80%

56%

0%

10%

20%

30%

40%

50%

60%70%

80%

90%

100%

France Germany the Netherlands UK


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Telecom m un ica t i ons i n f r ast ru c tu re Almost all IT services depend on voice and data telecommunication services. An EU companywill 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 broadbandInternet is gaining widespread adoption in Europe.

Governm en t suppo r t India has become an important player in the outsourcing industry because the Indiangovernment has supported and stimulated it to a large extent. This support ranges fromproviding education, investment in infrastructure facilities and technology parks, to setting upa Ministry of Information Technology, and promoting the sector in a structured manner. Egyptis another good example since their government supports companies to a large extent in theirefforts to become active in the EU market.

Coun t r y image One of the largest barriers for a developing country to be successful in the ITO market may bethe country image. Companies that are located in a country with a poor reputation have topresent themselves as a reliable partner.

Decis ion -m ak ing au tho r i t y One of the major issues that EU companies could consider is where the decision-makingauthority is allocated within the offshore service provider. For example, many Indian firms arestill Indian-centric, forcing delays when major decisions must be made. Some customers mayconsider it necessary to get fast decisions under certain circumstances, without having to waitfor eight or sixteen hours.

Pol i t i ca l s tab i l i t y Political stability within the company is an important issue for outsourcing decisions. This isespecially the case for services, as contractual relationships are often for a longer period oftime.

3.3 Trends and characteristicsOne of the most important trends in Europe is nearshoring. Many European companies havestarted adopting this model because of the geographical and cultural advantages. Anotherimportant issue is the greater sense of control over the outsourced process that EU companiesfeel in a nearshore destination. Research agency Gartner divides nearshore suppliers into threecategories: 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, costsavings is no longer the only important factor. As mentioned before, the available workforce inthese countries is becoming increasingly important. Developing countries that are based inoffshore locations (Asia, Africa and South America) have to compete with these nearshorecountries, although they could also cooperate with them by offering specific knowledge andexpertise. For more information on offshore and nearshore destinations please refer to Section4.

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 differentcontracts.


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The current economic downturn in several EU countries is expected to increase the overallEU demand for offshoring/nearshoring as companies are looking for IT solutions to workmore efficiently.

The effect of the current credit crunch is still unclear. The effects could be that companiesshelve or even cancel their IT projects. On the other hand it could drive the demand for ITsystems and software that focus on efficiency control.

The availability of a skilled labour force and the need for more efficient processes arebecoming increasingly important demand drivers beside cost savings.

Security and Intellectual Property Protection are becoming increasingly important issues forEU buyers of software and IT services.

Application software is expected to be one of the fastest growing segments of IT services inthe years to come, mainly fuelled by financial services firms.

Regarding outsourcing services, web hosting and SaaS offer the best chances in most EUcountries.

Potential for offshoring/nearshoring is highest in Western European countries like the UK,the Netherlands, Germany and France.

3.4 Opportunities and threatsTrends and market developments offer opportunities and threats to exporters. A given trendcan be a threat to some and an opportunity to others at the same time. The following trendsshould, 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 costcompanies in DCs.

+ The increasing importance of Multi Vendor sourcing offers opportunities for DCs ascompanies want to spread risks and divide projects into pieces that are each managed byone of the companies.

+ The increasing shortage of skilled labour drives the demand for offshoring/nearshoring byEU companies. This creates chances for offshore destinations and therefore also for DCs.

The nearshoring trend offers good opportunities in Eastern Europe and Northern Africa, butmeans 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 forcompanies that can only offer the lowest price and are unable to meet the higher qualityrequirements.

Indias strong position is an opportunity for Indian companies but a threat for companiesfrom other DCs.

The increasing attention of EU buyers for the protection of intellectual property rights andthe 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 andGermany), 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.
http://www.cio.com/topic/1521/Offshoringhttp://www.euroitx.com/http://www.forrester.com/http://www.gartner.com/http://www.neoit.com/http://www.oobp.org/default.aspxhttp://www.oobp.org/default.aspxhttp://www.outsourcing-center.com/http://www.outsourcing-center.com/http://www.oobp.org/default.aspxhttp://www.neoit.com/http://www.gartner.com/http://www.forrester.com/http://www.euroitx.com/http://www.cio.com/topic/1521/Offshoring


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4 OFFSHORE/ NEARSHORE LOCATIONS

This section provides an overview of the leading and emerging offshore countries for softwareand IT services. India is still the number one in the offshore market, but many other locationsare 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 theircompetitive environment. Subsection 4.2 zooms in on nearshore locations, as these areincreasing in popularity. Furthermore, the main trends, and opportunities and threats arediscussed in Subsections 4.3 and 4.4 respectively. Subsection 4.4 provides you with usefulsources.

4.1 Overview offshore/ nearshore locationsThis 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 nearshoringin general. This means they are not solely focused on software and IT services specifically, butcan be applied to these service groups.

AT Kearney global rankingTable 4.1 shows a global overview of the main offshore supplying countries, based on a studyby AT Kearney (2007). The A.T. Kearney Global Services Location Index analyses the top 50services locations worldwide against 40 measurements in three major categories: cost, peopleand skills availability, and business environment. These categories reflect the main drivers foroffshoring 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 inthe world. Some European nearshore destinations, such as Estonia, the Czech Republic andPoland, can be found in the middle of the list. They still have a much better position than mostWestern European countries. Please refer to appendix D Metrics of the AT Kearney globalservices location for an introductionon which characteristics have been considered tomeasure.

Table 4.1 A.T Kearney attractiveness of global services locations, 2007 Country Financial

attractivenessPeople and skills

availabilityBusiness

environmentTotal score

India 3.22 2.34 1.44 7.00

China 2.93 2.25 1.38 6.56

Malaysia 2.84 1.26 2.02 6.12

Thailand 3.19 1.21 1.62 6.02

Brazil 2.64 1.78 1.47 5.89

Indonesia 3.29 1.47 1.06 5.82

Chile 2.65 1.18 1.93 5.76

Philippines 3.26 1.23 1.26 5.75

Bulgaria 3.16 1.04 1.56 5.75

Mexico 2.63 1.49 1.61 5.73

Singapore 1.65 1.51 2.53 5.68

Slovakia 2.79 1.04 1.79 5.62

Egypt 3.22 1.14 1.25 5.61

Jordan 3.09 0.98 1.54 5.60

Estonia 2.44 0.96 2.20 5.60


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Country Financialattractiveness

People and skillsavailability

Businessenvironment

Total score

Czech Republic 2.43 1.10 2.05 5.57

Latvia 2.64 0.91 2.00 5.56

Poland 2.59 1.17 1.79 5.54

Vietnam 3.33 0.99 1.22 5.54

United Arab Emirates 2.73 0.86 1.92 5.51

United States (tier two) 0.48 2.74 2.29 5.51

Uruguay 2.95 0.98 1.54 5.47

Argentina 2.91 1.30 1.26 5.47

Hungary 2.54 0.95 1.98 5.47

Mauritius 2.84 1.04 1.56 5.44

Tunisia 3.03 0.90 1.50 5.43

Ghana 3.27 0.90 1.25 5.42

Lithuania 2.60 0.83 1.98 5.42

Sri Lanka 3.18 0.96 1.22 5.36

Pakistan 3.23 1.00 1.11 5.34

South Africa 2.52 1.18 1.60 5.30

Jamaica 2.83 0.96 1.49 5.29

Romania 2.88 0.87 1.53 5.28

Costa Rica 3.00 0.86 1.36 5.22

Canada 0.77 2.09 2.30 5.16

Morocco 2.92 0.90 1.33 5.14

Russia 2.61 1.38 1.16 5.14

Israel 1.97 1.27 1.86 5.10

Senegal 3.19 0.82 1.05 5.06

Germany (tier two) 0.46 2.19 2.40 5.05

Panama 2.88 0.75 1.40 5.02

United Kingdom (tiertwo) 0.50 2.16 2.35 5.01

Spain 1.18 1.71 2.06 4.95

New Zealand 1.53 1.12 2.25 4.91

Australia 0.89 1.69 2.31 4.89

Portugal 1.59 1.14 2.11 4.84

Ukraine 2.76 0.98 1.09 4.83

France (tier two) 0.45 2.07 2.27 4.79

Turkey 2.06 1.31 1.41 4.78

Ireland 0.40 1.54 2.29 4.18Source AT Kearney (2007)

Add i t i ona l f i nd ings 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 Chinas strong growth, thematurity level of service providers by Chinese suppliers is not taken into account. Ingeneral these processes do not yet meet international best practice. However, the intensecompetition in the country will eventually force local providers to invest in upgrading thequality of their processes to international standards.

The relative cost advantage of the leading offshore destinations declined almostuniversally, while scores for people skills and business environment rose significantlybetween 2005 and 2007. This shows that the key to maintaining and enhancing long-term

competitiveness lies in skills development, infrastructure investment and the regulatoryenvironment, not in attempts to control wages.


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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 alsoa 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 18thspots respectively.

The Middle East and Africa appear to be the next frontier in offshoring as countries such asEgypt, Jordan, the United Arab Emirates and Ghana perform well. Egypt and other NorthAfrican nations stress their unique combination of European language skills, technicalproficiency and low wages. Especially French companies appreciate the language skills inNorthern Africa and see this as their most important nearshore destination.

The increasing importance of offshore destinations is to some extent facilitated bytechnological developments in the field of communication such as video conferencing andvoice over IP (e.g. Skype). These developments lower the barrier for EU buyers tocommunicate with software and IT services suppliers in offshore destinations.

The performance of Turkey is surprisingly poor, despite its emerging success as an offshoredestination. Its relatively high costs compared to other emerging markets are notcompensated by a correspondingly higher education level or business environment rating.

Russia scores well in areas like financial attractiveness and skills availability, but as theRussian business environment is currently the lowest in this survey, a high ranking is out ofreach. Nevertheless, Russia is developing a niche for higher-value global IT outsourcing,research and development and software development. Especially low cost university citieslike St Petersburg, Nizhny Novgorod and Samara offer good potential.

ITO competency-destination matrixAnother way to find out more about competing countries is Table 4.2. It shows the suitabilityof each country in detail for a variety of competences. As shown, India offers practically everykind of ITO service mentioned in the table; there is no other DC with the capacity to offer thesame number of ITO services. When looking at the CEE countries, it can be said that theyprimarily 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 everycountry present in the table also offers application management & support, multimedia &animation and web-based applications.

Table 4.2 ITO competency-destination matrix, 2005

Brazil

Canada

China

Czech

Republic

Hungary

India

Ireland

Malaysia

Mexico

Philippines

Poland

Romania

Russia

South

Africa

CAD

QA/testing ApplicationManagement& Support

IT Consulting SystemIntegration/ EAI Packaged S/WImplementation

S/W Localisation InfrastructureManagementServices

E-business Embedded


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Brazil

Canada

China

Czech

Republic

Hungary

India

Ireland

Malaysia

Mexico

Philippines

Poland

Romania

Russia

South

Africa

Technology

Multimedia &Animation

Web-basedApplications

Wirelesstechnology

EA (ERP, CRM,SCM, DW/DI, KM) Source: neoIT (2005)

4.2 Overview of nearshore destinationsNearshore destinations in Eastern Europe are gaining in popularity among European companies

that want to outsource their software and IT services. These nearshore destinations havecertain advantages over offshore destinations like Asian countries. Especially German andFrench companies mention the cultural and language aspects in Eastern Europe as importantfactors for choosing these countries as a destination for their outsourcing projects. Accordingto CBI expert Mr Klucs, nearshore destinations are also especially interesting for SMEcompanies. They feel more comfortable with these nearshore destinations because of thegeographical closeness and a better understanding of the EU culture.

Centr a l and Easte rn Europ eThe region that has gained most in popularity over the past decade is Central and EasternEurope (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 themore offshore destinations are the geographical and cultural proximity to Western Europe,lowering the barrier for EU buyers and the multilingual workforce. In addition, the growingmarkets 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, Bulgariaand the Baltic States will offer the same skills at an even lower price and are consequentlyexpected 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 developinga niche in global IT and R&D offshoring, based on its strong human resources. Countriesoutside the Central and Eastern European region will face heavier competition. Table 4.3 showsthe number of IT professionals in the different CEE countries. Please note that only ITspecialists involved in IT outsourcing services are taken into account.

Table 4.3 Number of IT professionals in CEE countries

Country IT professionals

Ukraine 14,000

Romania 12,500

Belarus 9,500

Hungary 9,000

Bulgaria 8,000

Poland 7,800

Czech Republic 7,500

Serbia 4,000

Estonia 3,700

Slovakia 2,500


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Country IT professionals

Moldova 1,440

Lithuania 1,300

Croatia 1,000

Latvia 600

Slovenia 450Albania 100Source: Central & Eastern Europe Outsourcing Review 2007

4.3 TrendsThis 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 andNorth Africa. The main reason for this trend is the unique combination of

2009 - Software and IT Services UE

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