The Software and IT Services Market in Romania in the Context of a Global Crisis

Aprilie 2009

EUGEN SCHWAB-CHESARU - Partner & Managing Director PIERRE AUDOIN CONSULTANTS S.R.L.

The software and IT services (SITS) market in Romania, just as in most of the rest of Eastern Europe, experienced a major mood swing in 2008. Actually one can talk of two very different halves for 2008, as the market switched from a strong pipeline and a generally upbeat economic outlook in the first half of 2008 to a sluggish year-end, dominated by panic, uncertainty and caution. Such dramatic changes, in confidence and in the actual spending, need to be put in the context of a global economic downslide.

During the first half of 2008 and even in the third quarter of last year, spending was robust, and many IT end users were planning an acceleration of their spend on technology. At the same time, many small and medium-sized enterprises were opening up more and more for IT projects, encouraged by solid results in 2007 and an unprecedented level of foreign direct inflows.

However, following the panic and the harsh plunge of global stock exchanges, the software and IT services market in Romania increasingly started to feel the effects of the economic downturn seen in mature markets.

Against the expectations of many, business confidence worsened, especially towards the beginning of the fourth quarter, while many companies began to cut on their IT plans or even put a freeze on their IT budgets. The subsidiaries of international enterprises present in Romania were the first to be hit, as they were bound directly to corporate IT budgets. Nevertheless, PAC observed that by November-December 2008 many domestic SMEs – especially the ones providing for external markets - were downsizing and even freezing their IT budgets as well, impacted by a domino effect in demand shrinkage.

In order to answer how deeply the global economic crisis is going to leave its mark on the Romanian SITS industry, one needs to understand where Romania stands today in terms of SITS spend.

A comparative view for 2008 shows that the SITS expenditure stands at 35 EUR/capita in Romania, while the average SITS spend in Eastern Europe is EUR 40. Romania situates lower than the average Eastern European SITS expenditure/capita mostly because of the wide gap with more mature economies, such as the Czech Republic (159 EUR/capita), Hungary (104 EUR/capita) or Poland (86 EUR/capita). When comparing the figure on the domestic market with the Western European average for SITS spending/capita, the gap unfolds a difference by a factor of 15+ times, with the average SITS spending per head in Western Europe standing at EUR 548.

The figures are highly illustrative, as they provide a static view on where Romania actually is in terms of IT maturity. Looking further at the composition of the SITS market by sub-segments, this provides evidence on the infant penetration of IT in the Romanian economy.

By contrast, the system infrastructure software (SIS) market in Romania accounts for almost 15% of the SITS spend, while in Western Europe this segment averages a portion of not more than 5.5%. Furthermore, within SIS, in Romania operating systems account for the largest portion of the segment, while in mature markets there is a balanced distribution between middleware, infrastructure management software or security software and operating systems.

Romania’s infant IT maturity is also illustrated by the share that office automation software holds into the total application software products market. In Romania, office automation accounts for 26% of the application software market compared to an average of 14% in Western Europe.

But a country’s level of IT maturity is best visualized by the share the IT services business accounts for in the total SITS spending. And from this point of view Romania remains a software product driven market, as IT services represent only 48% of the SITS. Contrasting to Romania’s current position, IT services in Western Europe account for 74% of the SITS. Romania is even far behind CEE countries, such as the Czech Republic (67%) or Poland (62%).

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