The Romanian IT Market Dynamics - Between Political and Economical Instability
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Romanian IT expenditure in the region
The Romanian IT market had a late start, caused by the difficult economic situation in the last decade. Since the late 90s, the evolution has accelerated, but the volume of the IT expenditure has remained much lower than in other countries in the region (the Czech Republic, Hungary or even Slovakia), which, theoretically, have an even lesser market potential.
However, in the last couple of years, the Romanian IT market has taken several steps further in its development. Nevertheless, the structure of IT expenditure, with a still high share of hardware, shows that there is rather long until the market matures. Software and IT services (SITS) had the fastest development, but the hardware segment has also sped up lately, since several large projects have involved extensive infrastructure investments too. Infrastructure is going to be part even of projects for business solutions implementation, as the companies need appropriate hardware to run these systems, especially when complexity is high.
For 2008, PAC expects the Romanian IT expenditure (hardware, software, IT services and all personnel and other costs of IT departments) to go up to almost EUR 2.3 billion, which is more than four times the amount recorder in 2001. Both the hardware and SITS segments continued the good development from the prior couple of years, within the parameters forecasted previously.
Software and IT services represented the main area of growth, but hardware did not have a much slower evolution; together, the two classes stood for over 70% of the IT expenditure in Romania, with hardware still bigger than SITS. Both segments have been driven by some large projects for the upgrade and extension of IT systems in large Romanian companies, in utilities or manufacturing, after having been privatized in the last few years. Besides those, the improved performances of the Romanian companies, including SMBs, allowed for IT investments to take place – infrastructure, integrated ERP systems or additional modules, industry solutions, related services etc.
However, as the market is still small, the impact of big projects is particularly high; practically, they are accessible only to few companies that may act as main contractors, but the smaller companies benefit as well, working as subcontractors.
In spite of the good development in the last few years and of the country’s size, the IT expenditure (everything related to IT needs, including personnel, hardware, software, services and miscellaneous) in Romania represents only a bit more than 5% of the Eastern European region.
The software and IT services market
In Romania, software and IT services have relatively equal shares, showing once again the rather low maturity of the market – quite high weight for system infrastructure software and application software products, above the levels recorded in the more developed countries in the CEE region. For 2008, PAC expects that less than 50% of total SITS revenues to come from software products (including system infrastructure software, tools and application software products), while, by comparison, software represented 27% in Western Europe and around 35% in Hungary or the Czech Republic.
It is worth mentioning that the large IT investments carried out lately have included a great part of infrastructure that has boosted the system infrastructure software – operating systems and system management software.
Most of the software vendors are optimistic, but the growth rates they are budgeting are less impressive than several years ago; however, the absolute amounts are considerably higher and, consequently, the absolute value of the growth is larger every year.
The structure of the software market, the demand for such products and the drivers show the development level of the overall IT sector in Romania, which is still not very high.
The big share of system infrastructure software, of which operating systems are the great majority, is such a sign of immaturity – as the Romanian market is still very much hardware-oriented, infrastructure software is needed. However, even in this area, the demand for sophisticated products (e.g., storage, network and system management, performance, change management) has only occurred. In the future, the accelerated growth in this sub-segment will drive the SIS market further, compensating for the slowdown in the operating systems area.
Tools, the second segment of technology, is going to accelerate its development – mainly in the mid term – as demand evolves towards information access & decision tools, infrastructure & integration platforms. Still, the most consistent growth will come from databases, even more as several large projects, including basic infrastructure and implementations of complex applications, are already started or in the preparation phase.
On the other hand, the two segments mentioned above are very much influenced by the global trends and evolutions, and new topics may be pushed on the Romanian market by the big international players that dominate the local scenery as well.
As stated before, the application software products represent the main part of the Romanian software market. On one hand, Microsoft with its Office package covers more than 10% of the market, while business and industry specific applications stand for the great majority of the segment. For application software products, the market has been more open for Romanian software houses that have got a fairly good position on the ERP solutions market, mostly for small and medium companies.
For the next two-three years, PAC sees a high point in the development of ASWP, with growth rates of 22-25%, business application segment being the main contributor to this development. Further on, the expansion will calm down, but this segment will remain significantly important within total software and IT services.
Together with its maturation, the ASWP market will see a deeper consolidation, and some local players may be forced to merge or to attract financial or strategic investors in order to remain on the market.
Considering both the share and the growth rates, project services has been the main driver of the Romanian software and IT services market, and this role will be maintained in the medium term as well.
The scope of services mainly concerns implementation/ development of basic IT systems (e.g., ERP, custom development) and support (hardware maintenance, installations), while outsourcing is very small.
Reflecting the structure of the ITS market, the major system integrators that provide both project services and hardware maintenance were the leading players, mainly subsidiaries of international groups (IBM, HP, S&T, Siemens).
As the ITS market grows and gets more mature, its structure will change; together with the progress of outsourcing as well as of project services, the weight of hardware maintenance will decline. However, this topic plays an important role, and many large projects are infrastructure-oriented. At this time, the Romanian IT services market goes through the stage experienced about four or five years ago by other CEE countries such as Hungary or the Czech Republic.
A general feature of the Romanian IT services market is the broad extension of sub-contracting – most leading international players use this method in order to remain profitable and compete against the local suppliers. Sometimes, even parts of the outsourcing contracts were sub-contracted to local partners with a better geographical coverage and lower costs.
Step by step, the Romanian outsourcing market has shaped up, but the growth pace is, however, under expectations, as the customers are not considering this type of services yet; in many cases, even the signed contracts set going late.
Taking into account the rather small volume of the market, a few large projects that are signed or canceled at a certain moment have noticeable effects on the evolution of the overall IT spending or on the performances of the contractors; this situation will continue even in the mid term.
Thanks to the country’s increasing attractiveness, international large outsourcing deals have a local component and generate, indirectly, a market for such services; however, usually, the part of global deals that regard Romanian subsidiaries, is not very large and do not generate any margin for local players.
Demand for hardware infrastructure is still high in Romania, thus hardware maintenance is needed, especially for mainframes, middleware, servers as, lately, this type of infrastructure has extended and requires good specialized services. On the other hand, outsourcing is far from being a common topic for the Romanian customers that will call primarily for hardware maintenance.
Still, the big hardware manufacturers and some large international services suppliers will remain the dominant players. However, the margin for maintenance services is diminish (mainly for basic services): on one hand, subcontracting may decrease to some extent as the customers will go directly to the local providers (those large enough to deliver strict SLAs and properly manage large infrastructure when it is the case) that currently act as sub-contractors; on the other hand, some small players will not be able to sustain the business only with maintenance and will shift towards services with a higher added value, even infrastructurerelated. In addition, the IT suppliers will increasingly offer maintenance services for the telecom equipments integrated in complex systems.
