Slow Recovery in 2011 - The Optimistic Scenario for the Software and IT Services Market in Romania
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The financial and economic crisis of 2008-2009 has found the Romanian software and IT services industry in a stage of fast development, but still immature, with a fragile balance between offer and demand and an increasing cost of the IT skilled workforce.
With one of the highest growth rates in the region, Romania was hit by the crisis at the time of a highly unstable political situation (with three Governments, two key elections) and at the moment of a big real estate boom that absorbed a significant part of private financial resources.
2009 was a year of very few local large, complex projects, but characterized by a high pressure on prices, a fierce competition between IT vendors and a polarization of players based on their ability to be involved (as prime- or sub-contractors) in the few public projects launched during the recession.
Despite the relative market maturation, the demand is still highly infrastructure-oriented, including related software, which leads to a high share of system infrastructure software, databases, etc., within software and IT services. During 2009, and PAC forecasts that 2010 will follow the same trend, the infrastructure-related deals (support, integration, consulting for optimization and consolidation) are more often signed than the ones related to complex application systems (ERP, CRM, BI, etc.) and, for most vendors, the traditional, long-term infrastructure deals have been the safe harbor.
Even though in most EU countries the demand for infrastructure is no longer a very hot market for IT players, the Romanian market conditions are still very different and there is still a lot of room for growth in infrastructure-related services, sometimes with quite good margins, mainly when compared to some of the applicationrelated agreements.
From a vertical perspective, the Romanian software and IT services market did not react at the same level in all sectors. The less hit was the Public sector, but, at the same time, it has been supposed to be "the safe harbor" for the local IT industry during 2008-2010. Because of an increasingly unpredictable political situation and the preference of public organization to only fuel with significant projects a small group of companies, strong enough in relationship and political lobby, the public administration was also an important source of discrepancies between IT players, especially system integrators.
It is hard to predict changes in the way the public administration will conduct IT-related tenders and the way the Romanian Government will understand to adopt efficient IT solutions, with clear functionalities and references across Europe, instead of fueling with high budgets custom software development with uncertain best practices or buying lots of over-evaluated hardware and software with no broad conception and unified systems.
Except for foreign investments and last privatizations, which are among the strongest growth factors for the IT market evolution, IT expenditure across verticals is very much linked to the economy structure and the GDP evolution in different segments of the market.
Therefore, the SITS market is influenced by the same factors, in particular cases the specificity of IT usage having a higher impact. There are verticals such as Manufacturing, Retail, Services or Utilities where an early penetration of ERP systems is natural and easier to be performed. There are others like Banking, Insurance or the Public sector where the first focus lays on core systems in terms of IT expenditure, while custom development is also extensive. These situations are even more enhanced by the low level of Romanian market maturity.
The crisis has had also a dramatic impact on the IT services suppliers in Romania; even though most of them have been less impacted as the market average, out of the 20 most important IT services players, 13 did not manage to increase their revenues or, at least, to keep them flat in 2009 compared to 2008.
After two difficult years, the current situation of the ERP market knows little recovery, in terms of investments, projects and vision. According to top managers of software and IT services companies, only after two or three years will the IT business reach again the level of 2008, which is considered the best year for the IT suppliers (highest volume ever).
The near future is still blurry, as the solutions for economic improvement fail to appear and depend very much on political movements. Most companies, especially small ones (under 50 employees), had to dramatically decrease their staff, in order to keep spending as low as possible. Also, the wages in the IT industry reduced significantly (in foreign currency, due to the exchange rate), and Romanian specialists became even more competitive for outsourcing near and offshore projects.
The austerity measures adopted by the government starting July 1st, as well as the IMF conditions oriented the central administration to European funds, in order to finance public IT projects, although the absorption rate continues to be low. The European funds, normally available after the country’s accession to the EU, would have been in a position to help the IT players in Romania, but they have been very badly managed and had almost no impact on the local market.
There is still considerable room for PC adoption in various sectors of economy, as computerization lags significantly behind EU levels, fueling opportunities for Office-like solutions. Together with EU funds availability and considerably lower prices in the market, this should boost the penetration of such solutions, especially for the SME market, as a considerable part of them are still working on very undeveloped IT systems.
