2011: Romania remains a laggard in IT investment among its CEE counterparts

Mai 2011

PIERRE AUDOIN CONSULTANTS S.R.L.

After two years of consecutive decline for the software and IT services spending, the outlook continues to be uncertain for the IT industry in Romania.

The economic downturn in Romania has significantly taken its toll on the confidence and general optimism of the IT end users, and this has been further transferred on the IT suppliers, whose performance showed variations from single-digit to double-digit dips in IT services. Given the immature nature of the Romanian IT market and a less strategic role of IT in Romanian organizations, any major IT initiatives have been inhibited during these last two years. IT spending for new software functionality and/or build-up developments was suppressed severely, irrespective of vertical sector. Nonetheless, the size of the organization had a corresponding impact on the level of IT budget cuts. In the commercial sector, the smaller the company, the harsher the levels of cuts on the IT spend.

Instead of playing an offsetting role, the public sector in Romania has disappointed yet and again in 2010 and does not show any major signals that will prop up the IT industry in 2011 either. PAC expresses its pessimism that the current government will prioritize IT projects for the near to medium run. Despite availability of financing from the EU, the performance of the authorities in attracting and consuming EU funds for IT projects has been more than deploring. It is not only in Romania where the public administration misses opportunities to utilize EU funds for e-government projects. Other countries such as the Czech Republic have also lacked the expertise in attracting EU money. However, there are also examples to be shown. The local administration Poland has set clearly a good example on how to utilize EU funds to become more IT automated, while leveraging opportunities for a whole industry.

Just as in the prior year, 2010 saw a high pressure on prices and a fierce competition between IT suppliers. Prices in the public sector showed more resilience, while in the commercial space pricing saw often double-digit drops. Discounting and battles in licensing products was less severe than in the previous year (given the plunges in 2009), yet vendors continued to be under big stress. Margins have sometimes reached their minimal levels, jeopardizing the long-term ability of local ISVs to sustain product development on their proprietary application software.

Profitability suffered immensely in 2010, and many suppliers closed the year in the red, sometimes for a second year in a row. There were also efforts to improve internal cost structures, for instance, various suppliers worked on moving their FTEs into contractor agreements or micro-enterprises. Many less affected have been the IT providers with dubious contractual agreements (e.g. outside the fiscal perimeter).

"Despite the size of the country and its IT resources, the Romanian software and IT services market cannot exceed thepositioning of the overall local economy in the region."

While the signs of stabilization have been there for the last two quarters, there is cautious optimism over the improvement in IT buying in 2011. This stems from the lack of any major IT projects in the public sector at the horizon of 2011, coupled with a low number of commercial enterprises that are starting to spend again. Put into perspective, the recovery of the IT markets in other CEE countries leaves Romania behind again.

In Poland, IT investments are beginning to pick up in 2011, driven primarily by the mid-market. Poland is strongly export-driven, and while the rest of Europe has been struggling in recession, Poland’s robust economic performance built confidence among the domestic enterprises to restart spending for IT systems in 2011. At the same time, long postponed projects in the central administration (e.g. healthcare, public safety, e-government, identity cards) should be kicked off in 2011 under the current government. These would end the inertia seen in the public sector in the last couple of years, significantly catalyzing the overall IT expenditure in 2011/2012.

In the Czech Republic, suppliers have been holding to the public sector in 2009 and 2010. However, in 2011 the newly elected government gives a lot of uncertainties and makes suppliers nervous.

Nevertheless, one needs to acknowledge the level of maturity of the Czech IT services market (commercial and public sector) and its resiliency. IT projects have a very different nature in the Czech market compared to Romania, and the maturity to which it has grown built a traction that feeds suppliers, particularly with phased development/optimization and gradual replacement. In contrast, in Romania often the maturity of customers leave projects in an on/off mode. A relatively similar situation to the Czech market can be found in Slovakia, where more IT intensive enterprises (comparison done for the SME segment) enables stepby-step development, keeping outlook upbeat and afloat. Even the Hungarian IT services environment, after two bleeding years is showing signs of recovery in 2011 for the same reasons.

The dependency on large projects in both the commercial and the public sector in Romania pose a constant threat of hiatuses and filling up the backlog. This leads to high ups and downs in the revenue streams of suppliers and disrupts a fluent market evolution, hence resource planning. As spending for IT services remains erratic, the threat of big fluctuations will remain systemic for the domestic IT industry in the medium term, while the outlook hard to predict.

Nonetheless, PAC believes that certain industries in Romania are more likely to align with the recovery wave in Western Europe than others. The utilities sector provides significant potential for automation, particularly in the infrastructure domain, and there financing is less of an issue relative to other vertical markets. Overhaul and expansion of the IT infrastructure layer at most utilities groups in Romania theoretically provide impressive opportunities. Nevertheless, when regarded pragmatically, PAC believes that replacement and modernization of the infrastructure domain will be done in small incremental steps.

The banking and financial services sector begin to open projects in 2011, yet pricing and pragmatism in project approach are two major elements that have changed compared to the pre-2009 period. Banks are still trying to do much by themselves and continue to buy a lot in a time and material manner.

The telecom sector is a fairly closed market, driven by global framework agreements and global suppliers. Price pressure has been especially dramatic in this vertical industry, and bits and pieces of commodity development were sent offshore. However, in Romania, internal development has been challenging the entry of external providers. Actually, the preference for internal development among many enterprises and generally a more limited culture of working with systems integrators (SIs) compared to other countries has favored more infrastructure integration in Romania.

Nevertheless, the limited interaction between SIs and many end users with potential for externalization in Romania can be attributed also to the lack of best practices on the back of the local SIs. Suppliers have been relying historically on a <<push>> strategy, rarely being proactive enough to invest in <<pull>> strategies. In a more prosaic way, it has been rather more a matter of “IT end user: I give away/ IT supplier: I take what is given”. Domestic suppliers have rarely had the capability to proactively present irresistible value/project propositions. Typically, they have been working more as execution assistants, delivering on tasks. There are not many countries in CEE where the local suppliers have developed best practices and where they could compete head-tohead with global consultancy houses. Poland, however, can be set again as an example here, with various domestic suppliers that built capabilities ahead of the customer demand.

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