The analyis of IT industry in Romania

Constantin Măgdălina, ExpertEmerging Trends & Technologies

IT industry in Romania speeds up its growthAuthor: ConstantinMăgdălina, Emerging Trends & Technologies Expert

I. Market overview

The present added value of the IT&C sector to Romania’s GDP reached EUR 9.8 billion in 2015. It has doubled up compared to 2012, and overpassed industry sector’s contribution to GDP, coming close to the one of the trade sector. In 2015, IT&C had the most rapid growth of all economic sectors, 12.5% compared to 2014 and had the second largest contribution to the overall Romania’s economic growth of 3.7%.

In this context, the value added by the software and IT services sector to Romania’s GDP has reached EUR 3.066 billion in 2015, by 21% higher than the one generated in 2014, according to the data from the Employers’ Association of Software and Services Industry from Romania (ANIS). The local software market (exports not included) is forecasted to expand by 6.7% to a value of EUR 425 million in 2016, a exceeding the EUR 398 million level from 2015. A strong growth is expected to be maintained over the medium term, with a CAGR of 8.4% forecast over 2016-2020 to EUR 648 million in 2020.

As for the local IT Services market (exports not included), it is forecasted to grow from EUR 593 million in 2016 to EUR 972 million in 2020, a CAGR of 8.5%. Cloud computing andoutsourcing adoption by local enterprises will drive expansion of the services segment, supplementingtraditional revenue sources such as consulting and systems integration.

Description 2013 2014 2015 2016E 2017F 2018F 2019F 2020FIT market value [EUR bn] 2.152 2.548 3.066 3.616 4.211 4.834 5.495 6.000IT market growth rate [%] 15% 18% 21% 17% 16% 15% 14% 14%Local IT market [EUR bn] 897 953 991 1.036 1.154 1.314 1.482 1.620Local software sales [EUR bn] 335 370 398 425 485 499 607 648Local IT services sales [EUR bn] 562 583 593 611 669 815 875 972Source: Software and IT Services in Romania 2016 – ANIS, Romania IT Report Q3 2016 – BMI (E/F = estimation/forecast)

The enterprise application market has considerable potential in ERP and CRM, and lower-cost cloud providers could make gains in market share by tapping this underpenetrated opportunity.Relatively low penetration of enterprise applications represents an opportunity for vendors, and growth could be particularly strong as cloud delivered ERP and CRM solutions to deepen the market. II. Talent pool

In Romania, there are approximately 100,000 IT specialists at national level. Technical education includes 5 of the top polytechnic universities, 59 domain-specific universities, and 174 private colleges. Romanian universities have been top 3 in the IEEE Design Competition every year since 2001. The number of engineers per capita is greater in Romania than the US, India, China, or Russia. 27% of IT bachelor and master students start obtaining technical certifications while in college. The country is in the top 10 globally in the number of certified IT specialists, while about 98% of IT professionals speak English. This recommends Romania as a hot spot for IT sector rapid development over the next decades.

Bucharest occupies the first position in the Romanian IT industry with 56% of the number of employees, 27 of the 30 biggest companies in software and services are based in Bucharest; the city is home to local companies, integrators and solution providers, as well as support and R&D centres of IT multinational companies. Provides around 2000 IT graduates per year and went up in Tholon’s top 100 outsourcing sites from 44 in 2013 to number 40 in 2014. After Bucharest, Cluj-Napoca is the second city by the number of software and services companies based here. Corporations opened new R&D centres or expanded existing ones. 4 years ago, Cluj-Napoca was one of

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the hot spots in Romania for IT and BPO services. With 1700 IT graduates it also offers the second richest grad pool in Romania. Timisoara remains and important IT hub in Romania, but as new rising star surfaced Iasi, considered in 2013 the second local IT cluster in Romania after Cuj-Napoca. Other hubs with good talent pool and potential to grow are TarguMures, Sibiu, Brasov, Craiova and Pitesti.

Romania is positioned to benefit from regionalization of the cloud computing market, due to its strong networking infrastructure, low cost and especially to the local labour skills base. A large percentage of IT specialists are software developers (55%), followed by technical support skills (15%) and quality assurance/ testers (9%).

An additional advantage of the country is represented by the diversified and highly required programming languages Romanian experts own: Java (28%), PHP (15%), .NET C# (15%), and C/ C++ (12%) rank the highest in the top of programming languages and of expertise. IT professional are drawn to obtain international certifications such as: Linux, CISCO, Microsoft, Oracle, Sun, ISTQB, OMO, CBAP. Although Romania aims to be a regional IT hub, the pool of talents seems to not commensurate this goal. The over 7,000 IT graduates are insufficient to cover the needs of the market. This shortage may deepen over the longer term as qualified workers migrate to other parts of the EU in search of higher pay and better employment opportunities.III. Industry segments & competitive landscape

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a. SOFTWARE

Enterprise software: The Romanian enterprise software market is mature in a global context as aconsequence of increased integration with the wider European economy - still penetration rates aresignificantly below those in Western Europe as well as leading Central and Eastern European markets suchas the Czech Republic. The enterprise software opportunity in Romania remains focused on ERP, CRM and supply chain management (SCM).The latest data for 2015 show that adoption rates among Romanian large enterprisesand small-and-medium-sized enterprises (SMEs) are below the European Union (28 country) average forboth ERP and CRM. In some cases the gap was especially large, including SME ERP penetration and CRMlarge enterprise penetration.

Cloud computing: is a small market compared to most of Europe, but it is developing rapidly.Although price pressures are expected to be intense due to price sensitivity, thepotential of the Romanian market is significant, with rapid proliferation of adoption supported by highquality and extensive network infrastructure. It isforecasted that total Romanian cloud computing spending willincrease at a CAGR of 17.4% over 2016-2020 to EUR 69 million.

SaaS: Eurostat data provide an outline of the market which also indicate Romania is falling behind peers in CEE. In 2014, just 5% of Romanian non-financial enterprises with 10 or more employees had adopted at least one cloud service (this figure also includes infrastructure and platform services).

IaaS/PaaS: In terms of Infrastructure-as-a-Service (IaaS)/Platform-as-a-Service (PaaS) adoption, the datashow storage of files and hosting databases were the most common in 2014 at around a third of cloud usingenterprises, while only 19% of cloud using enterprises in Romania using cloud computing power for theirown applications, from which we infer this could be an area of medium term outperformance.

b. IT SERVICES

The Romanian IT services sector is expected to grow to EUR 593 million in 2016, beforeincreasing to EUR 972 million in 2020, corresponding to a CAGR of 8.5%. The IT services industry will be theoutperforming segment of the IT market over the medium term as a result of continued growth inoutsourcing and wider adoption of cloud computing services among Romanian end-users in both the publicand private sectors. Key to this will be domestic demand from corporate modernisation and governmentinvestments in the information society. Another factor will be outsourcing, while the potential for cloudcomputing growth in Romania is very strong if EU regulations for harmonisation of data security andprivacy are implemented.

EU funds will continue to support spending on IT services as Romania continues on the path to fullintegration. The government has looked to EU structural funds to enable IT projects that can help generateinvestments and support the market. Local governments are also recipients of EU funds and constitute animportant IT services spending vertical.

IV. Opportunities and growth drivers

Household income forecast envisages a steady migration of households up the income scale in Romania overthe medium term, which will allow PC vendors to target higher value sales, and potentially benefit fromshorter replacement cycles.

The updated the Digital Agenda for Romania 2014-2020 includes a projection for EUR 2.4 bn of IT investments, ofwhich EUR850mn is expected to be secured from European Operational Program funding; EUR495mn isallocated to broadband roll-out; EUR100mn to e-government and interoperability; EUR85mn for IT ineducation; EUR50mn for IT in healthcare; EUR30mn for cloud computing and social media; and EUR15mn for IT in culture.

Deeper integration into the European policy umbrella is expected to facilitate growth not only in outsourcing, where Romania is a regional leader, but also in more advanced IT services such as cloud computing. Although at an early phase of development, enterprise resource planning has reported 20% growth and looks set to

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remain a major opportunity as businesses invest in cost saving efficiency measures to modernize and compete at the European level.

The modernisation of key economic sectors in Romania will continue to provide IT vendors with opportunities in banking, oil, power and telecommunications. An environment of investment in modernisation is likely to drive growth, particularly in the transport and utilities sectors.

AboutConstantinMăgdălina

ConstantinMagdalina is an expert in emerging trends and technologies. He has a 8 years of working experience, while he performed in multinationals both in Romania and abroad. Constantin holds a Master in Marketing and Business Communication from the Academy of Economic Studies in Bucharest. He is a certified Lean Six Sigma and ITIL Expert which provides him a good understanding of processes and transformations within organizations. The certifications from the Chartered Institute of Marketing and Hubspot complement his expertise and knowledge of business transformation. In his over 4 years of working with EY, Constantin initiated and conducted studies which analysed different aspects related to the business environment in Romania such as the growth forecasts of companies for 2013-2016, knowledge management insights, the buying experience in the age of digital consumers, social media 2013-2015, the utilization of mobile devices in Romania. He is the author of numerous articles on topics related to innovation, the efficiency of business processes, social media, the buying experience in the digital age, trends and emergent technologies. Constatin is invited as key-note speaker at numerous events and business conferences.

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