Analysis of Romania as an Offshore Services Location

May 27th, 2008

This report analyzes Romania’s suitability for offshore outsourcing, based on 10 criteria: language, government support, labor pool, infrastructure, educational system, cost, political and economic environment, cultural compatibility, global and legal maturity, and data and intellectual property security and privacy. Sourcing managers can use this report to judge whether Romania might be a good location for their organizations’ captive or outsourced offshore IT and business process services.

Key Findings
• Romania’s key strength is its availability of skilled IT services labor pools at competitive low costs.
• Romania is transforming its entire economic and political systems to bring them into line with European Union (EU) standards.
It is receiving financial aid to mature its IT infrastructure and legal system and to create an information society.
• A shortage of certified IT services delivery centers, a drain of IT workers and the level of corruption pose challenges to sourcing managers.
Recommendations
• Offshore service providers requiring multiple language capabilities, a qualified IT workforce, and proximity to European markets and cultures should consider Romania as a location for IT sourcing.
• IT sourcing managers need policies and practices in place to manage the potential threat of corruption in Romania.

Romania: Outsourcing Rating
Criterion Rating
Language: Good
Government support: Good
Labor pool: Good
Infrastructure: Fair
Educational system: Good
Cost Very: good
Political and economic environment: Good
Cultural compatibility: Good
Global and legal maturity: Good
Data and intellectual property security and privacy: Good
Source: Gartner (November 2007)

Language
• Almost 60% of Romanians employed in the IT industry sector speak English.
• Romanians’ language capabilities are used for German, French and Italian clients of offshore IT services providers, by business process outsourcers, by software firms for development and by large enterprises as shared-service centers for activities such as marketing.
Analysis: Romanian is the official language of Romania, yet a fairly large number of the population is multilingual (most speak English and French). Service providers can acquire labor pools that are English, French, German and Italian speaking.
Gartner rating: Good

Government Support
• Romania has a dedicated IT ministry and an Agency for Foreign Investment (ARIS) to support the growth of the IT industry.
• The main measures adopted by the government to develop an IT industry include the consolidation of the national information infrastructure, accelerating the construction of an information society, education, training and nationwide IT projects, such as those for the customs office and a unified income tax system.
• Two major organizations represent the Romanian software industry: the Employers’ Association of the Software and Services Industries (ANIS), which has more than 100 members, and the Romanian Association for the Electronic and Software Industries (ARIES), which is the largest trade association for software and electronics in the country, with 380 members (an estimated 80% of the industry).
• The government offers incentives to attract foreign direct investments and has signed trade agreements with almost 83 countries.
Analysis: The Romanian government supports the IT industry and takes advantage of EU programs to develop the country’s infrastructure, enhance its IT R&D capabilities and recognized competencies, establish the required standards, and increase computer literacy rates and IT’s contribution to the gross domestic product (GDP), which stands at about 8%. Outsourcing service providers with an affinity to R&D activities may be entitled to program funds from the EU.
Gartner rating: Good

Labor Pool
• Romania has a population of 21.4 million, with an average age of about 24.
• According to Eurostat, the employment rate of people ages 15 to 64 stood at 58.8% in 2006 (compared with an EU average of 64.4%).
• About 8,000 university graduates are added to the IT labor pool each year. There is a pool of about 134,000 people for various technology-oriented jobs.
Analysis: Romania’s IT services outsourcing experience is growing fast, and the country is eager to close the gap between its educational system and the number of IT professionals required — it relies on about 15,000 high-quality professionals among an IT workforce of 86,000 in a total labor force of 9 million. A small number of providers have started to use Romania’s neighbor, Moldova, as a source of qualified IT labor. As Romania’s maturity grows, Gartner expects more companies certified to Capability
Maturity Model Integration standards. Multinational firms have opened centers in Romania, and competition for skilled labor is high. Romania is developing its own IT industry competencies and improving the standard of living to counteract the drain of skilled IT workers.
Gartner rating: Good

Infrastructure
• Romania’s telecommunications infrastructure supports industry’s current requirements, although fixed-line penetration is low.
• According to a report by the European Commission, only 7% of enterprises had broadband access in 2004, and 35% of the population had access to a PC.
• By 2014, 9,145 kilometers (km) of national roads will have been rebuilt, including about 250 km of expressways and connections in the area surrounding the capital, Bucharest, which holds an estimated 2 million people. Four European infrastructure projects are as follows: connecting Bucharest and Constanta by highway; building an Athens-Sofia-Vienna rail link; solving traffic-related problems on the river Danube; and developing the port of Constanta.
• Utilities are generally available but not always reliable, with outages and shutdowns being common, less so for power supply.
Analysis: Outsourcing service suppliers can leverage Romania’s air, road and rail connections, and benefit from the implementation of globally accepted standards. Most people travel by road rather than by rail, and the share of passenger transportation by air is low. Some airports need expansion to improve capacities and avoid future congestion problems. The government has authorized additional infrastructure investment in four airports — Timisoara, Constanta and two in Bucharest.
Gartner rating: Fair

Educational System
• The Sistemul Educational Informatizat program was introduced in 2001 and aims to provide IT support to the educational system. Business management courses have been introduced in cooperation with institutions in Canada, France, the United Kingdom and the United States.
• The Association for Information Technology and Communications of Romania and the national body that administers the European Computer Driving Licence (ECDL) issued more than 75,000 skill cards and 35,000 licenses by May 2007. There are 35 accredited ECDL test centers, and several universities have adapted curricula to accept the ECDL as proof of practical IT ability.
Analysis: Romania is known for its high-quality technical education, with an estimated 8,000 people with IT backgrounds graduating each year. The distribution of job profiles of new entrants to the market shows the importance given to programmers, who account for 30% to 60% of the total, and system analysts (10% to 30%). IT studies have a long-established reputation in Romania, at the universities of Timisoara and Bucharest, the Academy of Economic Studies in Bucharest and technical universities in Cluj-Napoca, Iasi and Craiova. Research sourcing can primarily be obtained from educational institutions in cities such as Bucharest, Cluj-Napoca, Iasi and Timisoara. Competition among outsourcing companies for educated talent is high because the country attracts foreign direct investments with financial benefits, while educated and skilled labor leaves the country for higher salaries.
Gartner rating: Good

Cost
• The cost of doing business in Romania is high in terms of office rental in major cities and the cost of transportation and telecommunications services. The modernizing of the financial system may further delay financial transactions in Romania. Local capital is expensive, but foreign companies may qualify for some tax exemptions, based on the size of their investment. Local enterprise taxes amount to 46.9%, which is 0.7 percentage points above the average for countries in the Organisation for Economic Cooperation and Development.
• In the first quarter of 2007, the minimum monthly wage in Romania was set at €115, according to the Institute of National Economy, Romanian Academy. Businesses in some sectors are under pressure to keep wages low, and enterprises have started to employ foreign workers from non-EU countries.
• In 2007, the healthcare and education sectors were granted pay increases of 20% to 24% from the state budget. In August 2007, net average earnings across all industries had seen an annual increase of 19.8%.
• Romania’s labor exports and the anticipated fall in population may attract migrants from non-EU countries. In the future, service providers may have the option to employ foreign workers at lower wages from such countries as Albania, Moldova, Turkey and Ukraine.
Analysis: Although Romanian wages are rising, they remain lower than those in Western European countries, so emigration incentives will remain high for Romanians. The pay increases awarded to healthcare and education workers may be early signs of a change in the cost benefits. Romania is one of the least-expensive countries in the EU, although living expenses in Bucharest are significantly higher than in smaller cities or rural areas.
Gartner rating: Very good

Political and Economic Environment
• Elections are considered free. A presidential election was held in November 2004, with 12 candidates competing for the office. A runoff between the two leading candidates was held in December 2004.
• The government has adopted legislative packages that render freedom of expression consistent with European standards. It approved a series of measures aimed at creating a favorable economic environment for the media and eliminating possible state control of the press.
• The country enjoys a low unemployment rate of approximately 6.1%, and GDP growth is forecast to be 5% a year until 2010.
Analysis: The judicial system is in transition to EU norms, and the business climate is very good.
Romania is a stable country, but it is still rated low in terms of corruption and bureaucracy by the EU and other institutions. It takes a reasonably long time to obtain legal permits to start up a business, and to understand local procedures and workforce laws.
Gartner rating: Good

Cultural Compatibility
• Romania is a safe place for expatriates and their families. There are schools and higher education institutes of an international standard in some larger cities. The country’s financial system accepts major credit cards and travelers checks.
• Romania’s richness in language skills represents the country’s significant ethnic diversity. An estimated 12% of the population represents more than 20 ethnic minorities.
Romania’s historical ties with countries such as Bulgaria, Italy, Greece, Russia, Turkey, Poland, Hungary, Moldova and Germany have led to a diversified mix that includes cultural “melting pots,” such as the city of Dobruja.
Analysis: Romania has an Eastern Orthodox Christian majority, but accepts foreign culture positively. Its historic ties with many countries have created an exceptional mixture of diverse ethnic backgrounds, and citizens from countries such as Germany are highly regarded. Service providers with employee diversity policies should find common ground with local employees and rapid social integration of their expatriates.
Gartner rating: Good

Global and Legal Maturity
• Romania’s accession to the EU in January 2007 brought it member-state status and obliges the country to adopt the entire EU community rulebook. Romanian citizens have become among the most numerous issuers of petitions to be solved by the European Court of Human Rights. By the end of 2006, the court registered 89,887 applications, with 12% against Romania and 73 judgments of the country.
• The legal profession suffers because of the instability of the judicial system, which has admitted alternative legal structures, and is confronted with economic dependency, fiscal evasion and even repression, according to press articles.
• According to Transparency International’s 2007 Corruption Perceptions Index, Romania is ranked 69th out of 180 countries (in which 1 is the best and 180 is the worst). This represents a 15-place improvement compared with 2006. World Audit places Romania 54th out of 150 countries in terms of corruption.
• World Audit ranks Romania 50th out of 150 countries for democracy and 56th for press freedom. The World Bank rates Romania 48th out of 178 countries for ease of doing business.
Analysis: The EU indicated in its July 2007 progress report that corruption is still an issue in Romania. Economic sanctions may be taken by the EU if no significant progress is demonstrated by the government in the short term. Romania has signed bilateral agreements with 83 countries and is a member of the World Trade Organization (WTO). It is on its way to adopting all European and global trade requirements, and the government is committed to solving the problem of corruption. Companies setting up operations in Romania should be aware that they may need to control bribery and corruption.
Gartner rating: Good

Source: Gartner

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