Outsourcing to Eastern Europe: Financial Services Industry Perspective. Alex Golod, VP, Global Delivery Georgy Li, Area Manager, Canada and the U.S. Eastern Europe – Attractive Outsourcing Destination O&O jobs in Eastern Europe FTEs, thousands, cumulative 250 000 200 000 150 000 100 000 50 000 0 2005 2006 2007 2008 2009 (est.) Source: McKinsey More then 500 offshore outsourcing centers By the end of 2008, the Central and Eastern European ITO market exceeded $3.5 billion, with Russia also exporting over $3.6 billion of IT and business services. Notable market growth, despite challenging world economy environment Growing portfolio of outsourcing services Region Overview Eastern Europe: Services provided: Belarus, Back Office or "Non-Core" Functions, such as F&A and HR Bulgaria, (Poland, Czech Republic, Hungary) Czech Republic, Hungary, Call Centers and Customer Support Moldova, Services (Poland, Romania) Poland, Romania, IT Outsourcing (Ukraine, Russia, Russia, Belarus, Romania) Slovakia, Ukraine. R&D Outsourcing (Russia, Hungary, Czech Republic) Industry Growth: Comparison to India Outsourcing industry growth in the Eastern Europe and India 2008 to 2007, % 30% 25% 20% 15% 10% 5% 0% BPO (F&A, HR, ITO R&D, ESO Overall CC) India 12% 9% 8% 11% Eastern Europe 25% 22% 17% 22% Source: McKinsey Trends The CEE countries are notable for technology-oriented educational system and a solid Research & Development foundation. The engine of rapid growth of outsourcing industry in the CEE region in recent years were countries of Eastern Europe (Ukraine, Belarus), as well as new EU members (Bulgaria, Romania). More established players, such as the Czech Republic, Poland and Hungary have smaller pool of available specialists, but they can rely on significant experience, A+ rated customer list and well developed infrastructure. While the countries of Eastern Europe are engaged mainly in ITO, with first baby steps in BPO, the Central European countries demonstrate certain maturity in BPO market with captive centers of large multinational companies. Labor Cost and Country Risks Although many countries in EE are no longer "low cost", their value proposition still holds true due to cultural, regulatory and geographic proximity to Western Europe and USA. High-skilled multilingual labor force with good engineering and R&D talent and with competitive cost structure remains a trademark of the region. 11 Eastern European cities are included in the top 25 safest outsourcing destinations by Black Book of Outsourcing. Crisis Impact on Industry Beyond quick wins, Western companies will continue to face structural cost pressures. Global decrease in demand due to shrinking economies and political influence to keep skilled work force “in house” are serious concerns among outsourcing services providers. Recession and growth slowdown invokes more – and more targeted – government support for O&O industry in the region. Major transformations of Western companies make managers focused first of all on immediate savings not on long-term development programs and projects. Crisis Impact on Outsourcing Industry Salary level change in EUR Since January 2008, % Depreciation of local currencies improves the Czech Republic economics of moving to EE Romania Russia Crisis increases Belarus attractiveness of locations Hungary Poland Reduced attrition Ukraine Increased labor supply at all -40 -30 -20 -10 0 10 qualification levels Local currency Reduced salary expectations devaluation vs. EUR Mar 2009/Jan 2008, % Reduced cost of running business Czech Republic Romania Source: McKinsey and Belarusian Ministry of Statistics Russia Belarus Hungary Poland Ukraine -50 -40 -30 -20 -10 0 Industry Trends Captives continue to be the favored operating mode for EE offshoring, while the presence of top outsourcing companies and number of their development centers is growing steadily. “The death of captives” trend prevalent elsewhere in the world, is not really a threat in EE yet. Growth of outsourcing in the smaller established EE countries (Czech Republic, Hungary) slowing down due to higher costs and “heated” labor market. Overall business process outsourcing expected to grow quite rapidly due to region’s untapped potential to offer sophisticated BPO and KPO services. Ukraine can become the engine of this process as a country possessing large talent pool with very slow adoption of BPO services. Poland, Romania and other current BPO leaders will continue to attract new centers, particularly in less established locations. Russia: only country able to scale up existing centers to several thousand FTEs, but will not attract many newcomers. Also, growth of R&D outsourcing is expected. F&A Outsourcing to Eastern Europe Prominent financial services industry leaders already established their outsourced service centers in EE region F&A Outsourcing capabilities of Eastern Europe attract leading companies to build accounting captive centers in the region Total number of FTE working in Eastern Europe in F&A outsourcing sphere reached 6000 Country Overview UKRAINE - THE LARGEST COUNTRY IN EASTERN EUROPE Population: 46 million. Languages: Ukrainian (official), Russian, others. Education: Adult Literacy Rate – 99,4%. About 75% of adult Ukrainians have secondary or higher education. Work force: 22,4 million. Industry and construction – 25,6%; agriculture and forestry – 23,1%; health, education, and culture – 14%; transport and communication – 6,5%. Overview of Economy Ukraine is an emerging free market, with a gross domestic product that has experienced rapid growth in recent years. Western-oriented government policies encourage partnerships and closer business ties with US and EU companies. In 2008 Ukraine joined the World Trade Organization. Ukraine now has the potential to be one of the region’s leaders in volume of foreign direct investment and portfolio investment In 2003-2008 Ukraine had the highest IT industry growth rate among Central and Eastern European countries. Ukrainian IT market ranked fourth after Russia, Poland and the Czech Republic. Main Economic Indicators GDP (third quarter of 2009 vs second quarter 2009) 3.7% Industrial Output (November 2009 vs November 2008) 8.6% Gross Agricultural Output (Jan- Nov 2009 vs Jan-Nov 2008) - 0.0% Retail Turnover of Goods (Jan- Nov 2009 vs Jan-Nov 2008) ↓ 16.5% Real State Budget Revenues (January-July 2009) ↓ 17.8% Real Disposable Incomes of Population ↓ 8.3% (January-September 2009) Consumer Price Index (November 2009 vs November 2008) 13.6% Manufacturer Price Index (November 2009 vs November 2008) 12.9% Hryvna depreciated to USD in 2009 0.2% Source: Ministry of Economy of Ukraine First quarter of 2010 will be the first quarter of GDP growth after a prolonged recession. However, experts from the World Bank believe that the process will be slow, and GDP growth in 2010 will not exceed 2,5%, while GDP growth in 2011 is predicted around 3,8%. Ukrainian Outsourcing Industry Human Resources. Growing pool of qualified human resources as well as European mentality and competitive rates turned Ukraine into an exciting emerging outsourcing destination. Intellectual Property. Ukraine has recently ungraded IP laws, making them compatible with Western tradition. Contrary to popular belief, Intellectual Property is highly respected among IT providers in Ukraine. Basic Operational Commodities. Reliable infrastructure, solid telecommunications and a sound legal system are now widely available throughout the country. Industry Growth Rate Ukrainian Outsourcing Services Exports Growth, in $ mil. 600 500 400 300 200 100 0 2003 2004 2005 2006 2007 2008 2009 (est.) Accoding to IDC, Market Visio and Ukrainian Hi-tech Initiatice researches The Ukrainian offshore outsourcing market has experienced steady growth in 2003-2007 as a result of strong interest and demand from both US and EU markets. The world economic crisis severely affected the industry, but unlike other segments of the local IT market, as well as other industries of the Ukrainian economy in general, offshore outsourcing industry survived with the minimal losses. While ITO remains the main force of Ukrainian outsourcing, high-quality small and mid-size BPO projects have started to appear recently. Market Acknowledgement The achievements of the Ukrainian outsourcing industry are noted by the market experts: Ukraine is included in Gartner’s top 30 locations for offshore services in both 2007 and 2008. Kyiv was included by Tholons in Top 50 Global Emerging Outsourcing Cities list. Ukraine now appears in Gaming Industry’s top 12 European Countries. Ukraine is among A.T. Kearney Top 50 Global Services Locations as of 2009, inching up 5 positions, but still only on the 42nd place. There is definitely room to grow in rankings! Financial Services Industry Specific Trends Growing talent pool. Eastern Europe is increasingly able to provide a stable pool of trained resources with critical financial industry knowledge, despite previous lack of tradition and internal markets compatible with Western financial systems. Increasing market sophistication. Industry specific knowledge expanding in local markets: 1) Local banks and financial institutions have been investing in modern technology systems 2) Global banks entered local markets, bringing established work schemes and systems. Expanding product development. Many popular products, including portfolio systems, FIX engines, and analytical and risk management packages have been developed in Ukraine, Russia and Belarus. (Unfortunately, product vendors still wary of telling