1 TRENDS OF INFORMATION SYSTEMS OUTSOURCING. A ...

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Mar 26, 2009 - software application in-house or outsource the project to an external vendor ... center management are among the most popular. .... data center services, system operations, telecommunication and networks, help desk or .... house IT service is not central to the organization, outsourcing it can help free up IT.
TRENDS OF INFORMATION SYSTEMS OUTSOURCING. A ROMANIAN PERSPECTIVE

Gabriela Mesnita "Alexandru Ioan Cuza" University of Iasi Bd. Carol I, no. 22, 700505, Iasi, Romania Phone: ++ 40-232-201585; Fax: ++40 232-217000 E-mail: [email protected]

Florin Dumitriu "Alexandru Ioan Cuza" University of Iasi Bd. Carol I, no. 22, 700505, Iasi, Romania Phone: ++ 40-232-201585; Fax: ++40 232-217000 E-mail: [email protected]

Abstract

Business today depends on information technology as never before. One of the key stage of information system development consist in election of system design alternative. In this regard could be look at three basic approaches: buy a commercial solution and customize it, develop a custom software application in-house or outsource the project to an external vendor or developer. Ten years ago outsourcing vendors have focused mainly on data centers and legacy applications. In the last decade, outsourcing has become an efficient method to cut costs and improve the performance of a information system development and operating within a company. As the new trend of globalization constrain companies worldwide to go outside of national frontiers to look for the specialised firms for different business areas in their needs for best equilibrium between high quality of services and cost-effective solutions. This is the same situation of IT companies. In this context, could be seen the trend of IT outsourcing market development, in particular oriented to the developing countries, such as those from Asia, East Europe. The pressure to cut costs forces IT companies to search for cost effective solutions for software development projects, so the price for software product could be dropped, and the company could get a better position on the market. One of attractive destination for IT companies is Romania, due to the

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great number of well-educated and highly skilled IT workers who have better understanding of Western European and American culture. In this paper, we discuss the main evolution stages of information systems design alternatives and the perspective of IT outsourcing market in Romania. We focus on the advantages of Romania as IT outsourcing market under globalization context.

Keywords: information system outsourcing, reasons for outsourcing, market of outsourcing, offshore IT outsourcing, Romanian IT outsourcing

1. Introduction

Due to quickly changing technology trends, business tends to rely on external vendors and contractors to develop and manage their information systems. In the last years, outsourcing has become a common solution for many organisation concerning their option of IS development and management. For businesses which have IS department, generally large companies, there are mainly four situations as base for decision to outsource the IS (Jessup,2003:261-262): limited IS staff, not very well skilled professionals, overloaded with different project, difficulties for IS human resources to look at the future. The IS outsourcing represent one of the most agreed solution for small and medium enterprises, due to the lack of IS department as well as the IS professionals. A fundamental issue appears to be the increasingly complex nature of the outsourcing marketplace. For example, there has been a noticeable increase in the number of IT functions that can now be outsourced: web hosting, PC maintenance, network management, and data center management are among the most popular. The providers are looking to more missioncritical functions, such as call centers and developing specific applications, as engines for their own growth. So, there are many determinants which leading to consider outsourcing the information systems. Last years evolution of information technology and competitive pressure of emerging technologies (e-business, mobile-business, wireless etc) bring to set-up and develop an outsourcing marketplace. The competition in information technology sector in developed and emerging countries has increased significantly. Therefore, several IT service providers have entered into these markets and are offering various information system services.

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Globalisation and competitive stress have forced businesses to find better and efficient ways to use IS for competitive advantage and high performance. IS development is extremely highcost, labour intensive and skill-intensive. Therefore the businesses are facing intense competition for efficient, on time and within budget production. The requirements and preferences of clients for IS are changing very quickly. In response to these problems and business trends the firms may overcome these challenges by transferring IS professionals, facilities, hardware leases to third party vendors located in developing countries where there are a great potential and many opportunities. This practise is called offshore outsourcing which are the new wave of IS outsourcing. So, our paper will follow two directions. The first one focus on taxonomy and determinants of IS outsourcing and offshoring as theoretical framework for the second one, which tackling SWOT analysis of Romanian IT outsourcing market.

2. THEORETICAL APPROACH OF IS OUTSOURCING

The term system acquisition has been used for years to describe situations where a customer contracts with a system development organization for the complete development of a system component (possibly including life cycle maintenance). Outsourcing can be distinguished from acquisition by the level and type of effort agreed to by the developer and customer. Without calling their business arrangements “outsourcing”, companies have outsourced long system functions, entire system projects, and system development phases (components) (Vijayan,1996:81). System outsourcing is a form of contracting (or subcontracting) with an external organization for: the development of complete or partial system components, the purchase of packaged or customized package system components, or activities to aid in the system development life cycle. Figure 1 shows a high-level view of the system-outsourcing domain. This view has many similarities with evolution of IS outsourcing as results from an analysis of major futures of outsourcing (Lee,2002:197-199).

In-house efforts are those efforts where the entire development is accomplished within the customer organization. Many organizations have information technology, prototyping, applications, or otherwise-named departments responsible for in-house application development. Beyond in-house development, perhaps the simplest outsourcing arrangements to explain are those where a developer is contracted to develop a part of an overall system.

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1960s

1970s

1980s

1990s

2000s

System outsourcing

In-house development

Less outsourcing

System Component

Development Phase

Product and/or component outsourcing

Entire System Project

Entire System

More outsourcing

Total outsourcing

Figure-1: Evolution and domain of information system outsourcing

In process component (development phase) outsourcing, the customer organization simply contracts for an external group to perform all or part of the functions of one or more of their process steps or components. One traditional example is contracting for system-level software testing

Current outsourcing literature focuses on this strategy for system development and information technology service/infrastructure outsourcing. System users and developers begin a development project by planning. Among many other things, this development plan includes project organization and whether and how outsourcing may be used during development. The outsourcing strategy is the type of outsourcing or combination of outsourcing types used on a project (Kaner,1997). System development outsourcing differs from most outsourcing because companies are attempting to contract complex, intellectual “project” work rather than typical repetitive, well understood “process work” (Thomsett,1998). This effort certainly requires intelligence and experience, but it is largely repetitive and somewhat simpler than developing system component from high-level user requirements. As a result, the vast literature cache of IT outsourcing experience is of limited value to a customer trying to select an outsourcing strategy to meet an organization’s software development goals (Outsourcing Institute,2002).

2.1. A taxonomy of IS outsourcing

In this context the research literature (Lacity,1993b:73-86), (Willcocks,1993:223-242), (Perry,1997:23-26), (Lacity,1998:323-408), (Jayatilaka,2002:100-130), (Ang,2002:131-152),

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Gillespie,2002:12-18), (Mears,2005) identify different outsourcing options following multiple criteria for outsourcing taxonomies:

1. Sourcing decisions: •

total outsourcing – decision to transfer almost all information system components and function to a single vendor (more than 80% of the IS budget is spend to obtain IS services from external vendors);

•

total insourcing – decision to keep the management of functions and resources internally (more than 80% of IS budget is spend to obtain IS services from internal IS department);

•

selective outsourcing – decision to source selected information systems functions from external provider while another part of functions and resources still be retained internally (less than 80% and at least 20% of IS budget is spend to obtain IS services from external vendors).

2. Outsourcing domain: •

personnel management – only the personnel needed to selected functions, mainly for programming and maintenance activities;

•

project management – could be taking into account for a specific project or a part of IS development. In this case, the vendor is responsible for managing the activities and resources allocated for a stage or function of IS development;

•

service management – contracting the various services like application maintenance, data center services, system operations, telecommunication and networks, help desk or user support.

3. Outsourcing arrangements: •

general outsourcing – consist in three types of outsourcing, that is selective outsourcing, value-added outsourcing and co-operative outsourcing;

•

transitional outsourcing – undertake the movement from one technological platform to another, which could involve the management of the legacy systems, transition to the new technology, and management of new platform;

•

business process outsourcing – involve the responsability of a third party for an entire business function, such as hotlines, help desks, call centers, claims management,

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document processing. Business process outsourcing focuses on providing efficient solutions for complex but repetitive business processes.

4. Relationship: •

single vendor – single client – typically for simple function or update of some information system component;

•

single vendor – multiple clients – is usually to application development when a single vendor assure the implementation and maintenance for multiple businesses with comparable features;

•

multiple vendors – single client – can be found at the large companies which outsource entire information system development and maintenance to the different provider;

•

multiple vendors – multiple clients – can be seen on e-business context where cooperate multiple companies on the value chain. In this context, each business could contracting one or more partners from value chain to outsourcing information system.

5. Period of outsourcing: •

long term – is a strategic partnership or alliance between client and vendor according the strategic objectives of both parts;

•

short term – usually is used by businesses which first outsourcing a small part of their information system.

6. Location of vendor: •

domestic outsourcing – refers to the outsourcing practice done by the firm within the same country;

•

offshore outsourcing – also called international outsourcing refers to a commercial arrangement that allows a firm to look outside for foreign service providers who are capable of performing or subcontracting activities that have done previously in-house domestically;

•

nearshore – service provider are located in neighbouring countries and concept has attracted more attention in the last year because it is seen as less risky and less politically charged than sending jobs overseas to places such India, China and so on.

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All these types of IS outsourcing depend on the different factors or critical aspects which must be taking into account when businesses want to outsourcing part or all their IS functions. A summary of these factors will be presented in the next section.

2.2. Factors for IS outsourcing decision

The debate on outsourcing raises serious questions. Determining the reason, costs, benefits and risks that support the outsourcing decision making process is complex. Under these circumstances, the most commonly cited drivers in research and practical papers for IS outsourcing

are

the

following

(Hirschheim,2000:99-107),

(Lacity,1993b:73-86),

(Currie,1998:169-180), (Aalders,2001:218-228), (Baldwin,2001:15-24), (Getronics,2002), (Knowledge Systems and Research, Inc.,2004), (Udo,1996:690-697), (Plant,2000:175), (Outsourcing Journal,1998).

1. Financial: •

reducing costs – economies of scale may allow vendors to provide services at a lower rate than that of in-house provision. Multiple client organizations may share the same IT infrastructure as the vendor. The cost of maintaining a specialized support team is also shared by a number of client organizations. The cost savings are especially significant when acquiring a highly specialized service, which is usually expensive;

•

obtain immediate cash – when businesses turn over their IS to a service provider, they can sometimes strengthen their balance sheets by liquefying their IT assets;

•

replacing capital outlays with periodic payments – an outsourcing arrangement typically charges client organizations on a fee-for-service basis, and client organizations subsequently do not need to make a large initial capital investment.

2. Technical: •

improving the quality of IS – outsourcing service provider companies are specialists in the services they provide, enabling them to provide services at either lower cost or with higher quality at the same cost, and they are often more skilled than the general IS department of the firm buying the service;

•

gaining access to new and/or proprietary technology – one of the biggest drawbacks of in-house IT service provision is the fixation on the purchased technology. The large

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capital investment in IT equipment for in-house service provision sometimes forces the continued use of obsolete technology due to financial reasons. Given the fastchanging nature of technology, outsourcing allows for better risk management. The risk is shifted to vendors because they are responsible for technology upgrades.

3. Strategic: •

focus on core activities – is a common strategic goal of outsourcing. When an inhouse IT service is not central to the organization, outsourcing it can help free up IT personnel to focus on the core. Network and application support, for instance, may not be central to a human resources department. In this case, it is of strategic value to outsource network and application support to a vendor and transfer in-house IT personnel to assignments on core business activities;

•

time to market – many companies are constrained by lack of flexibility when faced with issues of capacity and capability in their internal IS units. An outsourcer can generally provide resources reasonably quickly. This may allow the businesses to acquire or construct new systems to support business activities in a way that is not possible with a limited internal resources;

•

specialized firms can more easily attract highly skilled professionals – IT outsourcing also addresses one of the main problems facing firms in carrying out large IT projects—the shortage of IT staff. Because vendors have a specialized IT workforce for the services they provide, they are able to meet the demands for skilled IT professionals.

Therefore, the critical areas for a successful outsourcing program are: understanding company goals and objectives, strategic vision and plan, selecting the right vendor, ongoing management of the relationships, a properly structured contract, open communication with affected individual/groups, senior executive support and involvement, careful attention to personnel issues, short-term financial justification.

2.3. The new wave of IS outsourcing – the offshoring

The literature review (Harindranath,1997:134-138), (Yalaho,2002:30-36), (Kontsevoi,1999), (Amberg,2005) consider the offshore outsourcing involves contracting software development and other related IT activities such as project analysis, design, coding, testing and 8

maintenance, to the third parties abroad, that is from companies in developed countries to software businesses in low-wage areas. This allows a business to find outside foreign service providers who are capable of performing and contracting activities that have done previously domestically. The offshoring is viewed as a revolution which has proven itself in the marketplace and has become a benchmark (Meredith,2005), (Kontsevoi,2005).

As outsourcing have a taxonomy, the offshoring could be comprise into four models (Ericson,2002): •

direct – useful where a specific project meets a specialized offshore developer;

•

brokered – used when an offshore company play different roles like selection suppliers, contracting the deal, setting up infrastructure and may manage part of the relationship on the client's behalf;

•

owned offshore/onshore – consist in permanent offices where upfront business development, sales and face-to-face support can be delivered;

•

hybrid – services are provided by an offshore partner network, but unlike a broker, takes full legal, financial, management and logistic responsibility for on-time, onbudget project completion. A variety of partners, each with specific field expertise give clients a choice, a range of application development/management and infrastructure.

The offshore outsourcing with cut rates and quality results are taking critical market share from the industry's established companies. As a result, rates are decreased, service levels are increased. The increase in adoption rates for offshore IT outsourcing is even more substantial than outsourcing overall. The implications of offshore outsourcing for traditional onshore IT outsourcing providers are obvious. They must adapt to compete with offshore businesses by rapidly expanding their services capabilities in lower cost locations and must focus on achieving levels of standard quality services.

Why IT businesses are interested for offshoring? One of the most cited reasons of offshoring including (Kontsevoi,1999), (Yalaho,2002:30-36), (Goolsby,2002): •

overcoming the shortage of IT professionals. The demand for software professionals in the industrialized countries have increased significantly in recent years;

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•

the low cost opportunities of foreign software houses. The gap between the salary of IT professionals in industrialized countries and those in developing countries is so huge that offshore software development could be considered as a practicable alternative to inhouse development because of lower cost, inability to hire and retain qualified IT professionals;

•

global competition imposes businesses to be proactive by find the ways to produce cheaper new customers and expand market positions;

•

the advantages of proximity to the market (international market) include knowledge of the customers and local condition;

•

improve time-to-market by using time zone differences in “round-the-clock” development.

But the offshoring decision it is far to be simply. In this regard the businesses must take into account some aspects when select the offshoring country (Amberg,2002), (Yalaho,2002:4044): •

availability of well-educated, trained, experienced and English speaking software professionals, that is knowledge-domain strengths and talent pool;

•

low salary of software professionals and low production costs;

•

availability of infrastructure: telecommunication lines, Internet, electricity;

•

existence of effective intellectual protection law;

•

favourable government policy and support for software production, low tax;

•

political and economic stability;

•

geographic location;

•

cultural affinity and work culture.

In the fact, selecting the best offshore country means choosing the best compromise concerning benefits and restrictions. India still is the leader with the best ratio for cost and quality. Other offshore experienced countries like Ireland and Israel have already reached a certain saturation of their offshore capacities and as a consequence range in the top level regarding labour costs. Other Eastern European countries will climb up the "hill" by gaining experience with small projects which will get more complex over time.

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3. ROMANIA AS IT OUTSOURCING MARKET

Offshoring is one of the most significant forces shaping today’s business environment. The current boom of outsourcing has led to the setting up of new areas which already challenge the India’s dominance in IT outsourcing. Across the rest of Asia can be found outsourcing providers in China, Singapore, Malaysia, Philippines, Thailand and Hong Kong. Another area is represented by countries from Central American, Caribbean or South American, such as Chile, Mexico, Barbados, Jamaica, Argentina and Dominican Republic. In the African continent there are also outsourcing providers in South Africa, Madagascar, Egypt. In recent years, a huge interest is set to countries from Eastern Europe, like Czech Republic, Poland, Hungary, Russia, Ukraine, Lithuania, Bulgaria. Among these, a special interest has received in recent years the Romanian market. We also must include in the offshoring map the Western European countries, especially Ireland and UK, although strong competition from the emerging markets is likely to see their share of offshoring projects falling.

But which destinations are most attractive today and the coming years? Maybe Romania is not the best choice at present, but it has a great potential and a lot of advantages. So, we will analyze the Romanian position in this huge evolved global IT outsourcing market. We present a SWOT analysis (figure 2), which shows the Strengths, Weakness, Opportunities and Threats facing the Romanian IT outsourcing industry. Our analysis is an empirical study based on various reports and surveys performed both international and national specialized organizations.

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Strengths • • • • • • • • •

Highly qualified human resources Low cost of human resources High flexibility of manpower Presence of IT companies from US and Europe Naturally developed industry around centers of excellence in Bucharest, Cluj, Iasi and Timisoara, Strategic market location to serve EU Workforce with very good foreign languages skills (English, French and German languages) Good legacy experience in domestic outsourcing Good government suport for IT industry

Weakness • • • •

Lack of credible investment policies keeping away foreign investors and companies Enforcement of copyright law Lack of domestic IT projects to develop credentials and experience High cost of telecommunications and IPLC (International Private Leased Circuit) infrastructure

Opportunities • • • •

Fast growing West Europe IT market having cultural similarities Large emerging global IT market for offshore development, IT-enabled services Eastern European countries will become a serious challenge for Asia in IT outsourcing Lack of IT professionals in West European countries

Threats • • • •

Lack of a domestic market to enable industry to develop expertise Asia domination of the offshoring market The intensifing competition for offshoring Moratorium of Romania integration in EU

Figure–2: SWOT Analysis of Romanian IT outsourcing industry

3.1. Strengths of Romanian IT outsourcing market

1. Highly qualified human resources

Romania has built the reputation of a well known educational system, focus on math, engineering and science. Also, Romania has a well-developed ICT base and a long history of excellence in Information Technology education and science. Its base dates back to the Communist regime when the Romanian IT industry built its own computer in 1957 called CIFA, followed by MECIPT in 1961 and DACICC in 1962.

According to The Brainbench Global IT IQ Report (BrainBench,2002:4-5), Romanians already dominate Europe with more than 16,000 certified specialists. The report indicates that Romania ranks 6th place in the world and 2nd place in Europe in professional competence and intellectual training. The report has studied the qualification of labour force in various

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fields: software, general knowledge, finances, health, industry, information technology, foreign languages and communication, management and executive.

Romanian programmers are acknowledged worldwide as highly trained professionals offering innovative and original solutions to the problems they encounter. Compared with Indian programmers, the Romanian programmers rely more on their imagination to clear up the problems, to look for alternative solutions to speed up the development time and they identify the best way to get the job done. Indian programmers are reliable and skilled technicians, but they will not come with new solutions or create a project from scratch. On the contrary, Romanian programmers can discover new possibilities for a project and identify new solutions starting from a general idea behind a certain project in order to create the project specifications (CitiXsys Technologies,2002). This is really great when the client need to develop a project starting from a vague idea.

This image was also created by numerous software developers and programmers, who left the country after the fall of the Iron Curtain in 1989. Some of them has returned as experienced project managers.

In Romania, the IT job supply is much higher than needed and the companies may hire additional personnel to develop projects considerable faster. For any IT company, a shorter development time is an important weapon for getting in front of its competitors.

2. Low cost of human resources

Pete Foster, a research director at PAC, said there is a view that India is getting more expensive and Eastern Europe represents a good opportunity and a new area to find resources (McCue,2004).The report “Offshore Romania 2003” predict the Romania as the ideal outsourcing alternative to India with costs almost 50 per cent less (Hasan,2003). The report “Strategic Review 2003” shows that the IT employee costs per year in Romania are substantially less compared to India ($5,880), Ireland ($28,000), Israel ($25,000), Canada ($28,174) and South Africa ($18,000) (Hasan,2003).

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A study, conducted from 16th of February 2005 to 4th of March, among more than 400 Romanian IT companies, reveals the average costs to lease a person based on their qualification is between 17.5 EUR/hour and 21.4 EUR/hour (Pintilie,2005).

3. Presence of IT companies from US and Europe

The Romanian IT industry had a strong manufacturing and development base during the Communist regime. The industry was developed on a concept of self-reliance, which integrated research institutes, academia and industry. This situation changed after 1989. IT industry in Romania has become linked to the new technologies through companies from developed countries, such Microsoft, IBM, Oracle, Hewlett Packard, SAP and so on.

For example, Oracle aims to help push Romania into becoming the Silicon Valley of Central and Eastern Europe according to Giacoletto, Executive Vicepresident for Europe, Middle East and Africa (ADCOS,2004). The firm has opened three Oracle Services and Technology Centers in Bucharest Financial Plaza to supply services to clients all over Europe to prop up this target.

4. Naturally developed industry around centers of excellence

Industry in Romania has become linked to the new technologies through companies from developed countries which have established local operations to take advantage of the qualified labour that has graduated from technical institutes in Bucharest, Cluj, Iasi and Timisoara. Over 3.500 software companies operate in Romania, located mainly in the great University centers: Bucharest, Timisoara, Cluj, Brasov and Iasi (ITC,2002).

To support future specialists in IT field, In the last years was developed technological parks in university and industry centers, such as Iasi, Galati, Brasov, Timisoara and discussions have been started on creating a technological park in Polytechnic University in Bucharest..

5. Strategic market location to serve EU

The close proximity to Western Europe, with which it shares close cultural and historical ties, represent for Eastern Europe a great competitive advantage against Asian countries. The 14

nearshoring bias attests this advantage. Romania is located at the crossroads of Eastern and Western Europe and is only about two hours from Germany or France. In addition, Romanian citizens don’t need visas to visit the EU.

A great advantage will represent the admission of Romania in EU. Romania is an Associate Member of European Union. Also, it is in the process of preparing for accession to the EU by the year 2007. Towards this end, initiatives have been taken on the following: stable institutions guaranteeing democracy, the rule of law, human rights and the protection of minorities; the existence of a functioning market economy, as well as the capacity to cope with the competitive market pressures in the Union; ability to take on the obligation of membership, including adherence to the aims of political, economic and monetary union, i.e. acquis communitaire; harmonization of standards, technical rules and obligatory requirements, referring to product safety and industrial production processes.

6. Workforce with very good foreign languages skills (English, French and German languages)

According to a study made by The Eastern European Translators Association, Romanians are best foreign language speakers in Europe. Almost 60% of the Romanians speak a foreign language, usually English. Some 25% of them speak two foreign languages (usually English and French), while 4% of them speak more than two foreign languages. Despite their considerably higher living standard, other Europeans are way behind Romanians, as far as foreign languages go. Only 40% of the Germans, 35% of the French and 25% of the English bothered to learn a foreign language. The study indicates that English will become the Romanians’ second native language in future. As for the other Eastern Europe countries, Hungary ranks second after Romania with 45% of the population speaking a foreign language (ADCOS,2005).

7. Good legacy experience in domestic outsourcing

Although the domestic outsourcing market is in his development phase, there is a good experience in IT outsourcing services gained during the Communist regime. In that period, the IT services were centralized in IT centers (named calculus techniques and informatics centers) created in each industrial city. The large majority of companies have used the 15

services delivered by these centers, which conducted to an old culture of outsourcing. These centers were under tremendous pressure to change their roles after 1989, when the most of companies have created their own IT centers or departments.

8. Good government support for IT industry

Conscious of his country advantages and the great opportunity in the global IT offshore market, the Romanian government give all his support to IT industry development. The government’s IT Vision for Romania is encapsulated in the following: “Romania should aspire to become the ‘Internet hub’ for the Black Sea region. The Romanian IT industry will be leading regional supplier of Internet-based services, specialised software, and contract manufacturing by 2010 by leveraging national competitive advantages”. (Ticau,2004)

The Romanian government has provided several tax incentives to stimulate the IT sector including: lower taxes for telecom and IT related investments which are considered to have a significant economic impact, incentives for SMEs, income tax exemptions for software developers, special facilities for underdeveloped investment zones and tax exemptions for hardware production enterprises with sales of over US$1 million per year.

3.2. Weakness for Romanian IT outsourcing market

1. Lack of credible investment policies keeping foreign investors and companies at bay

Levels of Foreign Direct Investment (FDI) increased substantially during the last years, totalling €1,591 million in 2003, which was above government estimates and represented an increase of 39% over 2002 (EC,2005:100). Despite this development, the levels of FDI in Romania are still low compared to other countries in the region.

To remedy this situation it will be necessary to look beyond investment promotion per see and address the structural obstacles to investment that include corruption, excessive bureaucracy and an unstable legislative climate. There’s more of a political risk factor in Romania than other Eastern European countries.

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Romanian programmers who have immigrated to Europe oftentimes maintain contacts with their colleagues left in the country. Romanian software developers rely heavily on informal contacts and personal connections to create market linkages and networks. These contacts often provide the basis for collaboration and the farming out of offshore work to Romanian firms. Sales channels are not formed on a strategic basis, but rather ad hoc depending on the types of contacts many of the Romanian managers have. To date, most package distribution and sales management is through the channels of existing joint venture partners if a Romanian firm has such partners.

2. Enforcement of copyright law

Intellectual property protection is important in the software industry to protect the rights of software creators. Romania is party to the major international conventions protecting intellectual property rights including the Paris Convention of 1883 including amendments, the Bern Convention, and the TRIPS Agreement. Legislation regarding patents, trademarks, copyrights, and other types of intellectual property rights is in agreement with EU practices and ensures protection against infringement.

However enforcement of intellectual property rights is far from satisfactory especially in the IT sector. Large-scale software piracy has caused foreign companies significant losses in the market. Cybercrime is also a problem. For example, some of the skilled Romanian software professionals have used their talents as hackers to break into high security internet sites an exploit companies for money. The Romanian government is aware of these issues and is working with local and international enforcement bodies to identify solutions.

3. Lack of domestic IT projects to develop credentials and experience

The IT spending in Romania is the lowest in the Eastern Europe and the e-commerce is still proscribed by lack of right conformation to laws, although in the last two years it was enriched with new laws in this domain. Due to the small domestic IT market, some western companies might consider the Romanian companies not be able to hire enough programmers to deliver large, complex projects.

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In 2003, the Romanian IT services market reached $109.27 million, representing a year-onyear growth of 10.7%. Basic deployment services still remain a major component of IT services spending in Romania, reflecting the IT market's orientation on IT hardware and software infrastructure acquisition. The system integration services form the second largest share of the IT services market, at 23.7%. Revenue from the provision of system integration services count $25.94 million. IDC believes that the systems integration services category will continue to be in demand in the future, following the investments in infrastructure, hardware replacement and software upgrades mainly in the public sector (IDC-Romania,2003). IDC also believes that the Romanian IT services market will expand at a CAGR (Compound Annual Growth Rate) of 17.4% across the five-year forecast period. Expenditure on IT services should reach $243.70 million by 2008.

The Romanian IT/software domestic market can be expected to expand due to increasing investments in the telecommunications infrastructure, IT spending in the government and public sectors, and the deployment of IT solutions in the SME sector to improve competitiveness. Additionally, the Ministry of Communication and Information Technology has several development programs that should make an impact.

4. High cost and low quality of telecommunications services

In 1997 the EC Commission remarked that Romania could have some difficulty in adopting the EC model of telecommunications liberalisation, because of slow sector development and delays in liberalisation. Since then, Romania after some hesitation made sudden progress in liberalising the telecommunications market and with completing the alignment with the acquis, including implementing legislation. The regulatory framework now in place is close to full acquis alignment and the telecommunications markets are largely liberalised and open for competition (EC,2005:109).

Telecommunications have become a reality in Romania with the increase in alternative voice telephone service providers over public networks. However, the penetration of telephones stays behind the EU average for both fixed and mobile telephony.

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3.3. Opportunities for Romanian IT outsourcing market

1. Fast growing West Europe IT market having cultural similarities

The different studies reveal a growth on European IT market. According to the report made by EITO in cooperation with IDC (EITO,2005), the annual growth of IT market in Europe for 2005 and 2006 will be 4.5%. In 2005, it will represent 33.8% from a worldwide IT market estimated to 917 billion Euro. Europe is on second place, after by USA (38.7%).

Moreover, the Romanian culture is much closer to European and North American culture than are its competitors India and other Asian counterparts. Having a closer cultural link helps reduce some problems that result from team working together with differing cultural backgrounds. The Eastern Europe region’s economic, historical and geographic ties with Western Europe make it attractive for smaller companies looking for a culturally similar labour force. Due to this cultural affinity, Romanians can better understand the subtle cultural and ethical issues in software human interface design for a Western market. In the same way, the present United Kingdom’s use of Indian outsourcers is largely driven by historical and cultural links to the country, not only by seeking cost breakdowns.

2. Large emerging global IT market for offshore development, IT-enabled services

A survey made by Economist Intelligence Unit (EIU,2005) reveals the IT industry will benefit from a renewed enthusiasm in business for technology and communication. The IT industry will enjoy a growth prospects on about 10% year-on-year change on the coming three years. In these conditions, the competition for offshoring will be intensified. The same study shows outsourcing and offshoring as critical forces that are reshaping the global marketplace.

3. Eastern European countries will become a serious challenge for Asia in IT outsourcing

As the new model of global economy forces companies worldwide to go beyond national frontiers in search of ideal balance between highly trained human resources and cost level, most of USA and Western European companies have turned their attention on East European software development companies. Although India is currently ranks as the most attractive 19

offshoring destination and will continue to dominate the offshoring market in the near future, with China on its heels, the Eastern Europe becomes more and more attractive as IT services outsourcing destination, especially for Western Europe.

Eastern Europe will emerge as an offshoring hub. Currently, the numbers of offshoring projects in these countries is low, but they offer a very good mix of advantages, not least close proximity to high-cost Western Europe (EIU,2005). Roger Fulton, an analyst at the market researcher Gartner, said Western companies were increasingly sending their software and computer services work to companies in Eastern Europe to save money (O’Brien,2005).

The Economist Intelligence Unit has predicted that Eastern European countries are poised to take more offshoring business due to their attractive regulatory environments as well as close proximity and cultural ties to Europe (Pruitt,2005). Romania may take a lot of advantages from this change in global offshoring of IT services, especially after 2007 if Romania will be accepted as full member of EU.

4. Lack of IT professionals in West European countries

Confronted with the lack of IT professionals, West European companies couldn’t afford ignoring the availability of highly trained IT human resources in the South East.

Demand for IT skills was expected to grow from 10.5 millions IT professionals to just over 13 millions in 2003 with the shortage of IT professionals in Western Europe set to reach 1.7 millions by 2003, 13% of total demand. Europe has already lost 110 millions Euro in GDP since 1998 according to Datamonitor and stands to see growth cut by 3% in 2003 (Skyte,2002).

The same situation can be find in USA. The Department of Commerce estimated the shortage of professional programmers in the USA to 1.5 million by 2003 (CitiXsys Technologies,2002).

In Romania, it is known that the IT job supply is much higher than needed and his work force may represent a solution to this problem.

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3.4. Threats for Romanian IT outsourcing market

1. Lack of a domestic market to enable industry to develop expertise

The software industry is growing at a remarkable rate. On the other hand, according to International Trade Chamber estimations, Romanian IT exports have reached US$1 billion in 2004, making Romania a major exporter for the region.

Since the most of IT companies are micro enterprises, the managers are often very involved in development activities. Limiting firms’ abilities to develop successful software packages from start to finish is the fact that poor management skills are rampant in the Romanian IT sector. While Romanian IT professionals have high IT skills, they have often received little or no management training. Managers lack knowledge of modern management theory and techniques and frequently take a myopic view of their market. With the exception of a few larger companies in the sector who inherited management from former regional computing centers, the IT sector’s management is untrained and has a weak grasp of IT markets.

Project management skills are as important to success for package developers as marketing skills. IT companies that focus on outsourcing lack the more sophisticated project management skills that are required for companies that deliver full software packages. Their foreign buyer usually has used its know-how in project management to manage receipt of the deliverables from the Romanian company, but has not transferred that know-how down the value chain. As Romanian IT companies take on more sophisticated and complex projects, they will need to substantially raise the level of their project management capabilities. They will be required to have systems for quality checking, beta testing and version control.

Romania needs to ensure that the workforce has the right mix of technical, business and functional skills to meet the challenges of business and customers.

2. Asia domination of the offshoring market

The EIU report shows Asia Pacific stands out as the region that offers the greatest growth opportunities for businesses, with the two emerging giants attracting most interest of all. India’s allure continues to grow, with 8% of executives citing it as the single country offering 21

the greatest growth opportunity, up from 6% last year. Nevertheless it remains in the shadow of China, cited by 35% of executives as the top market for growth opportunities. The same report reveals Asia domination of the offshoring environment ranking, occupying 6 of the top 10 places in the study (EIU,2005).

3. The intensifying competition for offshoring

The competition is set to intensify both, between Asian and Eastern Europe zones, but especially between countries in East Europe. Compared to other countries in region, Romania is currently ranked with a lower score (7.08) than Czech Republic (7.26), Poland (7.24), Hungary (7.17), Slovakia (7.12) and Bulgaria (7.09) (EIU,2005). We must notice that all the country ranked in front of Romania and Bulgaria have already been accepted in EU. We consider that after it will be admitted as a full EU member, Romania will recover this gap and it will take on the leader.

4. Moratorium of Romania integration in EU

According to the last report of the European Commission, Romania have to made some progresses in order to be adopted as a full member of EU in 2007. In the period leading up to accession, Romania needs to continue its preparations, in line with the commitments it has made in the accession negotiations. The main recommendations regard the implementation of laws on the freedom of information and transparency in the legislative process, corruption in Romania continues to be serious and widespread. Romania’s anticorruption legislation is generally well developed, but its ability to keep under control corruption will depend on the effective implementation of the law. In particular, additional efforts are required to ensure the independence, effectiveness and accountability of the National Anti-Corruption Prosecution Office. It should concentrate its resources on investigating high-level corruption.

We can state at the final of SWOT analysis that Romanian outsourcing companies achieve an unbeatable balance between the quality of services and the cost level. The access to state-ofthe-art programming technologies and flexibility in personnel recruiting represent another advantages for Romania. Also, the current evolution of IT offshoring and nearshoring market could mean great opportunities for Romanian IT outsourcing to compete and take advantages in front of Asian market at least for Western European area. In turn, Romania must be aware 22

about pressures of dynamic changes on IT field and its major weakness, like a great rate of corruption, not very stable political and economic environment.

4. CONCLUSIONS

In the current trends of businesses, most of the companies are relying on outsourcing to minimize software development costs and get access to highly trained IT workforce. In the near future, outsourcing may become the only efficient way of developing custom software applications. In the last years, outsourcing has become a common solution for many organisation concerning their option of IS development and management.

First of all to describe the Romanian IT outsourcing market was valuable to identify different outsourcing options following multiple criteria for outsourcing taxonomies and factors with critical influence on outsourcing decision process.

Last years evolution of information technology and competitive pressure of emerging technologies (e-business, mobile-business, wireless etc) bring to set-up and develop an outsourcing marketplace. The competition in information technology sector in developed and emerging countries has increased significantly. In response to these problems and business trends the firms may overcome these challenges by transferring IS professionals, facilities, hardware leases to third party vendors located in developing countries where there are a great potential and many opportunities. This practise is called offshore outsourcing which are the new wave of IS outsourcing.

In this context, Romania could be viewed as a country with a large potential to gain in the "war" of competitiveness on IT outsourcing marketplace. This issue results from different reports, studies and also from our SWOT analysis, which was the second direction of present research.

A great opportunity for Romanian companies is the change to nearshoring. For industrialized countries in Western Europe, Romania is emerging as a promising alternative supplier of IT outsourcing services in addition to India, China and other Eastern Europe countries.

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