In recent decades, the IT sector has been Romania's wonder-child, maintaining steady growth supported largely by outsourcing companies. Located at the Eastern border of the European Union, only one hour ahead of Berlin and three hours' flight from London, the country became a flourishing technology hub. Both companies and developers are capitalising on several government initiatives, and know how to work the system to best effect.
Romania doesn't offer lowest prices in the outsourcing business, but it is highly competitive when you take into account the level of technical proficiency and soft skills in the country, "superior to what is typically found in other outsourcing locations," according to IDC.
Young and motivated professionals with European values and a mastery of not only English but German, French and Italian as well, are a crucial part of Romania's appeal, according to the analyst house.
The fairly low salaries of the IT workers compared to the West, their skills and the country's location have helped outsourcing become Romania's second largest in terms of exports last year, surpassed only by transportation.
Computer and information services exports reached €1.4bn in 2013, a 27 percent rise compared to 2012, according to The National Bank of Romania. This means it equates to $99 per capita, more than double that of India or the United States, according to the World Trade Organisation's most recent statistics.
"Similar to the last couple of years, approximately 90 percent of the total exports represents custom development services. Romanian companies offer now complete solutions for end-clients, rather than just offering services based on an hourly rate model," said Sorin Gavanescu, VP for outsourcing at Employer's Association of the Software and Services Industry in Romania (ANIS).
While there are some local brands such as Bitdefender, who sell their own products abroad, most software professionals work for foreign clients. "We estimate that there are 65,000 employees in Romania's software industry. Approximately 50,000 of them work in companies that offer outsourcing services. Many Romanian companies have both products and custom application development services," Gavanescu told ZDNet.com.
Cost effectiveness vs low cost
According to ANIS, customer surveys have shown that money is one factor that clients bear in mind when choosing Romania for their outsourcing services. Other considerations include previous experience, technology expertise, quality of the proposal, and having solid procedures of financial reporting.
This information is backed by the advisory firm Tholons, which states that on a global scale, price is no longer the most important aspect in outsourcing, as often higher cost locations can mean better service and results.
Analysts noticed that the focus is shifting from offshore to nearshore locations, such as Eastern Europe, thanks to a closer proximity of time zones between supplier and client, language, cultural affinity, and the existence of intellectual property law — the latter being a highly regarded decision factor.
"Romania is seen as a complementary location to India as Eastern Europe provides a perfect balance between cost and quality. Our clients say we are two to three times more productive than the traditional offshore vendors. There is better ability to understand the requirements and needs beyond project specs," said John Cotterell, CEO at Endava. The company has more than 1,100 full time employees in Romania, located in Bucharest, but also in Cluj-Napoca and Iasi.
Tholon's most recent Top 100 Outsourcing Destinations report includes several Eastern European countries, and puts the Romanian capital of Bucharest 40th in the list last year, up from 44th in 2012.
In the region, Poland tops Romania however, with Krakow (9th), Warsaw (32nd) and Wroclaw (65th) all making the list. Also, Hungary's capital Budapest ranks 26th, while Sofia in Bulgaria is 52nd.
Growing in Romania's smaller cities
Tholons' chart shows a concentration of the outsourcing industry in Eastern Europe's capitals, yet smaller cities are still making headway in the business.
In Romania, Bucharest still leads this industry with 63 percent of the total revenues and hosts 190 of the 290 companies with revenue over €1m, including Intel, IBM, HP, Freescale, Oracle, Microsoft, and Luxoft.
However, some of the IT companies have opened offices throughout the country, where it's even less expensive to hire IT personnel. IBM expanded to Brasov, HP and Endava have software development centres in Cluj, Continental Automotive and Alcatel-Lucent are present in Timisoara, Ubisoft is also in Craiova, and Amazon has a development centre in Iasi.
The well-established multinationals are complemented by many outsourcing companies — often small businesses without a high profile.
"It's fair to say that a British company would reduce its costs with internal development by at least 30 percent by outsourcing R&D activities to Romania. The cost saving is even higher in case of support or application maintenance projects," Gavanescu said.
He believes that an important factor in calculating savings is "weighing up the high work productivity of Romanian programmers, [for whom] the work culture and business ethics are similar to those in the Western world".
Alina Plaia, VP at Luxoft, said the respective cost of outsourcing to Romania compared to India is justified due to the seniority of Romanian staff and the level of execution.
"The new age of outsourcing is more about innovation and outsourcing certain capabilities rather than merely doing things cheaply. More and more tasks are being outsourced because they cannot be done in house, not only for the economical reasons. Therefore, the cost-related question is often irrelevant," she said.
Growing despite economic challenges
Most of the outsourcing companies based in Romania have been hiring during the recession, in a constantly growing market. One example is Fortech, located in Cluj-Napoca. "We usually experience a 50 percent increase in business year on year, most of it thanks to extending partnerships with our clients," Calin Vaduva, CEO at Fortech, said.
The company's business is entirely based on outsourcing, with over 100 client companies from the western world, with a focus on Germany and the US. They develop web, desktop and mobile applications mostly for the automotive industry and retail.
Alongside the growth of outsourcing, more and more Romanian freelancers have seen their income growing steadily during the past years, thanks to working for foreign clients.
"As of end of August we have 14,198 IT freelancers registered only in Elance.com in Romania, but the number is growing rapidly," Kjetil J Olsen, international VP at Elance-oDesk, told ZDNet.com. Over the past seven years, Romanian IT freelancers registered on Elance have earned more than $20m.
In the past three years the number of IT professionals earning money through Elance-oDesk has doubled. Today, the country ranks second in Europe by the number of IT freelancers, only behind the UK. However, in terms of dollars earned, it's outperformed by Ukraine, Russia, and the UK.
However, the earnings of IT Romanian freelancers on both the Elance and oDesk platforms have increased by more than 36 percent between this August and last, and the average hourly rate on Elance is now at $20.55. It's a relatively high figure, considering the average rate for a US freelancer is $30 per hour.
Developing a local business
The outsourcing industry is a foundation for building up the country's IT and technology industries as a whole. ANIS and other individuals and organisations are doing their best to encourage local tech projects, while in recent past years, entrepreneurial education programs, accelerators and startups have taken some steps forward.
IDC reports that "the number of startups in Romania is constantly increasing, with most focused on developing consumer applications that leverage social media. However, the number of applications successfully developed and marketed is relatively small".
Daniel Dragomir, CEO and co-founder of TechHub Bucharest, believes that the fact that IT companies in Romania do more outsourcing than local projects doesn't have a negative impact on startups. "Outsourcing needs to be seen as a phase, both in creating companies and training developers. There are several examples in which outsourcing companies have helped developers improve and afterwards they started their startups," he said.
As a natural transition, Dragomir believes that many companies who work for foreign clients have lately began to create their own software. "The challenge is to accelerate this process, as tech products have a greater added value."
TechHub Bucharest often organises events, inviting successful entrepreneurs from Europe or the US to share their experience with the newcomers. Throughout the country, the startup culture is beginning to take shape, and many young people are seeing the appeal of creating their own products and business early on.
What does the future hold?
The outsourcing business is expected to grow in Romania over the years to come, albeit limited by the numbers of IT professionals that the country's universities can educate. HR departments complain that it's now taking longer to find that candidate they are looking for and in some cases, developers financial expectations are increasing.
"The number of qualified professionals in the field is lower than the demand on the market. Fortech's vision to prevent this unbalance is to also target high school students, not just university students," Vaduva said.
Last year, a third of the IT companies in Romania paid their developers salaries ranging from €1,000 to €1,500 per month, more than three times the average salary in the country, according to an IDC study commissioned by ANIS. Moreover, a good 10 percent of IT companies are offering developers a monthly salary ranging between €1,500 to €2,000. The difference between salaries in Bucharest and the rest of the country can sometimes be as high as 40 percent for the same job, several studies note.
This year only, ICT salaries have experienced seven percent growth, the most significant in the country, a PwC study found. With a growth like this, some fear Romania might lose its low cost advantage as an offshore/nearshore destination.
"The IT professional market is undergoing fierce competition, which in most cases means a salary growth not always backed by performance and productivity increase. This can have a boomerang effect on a medium term and a decrease in the interest of doing business in Romania," Monica Jiman, CEO at Pentalog, said. Ninety percent of her company's turnover relies on export.
However, politicians promise to support the IT industry and to come up with ways to help it expand further on. Their measures so far include a 100 percent exemption on income tax for IT employees, a 50 percent tax deduction for R&D-related operations costs, public financing for development of IT innovation parks, as well as state aid for regional development, job creation, and investment support for the development of new technologies.
"We see continued growth in the IT outsourcing market for the next five years. The market share is shifting, albeit not tremendously, from the top providers to more agile, vertically-focused, and nearshore delivery competent vendors and we anticipate this trend will continue," Plaia said.
Romania's fiercest competitors when it comes to attracting offshore/nearshore activities are Russia, Ukraine, Bulgaria and Poland, the latest IDC survey of the local IT companies has revealed.