cloud computing in eastern europe 2014

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CBI Product Factsheet:

Cloud Computing in Eastern Europe Practical market insights into your product

The cloud adoption rate in Eastern Europe is not yet very high, but it is growing quickly. Poland is the most developed market when it comes to outsourcing and cloud adoption. The Baltic

countries show an average of 20% growth in the IT sector, and a shortage of staff. This factsheet shows that each region

or country within Eastern Europe offers good opportunities for

cloud computing providers from developing countries, but each in its own way. There are two ways to approach this market

that offer good opportunities for DC providers: to develop your own cloud solutions (SaaS) and offer them in Western Europe,

or to develop cloud solutions for an EU partner (classic outsourcing). In general, companies have a better chance on

the market if they specialise in either one of them.

Introduction

This product factsheet (PFS) focusses on Eastern Europe which in this PFS includes Estonia, Latvia, Lithuania, Poland, the Czech Republic, Hungary, Romania and Bulgaria. These countries were recently seen mainly as

outsourcing destinations, but within the last few years, they have increasingly become important outsourcers themselves. Industry experts identified SaaS as the most suitable service for DC cloud service providers. IaaS and PaaS need very high investments, which can generally only be made by large providers, and trust in the infrastructure/ platform/provider is very important.

Product Definition

Cloud computing is the provision of infrastructure, platform or software as a web-based service (see Figure 1). Infrastructure as a Service (IaaS): the delivery of computer infrastructure as

a web-based service. Instead of purchasing servers, storage, data centre space or network equipment, clients subscribe to those resources as a variable-cost service. The service provider owns the equipment and is responsible for housing, running and maintaining it.

Platform as a Service (PaaS): the delivery of a computing platform as a web-based service. This typically includes an operating system, a programming language, an execution environment, a database and a web server.

Software as a Service (SaaS): the delivery of software applications/solutions as a web-based service, for example horizontal business applications like

CBI Product Factsheet: Cloud Computing in Eastern Europe


Cloud computing benefits

Self service

Scalability

Pay per use

Location independent

24/7 support

Low cost of ownership

Flexibility

Customer Relationship Management (CRM), Enterprise Resource Planning (ERP), Content Management (CM), Human Resource Management (HRM) or finance and accounting. The advantage is that companies do not have to purchase software and do not need to buy and maintain IT hardware to run the software on. They pay on a pay-as-you-use basis. Furthermore, implementation is much faster and functionality updates can be done easily.

Fig 1 Cloud computing structure

Source: Peergroup ITO/BPO 2013

Benefits Important benefits of cloud computing that distinguish it from traditional outsourcing are self-service (clients can order/create new services online), scalability (the infrastructure should be virtually infinitely scalable) and pay per use. Furthermore, the cloud model delivers the tools and possibilities to work from any place at any time and therefore facilitates working from nearshore/offshore locations (Figure 2).

Fig 2 Benefits of cloud computing

Source: Peergroup ITO/BPO 2013

Cloud Computing solutions/services can be managed within a company (in-

house) or outsourced, which means that it is delegated to external service providers. Outsourcing can take place: Onshore: to providers within the same country (onshoring). Nearshore: to foreign providers within the region (nearshoring). Offshore: to foreign providers outside the region, typically overseas

(offshoring).

Application

Middle ware

Operating system

Hardware (services, storage, network, virtualization)

SaaS

PaaS

IaaS



Product Specifications

Price: for companies in Eastern Europe the main reason to adopt cloud computing is to save costs. Improvement in cost level or reduction (price) is also the main reason to outsource cloud services, according to various research studies in the individual Eastern European countries. However, costs are also one of the major concerns for Eastern European companies when it comes to the use of cloud services. This means that cloud service providers have to be very clear and transparent about their pricing.

CFA1: Focus on competitive pricing while maintaining high quality services. And do not only compete on price, but also on other areas such as flexibility, know-how or skills. CFA: Be transparent in cost benefits: avoid hidden costs.

Improvement in quality: the second most important reason for Eastern

European companies to adopt cloud computing is the improvement in the quality of the processes that are moved to the cloud. Also, the benefits that cloud computing offers are growing each year, in a variety of categories, including higher availability, geographic reach, cost savings and business continuity. This product requirement is therefore expected to remain very important within the next years.

CFA: Give examples of how your cloud services/solutions can improve the quality of the processes within the outsourcing company. Access to knowledge or external skills: access to knowledge and skills

that companies do not have in-house in the third most important reason for companies in Eastern Europe to outsource cloud computing

solutions/services. Whereas in the southern countries of Eastern Europe, there are more or less enough IT specialists, this is not the case for the Baltic countries. Estonia, Latvia and Lithuania are all dealing with a shortage of IT specialists. These countries are more likely than the other Eastern European countries, to nearshore or offshore IT services/solution. The fourth reason for companies from Eastern Europe to outsource cloud computing is because they want to focus on their core business.

CFA: In order to stay ahead of the developments on the cloud computing market, continuously monitor new cloud computing needs and requirements of the companies in your target market. Try to cater to these needs by being innovative and creative. Try to offer your services in a better, different, new or faster way than your competitors. The more innovative/creative your cloud service, the better you can distinguish yourself from competitors. CFA: Emphasise the advantages that outsourcing offers: mention that by outsourcing cloud services to you, they have access to excellent knowledge and skills and that they can focus on their core business while their cloud solutions are in good hands. Data security and privacy: data security and privacy are of utmost

importance to companies in Eastern Europe. Especially companies that are new to the cloud, are very concerned with safety issues. These concerns form a threat to offshore cloud service providers as they make the barrier for entrance higher. This is because offshore data security and privacy are perceived as being of an inferior quality compared to onshore or even nearshore. If you offer SaaS solutions directly to the market (so when it is not software development outsourcing), a reputable IaaS/PaaS provider should be selected, which has all the necessary security credentials, in order to take away security and privacy concerns from potential customers.

1 Consideration for Action



CFA: Provide information about your companys data security and privacy measures. CFA: Apply for security standards to support your commitment on data security and privacy. If you decide to offer SaaS solutions directly to the market, team up with a reputable IaaS/PaaS provider that has all the necessary security credentials. CFA: Explore your companys possibilities to provide services on cloud infrastructure in your target country. By doing so, you comply with EU legislation as the infrastructure service provider has to take care of many compliance issues related to the EU/your target countrys market, including data security and privacy. Furthermore, you eliminate potential doubts companies might have regarding data security. CFA: Avoid data security and privacy sensitive markets. These are generally regulated industries and industries where personal/corporate data is used in large quantities, for example finance and banking, healthcare, aviation or telecommunication.

Reputation and confidence in partner: relevant industry expertise and

reputation are important requirements for Eastern European companies that are selecting a cloud service provider. Around two-third of Eastern European companies say that too little confidence in external partners is the main reason not to adopt cloud services. Source KBC 2014.

CFA: Have clear satisfied customer testimonials about the quality of your services, the ease of the transition or the benefits your services realised as this will prove your expertise and enhance your reputation. CFA: Weather you decided to offer your own SaaS solutions, or offer cloud solution software developments services to Eastern European companies, you have better chances on the market if you specialise in either one of the business models.

Integration capability: the complexity of integration of cloud services with

in-house solutions and the compatibility with other solutions are an important barrier for Eastern European companies that are planning/considering to adopt public cloud services. The integration capability of a cloud service is therefore one of their most important requirements for cloud service providers.

CFA: Offer cloud services that can easily be integrated with other tools/solutions, for example, by selecting technologies that are based on open standards (a standard that is publically available and of which the specifications can generally be implemented on a royalty-free basis). CFA: Offer potential buyers a pilot project in order to demonstrate the integration capability of your cloud service. CFA: Offer assistance in the implementation and integration of your cloud services. Flexibility: flexibility in the customisation of the cloud service and flexibility

in contracts and Service Level Agreements (SLAs) are other important requirements of Eastern European companies regarding cloud services. The key areas in contracts and SLAs where flexibility can be brought into are: pricing, contracting terms (length, review), change management process, additional services, scope, service levels and technology change.

CFA: Be flexible in the customisation of your service: adapt your services to the specific needs of your customer.



CFA: Be flexible in your contracting and SLAs, be for example flexible in the length of the contract and be flexible in the additional services that can be included in the contract.

Buyer requirements

Buyer requirements can be divided into: 1. Must: requirements you must meet to enter the market, for example legal requirements. 2. Common: requirements you need to comply with to keep up with the market. 3. Niche: requirements for specific segments. Figure 3 gives an overview of EU buyer requirements for cloud services. Fig 3: EU buyer requirements for cloud services

Must Copyright computer programmes: the EU established specific rules to

protect computer programs by means of copyright (Directive 2009/24/EC and Directive 2001/29/EC). The legislation aims to ensure certain security against unauthorised reproduction of computer programs and applies to all computer programmes marketed within the EU, including imported programmes. The legislation therefore also affects businesses in non-EU countries that supply EU companies.

CFA: Refer to EU legislation: Copyright of computer programmes for more information. CFA: Although the EU legislation applies in all Member States, the quality of enforcement differs per country. For specific information about the copyright

computer programmes legislation in your target country, refer to the relevant competent authority in that country. Personal data protection in electronic communications: the EU

regulates the protection of individuals with regard to the processing of personal data and on the free movement of such data. Providers of technical services regarding electronic communications to EU companies have to take into account the EU legislation on personal data protection (Directive 2002/58/EC and 95/46/EC).

CFA: Providers outside the EU can be held responsible for violations of EU data protection requirements. It is therefore important that you comply with the EU legislation on personal data protection. Refer to EU legislation: Personal data protection in electronic communications for more information. Common ISO 27017 and 27018: ISO is currently developing standards for

information security controls for cloud computing services (27017) and privacy aspects of cloud computing (27018). These standards supplement the ISO 27002 standard and are expected to be published in 2014 or 2015.

Copyright computer programmes

ISO 9001

Industry specific

requirements

Niche

Common

Must

ISO 27002

Personal data protection

CMMI ISO 27017 and 27018



CFA: Follow the developments on the ISO 27017 and 27018 standards as they are expected to become important for cloud service providers. Refer to http://www.iso27001security.com for more information.

ISO 27002: ISO 27002 is the standard governing information security and

management. It provides the industry approved model for an Information Security Management System (ISMS) and addresses the confidentiality, integrity and availability of information within an organisation.

CFA: As data security is a main challenge in cloud computing, adopting the ISO27002 standard is strongly recommended. Refer to http://www.27000.org for more information on the 27002 standard. ISO 9001: ISO 9001 is an important standard for service providers. The

ISO 9001 standard represents requirements for the development and implementation of quality management systems in an organisation.

CFA: ISO 9001 is one of the best known quality standards among Eastern EU companies. Applying for ISO 9001 is therefore recommended. Refer to the

website of ISO for more information. Capability Maturity Model Integration (CMMI): ensuring world-class

quality and service delivery is an increasingly important access requirement for offering global sourcing solutions. Using the worldwide adopted CMMI model (in which you can achieve a 1-5 level rating) is a good way of proving to your customer that you are able to deliver the required service quality.

CFA: CMMI is less well-known than ISO 9001. However, it might help in gaining trust and proving your capabilities. Refer to the website of CMMI Institute for more information about the CMMI certification process. Niche Industry specific requirements: there are also industry specific

certifications or best practises that can be even more important than the above-mentioned general standards/certifications, depending on the industry the cloud solution will be used in. Examples are Basel II and III for the finance and banking industry, HL7 and HIPAA for the healthcare industry or PCI DSS for the payment card industry.

CFA: If you cloud services for a specific industry, research the availability of industry specific certifications/standards and consider applying for them. However, this has to be researched by industry. Industry associations can be a good starting point to look for them. For information on ITO buyer requirements in the EU market in general, refer to CBIs EU Buyer Requirements for ITO.

Trade and Macro-Economic Statistics

IT market IT market value largest in Poland: of all Eastern European countries that

are mentioned in this PFS, Poland has the largest IT market value (5,618 million), Czech Republic comes second (3,139 million), followed by Romania (1,479 million) and Hungary (1,335 million). From the Baltic states, Lithuania has the largest IT sector, followed closely by Latvia. Estonia has the smallest IT sector of the three. In all Baltic countries, the IT market is growing quickly. Also these markets (as opposed to the southern Eastern European markets we research in this PFS), see a shortage in IT specialists, which limits growth of the sector. This offers opportunities for cloud computing specialists from developing countries as a shortage in IT staff is a good driver for nearshoring or offshoring IT services.



Cloud Computing market Fig 4: Percentage of companies that are planning to move (more) parts of their IT

into the cloud within the next 3 years.

Source: KBC, 2014

Cloud computing market expected to grow in all Eastern European

markets: research by KBC in 2014, revealed that many companies in Eastern Europe are planning to move (more) parts of their IT into the cloud, between 2014 and 2017 (figure 4). Romania leads, together with Poland with 30%, closely followed by Hungary (23%) and Czech Republic (22%). Unfortunately, the other Eastern European countries that we research in this PFS, were not researched in this study. However, the cloud computing market is expected to grow in all Eastern European countries that we research in this PFS, but statistics that are based on the same source are not available.

Big differences in cloud computing readiness: a 2014 study by KBC reveals that there is a big difference in cloud computing readiness between the different Eastern European countries. Poland is by far the most ready for cloud computing (they receive a 7 on a score from 1 to 10, 10 being the highest), Czech Republic follows at a great distance (4), followed by Hungary (3) and Romania (2). Unfortunately, the other Eastern European countries that we research in this PFS were not researched in this study.

Cloud advertising is the top segment of the cloud computing market: according to research by Gartner in 2013, the top segments of the cloud computing market break down as follows: cloud advertising (48%), Business process as a Service (28%), SaaS (14.7%), IaaS (5,5%), management, security and automation (2,8%), PaaS (1%). Of these segments, IaaS is the fastest growing.

Cloud computing spending increasing rapidly: research conducted by Gartner in 2013 shows that the cloud computing spending in the world is growing very quickly. Even though Eastern Europe does not make up a large part of the global spending, this emerging market shows one of the highest growth rates.

Business opportunities for cloud computing exist in many verticals

and application areas: cloud adoption is very diverse in terms of the spread of verticals and application areas. And even though there are a few sectors that are not engaged in cloud computing, business opportunities for cloud computing exist in almost all verticals and application areas.

22%

23%

30%

30%

Czech Republic

Hungary

Poland

Romania



Cloud computing outsourcing market Outsourcing readiness varies greatly: the Eastern European region itself

is a popular IT nearshoring location for companies from Western Europe. As Eastern European companies have a strong patrimonial attitude towards their IT assets, they are less open towards IT outsourcing than most Western European countries. However, also companies from this region are taking on a mature approach towards IT outsourcing as changing economic conditions such as competition in a single EU market, globalisation, economic uncertainty and constrained access to financing make companies reconsider the way they run their operations. Furthermore, as references around IT outsourcing build in Eastern European countries, there is an evident interest among Eastern European companies in outsourcing (part of) their IT services. 2014 research by KBC revealed that the IT outsourcing readiness varies greatly between the different countries in Eastern Europe. Czech Republic is the Eastern European country that is most ready for outsourcing IT services (6 out of 10), followed at a distance by Hungary (5), Poland (4) and Romania (1). Forecasts from the same survey revealed that within all surveyed countries, IT outsourcing is gaining ground.

Nearshoring against offshoring: onshoring is the most preferred way of outsourcing for Eastern European companies. Nearshoring is the second most preferred way because of cultural proximity and less time difference. Popular IT nearshoring destinations are countries that offer either a better IT talent pool, or are considerably cheaper. Offshoring is less popular.

CFA: Limit the possible disadvantages of being offshore by providing excellent means of communication, availability in the required time zone and good security and privacy measures. CFA: Differentiate yourself from onshore and nearshore providers to remain competitive, and emphasise how you are different in your marketing message. Do not only focus on price difference but analyse what other advantages you can offer to EU buyers. You can sell for example your location as an advantage for 24 hour round operations or you can specialise in a specific vertical or horizontal market. CFA: Benchmark your competitiveness against onshore and nearshore ITO providers and analyse their best practices. Use your competitors as resources to help you discover what they are doing right and sometimes also what they are doing wrong. It can help you identify ways to differentiate yourself from them.

Market Trends

Technological drivers Convergence of social, mobile, information (big data) and cloud:

social, mobile, big data and cloud are four market forces that currently drive the IT market. The convergence of these forces drives real business value.

The forces converge in several ways: cloud, mobile and social solutions enable the distribution of information, social media usage and behaviour drive mobile and information solutions and cloud can be a foundation for information, social and mobile solutions. The convergence of social, mobile, information and cloud is unleashing large opportunities and unlocks new potential for innovations in the application space.

CFA: Focus on innovative cloud applications in the field of social, mobile or big data as demand for such applications is rising rapidly and is expected to continue to do so in the coming years. Hybrid solutions: a fair share of Eastern European companies have a

hybrid cloud strategy and they increasingly use both public and private cloud. The use of hybrid cloud environments (a combination of private and public clouds) is growing in significance.



CFA: Develop tools/solutions that can easily be integrated with other tools/solutions in order to be able to operate with multiple vendors in the IT environment of your potential customer. Economic market drivers Economic crisis fuels the need for cost reduction: all Eastern European

countries suffer from the economic crisis in their own ways. Companies are increasingly looking for ways to save costs. The key driver for outsourcing has come back to operational cost reduction. And as application licenses can be expensive, more Eastern European companies are choosing cloud applications as a way to save costs.

CFA: Emphasise the operational cost savings that can be achieved by using your cloud services. For information on ITO market trends in the EU market in general, refer to CBIs Trends for ITO.

Market Channels and Segments

The most relevant channels to enter the Eastern European cloud computing market are described below. Subcontracting by ITO companies in your Eastern European target country is seen as the most realistic for DC cloud computing services providers. Another good option is having a local sales representative. If you develop cloud applications yourself, you can also sell them directly. Starting your own local office in an Eastern European country is not very recommended. In any case, it is recommended that you make a clear choice for a particular business model, so either develop your own cloud solutions, or focus on developing cloud applications for an Eastern European partner. Subcontracting by Eastern European ITO companies: subcontracting

means that ITO providers subcontract work that has been contracted to them by end user companies to other parties. In this particular case they offer cloud services. These ITO providers can look for possibilities to subcontract part of their work to DC ITO providers.

CFA: Make an analysis of your company and target market to choose the most suitable entry channel. CFA: Target ITO providers of which the size is in line with your own capacity. Focus on companies that serve the same industries as your company to increase your chances to find a potential match. CFA: Attend relevant industry events in your target country to meet potential partners. Furthermore, you also learn more about their business culture. CFA: Have good promotion material available, such as a professional company website and a company leaflet. Also invest in Search Engine Marketing so that potential customers are able to find your company online. Direct sales to end users: in the cloud, service providers are able to sell

their own applications and solutions without anyone in between. It is therefore an interesting market channel for DC cloud service providers. Moreover, the transaction costs for searching, evaluating, integrating and monitoring cloud services are expected to fall due to new SaaS electronic market places. This will open up a new distribution channel for cloud software developers in the long term. However, Eastern European companies are less open towards international partnerships than Western European companies which makes it more difficult to sell your products or services directly. It can offer opportunities, but you need to have profound end market knowledge.

CFA: Research the end market segment that you want to focus on in order to know how to effectively market your company.



CFA: Look for potential leads in the field of cloud solutions/services in online outsourcing market places such as Odesk and Elance (freelancers) and Ariba and Hubwoo (corporate). Although they generally involve smaller projects for freelancers and individuals, they could lead to potential pilot projects for companies as well. Furthermore, they are a cheap marketing tool. CFA: Target end users of which the company size is in line with your companys capacity. Intermediary: the outsourcing market in Eastern Europe has just started to

open up. Eastern European companies might therefore be still somewhat hesitant towards outsourcing and might prefer to work with a local intermediary such as a consultant/matchmaker or sales/marketing representative when they decide to use cloud services of a foreign provider. Intermediaries can therefore also be an important channel to establish contact with potential subcontractors or end users of cloud services.

CFA: If you choose to work with an intermediary, look at the following selection criteria: expertise (it should be in line with your services or vertical market

expertise), value and size of the network and references. Trade associations, trade events and databases can be good sources to help you find potential customers in Eastern Europe. Examples of such sources are:

Basscom - http://www.basscom.org - industry association of leading Bulgarian software development companies.

CeBIT - http://www.cebit.de - largest IT trade event in Europe, held annually, in March, in Hannover, Germany.

Central and Eastern European Outsourcing Association (CEEOA) - http://ceeoa.org - outsourcing organisation for Central and Eastern Europe. On their website you can find members, ITO events, analytics and more.

Czech ICT Alliance - http://www.czechict.cz - trade association for the Czech ICT sector. In the English version, go to Members for a member overview.

Czech Invest sector database - http://suppliers.czechinvest.org - register for free and go to ICT for a database of companies in the Czech ICT sector.

Czech Society for Systems Integration (CSSI) - http://www.cssi.cz - Czech association that associates companies, institutions and universities and individuals who are delivering or employing information and communication technologies and information services. Go to Adres len for an overview of members. They also organise several events in the field of IT, where you can meet potential partners face-to-face. They also publish research, studies, presentations and news articles about the Czech IT market.

EuroCloud - http://eurocloud.org - largest European Cloud event. Held annually in a different country in Europe.

ICT Unie - http://www.ictu.cz - trade association for the Czech ICT sector. Go to Clenov and select Seznam clenu ICTU for a list of members.

Infobalt - http://www.infobalt.lt - Lithuanian ICT association.

ITL - http://www.itl.ee - Estonian association of information technology and telecommunications. You can find a list of members, they hold several conferences and they give other information about the Estonian IT sector.

IVSZ - http://ivsz.hu - ICT association of Hungary. Go to their website for an overview of their members and news and events in and from Hungary.

LIKTA - http://www.likta.lv - Latvian ICT association.

Mobile IT - http://mobile-it.com.pl/en - mobile solutions and technologies trade event, held annually, in May, in Krakow, Poland. Also about cloud services and IT outsourcing.

PIIT - http://www.piit.org.pl - Polish ICT association. Go to Catalogue for a list of members. They also provide a newsletter.

Riga Comm - http://rigacomm.com - IT trade event, held annually, in November, in Riga, Latvia.

TOP IQ CIO - http://www.topiqcio.com - conference for IT managers in the Czech Republic, held annually, in November, in Prague.



You can also look for Eastern EU ITO and cloud application services/solutions providers by searching on search engines like Google. In advanced search, narrow your domain to your target countrys extension: .ee for Estonia, .lv for Latvia, .lt for Lithuania, .pl for Poland, .cz for Czech Republic, '.hu' for Hungary, .bg for Bulgaria or .ro for Romania. For information on ITO market channels and segments in the EU market in general, refer to CBIs Trade Channels and Segments for ITO.

Price

Price is the main reason for companies in Eastern Europe to consider outsourcing cloud computing services/solutions to companies in DCs. As salaries form a large share of the costs of IT services, large savings can be achieved by outsourcing cloud computing services/solutions to countries with a lower wage. The average annual salary of a software developer in Eastern Europe is rising

quickly. Software developers salary levels in nearshore/offshore destinations are usually lower and it is expected that the salary difference between Eastern EU countries and DCs will grow substantially in the next few years.

Field of competition

Refer to CBIs Field of Competition for ITO as competition in the Eastern EU market is based on the same aspects as competition in the ITO market in general.

Main sources

Baltic Course - http://www.baltic-course.com - international magazine about the developments in the different Baltic states. Select Technology to find the latest news on the IT sector.

Central and Eastern European Outsourcing Association - http://ceeoa.org - outsourcing organisation for Central and Eastern Europe. On their website you can find members, ITO events, analytics and more.

CIO - http://cio.com - technology magazine, has editions in almost every Eastern EU country.

Computerworld - http://computerworld.com - technology magazine that has editions in various Eastern European countries.

Czech Invest - http://suppliers.czechinvest.org - investment and business development agency of the Czech Republic. Go to Investment opportunities and select IT and software development for sector information.

ITO News - http://www.itonews.eu - IT outsourcing news portal from Central and Eastern Europe.

Outsourcing Portal - http://www.outsourcingportal.eu - outsourcing portal that mainly focusses on the outsourcing industry in Poland, but also has reports and articles about other countries (mainly in the EU) and an overview of outsourcing events.

Romania IT - http://www.romaniait.com - an Romanian initiative that aims to promote the Romanian IT industry.

For all CBIs ITO related market intelligence documents, go to CBIs Market Intelligence Platform for ITO.

This survey was compiled for CBI by Facts Figures Future in collaboration with CBI sector expert Laszlo Klucs

Disclaimer CBI market information tools: http://www.cbi.eu/disclaimer

cloud computing in eastern europe 2014

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