Amendment_No._01_ANNEX_3.pdf

IDC © 2014. www.idc.com Page 1 #CEMA22452

IDC CEMA RESEARCH PRESENTS

Moldova Moving into the Premier League of IT Nearshoring

Destination Moldova

Chisinau-based software development firm ISD is small but powerful. Its primary team of developers has exceptional expertise in core programming languages and platforms. They also specialize in voice recognition technology, giving them a competitive edge when it comes to key tasks such as speaker recognition, speaker adaptation, phonetic transcript creations, and support for different dialects. By deploying an agile customer-focused development methodology, they have secured contracts in the Netherlands, Germany, Belgium, Spain, Finland, and other European Union (EU) countries. Marquee clients include global powerhouses DHL, Xerox, Ford, Estee Lauder, and LG.

That IT developers based in Moldova service major international brands speaks to the country's emerging strength as an IT nearshoring and offshoring destination. While ISD is a home-grown firm, it works with partners to secure international contracts. Meanwhile, companies such as Endava and Pentalog have set up centers in the country to leverage local expertise. Just like Poland, the Czech Republic, Hungary, and Romania, Moldova has generated a disproportionate amount of IT talent given its size. The country has strong technical and educational traditions and a solid IT sector that provides invaluable experience to ambitious graduates. The country is also geographically well positioned and comes equipped with a linguistic and professional culture compatible with both Europe to the west and the Commonwealth of Independent States to the north and east.

Moreover, the government has actively developed policies and initiatives designed to promote foreign and domestic investment in the country, creating highly favorable corporate tax regimes and free economic zones and industrial parks. Information technology is a particular focus. Virtual IT parks, incentives designed to spur the software sector, tax programs to prevent brain drain, and training programs for IT specialists are all contributing to an IT ecosystem that increasingly exports development, quality control, and application customization and support to Europe, North America, and Russian-speaking countries.

An IDC Study Sponsored by USAID and GIZ

IDC Presents Value for Money Via Nearshoring in Moldova

IDC © 2014. www.idc.com Page 2 # CEMA22452

The country is not perfect. It is too small for service centers requiring thousands of workers handling tens of thousands of questions or requests per day. An efficiency-minded business culture is still developing. Although management practices and leadership have improved considerably in the past decade, more is still to be done in terms of best practices, expectations, and process establishment. And industrial sectors such as finance, telecom, manufacturing, and retail receive most of the focus.

That said, Moldova's IT environment is proving a competitive alternative to "classic" destinations. Second-tier IT companies have been successfully using Chisinau for sourcing operations for fifteen years. It is probably just a matter of time before large global players open centers. Moreover, a number of home-grown IT firms such as Allied Testing, Deeplace, and the route-optimization firm Noction have garnered international acclaim, customers, and backing.

Moldova may not be suited to all organizations looking to locate a sourcing center offshore, but it could do the job for many, particularly for companies interested in smaller, high-end operations.

Researched and written on behalf of the Competitiveness Enhancement and Enterprise Development II (CEED II) project and Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ), implemented by Chemonics International, Inc., and funded by the United States Agency for International Development (USAID), this IDC White Paper reviews the possible benefits of opening an ICT nearshore/offshore center in Moldova, what organizations should plan for if they do set up shop, and IDC's perspective of overall viability.

Ready to Go — the Moldovan Hat-Trick

Moldovan IT professionals have been growing progressively more skilled as both training and opportunities grow within their country. It does not hurt that many speak two, and often three, languages, helping ensure a global outlook, as well as the ability to provide service abroad. And the government is lending a hand. It has developed numerous incentives for attracting foreign companies (including instituting a low corporate tax rate) and keeping IT experts at home. It has made it easier to start and do business in the country, while creating an environment conducive to growth.

ICT Talent – Strong, Growing, and Multilingual

Solid Players for Assembling Winning Teams

Anecdotal evidence has started piling up in support of the rising ability of Moldovan IT and technical specialists. One CEO of a small software firm has developers in the U.S., Moldova, and Mexico and has nothing but praise for his Moldovan team. Moreover, salaries have risen and more than a few

IDC © 2014. www.idc.com Page 3 # CEMA22452

Moldovan IT professionals have returned home, bringing their international experience with them.

In terms of hard numbers, proportionally, Moldova is on par with other Central and Eastern European countries in terms of the generation of technical talent. In 2013, the number of skilled ICT professionals in Moldova reached 21,000. Well over 80% are technical specialists, including software engineers, analysts, developers, and project managers. Depending on how you count, upward of one-quarter work in the software industry alone. IDC's examination of the combination of available skills suggests that Moldova is particularly well positioned for core activities, such as web development and basic coding, and high-value activities, such as analysis and design and software development and testing. (It is not well suited to the kind of low-level and high-volume operations found in India and China.)

More on the Way

Universities and technical colleges are steadily producing graduates. For instance, the number of math and computer science graduates in Moldova was stable from 2010 to 2013, at just under 6% of the total number of graduates, well ahead of Bulgaria, Croatia, Hungary, and Slovenia.

(Though these countries have increased the proportion of math and computer science graduates, they are still well below the rate in Moldova.) In Romania, the proportion actually dropped from 2010 to 2013. Moreover, engineering accounted for just under 13% of total graduates in 2013; not as high as regional leaders

Romania (19.5%) and Slovenia (16.6%) but about the same as the Czech Republic (12.2%) and a good deal more than Hungary (10.7%).

Skills Improving

And IT is about to get better. In cooperation with the Technical University, a consortium of organizations (including USAID, the Moldovan Association of Private Companies, Microsoft, and IBM) are launching an IT Excellence and

Computer Science and Mathematics Graduates (% of Total Graduates), 2013

Source: Eurostat, National Statistics Offices, 2015

0,0%

1,0%

2,0%

3,0%

4,0%

5,0%

6,0%

IDC © 2014. www.idc.com Page 4 # CEMA22452

Innovation Center. Set to open by the end of 2015, it will provide a combination of training courses, certification programs, startup accelerators (coaching, mentoring, workspace provision, and funding), and opportunities to host and attend events, run workshops, and conduct research. The multimedia and 3D labs will be designed to foster entrepreneurial, coding, design, architecture, and leadership skills. Every year, the center aims to provide training for 1,000+ individuals and to influence up to 50 startups, helping 20 of them accelerate. IDC believes it will be a driving force of the development of the Moldovan IT ecosystem.

Finally, while English proficiency among graduates is lower than in other Southeastern Europe (SEE) countries, French proficiency is much higher, meaning Moldova could easily follow in Romania's footsteps to become a primary supplier to French-speaking countries. Moreover, Russian is widely spoken and still used at all levels of state and society, with around half of the population speaking the primary language of the CIS. (Offshoring firm Moldovan Call Center has taken advantage of this, offering services in six languages: English, German, French, Italian, Spanish, and Russian.)

Comparison of Resource Skill Factors — Languages, 2 013

Moldova Czech

Republic Hungary Romania Bulgaria Croatia Slovenia

English Language Education 242,200 730,340 610,245 1,689,547 431,083 338,162 141,493

German Language Education 17,100 300,682 343,657 151,196 101,604 143,880 60,852

French Language Education 272,410 40,101 24,423 1,486,759 37,540 9,250 5,053

Source: Eurostat, 2014

Government Incentives – Assists from Valuable Teammates

With its push to have one of the fastest Internet speeds in Europe back in 2010, the government showed quite a while ago that it believes ICT is an essential component of business, education, and economic development. (While other countries have since passed Moldova, according to Net Index, the country remains in the Top 20 worldwide.) At the same time, it had to wrestle with the brain drain caused by the allure of higher salaries, not just elsewhere in Central and Eastern Europe, but also globally. It therefore took steps on several fronts to ensure a business environment conducive to both cost-conscious organizations and those companies planning to expand operations.

The Kick Off — Setting up Play in Moldova Is Easier Than You Think

As a result of government efforts, Moldova has jumped 45 places on the World Bank's Ease of Doing Business index since 2009, when it ranked 108. In 2014, the country grabbed 82nd position, and it took 63rd position in 2015. The effort required to set up a business is also regionally competitive, with the entire

IDC © 2014. www.idc.com Page 5 # CEMA22452 process averaging just 6 days — 2 days less than Romania, 9 days less than Croatia, 12 days less than Bulgaria, and a whopping 24 days less than Poland.

It also costs far less. According to the World Bank Group's data on doing business, in Central and Eastern Europe, only Bulgaria and Ukraine have lower startup costs than Moldova.

Business startup expenses in Romania and Russia run around 50% higher than in Moldova; in places such as Poland and the Czech Republic, they are an order of magnitude higher.

Free Economic Zones and Industrial Parks

Once firms are up and running, the government provides a number of incentives to ensure costs stay low. Seven zones and two areas with a legal status similar to the zones have been established in the country.

Though the zones are general purpose, so to speak, they nonetheless help ICT suppliers. Companies doing business within the zones receive considerable financial benefits and legal protections, such as value-added tax (VAT) and duties exemptions, discounted or zero tax rates depending on the activity, and 10 years of protection from changes to laws that could adversely impact businesses. A multitude of additional benefits relate to the transfer of profits and ownership titles, the trade of goods and services within the free zones, and tax exemptions related to the level of overall investment.

Fiscal Incentives and Trade Agreements

For IT and communications companies setting up shop in Moldova, the corporate tax rate was zero (as reported in the original IDC White Paper) but is now 12%, a standard rate still well below most other countries in the region. In addition, most software companies can qualify for reduced social insurance contributions (based on a fixed percentage of just two months’ salary rather than the same percentage applied to the total annual wage). This program is designed to draw investments from large IT companies, which, in turn, should encourage additional investments from smaller companies looking to work with them or for them in

Corporate Tax Rate

Note: Hungary taxes profit of up to HUF 500 million at 10%; additional profit is taxed at 19%.

Source: World Wide Tax, 2014

0,0%

5,0%

10,0%

15,0%

20,0%

25,0%

IDC © 2014. www.idc.com Page 6 # CEMA22452 other capacities. It is also aimed at young entrepreneurs interested in starting their own companies.

Furthermore, the income of employees at software companies is subject to an income tax exclusion (for income above MDL 7,100 per month). The exclusion lasts five years, and should encourage IT professionals to stay in the country, increasing the overall IT talent base.

Finally, Moldova's geographic location has made it ideally suited to sign trade agreements bridging East and West. It is a member of the Commonwealth of Independent States Free Trade Area and a signatory to the Central European Free Trade Agreement, which includes both EU and non-EU member states.

And the Deep and Comprehensive Free Trade Agreement with the European Union has been provisionally in effect since September 2014, which should open new commercial opportunities with Western Europe.

Macro Moldova — More Goals in the Country's Future

As an emerging market, Moldova has ample room to grow — and is expected to do so for at least the next few years. While the country has been impacted by the slowdown in Western Europe, it has proven fairly resilient. Gross domestic product (GDP) expanded 6.0% in 2013 and an estimated 4.9% in the first half of 2014. According to World Bank (and other) forecasts, solid growth will continue, with annual GDP growth remaining at around 4% through 2016. Government programs and privatization are boosting economic activity. Foreign direct investment (FDI) continues to pour into the country. Though off its 2008 peak, it accounted for around 2.2% of GDP in 2012. And small and medium-sized businesses (SMBs) are expanding their operations.

Business and Financial Factors

Days to Start a Business (2015) 6 19 5 8 18 15 6

Days to Register Property (2015) 6 72 17 19 10 72 110

Standard VAT 20.0% 21.0% 27.0% 24.0% 20.0% 25.0% 22.0%

Employee-Related Costs 27.0% 34.0% 28.5% 28.5% 18.5% 15.2% 16.1%

Government Incentives Yes Yes Yes Yes Yes Yes Yes

Source: World Bank/World Bank Group, World Wide Tax, 2015

IDC © 2014. www.idc.com Page 7 # CEMA22452

Comparison of Economic and Political Factors — Economy, 2013

GDP Per Capita (USD) 2,204 18,851 13,380 9,502 7,302 13,651 24,568

Purchasing Power Parity (USD) 3,682 27,186 20,026 14,284 14,453 18,316 30,100

Consumer Price Index 4.6% 1.4% 1.7% 3.2% 0.4% 2.3% 1.9%

Unemployment Rate 4.4% 7.0% 10.8% 7.3% 13.0% 17.2% 10.1% Source: World Bank, EIU, NSOs, 2014

Yet, as with starting a company, the general costs associated with doing business are low. Commercial property is widely available in Chisinau (e.g., the six-floor Moldova Mall is being converted into office space). The average price of non-IT labor is less than half that in nearby countries, including the Czech Republic, Poland, and Hungary; and it is 20–35% lower than in Bulgaria and Romania.

Moreover, the IT services and telecom markets are helping drive awareness and use of ICT. Despite the relatively high price of mobile services, both businesses and consumers are embracing mobility. This will help drive spending on content-based services, opening the door to independent software vendors and mobile applications developers. Meanwhile, the government is sponsoring a number of large-scale IT projects, while banks are increasingly making services available online, both of which generate demand for IT consulting and integration services.

It all sets the stage for continued IT market development. IT spending per capita is still very low, meaning lots of room for growth exists. Companies in growing markets can rarely stay competitive without IT systems in place that can be scaled up and readily adapted and connected to the systems of suppliers and partners. IDC therefore expects individuals and businesses moderately well-equipped with hardware to trigger a need for task- and industry-specific software solutions. Unsaddled with legacy systems, many companies may even be able to leapfrog to state-of-the-art solutions that incorporate tablets, smartphones, networking, and various applications.

This has also been a boon to nearshoring and offshoring centers. Building on the growing foundation of infrastructure in the capital (outside of Chisinau, things are still fairly undeveloped), IT companies have set up service and development shops. Demand has been significant, with a range of IT services providers, software developers, and even call-center outsourcers establishing operations, resulting in IT services exports being twice as large as domestic IT services spending. The net effect has resulted in workers with a regional and global outlook that is well suited to delivering services abroad.

IDC © 2014. www.idc.com Page 8 # CEMA22452

Comparison of Financial Factors — ICT Spending and Penetration Rates, 2013*

Moldova

Czech

Republic Hungary Romania Bulgaria Croatia Slovenia

IT Market (US$M) $152 $5,177 $3,047 $2,979 $1,118 $1,092 $804

Hardware (% of total IT) 73% 45% 53% 69% 73% 53% 47%

Software (% of total IT) 12% 21% 21% 14% 14% 16% 32%

IT services (%of total IT) 15% 34% 26% 17% 12% 31% 21%

IT Spending Per Capita (US$) $42 $492 $308 $149 $154 $257 $422

Note: These numbers do not include the IT and BPO export market, which was around $57 million in 2013 and will reach $110 million by 2018.

Some percent totals may not add up to 100% due to rounding. Source: IDC, 2014

Plan for It — Tightening the Team

IT professionals in Moldova may be increasingly talented, but they continue to focus on a narrow range of industries and IT areas. And, while their skill sets have become solid, new graduates, and even those with some professional experience, need additional training to join global project teams.

While Moldovan company and team leaders are progressively versed in management theory and equipped with invaluable experience, firms still need to shed legacy processes and structures that date back decades.

ICT Talent — Broader Pitch Experience in Order

Despite growing recognition that Moldovan coders and application specialists can deliver high-value services abroad, their scope is still rather limited. In terms of technology, Moldovan programmers are well versed in .NET, JAVA, C/C++, C#, PHP, and other core processing languages. They also regularly work with databases and iOS-based development. Given these areas account for the great majority of tools needed to create business and mobile applications, Moldovan ICT specialists are well equipped to tackle most projects.

But, so far, they have mainly been tasked with projects stemming from a limited number of industrial sectors. Finance tops the list, with home-grown firms in particular having secured contracts with major banks in Western Europe. IT services exporters are also active in manufacturing, telecom, and retail. Again, regional players and smaller global players with Moldovan operations have a number of prominent clients in each sector. But almost nothing has come from media, transportation, education, government, or utilities.

There is also a strong focus on application development, testing, and customization. While the country is arguably too small to supply specialists for large IT support operations (as do countries such as Poland and India), regional and global suppliers could do more to tap the potential consulting market, especially in vertical markets such as those

IDC © 2014. www.idc.com Page 9 # CEMA22452 named above, in which Moldovan IT developers have garnered considerable expertise and experience.

Training Required — Adding Experience to Intelligence

Just because training is considered important and is generally a positive part of the corporate world, does not mean it happens. International companies operating in Moldova are generally diligent about ensuring staff are trained, either locally or at head offices or training centers abroad. But local companies often lack the budget and access to qualified trainers to provide their staff with technical skills seminars and business skills workshops. All told, only around one in four technical and business specialists in Moldova receive workplace training. The larger impact on the overall labor pool will be clear: It can take time to find people with the right skills up front.

The IT Excellence and Innovation Center scheduled to open toward the end of 2015 will help change this. It will help fill the skills and knowledge gaps of students and recent graduates entering the workplace. But it cannot do everything. When setting up offices and nearshore/offshore centers, international companies need to include skills development programs. This should include short courses or certification programs in everything from Windows and Linux to Java and C♯ to enterprise resource planning (ERP) and security systems, to name just a few examples. For both managers and ground-level IT specialists who work directly with international clients, call center management, effective coaching, call monitoring, customer care, phone etiquette, and customer relationship management (CRM) system utilization will all be de rigueur.

Leadership Improving, But New Formations Needed

A lot has changed in the past ten years. Moldovan business leaders have returned from abroad equipped with management experience. Non-Moldovan managers and directors have helped introduce best practices for motivating staff, allocating resources, and driving projects forward.

Nevertheless, the country still has a way to go. Managers have come a long way in the last decade, but organizational structures and cultures still need to change. At local branches of international companies, large chunks of tasks related to business development, marketing, and strategic management are handled abroad, limiting local staff exposure to what it entails. Among local SMBs, directors and owners often handle marketing, HR, and other specialized business areas on their own.

While larger companies now have departments for dealing with different areas of the business, room for development exists. As a result, the business environment is still instituting a management and process-oriented culture, IDC © 2014. www.idc.com Page 10 # CEMA22452 where role models and time-tested procedures allow promising leaders to learn through observation and mentoring.

The IDC Perspective

The early days for both the overall IT market in Moldova and for the country's role as a nearshore/offshore location are close to passing. By 2018, annual internal IT services spending will be around 40% higher than it was in 2013. Meanwhile spending on nearshore/offshore activities will nearly double. While the potential for building cost-effective centers is high, the market is small – because the country is small – and international vendors that move quickly will have the advantage.

Ready to Play in the Big Leagues

The current hardware focus of the IT market, along with a number of other development trends and indicators (e.g., GDP per capita, public/private partnerships, FDI levels, and IT spending per capita), paints a familiar picture in CEE: IT market growth is set to continue. The volume of services exported from Moldova reflects this. Growing from a small base, it expanded tenfold from 2002 to 2010; it then rose by another 35% through the end 2013. While such high double-digit growth will be hard to maintain, IDC believes Moldova will continue its rapid growth in terms of IT services exports, as it is becoming a preferred choice for sourcing locations across Southeastern Europe.

Many regional and international SMBs know this. Firms such as Pentalog, Endava, Ritlabs, Mediasoft, Noction, and ISD have all leveraged Moldovan talent to great effect. Endava sports a business model based on industry-specific expertise, an agile "blended" delivery model, and a strategic pan-European presence that enables access to a large pool of IT talent in Eastern Europe.

Noction likewise leverages a multinational team to develop and promote its networking software. ISD has landed contracts with DHL, Xerox, Ford, and LG.

In other words, the country has legs. It also has time-zone and cultural compatibility with Europe and the CIS. IDC believes that, by taking a proactive approach that accounts for the underdeveloped management environment and potential skills shortages, forward-looking organizations can ensure a steady supply of qualified labor for their nearshore/offshore centers.

But the clock is ticking. Unemployment is down and IT salaries are on the rise, as international companies have been realizing the potential. Moldova lacks the population base of India or China and should not be utilized for low-end work or thought of as a place to scale up operations into the thousands. Rather, its potential lies in a combination of core activities such as web development, basic coding, and high-end activities related to business application and mobile application development.

IDC © 2014. www.idc.com Page 11 # CEMA22452

As its base of ICT workers expands in number and in breadth beyond the current vertical market focus, the country will attract additional interest as an outsourcing center. Getting in Moldova now will enable companies to take full advantage of its benefits.

Method and Definitions: Please see the original IDC White Paper for a detailed description of definitions and research methodology. It is available at:

http://www.mtic.gov.md/img/d2011/download/2012/02-24/CEMA17850[1]_Final.pdf.

Copyright Notice: External Publication of IDC Information and Data — Any IDC information that is to be used in advertising, press releases, or promotional materials requires prior written approval from the appropriate IDC vice president or country manager. A draft of the proposed document should accompany any such request. IDC reserves the right to deny approval of external usage for any reason. Copyright 2015 IDC. Reproduction without written permission is completely forbidden.

Competitiveness Assessment of Moldovan IT Services Industry

Follow-Up of 2011/2012 Project

Prepared for USAID CEED II Moldova and Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH

November 2014

Table of Contents

Executive Summary Overview and Structure of the IT Services Market – Local Spending Overview and Structure of the IT Services Market – Export of Services (Offshoring) Competitive Assessment Promotional Strategy Methodology and Definitions

Executive Summary The overall IT market in Moldova (excluding the export of services) reached a total value $152.55 million in 2013.

The market is still heavily hardware centric, with software and IT services accounting for marginal shares of total internal spending, at 12%, respectively 15%.

Local IT services spending did not grow substantially in the past three years, from around $17 million in 2009 to just over $22 million in 2013, representing average annual growth of about 5%.

We expect internal IT services spending to grow moderately, at a compound annual growth rate (CAGR) of 6.8% during the five-year forecast period, to reach approximately $31 million in 2018.

The export of services including IT, research and development (R&D), and business process outsourcing (BPO) from

Moldova was valued at approximately $57 million in 2013. This market is expected to double to over $110 million by the end of the forecast period.

The internal market is heavily dominated by local IT vendors , as international vendors consider current local market still too small , despite its good dynamics (better than EU CEE countries, but lower than most former CIS countries such as Ukraine, Belarus, Russia or Kazakhstan). In order to set up offices that service local market, international IT players need to make significant financial efforts that cannot be covered by potential medium term wins ; moreover, they feel that, given the underdevelopment of the market and the pressure on prices, they cannot compete with local IT Services providers who are able to offer better prices due to much lower initial investments. As a result, they prefer to serve Moldovan market from nearby offices such as Romania, Ukraine or Russia.

Current and future investments in Government IT will represent the main driving force in the Moldovan IT Services market in the near future. In the case of such contracts, that are bound by World Bank regulations and have significant values, international vendors (including Romanian Companies) have a significant opportunity to extend their activities on the Moldovan market, as they are much better positioned to win such tenders. The special requirements related to financial capabilities and previous experience in similar large contracts that make it almost impossible for local players to qualify as potential candidates, give a huge advantage to regional or international IT services players willing to enter the Moldovan market.

To actualize this potential, the Moldovan government should continue promoting its IT export capabilities to international business communities, as well as supporting both the investments of international players into offshoring/nearshoring captive centers in Moldova and the export of domestic IT services abroad, especially to EU countries and the U.S.

Overview and Structure of the IT Services Market

Local Spending

Moldova IT Services Market Context

The current ICT market in Moldova is primarily in a buildout phase, with major investments focused on basic hardware infrastructure, such as server, storage, infrastructure software, and network equipment implementations. In the long term, the IT services market is expected to be driven primarily by large government projects, such as new egovernment initiatives and technology investments in highly competitive sectors (e.g., banking and telecommunications) and initiatives that support the alignment of IT with business goals. The Moldovan government is expected to continue to upgrade public infrastructure, and remain committed to egovernment initiatives aimed at improving the quality of public services. The rise in demand for exports in manufacturing, the growing usage of IT in the finance sector, transformations in the telecommunications industry, and demand in the government sector will fuel IT services market growth.

Though small, the small and medium-sized business (SMB) segment in Moldova will represent a growing opportunity for IT services providers, due to current low penetration levels. Characterized by a severe lack of IT maturity and a cost-conscious approach to business, SMBs in Moldova remain a difficult market to target in an effective manner. Nevertheless, emerging technologies such as cloud offer a cost-efficient means to capture the opportunity in this segment.

The IT services market will continue to expand over the forecast period, with operations management recording the highest growth rates due to high penetration levels of outsourcing services, followed by training and education services. However, the Moldovan IT services market face some challenges, including lack of IT skills among both providers and end users, long procurement cycles in government, tightening IT budgets, and problems in project management. The lack of vertical spending diversity is also a potential obstacle, as even underpenetrated sectors such as retail and wholesale have limited potential.

Overall, the biggest opportunities continue to lie in the government, finance, and telecom verticals.

However, verticals like manufacturing and utilities present potentially large wins for IT services project.

There are numerous inhibitors to the development of the cloud services market in Moldova, the most significant being the low number of cloud services providers, the rather weak range of offerings, and limited market awareness. On the plus side, cloud in Moldova benefits from government support rarely seen in emerging markets in the region.

IT Services Market – Drivers (1)

• Recovery from the Recession of 2012: Several indicators show that Moldova has made important steps in 2013 to recover from the previous year’s recession. GDP growth in 2013 accelerated to 6.0% year on year. In addition, the growth in the first half of 2014 was up to 4.9%. Manufacturing grew by 9.4%, while investments in road infrastructure and construction stimulated an expansion of output by almost 18% in 2013. Consumer expenditures was the main growth driver of the total expenditure which grew by 5.8% in 2013, fueled by remittances and wage growth. The economic recovery will lead to the creation of new businesses and increased budgets, some of which will be allocated to IT.

Government Cloud: The government of Moldova has implemented the M-Cloud platform based on cloud computing technology. This project will have a huge impact on all central administration, resulting in substantial cost reductions and more efficient internal processes.

• ICT Infrastructure: Several international reports and statistical indicators show that Moldova has a quite competitive ICT infrastructure, including the relative cost of broadband and international Internet bandwidth. This has a positive impact on the access to the internet for both private customers and entities in the growing SMB sector.

• Hardware Market Growth: Accounting for the majority of IT spending (over 70%), PCs, servers, networking equipment, and peripherals are the main drivers of the IT market, automatically generating demand for software and related IT services such as installation, configuration, and customization.

• Inexpensive Workforce: Statistics show that Moldova has one of the cheapest workforces in the region. From the potential investors’ perspective, this is definitely a competitive differentiator, and the country is thus still an attractive destination (especially for offshore services). Combined with improvements in the education system and business environment, a low-cost workforce contributes to the local IT industry’s competitiveness.

• Competitive Telecommunications Sector: The telecommunications sector in Moldova performs well in terms of geographic coverage, both for wired and wireless technologies. Despite the fact that mobile services are still rather expensive in the country, the mobile penetration rate is constantly increasing. This will drive spending on content services, thus opening new opportunities for independent software vendors involved in mobile application development.

IT Services Market – Drivers (2)

• Free Zones and Other Tax Incentives: Although not specifically tailored for the IT industry, free zones offer fiscal incentives for registered residents, including value added tax (VAT) and excise exemptions. Free economic zones offer investors preferential customs treatment, investment protection from the state part, legislative provisions for 10 years as well as several tax advantages such as Zero VAT and exemption from excise payments, total exemption from income tax derived from export of goods for 3 or 5 years (depending on the initial investment), or 50% exemption from tax rate from income derived from exports and 25% from income derived from other activities.

• Special Fiscal facilities for Software Companies. Moldovan Government is supporting the increase in competitiveness of its locally developed software products by offering special fiscal facilities to software development companies and their employees. Such companies can apply for a five year exemption from corporate income tax if income from Software Development in higher than 50% of the company’s sales, the company has no fiscal liabilities to the budget; this fiscal facility is only granted once. Until 2016, social security payments made by the company are limited to 1943.5 MOL/month/employee (this is the approximate amount paid for 2 average salaries in Moldova); also, the maximum taxable income for each IT employee is limited to 2 average salaries/month.

• Virtual IT Parks. The Ministry of Information Technology and Communications has recently taken the initiative to create virtual IT parks which will enable IT companies to benefit from simplified and lower taxing system similar to traditional IT parks, while continuing to work from their offices. According to this draft, IT companies may benefit from the introduction of a single 12% tax from sales (which incorporates all current taxes and fees) as well as exemption from VAT and custom duties on import of computer technology used for production purposes. This initiative is not yet effective, as it still has to be approved by the new Parliament.

• Unique Geographic Position: Moldova is bordered to the east by the EU (Romania) and to the west by the CIS (Ukraine), enjoying free trade with CIS states and being authorized to trade on EU markets. This advantage is likely to attract new investors, which will increase IT spending in the local market.

IT Services Market – Inhibitors

• Lack of Market Education: Many SMBs in Moldova are still unaware of, or lack confidence in, the clear improvements in efficiency that IT can bring. While vendors are making efforts to educate the market and align their offers to the needs of SMBs, these organizations are still restricting investments to those with immediate and tangible return on investment (ROI), such as machinery, production facilities, and marketing and sales, without realizing how these assets can be complemented by IT solutions.

• ICT Regulations and Business Environment: Many international reports show that Moldova ranks very poorly in terms of internal regulations and procedures for running a business. The administrative burden, bureaucracy, and tax system inhibit business development, thus discouraging potential foreign investors from setting up operations in Moldova. This has a substantial impact on the competitiveness of local industries, including the IT sector.

• Moderate Quality of IT Professionals: Although the number of IT graduates in Moldova (between 1,800 and 2,000 per year) is mostly sufficient for the internal needs of the IT industry, the percentage of technically qualified individuals is very low. This is because the education system’s vocational curricula does not match local requirements.

• Software Piracy: The software piracy rate in Moldova remains very high, estimated at about 89% in 2013. No significant progress in reducing the piracy rate has been made in the past four years, which is having a significant impact on the value of packaged software spending and on this industry’s contribution to GDP.

• Public Contracts Limited by Price Sensitivity and Lack of Transparency: In the public sector, most contracts are awarded on the basis of price, which keeps vendors’ profit margins low. Furthermore, transparency levels and fairness regarding tender proceedings have been questioned on several occasions. This serves to discourage bidding by qualified firms, not to mention undermining foreign direct investment (FDI).

• Low Purchasing Power: Moldova has one of the lowest average wage rates in the region. As price controls are lifted on utilities and basic commodities, Moldovans, especially those located outside Chisinau, are seeing their already limited purchasing power deteriorate. As a result, basic IT equipment, such as a PC, is too expensive for most Moldovans.

• Low Rate of Employable Graduates: In addition to suffering from a depleted HR pool, most IT companies consider the rate of employable fresh graduates from IT-related faculties and colleges to be too low, and the training period required for such graduates to be too long (longer than the European average). As a consequence, investors in the IT field keep their operations in Moldova small, despite the fiscal incentives offered, or they relocate to neighboring countries, which are often more expensive but have larger pools of employable graduates.

Overview and Structure of the IT Services Market — Current Market Size and Forecast (1)

F o r e c a s t a n d An a l y s i s o f I T S e r v i c e s S p e n d i n g ( U S $ M ) i n M o l d o v a , 2 0 1 3 – 2 0 1 8

IT Services 2013 2014 2015 2016 2017 2018 CAGR

IT Consulting 2.47 2.71 3.12 3.45 3.65 3.33 6.2%

Implementation 12.32 12.56 12.95 13.32 13.87 14.15 2.8%

Support Services 4.86 6.03 6.54 6.75 7.03 7.54 9.2%

Operations Management 1.34 1.56 2.01 2.34 2.75 3.23 19.2%

Training and Education 1.56 1.82 2.12 2.45 2.66 3.10 14.7%

IT Services Total 22.55 24.68 26.74 28.31 29.96 31.35 6.8%

Source: IDC, 2014

• Local IT services spending in Moldova reached $22.5 million in 2013.

• Basic IT services such as implementation and support services are still driving the market, together accounting for almost 75% of total spending. The heavy domination of Implementation services is the main reason why the further development of the Moldovan IT market in terms of value is not significantly higher; while the number of Implementation projects will continue to increase, their value will be heavily affected by the pressure on prices that pushes vendors to lower implementation tariffs or even include such services into the Hardware/Software prices.

• Due to the spending focus on hardware and network infrastructure, the majority of implementation and support services consist of systems integration and hardware support and installation activities.

• Finance, communications, manufacturing, and the public sector verticals were the largest spenders on IT services in Moldova in 2013.

• IDC expects that the IT services market will grow at a CAGR of 6.8% during the forecast period ending in 2018.

Overview and Structure of the IT Services Market — Current Market Size and Forecast (2)

2013 2014 2015 2016 2017 2018

IT Consulting Implementation Support Services Operations Management Training & Education

11.0%

54.6%

21.6%

5.9% 6.9%

IT Consulting Implementation Support Services Operations Management Training & Education

IT Services Market Size 2013:

$22.55 Million

IT Services Market Forecast:

6.8% CAGR through 2018

US$ Millions

Overview of the IT Services Market and Future Outlook (1) Implementation services remained by far the largest part of the Moldovan IT services market, while support services ranked second, despite the need for a further reduction of operational costs in the private and public sectors — which might be expected to hinder these two service categories.

The majority of projects that were carried out were small, with short implementation cycles, low risk, and rapid ROI.

The implementation services market was driven by technology convergence, the adoption of various IT security features in the finance sector, and availability and disaster recovery initiatives in some verticals. The virtualization rate increased among larger businesses, but penetrated the SMB segment at a slower rate than expected. The small scale of SMBs means that investments in virtualization are often rather ineffective, and many companies in this segment prefer free versions of virtualization installations.

Despite the low penetration rate, customers postponed hardware replacements and software upgrades and/or expired license renewals, which hindered the development of the implementation and support services segment.

Moreover, corporate IT departments are pressed to provide basic implementation and support services internally. On the other hand, implementations of IT asset management and license management software solutions increased, as IT departments were forced to keep track of IT assets in order to ensure the transparency of spending while reducing expenditure.

Due to the immaturity of the Moldovan market, many more infrastructure projects are to be expected, and demand for integration services will remain high throughout the forecast period. Consolidation and, later, virtualization are expected to accelerate in the large and very large business segment. The SMB segment lags behind, and SMBs still purchase low-volume standalone servers. Companies in both segments will continue to add storage capacity and implement various data management features such as tiering, thin provisioning, and de-duplication. The convergence of technologies, the need for better utilization of IT investments and interoperability between systems will contribute to the stable performance of integration services within the overall implementation and support markets.

Overview of the IT Services Market and Future Outlook (2) Demand for IT consulting services is expected to rise gradually across all verticals, but the most significant portion is expected to come from large projects commissioned by traditional consumers of consulting services, such as the government, telecommunications, and finance sectors. The transition to cloud is also expected to increase demand for IT consulting. The application consulting market has significant potential for growth due to low penetration of complex business management systems like EAS, CRM, and enterprise relationship management. The need for better integration of all corporate systems is another important issue that will continue to boost the segment.

IT training and education services placed fourth, as both end-user organizations and IT companies benefited from programs, and invested in professional certifications and improved qualifications for their staff. The decline in demand for basic end-user training was partly compensated by increased demand for specialized professional training. Demand for these services will increase in the next phase, driven especially by increased compliance and technology requirements. Suppliers should continue to develop the IT skills of their key employees, as well as the managerial skills of their project and finance managers. As the complexity of products and projects increases, the need for managerial skills will gain importance.

Operation management placed fifth in terms of overall IT spending, but is expected to have the most dynamic development, driven by the need for flexible scaling and the timely provisioning of services. The externalization of operation management is motivated by the very low ROI of spending on system redundancy. On rare occasions, some large international companies outsourced their IT functions in order to improve the quality of service. The bulk of businesses will still run their core systems internally and turn to external suppliers to secure disaster recovery or resources for peak workloads.

Adoption of the cloud delivery model is still limited, but the number of IT managers/CIOs that are willing to consider mixed in-house and outsourced service delivery is growing. On the other hand, many SMBs are not prepared to pay fees for high-quality service, in spite of the benefits. It is likely that they will prefer to switch directly to cloud services, due to the possibility of lower prices.

Essential Guidance (1)

Find a Competitive Edge. As regional and international vendors will enter the Moldovan IT market, local vendors must assess their ability to compete in terms of staff, financial resources, and marketing. Achieving critical mass by partnering or merging with other vendors will be crucial to winning larger projects and strengthening market positions. Local IT vendors should reevaluate their growth strategies, try to find niches that are not of interest to large vendors, and attempt to brand and differentiate themselves strongly.

They should also leverage their flexibility, local market and language expertise, and competitive prices.

Exploit Opportunities in Outsourcing and Cloud Offerings. The economic conditions are speeding up the transition to outsourcing and cloud offerings, as end-user companies have discovered that outsourcing services are cheaper and provide greater functionality than in-house services. Vendors need to educate clients better about the advantages of these services, such as improved customer relations and the ability to allocate more resources to core lines of business.

Be Proactive Toward the Government. Since the public sector (government administration, defense, police, judiciary, healthcare, education, and state-owned public enterprises) accounts for the bulk of IT spending in Moldova, it is crucial for IT vendors to be proactive in their dealings with this vertical market.

This means educating policymakers and civil servants in decision-making positions in particular, conducting marketing studies and benchmarking, and organizing conferences, as well as offering attractive financial arrangements, outsourcing, and more.

Address Micro Enterprises. Given the fact that many SMBs in Moldova cannot typically afford an in-house IT specialist, vendors should tailor offerings and marketing mixes to meet the specific demand of these users for PCs, peripherals, software applications, networking, and mobility.

Essential Guidance (2)

Align with Universities Now to Ensure Skills for the Future. It is no secret that finding talented human resources is becoming more difficult throughout CEE. One way that offshore/nearshore investors can combat this is by forming partnerships with local universities in the cities and countries in which they establish sourcing operations. This will have two advantages for them. First, it will enable future access to potential employees, and provide an avenue for efficient marketing as well as recruitment. Second, it may enable them to help shape the curricula being studied at the institutions, and this influence is becoming increasingly important given the speed at which technology changes. The rapidity of technological advancement is forcing companies to constantly seek staff with new skills for their operations. By addressing these changes at the educational level, companies will be able to ensure that their future flow of human capital is qualified and ready to contribute on the job from day one.

Increase Effectiveness of Public Procurement Procedures. Moldova is saddled with extremely high levels of administrative burden and perceived corruption, concerns about alleged political interference in…