Bulgaria: Home appeal

ICT

Economic News

18 Mar 2011
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With demand for domestic hardware and software recovering and renewed interest in the potential of high-value outsourcing operations, the outlook for Bulgaria’s information and communications technology (ICT) sector appears to be considerably brighter.

Domestic IT market is expected to grow 5% in 2011, reaching a total value of $947m, up from $902m in 2010, according to Business Monitor International (BMI), a UK-based economic forecasting firm. Growth may not match rapid pre-crisis figures as Bulgaria’s IT sector expanded from a low base and reaped the benefits of several consecutive years of economic expansion and modernisation, along with the stimulus provided by EU accession in 2007. However, current numbers still represent very respectable and steady growth, particularly given that 2011 may be a slow year as the country emerges from deep recession in 2009 and stagnation in 2010. Personal computer sales in Bulgaria grew by a modest 3.8% in 2010, according to the International Data Corporation (IDC), a US-based market research and analysis outfit. Consumer spending is still subdued, and some businesses are still wary of investment after a difficult period.

Nonetheless, a substantial proportion of Bulgaria’s population has enough disposable income to spend on computers and technology. As economic growth picks up, the market for IT products should expand as some citizens purchase their first home computers, and, more significantly, as the moderately well-off upgrade their equipment and software and seek new, high-tech services. There is particular scope for growth in notebooks and cloud computing. Meanwhile, on the business side, foreign investors can be expected to continue expanding and improving their IT systems, while Bulgaria’s small and medium-sized enterprises (SMEs) – the much-overlooked backbone of the economy – look to computerise and upgrade to improve efficiency. BMI expects that computer sales will total $696m in 2011, with software sales reaching $92m, and predicts that both will continue to grow steadily over the next four years.

Bulgaria’s State Agency for Information Technology and Communications (DAITS) has set a target for IT to contribute 10% to the country’s GDP by 2011. It has set out a range of initiatives to help support IT development, including enhancing computerisation and internet connectivity in schools, investing in training and a drive to make Bulgaria one of the world’s top 40 countries in terms of e-government services. The latter goal dovetails with the government’s aim of improving administrative efficiency, which is likely to see the public sector remain an important IT buyer for some years.

While the domestic market picks up again, attention is also returning to Bulgaria’s advantages as an outsourcing centre. A number of major international firms as well as smaller players in a range of sectors – including IT – are outsourcing ICT-related functions to Bulgaria in areas such as customer support, call centres and business process outsourcing (BPO).

In the second half of the last decade, Bulgaria was increasingly recognised as a promising outsourcing destination, indeed among the best in Europe. Competitive advantages include low labour costs by European standards; a skilled labour force with excellent IT, foreign language and mathematical skills; relatively low property prices and overheads; and a convenient location in a similar time zone to other European countries (UTC +2) and within easy reach of headquarters and clients elsewhere in Europe. Personal and corporate taxation is also low and the country’s cultural familiarity makes it an easy place for Europeans to do business. Additionally, political and macroeconomic fundamentals are stable, and the lev’s peg to the euro greatly reduces currency risk that is a factor in other Eastern European and global outsourcing destinations. EU membership also allows for the free flow of capital and labour and ensures that the legal system operates along international standards.

While outsourcing activities slowed somewhat during the recession of 2008-09, with some companies even freezing operations, the global economy has returned to growth. However, many companies are ever more conscious of the need to cut costs, adding appeal to the Bulgarian market. Increased demand from existing outsourcing operations was a major driver behind the absorption of new office space in Sofia in 2010, providing a much-needed fillip for the sluggish real estate sector, Atanas Garov, managing director of property firm Colliers International Bulgaria, told the local press. In October 2010, for example, Hewlett Packard announced that it would create 2000 new jobs in Bulgaria with the opening of a new development and support centre, adding to the 3000 employees it already has in the country.

Garov sees huge potential in the outsourcing and offshore industry, asserting that it could become an even more important generator of employment. Colliers International estimate that, with “concentrated efforts to attract investors and major service users”, Bulgaria could increase the number of people employed in outsourcing to 100,000 in five years, from 10,000-15,000 currently.

As industry leaders acknowledge, Bulgaria is relatively small in size – the population is around 7.5m and shrinking – and has higher costs in certain areas, including skilled labour, than some Asian and African rivals. Additionally, with inflation resulting in price increases each year and the currency peg holding the lev up, costs in Bulgaria will not remain so low for long. It will not compete as strongly on the same mass-market level as India, the Philippines, or Egypt, for example.

However, given the workforce skill level and its location, Bulgaria has substantial potential as a high-value outsourcing centre. Garov sees potential in segments including IT services and research and development serving industries such as pharmaceuticals, banking and telecommunications.

Coordinated efforts at an industry level could boost Bulgaria’s profile as an outsourcing destination and would help the industry to reach its potential. Furthermore, Bulgaria needs a diverse range of investors likely to make long-term commitments rather than temporary outfits looking to move on price alone. Bulgarian companies and local branches of international firms have proved their mettle over time, and now the country could well seize the opportunity to move to the next level.

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