Baltics: skills will make the market difference, IT EUROPA, By John Garratt and Auri Aittokallio

By John Garratt and Auri Aittokallio

The Baltic states have similar histories and attitudes, but the differences in the details make each interesting. Each is an example of a former Soviet Bloc state which has westernised very rapidly, built on established high levels of literacy and education. Links between the Baltic states have tended to be with the Nordics and Germany rather than with Russia to the east. Applications for EU membership were made 10 years ago.

These are still emerging countries, with low wages and with limited natural resources. For IT companies, there are few large customers - mainly in government or timber and paper processing. Infrastructure and road communications are sometimes poor, the three countries comprising many thousands of islands. Inflation and poor records on foreign investment work against them, but education and literacy make the people the main available resource to IT industries. Funds from the IMF and EU have provided a lot of the investment funding of recent years.

Estonia burst onto the news front earlier this year when poor relations with Russia led to cyber-attacks from inside that country, ostensibly from individuals, but raising concerns that a more organised attack was being conducted on a NATO member, possibly by state-sponsored organisations. The attacks have stopped but caused some changes, according to Allan Martinson of Tallinn-based venture capital company Martinson Trigon Venture Partners. "There's been no permanent effect other than that the issue is now being taken very seriously both in and outside Estonia. NATO is boosting its cyber-defence centre and investigating how to counter similar attacks in the future." The issue was also high on agenda of the meeting between German Chancellor Angela Merkel and the Chinese leader last week.

But overall, the outlook for IT remains positive. As the Economist Intelligence Unit report on IT competitiveness said in July, "Skills-rich emerging markets will challenge today's established performers. Future rivalry for India's and China's positions will come from the likes of Russia, Brazil, Malaysia and Vietnam, as well as smaller markets such as Estonia, Lithuania and Chile." Carving niches in software development and services represents their best chance of moving up the index table, it added.

"Because of Estonia's small size and positive attitude of public and government to innovative solutions, Estonia is also a perfect test site for new 'killer applications'," says Vaho Klaaman, Managing Director, Skyline, a partner of local development house Itransition. The illustrative examples are Kazaa and Skype - probably the two most famous solutions developed in Estonia.

IT service revenue has been growing consistently for three years now and demand for IT services remains very strong in 2007, say local analysts. IT services revenue grew faster than the overall IT sales revenue. In 2006 IT services revenue made up 49% of total revenue, an increase of almost 10% compared with 2005. This continuing trend verifies the tendency identified in the previous reports that the sector becomes more services oriented.

All three Baltic countries share similar market growth drivers. IT companies grew mostly on the back of large government projects financed by the EU and Shengen funds. At the same time private sector demand has also been positively affected by strengthening economy, inflow of EU funds and accelerating adoption of modern IT technologies by enterprises as the key element of their business management infrastructure.

But all is not well; companies we have spoken to report a slowing in growth, coupled with a tough fight to get skilled people. Worldwide recruitment specialist Monster reported a slowdown in hiring across the Baltic states in July, just as the rest of Europe picked up. One spokesperson said that while the education system was turning out high grade people, they were not immediately suitable for employment in IT.

But software development seems to be thriving. Allan Martinson has invested €1m in Rate Solutions OU. "It is a good platform, but the key skill is understanding how to create traction in other markets and monetise it," he tells IT Europa. "We are still learning. Rate OU has opened up in 14 countries and languages in the last six months and has quietly, with minimal marketing expenses, grown the user base to 0.4 million (on top of Estonian 0.35 million)"

There are some other examples - Fotki.com originates from Estonia and has 1.5 million registered and five million monthly unique users. It's the number 10 photo sharing site in the world. "I see Estonia's great niche in consumer web services and e-services (internet banking, e-govemment, digital signature, e-voting at parliament elections etc) and mobile services (m-parking, positioning services, mobile ID, m-banking etc)," says Allan Martinson.

Arunas Bartusevicius is owner and CEO of Sonex Group comprising IT companies operating in all Baltic States and Russia. With more than 500 employees, revenue in FY 2006 was €50m. He says: "All markets are strong and growing about 10% to 20% per year. Probably the largest growth is in the government segment, because of increased funding from the EU. There is a very large demand for complex IT infrastructure solutions, custom software development solutions, and others. Globalisation also is fuelling demand for IT-based solutions in business segments - both enterprise and SMB."

It is obvious that the standard enterprise areas (storage, security, internet management) are growing fast, but the countries' major enterprises are also taking the opportunity to establish their technologies ahead of the game. As Ainis Kavaliauskas, HP's Technology Services Group sales manager for Baltic countries says, the larger organisations are very aware of the costs elements such as energy requirements and heat produced and so are taking the opportunity to rip out old inefficient systems and replace with new servers and solutions, saving perhaps half the cost.

So servers and storage implementations are strong? Yes, says Arunas Bartusevicius: "These technology areas are growing fast, but there is also big demand in other areas we are working in - IT infrastructure optimisation and management, business intelligence solutions, content management, unified communications, software development, mobile workforce solutions."

Among the major players, the big names are all present, though some have just a representative office. IBM is big, on the services side, EMC is there in some force, and Fujitsu Siemens has been growing rapidly.

HP, with its advantage of the widest portfolio of products and services, has been experiencing double-digit growth in all three countries. The early investment in infrastructure and by government is "opening the gates" for later commercial investment. Global companies and investors are coming in, and there is a real demand for quality from clients, says Ainis Kavaliauskas.

Skilled resources are at a premium; yes the schools and universities turn out good people, but the need is for the more advanced staff. And because the projects tend to be small on an international level, individuals rapidly become key, and there is a risk of skilled people being grabbed by the competition.

Anjan Lahiri, head of European Operations at MindTree, says: "I recently went to scout the situation in the talent market. The conclusion I drew was that while the Baltics and eastern Europe will have a role to play in the global skills game, the macroeconomic condition in these countries will not enable them to play a central role. IT is not considered to be a 'great' career as the young people are very mobile and have many different professions on their mind, many of them 'soft' professions.

"Also, the salaries in these countries are very high by today's global IT standards - the standards that global IT contracts expect - and the social infrastructure to enable an IT services play is missing. My question is 'in how many countries do you have the best and the brightest wanting to pursue a job in software development?"

Lahiri adds: "The issue about skills is the availability of raw talent and the intensity and desire of the raw talent to learn more. Of course the environmental availability of things that can teach that person is also important and in all these, I feel the eastern European block is lacking. The number of people available is small, the people really do not want to be the best in IT when they are in their mid-thirties and forties and the overall environment is also not geared towards a single minded focus on training them."

Guntis Urtans (right), GM Baltic at Exigen Services and Exigen Services DATI, says: "So far we have no serious problems to recruit skilled specialists. As Exigen Services we can use a pool of experienced and skilled specialists from other counties - Lithuania, Russia, Ukraine, Belarus. On a regular basis we have internal training courses for our specialists."

Yes, but industry, while not large by European standards, is developing: electronics and chemical industries are investing strongly, and traditional industries such as furniture-making are renewing their technologies. There is also a historically successful shipbuilding industry, and breweries too have been gearing up. And the larger companies seem to have fewer problems recruiting.

The banking and financial institution sector has seen a lot of consolidation through mergers, and data centres have been springing up across the area. A key feature of the markets is the way the global brands and names have been displacing the local assemblers, particularly in the server and storage markets. With the institutions demanding sophisticated solutions, including SANs, and looking for lower total costs of ownership, the skills of the integrators are in demand. And with few local resources at this level, HP and the other vendors rely on local partners to do the implementations.

The area is waiting on the next slice of EU funding; previous investments in infrastructure have laid the groundwork. Customers are now moving from the pilot and test projects to full implementations. And government has provided a model: HP has been undertaking a major project at the Lithuanian Department of Internal Affairs, and expects to do the same in Estonia. Government spending represents perhaps around a third of the total IT spend in these countries, thinks Ainis Kavaliauskas. This is an area where the relatively small size of the countries works in favour of technology companies. Estonia has even changed its legislation to allow e-voting, one of the first countries in the world to go ahead with this.

But it is a long process. "I don't expect the Baltics to reach the levels of the rest of western Europe for at least 10 years, probably 20," says Kavaliauskas. And it may not be an easy path, there are already signs of overheating in the Lativan market, he thinks. If there is not major global economic crisis, the growth rate can be expected to continue, with HP growing at twice the market rate. Guntis Urtans says: "In comparison with previous years the last year in the local market was rather stable, without any mergers and acquisitions of local IT companies. The market is growing, more rapidly in the industrial/commercial sector where competition is very tight and IT usage is often critical to success (eg ERP systems, Internet solutions). In the last few years growth has not been rapid but stable -10% to 15%. Considering the rapid development in Estonia it might be that this year the market is slowing down. It's very difficult to maintain rapid growth for a long time. Latvia and Lithuania were slower during the last few years, therefore market growth this year and next might be more rapid than in Estonia."

Andres Parts, sales manager at 260-strong MicroLink Eesti, a €18.6m turnover services and solutions specialist in Estonia, also sees growth in 2007 of up to 15% in corporate IT, and around 25% in retail. IT retailing is becoming important in supplying small business in the country, he says. And consumer spending is a driving force expected to rise over 20% this year. Meanwhile government spending is up 10% to 15% year-on-year from 2006/2007.

Rauno Raal, unit manager at Siemens IT Solutions and Services in Estonia says: "The Baltic market is quite active when it comes to IT solutions. We consider ourselves to be innovative, meaning 'ready and eager' to take new systems into use. We have been 'test pilots' for several innovative solutions. For example in Estonia we have a very significant number of internet bank users, we do our tax declarations online, we've been using mobile parking for years, and government cabinet meetings are held via computers." In general all three Baltic countries are growing quickly, he says: "Maybe Lithuania is a bit behind and it still has some problems with corruption, which is under control in Estonia and Latvia."

The public sector is most certainly one of the drivers, especially in the main area of his work, SAP. But looking at general economic growth there are drivers in the private sector in the retail, wood and paper industry, agriculture and healthcare. "The biggest IT players are MicroLink, Webmedia, AlnaGroup, IT Alise, and Regio. I would say that the local Tallinn-based companies are quite dominant. For smaller companies it is a question of finding partners and merging. International companies like Tietoenator and IBM are trying to be more present, but I would not say that they are dominant."

Guntis Urtans comments: "There's not been so much from them as from local companies. Over the last few years we have had a number of mergers and acquisitions of IT/telco companies and now there are strong and serious players in the Baltic market."

Internet connections are widening even further, says Rauno Raal, "especially wireless protocols wi-fi and wi-max; 3G mobile is a very hot topic; SAP and other ERP providers are very busy creating new and efficient solutions." Web-based solutions are being upgraded and widened with portals for citizens, clients and partners. And all the companies are working on their strategies and of course are also looking into opportunities related to EU funding. "We inside Siemens are also keeping an eye on such possible tenders," he concludes.

"The Baltic market is quite active when it comes to IT solutions. We consider ourselves to be innovative, ready and eager to take new systems into use."

Rauno Raal, Siemens IT Solutions and Services

Urtans says: "Working in global markets for more than 15 years, we have accumulated extensive experience in solving complex problems for large customers - both government organizations and private companies." He plans this year to strengthen Exigen Services' market position, bringing together all the acquired companies under one company name and one brand so the market can fully appreciate its size, breadth, skills and capabilities.

"We plan to create packages of services to help our prospective clients understand what solutions they can expect from us. As a large systems integrator we are dealing with most web development technologies which are developing in the market - both MS and Java platforms as well as the majority of RDBMS (with focus on Oracle), Data Warehouse products etc. In addition, due to focus on application outsourcing activities to Western customers, we do have strong mainframe expertise. SOAP and open source solutions is one of essential elements of major part of our project activities."