Competitive Armenian Private
Sector Program (CAPS)
Armenia’s Example of Integration in Global Industry
GAREGIN CHUGASZYAN
IT Cluster Coordinator
Nov 2nd, 2006, Bucharest, RCI ANNUAL FORUM
Armenia’s IT Industry Armenia2020_Nikosia_Presentation_040605
Software and IT services sector: GDP share – nominal, percent, 2003
8.62
• More than 100 companies, with approximately
5000 employees…
• Large, multinationals (Synopsis, Alcatel, Sun
3.99
etc)consider this a place they need to be.
• Brainbench – ranked 20th in the world in
2.99 terms of IT certifications (among top ten per
capita)
• World Excellency in R&D and Creativity
(WSA awards)…
1.57
1.42
1.27
0.53
0.35
0.08 0.17
0.01
Turkey*
US Germany Ireland* India Russia Estonia* Armenia Georgia* Iran
Israel *
IT high growth countries CIS Neighbor
Western countries countries
Countries
* 2002 data, Georgia 2001 data
Source: US Census Bureau, RUSSOFT, NASSCOM, Enterprise Ireland, IASH, Bitkom, ANCI, ASIROS, Bilisim, Datamonitor, Sanaray,
Global Insight 1
Armenia2020_Nikosia_Presentation_040605
ARMENIA SHOWS A GOOD PRODUCTIVITY PERFORMANCE GIVEN QUITE
YOUNG AND RATHER FRAGMENTED SECTOR
Software and IT services sector: productivity – PPP, percent of US level, 2003
198
146
100
90
44
38
19
n/a
US Germany* Ireland** Israel** India* Russia* Estonia Armenia**
Western IT high growth CIS
countries countries countries
* MGI values: Germany scaled with GDP PPP = 2.06, India and Russia from in-depth MGI studies
** Ireland scaled with GDP PPP = 1.10; Israel playing equally on global market with US PPP=1,
Armenia: Exports at PPP = 1.5, domestic at PPP = 5.6
Source: US Census Bureau, RUSSOFT, NASSCOM, Enterprise Ireland, IASH, Bitkom, Datamonitor, Global Insight, MGI 2
Armenia2020_Nikosia_Presentation_040605
SECTOR EMPLOYS SIGNIFICANT SHARE OF WORKFORCE
Software and IT services sector: employee share of workforce, percent, 2003
1,75
1,28
0,95
0,59
0,23
0,10 0,09
0,04
US Germany Ireland* Israel* India Russia Estonia* Armenia
Western IT high growth CIS
countries countries countries
* 2002 data
Source: US Census Bureau, RUSSOFT, NASSCOM, Enterprise Ireland, IASH, Bitkom, Datamonitor, Global Insight 3
Armenia2020_Nikosia_Presentation_040605
OFFSHORING FRAMEWORK FOR EASTERN EUROPE Only captive
Captive or
provider
Baltics
• Well established provider landscape (circle size indicates
Political stability (Scandinavia oriented) IT labour pool)
EIU rating • Limited risk
• Limitations in talent pool already
visible
High Czech Republic
9,0
Poland Estonia
8,0
Lithuania Balkan States
Latvia • Established captive
Hungary
Romania Bulgaria communities
7,0 Slovakia • Skilled labour with
experience abroad
Medium Belarus**
6,0
India
Near-shore countries Armenia Former Soviet Union
5,0 • Well established, Ukraine • Mostly oriented
inward oriented Turkey towards US, not
provider landscape Western Europe
Russia
• Sufficient pool and • Developed provider
4,0
experience for landscape and
captive offshoring captive community
Low
3,0
1500 1200 900 600 300 0
Low Medium High
Cost advantage
Monthly wages in EUR for
IT specialists*
* For programmers with up to 2 years experience 2003
** Political stability high, but very low transparency and fairness of legal system
Source: McKinsey 4
Armenia2020_Nikosia_Presentation_040605
ARMENIA’S GLOBAL EXPORT FOCUS SHOULD Suggested first priority areas
Potential second priority areas
BE ON CUSTOMIZED APPLICATION
DEVELOPMENT AND EMBEDDED SOFTWARE IT services
1 IT consulting
2 Systems integration
3 Networking consulting and integration
High
4 Customized applications development
10 12 22 5 IT education and training
18 6 Software support and implementation
8 7 Hardware support and implementation
16 14 6 13 8 IT outsourcing
Attractiveness 9 11
20 5
of industry 9 Network infrastructure management
3 19
segment services
• Global 10 Processing services
market size 15
• Market 1 11 Applications outsourcing
growth rate 2 12 Business Process Outsourcing (BPO)
• Industry 21 7
profitability 4 (Packaged) software
17
13 Vertical business applications
14 Cross industry business applications
15 Consumer applications
16 Information and data management
Low
17 Application design and construction tools
Low High
Armenia's ability to be a significant player 18 Network management and security
(scale indicates "absolute" ability) 19 Systems management
• Technical skills
• Customer relationship/marketing skills 20 Operating systems
• Market concentration (only Packaged Software) 21 Middleware and serverware
• Language skills
22 Embedded software
Note: Size of bubble indicates global market size
Source: McKinsey 5
Armenia2020_Nikosia_Presentation_040605
What we are already doing….examples
IT Policy CAPS In-house Research
Example: Growth Dynamics of the Number of Graduates and Enrolled First Year Students in IT
related Departments during 2000-2006(right axis – number of enrolled, left axis – number of
graduated)
Graduated Enrolled
2000 2000
1908
1777
1800 1801 1800
1677
1600 1600
1400 1394 1400
1200 1200
1000 1000
800 644 800
600 600
400 400 400
200 200
0 0
2000 2001 2002 2003 2004 2005 2006
6
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BOTH FOREIGN SUBSIDIARIES AND DOMESTIC COMPANIES ALREADY
REACH GLOBALLY COMPETITIVE LEVELS OF PRODUCTIVITY
Foreign owned companies
INTERVIEW
• Only comparison of programming productivity possible
(at PPP) (further value creation steps executed abroad) BASED ESTIMATES
40
17 15
8
Productivity split
Armenia Tax, Process US
Programming programming admin manage- programming
productivity productivity and ment productivity
regulatory and staff
issues qualification
40%
60% 50% value
proportional
to salary
difference
Product generation and
marketing/ sales
Domestically owned companies
productivity 100
• Comparison of total productivity (at PPP)
20
20
8
12
16
9 15
Armenia Tax, Process Armenia Product Strategic Branding US total
programming admin manage- product mix (small manage- discount productivity
productivity and ment generation domestic ment
regulatory and staff and market)
issues qualification marketing/
sales
productivity
Source: McKinsey, Company interviews 8
Armenia2020_Nikosia_Presentation_040605
BUSINESS CASE SHOWS EVEN HIGHER SAVINGS ESTIMATES
POTENTIAL THAN OFFSHORING TO INDIA RECURRING COSTS
Percent of total process cost
100
-57%
-76
43 ~ 45
+9
+8 -5 +7
Total Labor Additio- Facility Telecom- Travel Cost level Cost level
costs cost nal costs muni- costs*** after after
Western savings* mgmt. cation offshoring offshoring
Europe/US resour- costs and to to India
(~ USD ces** IT infra- Armenia
5 million/ structure
year)
* Offshore location with 50 developers
** Duplication of project management staff (5 people) at onshore costs
*** For project business requiring significant coordination
Source: McKinsey, interviews 9
Armenia2020_Nikosia_Presentation_040605
BUSINESS CASE* SHOWS PAYBACK AFTER ONE AND A HALF YEARS
USD thousands CONSERVATIVE ESTIMATES
1500
2850
200 600
300
100
3000*** 2850
Duration
for setup
~ 6-9 months 4200
Location Location Equip- Training Severance Total First Second Net
selection** setup** ment costs set-up year year benefits
incl. invest- savings savings after two
recruiting ment (~57% years
of ~USD
Setup investments
5 million)
* For offshoring of 50 developers
** Including travel
*** Severance costs at USD 60,000 per developer at home location
Source: McKinsey 10
Armenia2020_Nikosia_Presentation_040605
Distribution of Workforce in four groups of companies
(groups based on number of employees)
50% of companies have employed
88 w orkers; ~90% of w orkforce
167 w orkers 4% of w orkforce
7% of w orkforce
100-360 workers in 6 companies
1065 w orkers;
48% ofw orkforce
20-82 workers in 25 companies
8-19 workers in 15 companies
1-7 workers in 17 companies
911 w orkers;
41% of w orkforce
11
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For IT to continue to grow, we need:
Still better collaboration among cluster companies, and between public and private players – particularly in
marketing and in forming alliances to bid on large IT projects
Access to a workforce with appropriate skills
Better management of existing workers so that companies can attract and retain the best professionals
Three levels of intervention:
Cluster level, Subcluster level, company level
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ICT Cluster Development: Vision
Our Vision is:
To develop a self-directing and mutually
supporting cluster of businesses and other
partners, which brings measurable
competitive advantage to ICT businesses and
wider economic benefits for Armenia.
• Clustering is a process not a goal
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Stages of Cluster Development
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Developing a Strategy for Cluster Development
15
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What we are already doing…..
Capacity Building
Cluster and working group meetings – revitalizing the ITDSC for better public-
private communication and embedding an IT cluster approach
Business Service Provider training –BSPs trained to improve offerings in IT
marketing, particularly in attracting more outsourcing, and more to be trained.
These BSPs will provide mentored company assistance starting in September
Association strengthening sessions (to expand their membership and provide
new services to small and medium sized IT companies)– services, training,
business plan
Expanding Capable Workforce for IT Growth
Awards and competitions to stimulate creativity in programming,
microelectronics
Assessment of supply of IT workers from Armenian higher education
institutions
Regional IT Camps
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What we are already doing….examples
THE CLUSTER APPROACH IMPLEMENTATION STRUCTURE : WORKING GROUPS AND ADVISORY BOARD
Legitimacy: The wider Partnership and its Working Groups E.g. the sector
Accountability and
involvement
Oversight:
Strategic leadership The Advisory Board
Taskforces
Execution:
Making it happen & core CAPS
delivery
Implementation, Approval & Contracting USAID
Delivery:
Project Delivery Agent Delivery Agent Delivery Agent
management
Linking & Disseminating to wider Partners
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What we are already doing….examples
Marketing & Promotion
1. A pilot training session carried out on May 24-25th for
eight participants
2. CAPS ICT Marketing Website
(www.globaltrade.net/caps)
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What we are already doing….examples
Workforce development
• IT Camps in Six Regions – 67 students in week-long summer
courses in six regions across the country. Achieved goals of
expanding skills in IT, building capacity of local NGOs to
offer training ,and promoting IT as attractive
career.(Charentsavan, Goris, Sisian, Kapan, Berd, Sevan)
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Armenia2020_Nikosia_Presentation_040605
What we are already doing….examples
(see www.itmonth.am) IT Month- The first truly countrywide cluster
activity
IT Month
Active Industry Involvement, Competitions, Involvement at
Conferences, Awards)
• IT Contest and IT school
• “Microelectronics 2006”, the first Armenian Olympiad
• Presidential Award to the best students
• “IT Entrepreneurship in Armenia”,
• international conference within the
• rameworks of Armenia-Diaspora Business Forum
• Open Source Marathon
• All-Armenian E-content Contest
• Global E-content Summit
• DigiTecExpo 2006
• Armenia-Egypt Business Forum
• Internet Quick Search Capabilities Contest
• UN IT Conference
• Interuniversity IT Contest
IT Month PR and Promotion Campaign
Annual RA Presidential Awards in IT Sector
First Armenian Microelectronics Olympiad
Booklet Publication
Global E-content Summit
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What is in the pipeline…..
Create multi-media communications and marketing plan in cooperation with IT associations
Develop strategic investment and supplier relationships
IT Cluster Assessment and analysis of legal and regulatory environment
Market studies and support for new market penetration
Workforce curriculum development
Improve (and institutionalize) data collection
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ICT Cluster Development
Diagnostics:
SWOT, GAP, Workforce, Etc.
Value Chain Analysis
Action Initiatives
Competitive Positioning 1. Action A
2. Action B
3. Action C
Diamond Analysis
4. Etc.
Market and Industry Analysis
Many other tools, as needed
Competitiveness
Objectives and
Strategy
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Proposed Cluster Map Basic Components
CURRENT ACTIONS MARKET
INDUSTRY (GAP) DEMAND
SUPPORT
STRUCTURES
23
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THANK YOU !
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