State of Software Development Outsourcing In Romania

Romania — Key Facts

Size: 238,391 sq km, ranked 81st in the world by area (comparable to Oregon)

Population: 21.30 million, ranked 59th in the world by population

Time zone: (GMT+3)

Government: unitary semi-presidential republic

Official languages: Romanian

GDP per capita, PPP: $32,297 (2019 est.) 

Human Development Index: 0.816 (ranked 52nd | very high)

Currency: Romanian leu (RON)

Economy: mixed economy, fast-growing

Main industries: automobile, petrochemicals, cement and construction, aircraft, textiles, food, mining, metallurgy, arms 

Major urban areas (over 500K people): Bucharest

Ease of doing business: ranked 55th, DB score - 73.3

Digital competitiveness index: #46 out of 63 | #34 Knowledge #45 Technology #51 Future readiness

Corruption perception index: 70/198 (-9 places since 2018)

The WE Forum Global Competitiveness Report: #59, with a year to ear improvement in score

A.T. Kearney Global Services Location Index: 28th

Universities: nearly 100 HE institutions (both state-owned and private), with two universities listed on QS World University Rankings® 2020 (>800)    

The largest IT companies: Bitdefender, UiPath, SoftVision    

IT industry market share: 6% of GDP, 1.2% share in employment, 300 IT companies, ca. 100,000 IT specialists

EF English Proficiency Index: 61.36 *(above average)

International Olympiad in Informatics: 115 medals, 31 gold, 52 silver, 32 bronze

IT outsourcing in Romania at a glance

The least familiar of the featured countries, Romania is emerging as a hidden gem for technology outsourcing and offshoring. Several key factors contribute to this: high quality of education, strong communication skills, and blossoming innovation ecosystems.

These aspects stem from a long-term, concerted Romanian authorities' effort to increase the country's competitiveness, improve school instruction quality, and adopt higher study programs that support tech-oriented education.

The Romanian IT industry has flourished over the last 20 years, reaching $7 billion in 2019. Foreign capital is the major contributor to that growth, accounting for 73% of the market revenue. Romanian companies generate the remaining 27%. The expansion of tech companies on the moderately-sized Romanian market creates an urgent demand for IT professionals, which remains largely unmet in a country of 21 million people.

With the current workforce of 100,000-120,000 people, Romania needs at least 180,000 more qualified staff to fill all the open jobs on the ICT market. The skills shortage resulting from mass migrations and the aging society is so significant that it is estimated to generate total losses of over $8.3 billion to the Romanian economy across all sectors.

In the context of outsourcing IT skills, the country bears much resemblance to Poland. Both countries get high scores on the human development index, ease of doing business, and global competitiveness, and rank exceptionally high in the English proficiency index.

How much do Romanian IT specialists make?

When we consider the costs of retaining IT specialists in Romania, they are slightly over the Ukrainian rates and below the Polish average.

Typical hour rates range between $25-49/hours, with premium vendors charging over $50.

Average salaries for software developers, according to IT Outsourcing Review:

• Junior Developer in Romania makes $1045/month,
• Mid-level specialists earn around $1815/month,
• Seniors - $2750/month.

However, extreme pay discrepancies occur between cities and regions, following the IT market's heavy concentration in the country's capital, Bucharest (it brings in 63% of IT market revenues).

As a NATO and EU member (like Poland), the country offers a favorable business environment for its western partners, which encouraged Oracle, Cisco, Huawei, and Ericsson to open their local branches. The outsourcing areas where Romanians excel include IT support, fintech, and web development, explaining why JavaScript, Java, and PHP are the most widespread languages.

While the Romanian IT outsourcing market cannot compete with Ukraine or Poland in size, it stays on a par with the two regional leaders regarding the quality of software skills. The country can also claim a strong advantage in the variety of foreign languages spoken by its citizens. 17% of Romanians speak English, about 10% French or Hungarian, nearly 5% know Italian, and over 3% - German. Romanians' multilingual talents underpin the country's attractiveness, especially in IT support and operations outsourcing. 

Investing in the Romanian IT market

Before the pandemic, Romania experienced steady growth in FDIs, with over half of all investments made in the digital and business services sectors. COVID-19 has hit the country hard, but analysts give Romania high chances of recovery in the post-pandemic world, conditional upon its determination to improve safety and security, accelerate digital transformation, and modernize infrastructure.

Due to its cost-competitiveness combined with relative political stability, Romania emerges as a very attractive place for global IT giants to set up their regional offices. In fact, over the last decade, the volume of foreign investment and team sizes of tech giants in Romania have quadrupled.

Major foreign investors

The technology sector's contribution to the Romanian economy has grown impressively over the last ten years to become an essential pillar of its development. The country readily takes advantage of foreign capital flows. Still, the benefits are mutual: KeysFin's research suggests that the Romanian IT sector is the most profitable investment for US companies such as Amazon, Adobe, or Microsoft.

•  Microsoft is one of the core investors in the Romanian IT market. Examples of its involvement include a 2003 acquisition of a Romania-based antivirus software vendor, the launch and subsequent expansion of a global technical support center in Bucharest, or a recent takeover of a Romanian software engineering services company, Movial. The software maker opened its first office in Romania in 1996, and now it employs ca. 1,700 people based in Bucharest and Timisoara.
•  Similarly, Amazon has been expanding its presence in the country for years, starting from 2005, when the first office opened. Three years ago, the company launched a corporate office and R&D center in the capital.
• Another prominent global investor is Oracle. The software vendor was one of the first to open an office in the country, as early as 1995. Since then, its local branch has grown to over 5,000 people and a turnover of over €200 million. Positive news aside, in 2019, the regional manager of the company's department faced formal charges in a bribery investigation.  
• For a decade, Google has been present in the country, with a first office set up in 2010. In 2019, the company expanded its local presence, opening a research center in Bucharest and taking over the existing R&D office from Fitbit, which Google acquired last year.

Incentives to invest

Entrepreneurship tops the lists of priorities for the Romanian authorities, which shows in various investment incentives available for eligible enterprises.

Nearly 100 industrial parks are spread across the country (about two-thirds of them fully operational), offering local and foreign residents exemptions on land, building, and urban planning tax, as well as an exemption for taxes charged for changing land destination.  

Additionally, the following fiscal incentives are available for investors:

• 0% profit tax for reinvested profit in new technological equipment;
• 0% income tax for employees working as software developers and hired in R&D labs;
• 0% income tax for R&D companies for ten years;
• Additional deductions of R&D eligible expenses;

→ All the above information is based on the data provided on a state-owned website, investromania.gov.ro. Moreover, Deloitte's 2019 report Investing in Romania comprises a detailed analysis of fiscal incentives, corporate and business law, and Romania's labor market.

Higher education in Romania

There are nearly 50 public universities in Romania, with almost the same number of private HE institutions. Currently, more than 500,000 students study there, as compared to over 700,000 a decade earlier. 

This sharp decrease in students' numbers is largely attributed to the population decline resulting from mass migration throughout the last ten years. Transitioning to the Bologna system and restructuring schools and universities has also played its part.

• 98.80% of young Romanians can read and write, which is equivalent to Poland and Belarus, and above Israel's, Greece's, Mexico's, or Colombia's literacy rate.
• Access to public tertiary education is free and egalitarian.
• As mentioned, Romania follows the Bologna scheme. Therefore most of its programs are divided into a three-year Bachelor's degree, a two-year Master's, and a Doctoral degree (postgraduate). 
• About one-fourth of Romanian students are enrolled in business, administration, and law programs, with one in five studying engineering, manufacturing, and construction.
• Surprisingly, only about 7% of students in the country study computer sciences, which exposes the Romanian education system as incapable of meeting the heightened demand for IT&C specialists. This inefficiency may potentially slow down the rollout for large IT outsourcing and offshoring projects, making it difficult for prospective investors or clients to secure an adequate workforce.
• The University of Bucharest, set up in 1864, is the most prestigious and largest in the country. Other prominent state education institutions include the University of Iași (the oldest in Romania) and the West University of Timisoara. All three rank among the world's top 1,000 higher education institutions (places +800).  
• Typical fees for international students range from $4,500-7,500 per year, equivalent to the Polish rates. 

Despite certain inefficiencies of the Romanian tertiary education system, it's crucial to highlight the country authorities' efforts to improve the teaching quality. At present, the Romanian tertiary education system is undergoing a strategic transformation. 

As part of the national reform, the country hopes to increase its competitiveness by ensuring equal access and participation of underrepresented groups and minorities in higher education. Projects are also being implemented to promote student entrepreneurship and furnish young Romanians with skills and knowledge well-aligned with the evolving labor market needs.  

Romania's startup ecosystem

Listed 45^th in the Global Startup Rankings (down by seven spots since 2019), Romania has already managed to build a name for its ecosystem, even though it's the youngest European nation for enterprises. 

Investors flock to the country lured by its vibrant startup scene, a booming economy, decent price-to-quality ratio, and technical diversity. Remarkably, Romania's startups' funding is quite diverse, with a vast local and foreign investment pipeline. 

The Romanian startup scene experienced a landmark moment in 2018 when UiPath became the first local startup to obtain unicorn status. The company's enormous success provided an incentive for many active, young entrepreneurs to seek funding to support their innovation-driven businesses. 

As a result, 2019 brought about a surge in investment rounds, with half of them between $100,000 and $2 million. It's important to note, though, that UiPath accounts for a massive 92.5% of the total funding volume that Romanian startups received that year. Unfortunately, this trend subsided in 2020, which saw a sharp decrease in the financing volume by 60%.

Key startup cities

Bucharest, Cluj-Napoca, Timișoara

The startup ecosystem in numbers

• +1,500 startups, scaleups, business angels, VCs, and PEs
• +100 active investors network
•  +100 incubators and accelerators
• 100,000 IT specialists

Focus industries

HR/recruitment, fintech, marketing and analytics, enterprise software, security

Success stories

•  UiPath – Romania's first unicorn provides cutting-edge robotic process automation technology. Founded in 2005, the startup has amassed a jaw-dropping $1.2 billion in funding from 25 investors. After the last funding round in 2020, the company is worth over $10 billion.
• 123FormBuilder – a SaaS for creating web forms and surveys was set up in 2008 and rapidly evolved into a global product, sustained by $1 million in total investment over three funding rounds. Last year, following a noticeable increase in business during the pandemic, the company announced a stake acquisition by a VC 212.

• FintechOS – this open-source, out-of-the-box intelligent business automation platform is used by some of the top finance, tech, and consulting brands in the world. That’s impressive, considering that the company was founded merely four years ago. Since then, it has accumulated $16 million in three funding rounds to continue expansion in the US, European, and SouthEast Asia markets.

• Elrond – another success story for a Romanian startup comes from a highly scalable blockchain platform for distributed apps, enterprises, and the new internet economy. Like FintechOS, Elrond came up in 2017, but it has already managed to shake up the tech world with its unique technology expected to bring a 1000x improvement in global payments speed. To this day, the startup has obtained $1.9 million in funding.
• TypingDNA – another successful (and relatively young) Romanian startup, TypingDNA has already raised $8.8 million to expand its biometrics authentication services and is now gearing up for a major expansion.

Challenges

• Missing experience in international business, leadership, and financial management
• Shortage of skilled, highly-qualified workforce to grow the startup
• Lack of business transparency and cumbersome bureaucratic procedures

Pros of software development outsourcing in Romania

• Strong aptitude for multilingual skills
• A promising and lively startup scene
• Knowledgeable and versatile workforce
• Attractive price-quality ratio
• Leading network infrastructure
• EU membership eases foreign cooperation 

Cons of software development outsourcing in Romania

• A significant skills shortage in the IT sector
• A heavy concentration of the market in Bucharest
• Bureaucratic bottlenecks and obscure legal framework
• Corruption is still relatively widespread