EIF Armenian It Industry Report 2003 ENG

8/3/2019 EIF Armenian It Industry Report 2003 ENG

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EnterpriseIncubatorFoundation ArmenianInformationTechnologySector

1

ARMENIANINFORMATIONTECHNOLOGYSECTORSOFTWAREANDSERVICES

REPORTONTHESTATEOFTHEINDUSTRY

2004EnterpriseIncubatorFoundation

123HovsepEminStreet

Yerevan375051,Armenia

Phone:+37410219797Fax:+37410219777

Email:[email protected]

http://www.eifit.com

Allrightsreserved.

InformationanddatainthisReportareprovidedasitisandwithoutwarrantyofanykind.

Enterprise Incubator Foundation does not guarantee the accuracy of the data and

information included in this Report. Please refer to Appendix 5 for description ofmethodology and assumptions. The Report was developed as of November 2004 and,

unlessotherwisespecified,isbasedoninformationavailableatthattime.

ThematerialinthisReportiscopyrighted.NopartofthisReportmaybereproduced,inany

formorbyanymeans,withoutwrittenpermissionfromEnterprise IncubatorFoundation.

Copies of this Report, however, maybe downloaded from http://research.eifit.com for

personal use. For other uses, please contact Enterprise Incubator Foundation at

[email protected]. All respective trademarks,brands, and names are the property of their

respectiveowners.

DevelopmentoftheReport: NorayrVardanyan,YervandSarkisyan


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ReportontheStateoftheIndustry

2

PREFACE

Enterprise Incubator Foundation is abusiness development and

incubation agency supporting technology companies in Armenia.Our objectives are to improve competitiveness of Armenian IT

companiesintheglobalmarketplace,buildlinkageswithbusiness

communities in key technology markets, improve access of local

companies to knowledge and information onbest practices and

experience, and assist Armenian firms with attracting local and

foreign investors. An important part of our strategy is the

provisionof researchandanalyticalmaterialsaboutArmenian IT

industry. The goal of this Report is to help better understand

ArmenianITsector,recognizeitsmainneeds,aswellasgaininsightsonpossiblesolutions

toitskeyproblems.

ThisReportistheproductofourrecentneedsassessmentsurveyfinishedinthefirsthalfof

2004 and our twoyear experience with the Armenian IT sector. The Report covers key

aspects of the industry including historical developments, revenues, productivity,

workforceandeducationalsector,policydevelopments,andothers.Inaddition,wediscuss

industryoutlookandpresentourrecommendationsonmostimportantareas,whichrequire

reforms in order the industry to continue and expand its growth. Appendices section

contains information about Armenia, its business environment, and development

institutions and NGOs active in the IT sector. Appendix 5 discusses definitions, key

assumptions,estimationmethods,anddetailsoftheindustryresearch.

TheReportisnotintendedtoprovidesignificantinsightstothosealreadyfamiliarwiththeindustry.RathertheobjectiveoftheReportistobringtogetherinformation,opinions,and

views from a variety of sources into one concise and consistent framework that couldbe

used as a definite source of information for those interested in Armenias IT sector. We

believe that this work is a major step towardsbuilding an internationally competitive IT

industry with robust company base, talented workforce, and high quality educational

institutions.

We would like to thank the team of Development Programs Ltd., which conducted the

needsassessmentsurveyonourbehalf.Weappreciatevaluablecommentsandfeedbackby

our colleagues from McKinsey: Avetik Chalabyan andJens Dinkel. The study could not

havebeenundertakenwithoutnumerousinterviewswithmanagerialandprofessionalstaffof IT companies, faculty and students of educational institutions, representatives of

developmentorganizations,NGOs,trainingcenters,andothers.Weareimmenselygrateful

toalltheseindividualsfortheirtimeandhelp.

Sincerely,

BagratYengibaryan

DirectorofEnterpriseIncubatorFoundation


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3

CONTENTS

Summary........................................................................................ 42003MainIndustryIndicators.................................................... 6IndustryOverview ....................................................................... 7

GeneralCharacteristics.................................................................................................... 7HistoricalDevelopments............................................................................................. 7CompanyFoundations................................................................................................ 9CompanyOwnershipGeography.............................................................................. 9Specializations ............................................................................................................ 10Technologies ............................................................................................................... 11

IndustryRevenues ......................................................................................................... 11Productivity .................................................................................................................... 14HumanResources .......................................................................................................... 16

Workforce.................................................................................................................... 16EducationalSector...................................................................................................... 18

OtherAreas ..................................................................................................................... 21ManagementPractices............................................................................................... 21ResearchandDevelopment ...................................................................................... 22TelecommunicationsInfrastructure ........................................................................ 22PolicyDevelopments ................................................................................................. 23

CompetitiveAdvantagesofArmenia ......................................................................... 24Conclusion................................................................................... 25

IndustryDevelopmentProspects................................................................................. 25Recommendations.......................................................................................................... 27

Appendices.................................................................................. 31

Appendix1:AboutEnterpriseIncubatorFoundation.............................................. 31Appendix2:AboutArmenia ........................................................................................ 32Appendix3:BusinessandLegalEnvironment.......................................................... 33Appendix4:DevelopmentInstitutions,Associations,andNGOs.......................... 34Appendix5:Methodology............................................................................................ 35Appendix6:Abbreviations........................................................................................... 38


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4

SUMMARY

Armenian information technology industry with its software and services segment1 has

been one of the most dynamic and promising sectors of the economy in the last decade.

Before the collapse of the Soviet Union, Armenia was considered a leading IT and

electronics center with more than a dozen of large R&D institutes and manufacturing

companies asof1985.After thebreakup of theUSSRby the end of the 1980s, the sector

witnessedsignificantcrisis,which,however,hasbeenovercomeasnewcompaniesevolved

inthemid1990s.

Startingfromaround1997,theindustryreceivedanewimpulseforgrowthwhenanumber

of startups emerged in the local market and several western companies established

development centers in Armenia. By 2003, the number of operating IT companies has

reached around 1102. In 2000, the Government of Armenia declared development of

information and communication technologies as one of the priorities for the Armenian

economy,whichfollowedbythecreationoftheICTMasterStrategyandICTdevelopment

implementationplantoestablishArmeniaasaregionalICThub.

INDUSTRYREVENUES

Industryrevenues for theyears19982003grewat30%3andreached$382million in2003.

Nearly two thirds of the total industry revenues are accounted to some 25 foreign

companiesoperatinginArmenia.MorethanhalfofthemhaveUSownership,whileothers

aremostlyRussianorEuropean.

ITservicesandproductsarebeingexportedtomorethan20countries,whichisoneofthe

signs of maturity reachedby the industry. The largest share of exports, 68%, goes to the

United States and Canada; the second largest market is Russia and CIS with 16%; third

comesEurope with 10%. Domesticmarket constitutes $13.5million andexports are more

than $24million, andboth are dominatedby the servicessegment.Local companies play

majorrole in the localmarket,while foreignbranchesaccount formajorshareofexports.

Thedomesticmarketremainssmall,thoughitshowedpositivegrowthduringthelastfew

years. It is expected to grow even faster whenbusinesses and Government realize the

benefitsthatITcanbringintermsofefficiencyandnewopportunities.

PRODUCTIVITYANALYSIS

Our analysis revealed that Armenian software companies involved in the provision of IT

services have relatively high productivity compared to that of the US software services

companies. Productivities of local and foreign firms in the services segment are 41% and

79% of that of the US services segment. The reason for the differencebetween local and

foreigncompaniesisthatthelocalfirmsperformlowervalueservices,andtheylackbrand

namerecognitionexperiencedbytheforeigncompanies.Contrarytotheservicessegment,

average productivity of packaged software companies is 17% of that of the US packaged

softwarecompanies.

1SoftwareandservicesandITsector/industryareusedinterchangeablyinthisReport.2

SeeAppendix

5for

assumptions

and

estimation

methods.

3Ifnototherwisespecified,allgrowthratesareCAGR(CompoundAnnualGrowthRate).


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5

In 19982003, the industry witnessed an increase in the productivity rates somewhere

around57%,whichwasmostlyattributedtoexportorientedfirms.Companiesactiveinthe

export market generate higher revenues and charge higher rates. In contrast to export

orientedcompanies,firmsfocusedonthedomesticmarketdonotshowsignificantgainsin

productivity.

HUMANRESOURCES

ThetotalworkforceemployedbytheITsectorisaround3,000individuals,whichrepresents

approximately 25% growth during 19982003. The workforce is almost evenly shared

between the local and foreign companies. Around two thirds of the workforce is

concentratedintheservicessegmentoftheindustry.

Annual average salaries of experienced developers range from $3,000 to $7,200, and for

team leadersorprojectmanagers,therange is$6,000$14,000.Salary levelsdependonthe

experience

of

the

employees

and

whether

it

is

a

local

or

foreign

company.

Salaries

are

competitive compared to most of the major IT outsourcing countries like China, India,

Ireland,Israel,andRussia.

ThenumberofstudentsenrolledinvariousITrelatedfieldsat14educationalinstitutionsis

approximately 3,900. This number has grown during last decade because of the

opportunitiesandbenefitsthattheITindustryofferstoyoungprofessionals.However,the

educational sector capacity is going tobe one of the major constraints for the continued

growthoftheindustry.

INDUSTRYOUTLOOKDuringitsmajorexpansionin19982003,theindustryhaswitnessedaround25%increasein

the workforce and around 57% rise in productivity, which resulted in higher than 30%

industrygrowth.IfappropriatereformsarecarriedoutbytheGovernment incooperation

withthedonorsandtheDiaspora,theindustrymaykeepitsgrowthtrendandreach$250

million in revenues and 14,000 in workforceby 2010. At the same time, Armenian IT

industry is capable of reaching revenues in therange of$300400million.However, such

high growth rates of 3540% couldbe achieved only with 2530% annual increase in the

workforce and around 78% rise in productivity. To continue current high growth of the

industry and achieve even higher rates require substantial efforts by the Government,

educationalandprivatesectors,aswellassignificantsupport from thedonorcommunity

andthe

Diaspora.


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2003MAININDUSTRYINDICATORS

General

Characteristics

Numberofoperatingcompanies 110

Numberofforeigncompanies 24

Growthinnumberofcompanies,19982003 24%

IndustryRevenues,million

Totalturnover $37.7

Turnoveroflocalcompanies $15.7

Turnoverofforeignbranches $22.0

Averagerevenue

per

company

$0.34

Averagerevenueperlocalcompany $0.18

Averagerevenueperforeignbranch $0.92

Domesticmarket $13.5

Exports $24.2

Packagedsoftware $11.9

Services $25.8

Revenuegrowth,19982003 30%

Productivity

IndustryaveragecomparedwithUSindustryaverage 28%

LocalcompaniescomparedwithUSindustryaverage 23%

ForeignbranchescomparedwithUSindustryaverage 43%

PackagedsoftwarecomparedwithUSpackagedsoftware 19%

ServicescomparedwithUSservices 54%

HumanResources

Totalworkforce 3,000

Technicalprofessionals 2,100Managementandadministrative 900

Workforcegrowth,19982003 24%

Averagenumberofemployeespercompany 17

Averagenumberofemployeesperlocalcompany 11

Averagenumberofemployeesperforeignbranch 35

Averageannualsalaryrangeforexperienceddevelopers $3,600 $7,200

NumberofstudentsinITrelatedspecialties 3,900


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INDUSTRYOVERVIEW

Armenia isoneofthe leading informationtechnologynationsamongtheneighboringCIS

andMiddleEastcountries.ItsITindustryhasbeenoneofthemostdynamicandpromising

sectors of the economy in the last decade. Past successes, qualified professionals and

Armenianentrepreneurialspiritpositiontheindustrytobesuccessfulintheyearstocome.

GENERALCHARACTERISTICS

HISTORICALDEVELOPMENTS

Armenia was one of the major centers for R&D and production in the areas of computer

scienceandelectronicsintheformerSovietUnion.Thispotentialhasbeencreatedbackin

the 1950s. At that time, several major R&Dand semiconductor manufacturingcompanies

were founded. These institutions operated for the Soviet Government and concentratedprimarilyonindustrialanddefenseapplications.

TheleadingR&DinstituteinArmeniafocusedoncomputerrelatedproblemswasYerevan

ScientificResearchInstituteofMathematicalMachines(YSRIMM).Itwascreatedin1956to

design andbuild computers and related equipment4. By the end of 1960s, YSRIMM was

already designing various computers, mainframes, automated control systems, as well as

operating systems, networking and application software. The institute designed and

producedatitsownproductionplantdozensofcomputers,someofwhichwerecompatible

withPDPofDigitalEquipmentandIBMmainframeseries.Asignificantachievementbythe

institutewasaprojecttodesignatelecommunicationsystemforthemissiontothemoon.In

the1980s,YSRIMMaloneemployedaround10,000people,almostthreetimesthesizeofthewhole IT workforce today. In 1957, another major research institution, Institute for

Informatics and Automation Problems was created as part of the National Academy of

Sciences.Researchwasalsocarriedoutatthemajoruniversitiesandotherinstitutions.

A number of manufacturing companies were established after Armenia developed its

scientific and R&D capacity. One of the largest electronics companies was Posistor, an

R&D and production holding with its parent company Sirius. Posistor was one of the

leadingcompaniesintheelectronicsindustryoftheformerUSSR.Itmanufacturedvarious

electronic components and devices. As of 1985, there were more than a dozen of large

radioelectronicsR&DinstitutesandproductioncompaniesinArmenia.Duringthisperiod,

ArmeniawasconsideredaleadingcenterofelectronicsandinformationtechnologiesoftheSovietUnion.

BreakupoftheUSSRbytheendofthe1980sandstartoftheeraofpersonalcomputersled

to the collapse of the whole Armenian technology sector. Gradually, new companies

evolvedtofillemergingopportunitieslocallyandinforeignmarkets.Thepotentialcreated

duringpreviousyearswas themajor force,whichenabledentrepreneursand investors to

startnewbusinessventuresinthefieldsofhightechandIT.

4In1992,itwassplitintotwoseparateprivatecompanies.


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The first private IT company in Armenia, Armenian Software, www.armsoft.am, was

established in 1987. During this period of economic liberalization, many new firms have

been created to provide system integration and custom software development services.

Thesecompaniesfocusedmostlyonservicestothedomesticmarketwithveryfewofthem

doing

business

with

foreign

clients.

Major

areas

of

specialization

at

that

time

were

accounting and financial applications targeted at the local customers, hardware assembly

andsale,andsomeoutsourcingservices.

Startingfromaround1997,theindustryreceivedanewimpulseforgrowthstemmingfrom

thesuccessesofthepreviouslyestablishedcompanies,overallrecoveryoftheeconomy,and

unprecedented growth of the worldwide IT industry. The potential of IT industry drew

attention of larger number of investors, policy makers, and professionals. The industry

started offering higher payingjobs to the young generation encouraging them to pursue

careersintheITfield. Anumberoflocalcompanieswereestablishedtoofferservicestothe

growinglocalITmarketandtoserveforeignclients.WesterncompaniessuchasCredence

Systems

(www.credence.com),

Epygi

Technologies

(www.epygi.com),

HPL

Technologies

(www.hpl.com), LEDA Design5, Lycos Europe (www.lycoseurope.am), Virage Logic

(www.viragelogic.com), and others established development centers in Armenia. Existing

strongscientificandeducationalbasewasamajor factorbehind thesignificantsuccessof

thechipdesignindustry,whichhasgrownintoalargerevenuegeneratingsegmentwithin

theITindustryandattractedanumberoflargeforeigndirectinvestments.

DEVELOPMENTSTAGESOFARMENIANITINDUSTRY

19561987: Period under the Soviet rule with state institutions working on largescale

projects for the communist government. Many industrial and other organizations had in

house

software

development

departmentsfocusingonautomationof

accounting and other organizational

functions.

19871997: First private packaged

software company (Armenian

Software) was founded in 1987 to

provide solutions to the financial and

banking sectors. First branches of

foreign companies were established,

manyconcentrating

in

chip

design

and

relatedareas.

1997Present: During this period,

potential of IT industry has been

recognized by a larger number of

investors, policy makers, and professionals. Previous success stories encouraged

establishment of new localand foreigncompanies.TheGovernmentofArmeniadeclared

developmentofICTasoneoftheprioritiesfortheArmenianeconomy.

5LEDA

was

acquired

in

October

of

2004

by

Synopsys

Inc.,

www.synopsys.com/news/announce/press2004/snps_acqleda_pr.html

0

20

40

60

80

100

120

1956

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

Number ofcompanies

Armenian IT Industry Evolution(major milestones in industry development)

R&D /production

Foreign

companybranch

Outsourcing

Local softwareservices firm

Foreignbranch in chip

design

Industrialautomation

Localprivate

packagedsoftware

company

Internetapplications

Major USinvestments

(chip design)

European andRussian investments


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COMPANYFOUNDATIONS

Armenian IT industry is quite young

despitetheoldtraditionsandlonghistory

of computer and software design. While

the first state institution specialized in IT

was establishedback in1956, the average

ageofArmenian IT companies is6years.

First local private firms were established

by the end of the 1980s, and by the

mid1990s first foreign companies were

setup. During the 10 yearsbetween 1987

and1997,thesuccessfulfoundationforthe

future growth of the industry has been

laidout.Inthelastfewyears,theindustry

sawasharpincreaseinthenumberofnewcompanies,bothlocalstartupsandbranchesof

foreigncompanies.84%oftheforeigncompanieswereestablishedwithinthelast6years.

The number of operating IT companies in 2003 achieved around 110, which represents

nearly25%growthduring19982003.Thenumberofregisteredcompaniescitedindifferent

sources varies significantly reaching 250 firms. The reason for such high estimates is that

during the recent growth of the IT sector, the industry drew attention of wouldbe

entrepreneurs who established a number of startups, many of which have stopped

operationsshortlyaftertheregistration.Inaddition,manycompaniesthatarespecializedin

a variety of technology related fieldsbut not necessarily software and services, include

softwaredevelopmentinthelistoftheirspeciliazations.

COMPANYOWNERSHIPGEOGRAPHY

ThenumberofforeigncompaniesinArmeniais24.Morethanhalfofthesefirms,suchas

Virage Logic, HPL Technologies, Epygi Technologies, and LEDA Design, have US

ownership. Companies with Russian

ownershiparearecentphenomenon.Inone

of the cases a completely new company

(ABM Soft,www.abmsoft.com) with Russian

capital was established to conduct both

business and technical functions locally. In

another case, a Russian outsourcing

company(VDI,www.vdiweb.com)establishedadevelopmentcenterinArmenia.Thereare

also companies from Germany (Lycos

Europe), Switzerland (Xalt, www.xalt.com),

United Arab Emirates (Systrotech,

www.systrotech.am),andothercountries.

ThereareseveralcasesofacquisitionsoftheexistingArmeniancompanies.Threeofthese

cases include two stateowned Armenian enterprises (YCRDI, www.ycrdi.am, and

Yer.ACSSRI,www.yercsi.am),whichweresoldtoRussianinvestorsbytheGovernment,and

anArmenianbranchoftheUScompany,Brience,whichwassoldtoLycosEurope.

0

2

4

6

8

10

12

14

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

Company Foundations by years

Based on a sample of 93 companies

USA62%

Europe

17%

Other

4%

Russia &

CIS

17%

Company Owner ship by Fore ign Countries


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12/39


11

5%

1%

5%

5%

7%

10%

16%

17%

10%

9%

9%

0% 5% 10% 15% 20% 25%

Other

Industrial Automation

Accounting, Banking and Financial Software

IT Services and Consulting

Management Information Systems

Customized Software Development &

Outsourcing

Database Management Systems

Computer Graphics and Multimedia

Internet Applications & E-c ommerce

Internet Service Provider

Web Design and Development

Distribution of Local Company Specializations

2%

2%

2%

5%

5%

7%

7%

7%

11%

16%

23%

5%

5%

5%

0% 5% 10% 15% 20% 25%






IT Services and Consulting

Programming Languages and Tools

Systems Software



Internet Applications & E-commerce

Networking Syste ms and Communicatio ns

Chip Design / Testing and Related

Customized Software Development &

Outsourcing

Distribution of Foreign Company Specializations

Other sectors, where local companies are active, are mostly related to providing services

and customized development. Generally, local firms tend tobe very diversified, which is

explainedbythesmallsizeofthemajorityoftheindustrysectors.

TECHNOLOGIES

Armeniancompaniesandprofessionalsuseavarietyof technologiesandhaveexperience

withstandalone,aswellasclientserverandnetcentricapplications.Companiesinvolved

in embedded systems design and testing extensively employ C/C++ and assembly

languages.Java and .Net technologies are more popular with companies focused on the

creationofnetcentricsolutions.Internettechnologies,suchasJSP,ASP,PHP,ColdFusion,

HTML, DHTML, XML, and Flash are widely applied. Other languages and technologies

includeVisualBasic,Delphi,Perl,populardatabasesystemssuchasMicrosoftSQLServer,

MySQL,Oracle,andInformix.ApplicationsaredevelopedforWindows,Solaris,Linux,and

recently

for

handheld

platforms.

Open

source

development

is

becoming

increasingly

popularamongyoungprofessionalsandstudents,aswellasITbusinesses.

INDUSTRYREVENUES

In 2003, Armenian IT sector generated

around$38million,whichcorresponds to

nearly 30% growth during 199820036.

Foreign companies accounted for nearly

twothirdsoftheindustryturnoveror$22

million.

Average

revenue

per

company

was$340,000;itwas$920,000and$180,000

perforeignbranchandperlocalcompany

respectively.Tenlargestcompanies,which

constitute only 9% of the total number of

firms,generated48%ofallrevenues;55%

ofcompaniesgenerated89%ofrevenues.

6In

1998,

total

turnover

of

the

software

and

services

segment

of

the

industry

was

around

$10

million.

Source:USAIDICTAssessmentReport,July2000,www.dec.org.

48%

41%

11%

9%

46%

45 %

0%

20%

40%

60%

80%

100%

Companies Revenues

> $1 mln $0.1 - $1 mln < $0.1 mln

Industry Revenue Concentrations


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Although only eight companies are

specialized in chip design, testing and

related areas, the revenue generated by

thissectorisnearlyaquarterofthewhole

industry

turnover.

Other

major

revenue

generating sectors are ISPs, networking

systems and communications, and

customizedsoftwaredevelopment.

In2003,thedomesticmarketconstituted$13.5million,whereasexportswere$24.2million,

or36%and64%fromthetotalindustryrevenuesrespectively.Thereasonforbigdifference

inexportsanddomesticmarketsisthatthelargestcompaniesofthesectorarebranchesof

foreign

firms,

which

almost

completely

export

their

products.

In

addition,

many

locally

owned enterprises also export significant portion of their products and services abroad.

Total market for packaged software amounted to $12 million. Both domestic market and

exports are dominatedby the services segment, which constitutes 82% of the domestic

marketandabout61%oftheexportsrespectively.

Domestic markets and exports are not distributed equally according to the company

ownership geography. Domestic market is almost completely dominatedby the locally

owned companies, 88%, while foreign branches account for nearly 84% of all exports.

Almostallforeignbranchesarecreatedbytheirparentcompaniesmostlyforoutsourcingof

thesoftwaredevelopment.Asaresult,only12%ofthedomesticmarketiscapturedbythecompanieswithforeignownership.

8.3%

3.0%

3.2%

4.0%

4.6%

5.4%

5.6%

6.3%

8.6%

13.8%

14.4%

22.9%

0% 5% 10% 15% 20% 25%

Other







Internet Applications & E-commerce

Customized Software Development & Outsourcing

Networking Systems and Communications


Chip Design / Testing and Related

Revenue Contribution by Sub-sectors

11.9

3.9

20.31.6

0

5

10

15

20

25

Domestic Market Exports

Local Compa nies Foreign Branches

Domestic Market and Exports by Ownershipmln US$

9.5

14.8

2.5

11.0

0

5

10

15

20

25

Domestic Market Exports

Packaged Software Services

Domestic Market and Exports by Segmentsmln US$


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13

DOMESTICMARKET

The localmarket forpackagedsoftware is

quite small, constituting around $2.5

million or 7% of all industry revenues.

Total

sales

of

foreign

branches

in

the

domestic market are $1.6 million and are

generated mostly from services. Services

segment dominates the domestic market:

82% of the revenues of the locally owned

companies from the domestic sales are

generated from IT services; it is 80% for

foreignbranches

The small size of the domestic market is

the result of rather low demand for software and IT services frombusinesses and the

Government.

A

number

of

factors

are

responsible

for

this

low

demand

including

low

employee wages, high software piracy rates, little or no understanding of the need for

productivityenhancementtools,financialconstraints,andotherfactors.Becauseofthelow

domesticdemand,thereisnoinducementforArmenianITcompaniestodeveloppackaged

software or offer new and higher quality services. The majority of the software packages

soldonthedomesticmarketincludeaccountingandfinancialsoftwareforlargeenterprises

and banks. Other products and services with the largest demand include enterprise

resource planning solutions, ecommerce, web development services, tools for healthcare

industry,anddistancelearningprograms.

EXPORTS

Armenian

IT

industry

exports

$24.2

million

of

products

and

services

to

more

than

20

countries. The largest share of exports, 68%, goes to the United States and Canada; the

secondlargestmarketisRussiaandCISwith16%;thirdcomesEuropewith10%.However,

EuropeissecondtoNorthAmericabythenumberofclients.

2.1

0.3

9.7

1.3

0

3

5

8

10

13

15

Loc al Companies Foreign Branc hes


Domestic Market by Segments and Ow nershipmln US$

NorthAmerica,

68%

Europe,10%

Russia &CIS, 16%

Other, 6%

Geographic Distribution of Exports

NorthAmerica,

44%

Russia &CIS, 15%

Asia, 5%

MiddleEast, 5%

Other, 2%

Europe,29%

Geographic Distribution of Clients


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Nearly 65% of IT companies are exporting their products or services. The largest part of

exportsor61%areattributedtoservices,whiletheremainingispackagedsoftware.Foreign

companies export more than 90% of their

sales and account for the largest part of

Armenias

IT

exports.

Local

companies

produce16%oftheexportsor$3.8million,

while foreign branches produce 84% or

$20.3million.

Factors hindering growth of exports

include still insufficient knowledge about

Armenia and its IT industry by the

international business community;

language issues, which are, however, less

importantnowas theyounggeneration is

becomingmore

proficient

in

English

and

other

foreign

languages;

long

distance

from

the

keyITmarkets(atthispoint,only10localcompanieshavesomekindofpresenceabroad).

PRODUCTIVITY

Productivity estimates for the Armenian IT companies were madebased on the annual

revenues generated by the companies per employee. Analysis, which was conducted

separatelyforlocalandforeigncompanies,

shows that PPPadjusted productivity of

local companies stands at 23% of the US

average

levels

and

productivity

of

the

foreign companies is at 43% of US levels.

As the chart shows7, industry average

productivity was at 28% of the US

productivitylevels.Theproductivityofan

averageArmenian ITservicescompany is

at 54% of that of an average US services

company productivity, while packaged

software segment operates at levels of

productivitycloseto20%ofthatoftheUS

softwarepackagedsegment8.

7Sectionsinthechart:industry,packagedsoftware,andservicesshouldnotbecomparedwitheach

other. While, for example, the chart shows that the packaged software productivity for local

companies issignificantly lowerthanthatoftheirservicessegment, inabsolutetermstheseratesdo

notdifferasmuchfromeachother.Comparisons,therefore,shouldbemadewithinthesectionsonly.8Complicationsinestimatingproductivityforforeignbranchesarisebecausewehadtouseturnover

figuresoftheArmenianbranchesinsteadofthoseoftheirparentcompanies.Therefore,productivity

rates for foreignbranches within industry and packaged software segments as it is depicted in the

chartmay

be

underestimated.

We

suggest

that

the

rates

of

the

services

segment

be

used

as

abase

for

productivityofforeignbranches.

8.9

0.53.3

11.4

0

5

10

15

20

25

Loc al Companies Foreign Branc hes


Exports by Segments and Ownership

mln US$

28%

19%

54%

23%

16%

41%

79%

27%

43%

0%

20%

40%

60%

80%

Industry Packaged Software Services

Industry Average Local Compan ies Fore ign Branches

Industry Segments P roductivity: Armenian vs. US(US level = 100% )


16/39


15

HighproductivityoftheservicessectorcomparedtothatoftheUSservicessegmentcanbe

explainedbythefollowingmajorfactors:

lowcapitalrequirementsalloweasyentryandexitbyentrepreneursandforeignfirms, the formercoupled with thenonregulatednatureof the industrycreatescompetitiveenvironmentforcompanies,andfinally servicesarenotsubjecttopiracy,whichseriouslyimpedesgrowthinproductivityrates.Itshouldalsobenotedthattheaverageproductivityintheservicessegmentiselevatedby

thehighproductivityofforeignbranchesconcentratedintheservicesarea.Productivityof

these companies is at 79% of that of the US services segment levels. On the other hand,

productivity of local services firms is at 41% of US service companies productivity. The

reasonfor38%differenceintheratesisthatthelocalcompaniesperformlowervalueadded

services for both local and foreign clients, and they lack the brand name recognition

experiencedbytheforeigncompanies.

In 19982003, the industry witnessed an increase in the productivity rates somewhere

around57%,whichwasmostlyattributedtoexportorientedcompanies9.Itisapparentthat

exportorientedfirmshadproductivitygainshigherthantheindustryaverage.Companies

find ways to the foreignmarkets, thusbecomingable to generate higherrevenuesand to

chargehigherratesas theybuild theirreputationamong theexistingandnewcustomers.

Additionally, software professionals,project managers, and companies in generalbecome

moreexperiencedastheyparticipateinlargerandmoreadvancedprojects.

Incontrasttoexportorientedcompanies,thosethataremainlyfocusedonthelocalmarket

donotshowsignificantgainsinproductivity.Theygrowprimarilythroughtheincreasein

the

number

of

employees.

The

major

problem

for

the

low

productivity

of

Armenian

IT

companies is thatnosignificantvalue iscreatedwithinArmeniabecauseof the following

factors:

Locally owned companies are either focused only on the domestic market, which islimited and does not present highvolume and/or fee opportunities. Or they provide

smallscale customized development and outsourcing to small or medium sized

internationalcompanies,whichdoesnotprovidehighvalueorreturns;

Foreignbranchesactonlyasoutsourcingcentersandarepaidoperatingexpensesplusaninsignificantmarginovercosts.Nosizeablevalue,therefore,isretainedinArmenia.

9Due

to

unreliability

of

historical

data,

as

well

as

significant

changes

in

the

industry

structure,

growth

inproductivityisdifficulttoestimate.Therefore,ratesprovidedhereshouldbeusedwithcaution.


17/39


16

HUMANRESOURCES

WORKFORCE

According

to

our

estimates,

the

total

workforce employed by the IT sector in

2003 was around 3,000 professionals,

which represents nearly 25% growth in

1998200310. More than 70% of the total

workforce is technical specialists such as

software engineers, analysts, developers,

project managers, and others. In addition,

around 1,000 technical professionals are

employedbythelocallyownedcompanies,

while nearly 1,150 specialists work for

foreign

branches.

Management

and

administrative staff constitute less than 30% of the total workforce. In total, about 1,450

individualsor48%oftheworkforceisemployedbythelocallyownedcompaniesand1,550

or52%workforforeignbranches.

On average, an IT company has 17

employees, from which 14 are technical

and 3 are managerial and administrative

specialists11. Local companies have on

average11employeeswith8technicaland

3nontechnicalstaff.Foreignbranches,on

the

other

hand,

employ

on

average

35

people with 31 technical and 6

nontechnicalstaff.Mostoftheworkforce,

around 2,100 individuals or 71%, is

concentrated in the services segment of

the industry. From these, around 330 or

11% of the workforce, work for internet

serviceproviders.

The number of specialists employed by

companies varies significantly within the

industry.About

6%

of

companies

employ

100 and more specialists, while 76% has

less than 25 employees. These 6% or 7

companiesemploy1,250peopleor42%of

theentireworkforce.17%or19companies

employ from 25 to 99 people, which in

totalisaround850individualsor29%oftheworkforce.84firms,or76%,withlessthan25

peopleemployabout880individuals,or30%oftheworkforce.

10Reliableandconsistenthistoricdataonworkforcewerenotavailable.Substantialdifferencesexist

amongvarioussources,whichcitefiguresintherangefrom500to1,500fortheyear1998.Wedecided

touse

1,000,

which

creates

relatively

consistent

picture

of

the

industrys

historical

growth.

11SeeAppendix5onhowtheaveragecompanysizewasestimated

990

450

410

1,130

0

500

1,000

1,500

2,000

2,500

Technical Spec ialists Management and Admin

Local Companies Foreign Branches

Distribution of Employees bySpecialty and Company Ownership

Foreign -Packaged,

20%

Local -Services -

ISPs, 11%

Foreign -Services

(excl ISPs),

31%

Local -Packaged,

9%

Local -Services

(excl ISPs),

29%

Workforce Distribution per Segments and Ownership

>= 100, 6%

50-99, 6%

25-49, 11%

< 25, 76%

Distribution of Companies per Number of Employees


18/39


17

Over75%oftheITworkforcehasover5yearsofexperience.About60%ofemployeeshave

5yearBachelor&MasterofScience (BSMS)degreeswithanother38%havingBachelors,

Masters,orPh.D.degrees.Thesearemostlytechnicalspecialistswithfewhavingmajorsin

economics,finance,andotherareas.About2%oftheworkforceholdsbusinessdegrees.

Armeniahasbeenchosenasanoffshoredevelopmentdestinationbytheforeigncompanies

partlybecause of its inexpensive and highly productive labor. Annual average salary for

experienceddevelopers(morethan twoyearsofexperience) isaround$3,600 in localand

$7,200 in foreign companies; developers

with two years of experience get $3,000

and$5,400respectively.Team leadersand

projectmanagersearnonaverage$6,000in

local and $14,000 in foreign companies.

Some of the exceptionally good technical

managers may earn up to $20,000 yearly.Salaries for entry level positions range

from $1,800 to $2,400 annually. These

salariesarecompetitivecomparedtomost

of the major IT outsourcing countries like

India,Russia,Israel,Ireland,andChina.

Manyofthecompaniespracticenonpaid internshipswhenselectingfreshgraduates.It is

commontohostinternsandtotrainthemanduseforlowvalueaddedjobsandthenselect

thebest for permanent positions. New employees usually do not start working at full

capacityforperiods longerthantwomonths.Formanycompaniesthis isa limitingfactor

hindering growth and making employers complain about the quality of education. ThisissueiscommonalsoforcompaniesinIndiawherefastgrowingcompaniescannotbillfor

newemployeesforthefirst36months12.

EMPLOYEEDEVELOPMENT

Significant differences for employee development exist among locally owned companies

and foreignsubsidiaries.Branches,aspartof theirstrategicmanagement,constantly train

their employeesboth in Armenia and at the head offices. In addition, they havebuilt

resourcecentersandlibrariestoassistemployeesintrainingandknowledgemanagement.

12India:

The

Growth

Imperative,

McKinsey

Global

Institute,

September

2001;

www.mckinsey.com/knowledge/mgi/India

Bachelor's(BS/BE),

15%

Master's(MS/ME),

16%

MBA, 2%

Bachelor &Master

(BSMS), 59%

Ph.D., 7%

Other, 1%

Employee Educational Background


1-2, 2%

3-4, 21%

5-6, 32%

7-10, 27%

>10, 18%

Employee Average Experience


$7,200

$4,800

$14,400

$6,000

$14,400

$2,400

$1,800

$3,600

$3,000

$6,000

$3,000

$6,000

$2,400

$2,400

$5,400$3,000

0 15,000

Entry level developer

Developer (2-year experience)

Developer experienced

Test engineer

PM

Sys Admin

Managerial

Support

Foreign Branches Local Companies

Annual Salary Levels


19/39


18

Employeesofanumberof foreignbranchesareofferedemployeestockoptionsandother

nonsalary incentives. Branches normally enjoy low turnover rates and high employee

commitment.

In

contrast,

although

local

companies

accept

training

as

an

important

part

of

the

development, fewareable toprovide trainingonapermanentbasis.Mostof the training

needs are greatly affectedby the availability of funds and training personnel. One of the

options isfreeor lowcosttrainingsofferedbythedevelopmentorgovernmentprograms,

which, however, are mostly targeted at general industry needs rather than a specific

companys requirements. Salary levels lower than those adopted at the foreignbranches

andlackofproperemployeeincentiveplanswereformanyyearsmajorfactorsbehindthe

high turnover rates at the local firms. Recently, however, various forms of incentives are

becomingmorewidespreadatthelocalcompanies.Duringthelast23yearsturnoverrates

havedecreasedsubstantially,whichwastheresultofhigherjobandsalarystability,better

workingenvironment,emergenceofstrongteamswithinthecompanies,andotherfactors.

EDUCATIONALSECTOR

Armeniahasastrong traditionofhighereducation,whereuniversitiesputgreatstresson

training students in the fundamentals and in educating them to understand the entire

engineering process. Today this tradition is enhanced with new ideas and approaches,

whicharetheresultsofArmeniasadoptionoffreemarketprinciples.

UNIVERSITIES

State Engineering University of Armenia (SEUA), www.seua.am, and Yerevan State

University (YSU), www.ysu.am, are the oldest and largest institutions developing

engineering professionals for the computer industry13. SEUA offers specializations in

computer and hardware design, software design and development, electronics and chip

design;YSUprovidesmajorsinalgorithmiclanguages,discretemath,systemprogramming

andmodeling.

American University of Armenia (AUA), www.aua.am, an affiliate of the University of

California, offers degrees in Master of Business Administration and Master in Computer

andInformationScience. EuropeanRegionalInstituteofInformationandCommunication

Technologies in Armenia (ERIICTA),www.eriicta.am, establishedby the European Union,

offers degrees in Software Engineering and IT Business Management. RussianArmenian

(Slavonic) University,www.rau.am, establishedby the initiative of Armenian and Russian

Governments,providesmajors inmathematicsandmathmodeling,systemprogramming,

electronics and microelectronics. A number of other colleges and universities established

recentlyaredevelopingrapidlytomeetexistingandfuturedemandofITspecialists.

Current educational system, except for a few universities, is inherited from the former

Soviet Union. After the independence, however, demand for professionals has changed

significantly, which resulted in discontinuation of many fields and specializations and

emergence of new ones. While the 5year degree system practicedby Soviet educational

institutionsisstillwidespreadinArmenia,anumberofuniversitiesrecentlyhaveadopted

13SEUA

is

the

successor

of

Yerevan

Polytechnic

Institute,

which

was

established

in

1933;

YSU

was

foundedin1919


20/39


19

thewesternstyletwoleveleducationalsystemwithBachelorsandMastersdegrees.Many

universitiesofferpostgraduateeducationandPhD.

The main issue facedby the educational sector is inadequate funding: tuition fees and

governmentsupport

are

not

sufficient

for

the

majority

of

educational

institutions.

At

the

sametime,manyuniversitieshavenointentiontoraisetuitionfeesbecausetheyarealready

high for an average Armenian student. Other issues facedby many schools are lack of

textbooks and professional literature, outdated library, limited availability of computer

equipmentandInternetconnection.

FACULTYANDTEACHINGMETHODS

14 educational institutions participated in our research employ around 460 faculty

members14. Most of them are concentrated in YSU and SEUA with the remainder spread

throughoutothertwelveuniversities.Themajorityofeducationalinstitutionsconsidertheir

curriculaandteachingmethodsbeinguptodateandmeetingindustryrequirements.Many

professors

develop

their

classes

using

experience

of

leading

European,

Russian,

and

US

universities and with their assistance. In some cases, local IT professionals are invited to

helpfacultyinaligningthecurriculatothelatestindustrytrendsandrequirements.Today,

more and more institutions recognize that besides technical skills students need to be

proficient inbusinessareas aswell.Differentbusinesscoursesareofferedatanumberof

universities including marketing, management,business ethics, law, and other subjects.

Teachingof foreign languagessuchasRussianandEnglisharealsoconsideredextremely

importantfordevelopinghighqualityengineeringandmanagerialcadre.

Despite therecent improvements in theeducationalsystem,current teachingmethodsare

consideredby many as inadequate in the attempt to meet the IT industrys demand for

highquality

human

resources.

In

addition,

two

major

interrelated

issues:

low

wages

and

aging facultyresult in the facultysizebeingconstantordecreasingover timewhile the

studentbodygrowingeachyear.

STUDENTS

Approximately 75,000 individuals, ages

1723, or 2.3% of the total population, are

students of higher educational

institutions15. In2003,approximately3,900

students were enrolled in various IT

relatedfieldsat14educationalinstitutions.

Around70%

of

all

these

students

study

at

SEUA and YSU. 87% attend public

institutions and 13% attend private

universities16. 81% of students are from

Yerevanand19%arefromtheregionsand

abroad. Foreign students from Europe,

Russia & CIS, Middle East, and other countries study in Armenia, and their number is

growing over time. Overall quality of the enrollees hasbeen improving for the last 35

14 Educational Sector section discusses only institutions, their departments, faculty, and students

associatedwithITmajors.Allfiguresanddescriptions,therefore,applytoITspecializationsonly.15

UNESCOInstitute

for

Statistics,

Global

Education

Digest

2004,

www.uis.unesco.org.

16Informationinthissectionisbasedoninterviewswith474studentsfrom11educationalinstitutions.

SEUA, 1,550 ,40%

YSU, 1,190 ,30%

Other, 1,180, 30%

Distribution of Students by Universities

Based on a sample of 14 educational institutions


21/39


20

years.AdmissionstoITdepartmentsareveryrigorous,especiallyincaseofSEUAandYSU.

Programming, information and applied mathematics, automated control systems and

microelectronicsarethemostpopularmajorsforapplicants.

Languageskills

are

deemed

by

students

as

very important for the successful career

and professional development. Around

64% of the students participated in our

research considered their English as

excellent or good, while around 91%

thought that their Russian is excellent or

good.ThesefiguressuggestthatArmenian

universitiesandsecondaryschoolsneedto

providebetterandmorerigorousteaching

ofEnglishasaforeignlanguage.

Overall,around30%ofthestudentsbelievethatthecoursestakenpreparethemwellforthe

IT industry, while over 40% considered courses not meeting the current demands of the

sector.Ingeneral,universitiesensuresatisfactorylevelofprofessionalskills,teachstudents

tothinkanalyticallyandworkindependently.Nevertheless,studentsacquiremajorpartof

necessary knowledge and skills during the employment. Currently, around 55% of the

students are employed; more than 70% of those work for IT companies. As a rule, top

studentsgetjobsduringtheir2ndand3rdyearsofbachelorstudies.

In general, the representatives of IT firms regard the current number of students as

adequate tomeet industrysdemand in technicalspecialists.At thesame time, theypoint

that

the

overall

quality

of

the

graduates

does

not

meet

the

needs

of

the

industry.

Many

graduatesrequireonjobtraininginordertobecomequalifiedforfulltimepositions.

COOPERATIONWITHINDUSTRY

Cooperationbetween the industry and the educational institutionswas rather weak for a

numberofyears.However,thistrendhaschangedrecently.Examplesofsuchcooperation

areLEDADesign,whichfoundedmicroelectronicsdepartmentatSEUAandtogetherwith

CadenceDesignSystemsprovided$25millionworthofsemiconductordesignsoftwareand

servicestothedepartment;LycosArmenia,whichestablishedincooperationwithEIFtwo

centers for internet technologies at SEUA and YSU. Students graduating from these

educationalfacilitiesareacceptedbythecompaniesforemployment.Atthispoint,industry

anduniversity

cooperation

does

not

go

further

than

teaching

and

training,

which

main

goal

istopreparequalityprofessionalsforseveralcompaniesandindustryingeneral.

51%

17%

7%

29%

6%

47%

40%

3%

0%

20%

40%

60%

80%

100%

Russian English

Excellent Good Average Poor

Student Language Skills

Based on a sample of 474 students representing 11 educational institutions


22/39


21

TRAININGCENTERS

Approximately 18 training centers in Armenia provide IT related courses. In 2003, the

numberofindividualstrainedandtrainerswereapproximately4,500and190respectively.

The most popular courses taught at the

centersare

computer

basics,

graphics

and

design, programming languages, software

engineering,andnetworkadministration.

Mosttrainingcenterstrytokeepabreastof

IT industry trends. Some of them

cooperate with various organizations,

universities, local and foreign companies.

The majority of the training centers are

interested in increasing their capacity to

handle more trainees, which, however, is

difficult

to

implement

due

to

the

lack

of

spaceandequipment.Representativesofthetrainingcentersbelievethatloweringtuitions,

increasingmarketingtoandrecruitingfromuniversitiesshouldhaveapositive impacton

theirgrowthperspectives.

OTHERAREAS

MANAGEMENTPRACTICES

Significant difference existsbetween locally owned companies andbranches of foreign

firms on how companies management is carried out. The majority ofbranches do not

engage in common management practices such asbusiness development, marketing, and

strategic management: these activities are accomplishedby the head offices. In addition,

foreigncompanies,whencomparedtolocallyownedfirms,employmoreadvancedproject

managementpracticesandusebetterdocumentedanddesignedmethodologies.Thereason

isthat,inmostcases,processesemployedbytheparentcompaniesaresimplycopiedtothe

Armenianbranches.

After the collapse of the planned Soviet economy, commonly accepted management

practices have only recently entered Armenian business community and IT sector in

particular.Asaresult,manylocalsoftwarecompaniesdonohavesufficientexperienceand

knowledgeofthebestmanagementpracticeswidelyemployedbywesterncompanies.The

major reasons are the lack of highquality managers with appropriate education and

background,newlydevelopingmarketeconomy,insufficientexperiencewithinternational

clients.

However,ascompaniesgrowanddevelop,theirmanagementgrowstobemoreandmore

sophisticated.Westernpracticesarebecomingpartofthedaytodaymanagementof local

software firms. While several years many marketing and project management functions

were conducted by a companys director, now the majority of firms has separate

departments dedicated to marketing, HR, operations, and other areas. Companies accept

largernumberofbusinessgraduatesandpaymoreattention tomanagement trainingand

professionaldevelopment.

ComputerBasics, 44%

Graphics andDesign, 22%

ProgrammingLanguages,

17%

SoftwareEngineering,

11%

NetworkAdmin, 6%

Most Popular Courses


23/39


22

RESEARCHANDDEVELOPMENT

Historicallymajorresearchhasbeencarriedoutinspeciallycreatedinstitutionsmostlyfor

defense and industrial projects financed by the Government. Departments at the

universities focusedonsmallerscaleresearchprograms.Afterdisintegrationof theSoviet

Union,governmentfundinghassharplydecreased,which inturnforcedtheseinstitutions

to look for new sources of funding to finance their research activities. Several private

companies havebeencreatedon thebasisofstateownedresearch institutions to develop

and market commercial products and to perform smallerscale research activities. Now,

aroundone fifthof theprivatecompaniesare involved insomesortofresearchactivities.

Thisresearch,however,ismostlyofappliedengineeringandcompanyspecificnatureand

isdirectedatquickcreationofintellectualproperty.Incaseofforeignbranches,theresults

oftheirresearchare transferred totheparentcompanies in theirrespectivecountriesand,

therefore,donotnormallycreatecompetitiveadvantagesforArmenia.

Public research is conducted mostlyby the major universities (SEUA and YSU) andby

instituteswithintheNationalAcademyofSciences.Researchiscarriedout inthefieldsof

computer aided design, theory of algorithms, discrete mathematics and combinatorics,

cognitive algorithms and expert systems, software engineering, networking, distributed

processing,patternrecognition,math logic,computationalmethodsandsignalprocessing

systems,andothers.Generally,inrecentyearstherewasashifttowardsappliedasopposed

tothefundamentalresearch,whichraisesconcernsoverthelongtermviabilityofresearch

byuniversitiesandresearchinstitutions.

Institutions involved inR&Dactivitiesare facedwithseveral issues.Themajorone is the

level of funding, which although has been growing in recently, nevertheless is still

consideredasinsufficient.GrossdomesticexpenditureonR&D(GERD)wasaround0.32%

of GDP17 in 2002. This negatively compares to R&D expenditures in more advanced

economies that normally have spending levels at 13% of GDP18. Other issues are weak

commercializationmechanismsandmodestcooperationbetweentheindustryandresearch

organizations.

TELECOMMUNICATIONSINFRASTRUCTURE

Theproviderof telecommunicationsservices inArmenia isArmeniaTelephoneCompany

or Armentel, www.armentel.com, which major shareholder is the Greek company OTE.

Armentel has a monopoly on all local and international telecommunications services.

Armentels channels include fixed line communications network, cellular phone network

(GSM900),internationalandsatellitechannels.Currentnetworkallowsphonecallstomorethan 200 countries. Satellite communication is providedby two earth stations via Intelsat

and Express systems. Fiber optic communication to major international networks is

provided throughTransArmeniaOpticalNetwork (TAOS)andotherchannelsviaRussia

andIran.

Internet services market hasbeen growing very rapidly in the recent years. In 2003, the

number of ISPs reached more than 20 firms. The number of internet users has alsobeen

17 We make comparison for the whole economybecause separate data on IT R&D is not available.

R&Dexpenditure

in

2002

was

$7.7

million;

source:

National

Statistical

Service,

www.armstat.am.

18GovernmentrhetoricandtheirR&Dexpenditure,FrankGannon,EMBOreports,VOL4,No2,2003.


24/39


23

consistentlygrowinginthelastfewyearsreachingupto80,000usersin200319.Connection

totheInternetismadethroughvariousmeans:dialup,ISDN,satellite,DSL,orleasedlines.

Currently,thepricesforhighspeedinternetconnectionarehigherinArmeniacomparedto

thoseofotherITexportingcountriessuchasChina,India,andRussia.

POLICYDEVELOPMENTS

In 2000, The Government of Armenia declared development of information and

communication technologies as one of the priorities for the Armenian economy, which

followed by a number of specific actions to bring this decree into effect. In 2001, the

Governmentjointlywith theWorldBank,USAID, foundations,academic institutions,and

private enterprises developed the ICT Master Strategy and ICT development

implementationplan topromote ITandestablishArmeniaasaregional ICThub. InMay

2001, the Government approved the ICT Development Concept Paper and Action Plan

preparedby the Ministry of Trade and Economic Development in accordance with the

recommendationsoutlinedintheICTMasterStrategy.

InJuly2001,InformationTechnologiesDevelopmentSupportCouncilofArmenia(ITDSC),

www.itdsc.am,chairedbythePrimeMinisterwasestablishedbythedecreeofthePresident

ofArmenia.ThemissionoftheCouncil istoactasabridgebetweentheGovernmentand

theprivatesectorandtoserveasaconnectinglinkbetweentheDiasporaandArmenia.The

goalsoftheCouncilaretoassisttheGovernmentandtheprivatesectorinbuildingstrong

andviable IT industry anddevelopingArmenia intoanadvanced informationsociety. In

2002,EnterpriseIncubatorFoundation,www.eifit.com,wasestablishedbytheGovernment

of Armenia and the World Bank to support the development of information technology

industry in Armenia. EIF is the largest development initiative within the IT industry in

Armenia20.Informationtechnology isconsideredbytheGovernmentasan importantarea

forinternationalcooperation.Variousprojectsareinitiatedinthisarea,thelargestbeingthe

EuropeanRegional Instituteof InformationandCommunicationTechnologies inArmenia

(ERIICTA),www.eriicta.am, which was established with the financial assistance from the

EuropeanUnion.

While today theGovernment ismoreactive in the ITsector thanseveralyearsago,many

companies,nevertheless,expectsubstantiallyhigherinvolvementoftheGovernmentinthe

sectordevelopment.Expectationsincludesuchactivitiesasfosteringtheuseoflocallymade

softwarebyothersectorsand,bythat,increasingthedemandfordomesticITproductsand

services, improving the legislative framework including reforms in tax regulation,

providing larger support to universities, eliminating monopoly on telecommunications

services,andsupportingITfirmswithfinancingandinternationalmarketing.

19 Towards a knowledge economy, ereadiness assessment, Armenia, H. Hakobyan, L. Galstyan, S.

Vardanyan,2003,

Yerevan.

20SeeAppendix1:AboutEnterpriseIncubatorFoundationformoreinformationaboutEIF.


25/39


24

COMPETITIVEADVANTAGESOFARMENIA

ThefollowingarethecompetitiveadvantagesthatArmenianITindustryhas

relieduponandshouldexploitheavilyinthefuture:

Worldclass R&D capabilities in computer science, physics, andmathematics

Welleducated and talented workforce with a high degree of technicalskills

Stronguniversityprogramswithspecializationsincomputerandrelatedsciences

Highlycompetitivecostoflabor SolidGovernmentsupportofthesector Continuedrobustgrowthoftheindustry StrongandsuccessfulDiasporainEuropeandNorthAmerica Extensiveexperiencewithlargemultinationalcompanies SoundlawsandregulationsforIPprotection


26/39


25

CONCLUSION

Attheend,wepresentourviewontheITsectorsdevelopmentprospectsforthenext56

years,discussbarrierstothe industryexpansion,aswellasprovideourrecommendations

forsupportingfurthergrowthoftheindustry.

INDUSTRYDEVELOPMENTPROSPECTS

Armenian IT industry iscapableofreachingrevenues in therangeof$300400millionby

2010. Such high growth rates of 3540% per anum couldbe achieved with 2530% yearly

increase in the workforce and around 78% rise in productivity. So far, in 19982003, the

industry has witnessed around 25% increase in the workforce and around 57% rise in

productivity,whichresultedinnearly30%industrygrowth.Theseratesmaybesustained

andraised inthefutureonly ifappropriatereformsare implementedby theGovernment,

educationalandprivatesectors.Wediscussactionsrequiredforensuringthehighgrowth

ratesoftheindustryintheRecommendationssection,whileherewepresenttheoutlookfor

workforce,productivity,andindustrydevelopment.

WORKFORCE

SupplyofITprofessionalshasbeengrowingovertime,whichmaycontinueintothefuture

as the industrysdemand forspecialistsrisesover time. Higher demand forprofessionals

will createsignificant competition among companies, which, in turn, will induce firms to

providebetteremploymentconditions.Already, the ITprofession ishighlyrespectedand

popularamongyoungergeneration.Eachyeara largernumberof individualsapply toIT

relatedspecialties,and,atthesametime,theuniversitiesincreasetheadmissionquotas.In

addition, more educational establishments start offering IT specializations and new

institutionswithsuchspecializationsemerge.Thesetrendswillallowtheworkforcetogrow

somewhereintherangefrom15%to20%.Thesepercentagescorrespondtoaround400600

specialistsin2004,500700in2005,and600800in2006.Accordingtoourestimates,in2003

the educational sector supplied around 700800 graduates in IT related specializations.

Assuming thatpartof thegraduatesgoes towork forothersectorsorswitchprofessions,

educational system will be able to support 1520% workforce growth in 20042006. In

addition,asadmissionquotasare increasedandmore institutionsstartofferingITmajors,

the supply of graduates will increase as well. Therefore, we may expect that 1520%

workforcegrowthmaybesustaineduntil2010.

PRODUCTIVITY

Development of the domestic IT market is a key contributing factor towards the rise in

productivityof the local IT firmsandrapidgrowthof the industry.Sofar, themarket for

local packaged software was primarily in the field of enterprise solutions, and this trend

willcontinueinthenext45years.ThedomesticmarketforITproductsandserviceswillbe

shapedbythewayothersectorsofeconomydevelop.Theexampleofthebankingindustry

showsthatasindustriesexpandtheystartusingmoreproductsandservicesfromthelocal

ITcompanies.Thedevelopmentofthebankingsectorcanbe,tosomedegree,projectedto

that of the other sectors of the economy, which indicates a rise in the demand for local

software products from other sectors of the economy. However, domestic market is not

largeenough to support the highgrowth inproductivity,which requires largerscaleand

complex projects for the companies in the services segment and much higher number of


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26

customers for the firms in the packaged software segment. As a result, exportoriented

companies willbe,as it is now, the major contributors to thegrowth in productivityand

industryrevenues.

Asthe

industry

develops,

the

local

companies

will

seek

more

opportunities

in

the

foreign

markets.Ascompaniesengageinalargernumberofprojectswithforeigncustomers,they

willgainexperienceandbuildreputation.Higherqualityproductsandbetterknownbrand

nameswillallowlocalfirmstosellmoreproductsandservicestoforeignclientsandcharge

higherratesfortheirwork.Hence,theexportorientedlocalcompaniesmaybeabletogain

highproductivitygainsof710%peryear.Thistrendwillslowdown,however,asthelocal

companiesreachoptimallevelsofproductivity,whichweconsidershouldbeclosetothat

oftheforeignbranches.Atthesametime,companiesfocusedonthedomesticmarketand

newfirmsenteringtheindustrywillslowdowntheoverallindustryproductivitygrowth,

whichmaystayintherangeof37%orlower.

INDUSTRYOUTLOOKIn this section, we provide three industry expansion scenarios: slow growth, continued

growth, andbenchmark. They present different growth trendsbased on the level of the

Government, as well as donor community and Diaspora, involvement in the industry

development.

Slowgrowthscenarioassumesnoor insignificantsupportof theGovernment to thesector

development, which results in declining workforce and productivity growth rates. If no

majorreformsarecarriedoutbytheGovernment,weexpectthattheeducationalsectorwill

support on average 15% annual expansion of the IT workforce. At the same time, the

productivitygrowth rate may decline toaround 3% as newcompanies emerge andmore

inexperienced

specialistsenter

the

workforce.

The

industry

would

grow

at

18%

annually

andreach$120millioninrevenueswithtotalworkforceofaround7,900by2010.

Continued growth scenario assumes that the Government, donors and the Diaspora are

actively involved in the sector development. These efforts ensure that the current

highgrowthtrend issustained into the futureaswell.Theseassumptions:workforceand

productivitygrowat25%and5%respectivelysupportindustrygrowthof31%peranum.

For this scenario, the expected size of the industry and the workforce in 2010 are $250

millionand14,000respectively.

Underthebenchmarkscenario,weassumethattheGovernment,donorcommunity,andthe

Diaspora

will

work

in

tandem

with

the

private

and

educational

sectors

to

substantially

increase the quality and supply of the IT professionals, improve Armenias telecom

infrastructure, enhance marketing and investment opportunities, as well as provide

assistance in other important areas. Substantial and effective support to the sector may

result in the workforce and productivity growing at 2530% and 78% respectively. The

industry,inthatcase,wouldgrowataround3540%andreach$300400millioninrevenues

andupto19,000inworkforce.


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RECOMMENDATIONS

Inthissection,werecommendasetofactionsthatshouldbeundertakentoensurefurther

high growth of the Armenian IT industry. Recommendations are arranged into two

sections: workforce and productivity two factors that determine the industry growthtrends. Recommendations are intended for the Government, and representatives of the

educationalandprivatesectors.TheroleoftheGovernment isextremely importantanda

substantialinvolvementfromitspartisassumedandexpected.

WORKFORCE

Supply of qualified workforce is a substantial impediment to the industry growth. The

currentnumberofprofessionalsenteringITworkforcewillnotallowthe industrytokeep

and,moreover,reachhigherthanhistorical30%growthrates.Variousmeasures,therefore,

shouldbeimplementedinordertoincreasethesupplyofITworkforcetonotonlysustain

high rates witnessedby the industry in the recent years,but also support even larger

expansionofthesector.

IncreaseSupplyofITGraduates

Admissionofstudents to ITrelateddepartmentsofexistinguniversitiesshouldberaised.

Infrastructureofexistingeducationalestablishmentshouldbeimprovedinordertoincrease

theircapacityandoverallquality.Atthesametime,existinguniversitiesmaynotbeableto

meet the longterm demand in graduates. Therefore, new educational establishments

specialized in IT related disciplines maybe required to fulfill this demand. In addition,

universityindustryeducationalinitiativessimilartothosestartedbyLEDAandLycos/EIF

couldprovideadditionalinfluxofhighqualitysoftwaretalent.

IncreaseSupply

of

Business

Specialists

Atthesametime,specialattentionshouldbepaidtothesupplyofbusinessprofessionals.

Current educational system does not have the capacity to fulfill the industrys and the

economyslongtermneedsinhighqualitymanagersandbusinessspecialists.Universities

shouldstartofferingBachelorandMasterlevelbusinessmajorssimilartothoseprovidedat

westerneducationalinstitutions.Ideally,businessschoolsprovidingtopundergraduateand

graduateeducationshouldbeestablished.

ImproveFaculty

Highqualitysoftwareprofessionalsshouldbeattractedtoteachatleadinguniversities.This

effort requires that the current compensation level of professorsbe revised. At the same

time, software specialists willing to enter teaching positions must be trained in latestteachingmethodsandtechniques.

ProvideContinuousEducation

Opportunitiesforcontinuouseducationshouldbesignificantlyexpanded.Trainingcenters

are one of the places where IT andbusiness professionals wouldbe able to continuously

update theirknowledgeanddevelop theirskills.Universitiesshouldstartofferingclasses

notonly for fulltimestudents,butalso toall individualswhoare interested inparticular

classesormajors.


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PRODUCTIVITY

Productivity is the second factor, which has tobe improved significantly to enable the

industry development. Emergence of new companies and entrance of a larger number of

inexperienced specialists into the workforce result in declining productivitygrowthrates,

which,in

turn,

makes

itdifficult

to

sustain

historical

industry

growth

of

30%.

A

number

of

actionsfromtheGovernmentandtheprivatesectorarerequiredtoaddressvariousissues

affectingproductivitygrowth.Theseissuesaregroupedintotwomaincategories:external

andinternal.Externalaspectsaremostlyrelatedtotheindustrywideandglobalissuesand

intended primarily for the Government. Internal factors are aimed at companies internal

operationsandintendedfortheprivatesector.

ExternalIssues

ImproveBusinessEnvironmentandInfrastructure

TheGovernmentshouldintroducevariousincentivesforbothforeignandlocalinvestorsin

IT and hightech areas. Such incentives couldbe in the form of reductions in profit and

other

taxes,

tax

incentives

and

matching

grants

to

IT

companies

to

invest

in

employee

development, as well as similar incentives for companies in other sectors of economy to

invest in IT solutions. Such policies wouldbe one of the major drivers for accelerating

industry growth and demonstrate the readiness of the Government to support its

declarationofITasaprioritysectoroftheeconomy.

The Government should also support the creation of excellent highspeed internet and

telecom infrastructure with widely availablebroadband network services. This willboth

attractFDIandenableITfirmstoenterservicessegmentsrequiringhighspeedconnections.

Establishment of software hubs, technoparks, incubators, and VC firms should be

promoted.Viasphere

Technopark,

www.viasphere.com,

SolarEn,

www.solaren.com,

and

EIF

are

the first organizations in the country focused on building infrastructure and

commercializationmechanisms.ThecaseofViasphereTechnopark,thefirsttechnoparkand

hightech VC firm in Armenia, proves that this model could very successfully facilitate

creationofnewbusinesses,particularlyinhighvalueaddedareas.

ShifttoHigherValueaddedProductsandServices

Private companies should shift their focus to packaged software and larger and more

complex projects, which offer higher profit generation opportunities. More importance

shouldbeplacedontheprojectshavingsignificantdesignelementsorinvolvingsolutions

tocomplexproblems,e.g. in theareasofmathandengineering.Sincenosinglecompany

hasacritical

mass

of

programmers

and

managerial

staff

(500+

employees)

to

compete

in

the

middle or highend outsourcing markets, industrywide consolidation efforts maybe a

necessity.Partnershipsandalliancesarealsorequiredtoservetheevergrowingcomplexity

oftheprojects.

ThereisaseriousneedtoincreaseR&Dspendingtoremaincompetitiveandtocreatenew

opportunities.SignificantpartoftheindustrywasbasedontheR&Dpotentialbuiltduring

the Soviet period. Increased R&D spending should partly come from the government

budgetandpartlyfromprivatesources.Publicprivatepartnershipsaretobestrengthened

inorder tocreatemechanismsand incentives for theprivatecompanies to invest into the

R&Dconductedbyuniversitiesandresearchinstitutions.


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IncreaseDomesticMarketSize

A strong and sophisticated domestic market is important forbuilding a competitive and

growing industry and promoting exports. Limited domestic demand for software

applicationswillprevailforthenextseveralyearsifnoradicalpoliciesareimplementedby

theGovernment

to

promote

utilization

of

IT

solutions

by

all

the

sectors

of

the

economy.

The

GovernmentitselfshouldbeoneoftheprimeconsumersofsophisticatedandlargescaleIT

solutions. Local companies should be given priority over temporary project offices of

foreigncompaniesin implementationofgovernmentprojects, including thosefinancedby

USAID, WB,andother donors. The Governmentshouldalsosupport dissemination of IT

for the wider population in Yerevan and regions of Armenia, e.g. through local

egovernance projects, computerization of schools, libraries, and other public

establishments.Andfinally,theGovernmentshouldtaketheleadingroleinsponsoringthe

creationofITinfrastructureswhicharenotcommerciallyprofitableforanysinglecompany

butwhichmayhavesignificantpotentialincreatingcommercialapplications.Examplesof

suchinfrastructureswouldbeinternetpaymentsystems,opensourcemapsofYerevanand

Armenia,and

morphological

dictionary

of

Armenian

language.

ImproveAccesstoForeignMarkets

There is a need to focus on extensive and targeted marketing and country promotion.

Companiesandthepublicinstitutionsneedtoexerciseexcellentmarketingcommunication;

participate in overseas exhibitions and forums; createjoint representations abroad; and

createanArmenianbrandname.Strongcountrybrandnameshouldbecreatedbythejoint

effortsoftheGovernment,industryassociations,publicinstitutions,privatecompanies,and

theDiaspora.

Being one of the strongest competitive advantages of Armenia, the Diaspora was so far

crucialin

the

development

of

the

Armenian

IT

industry.

Diaspora,

particularly

in

Europe,

shouldbebetterutilized tocreatebothnewsales opportunitiesandattractFDI.Diaspora

representatives shouldbe involved in policy and industry development and invited to

conferencesandforumsinArmeniatocreatestronglinkageswithArmeniancompaniesand

publicinstitutions.

Industryassociations,publicorganizations,andprivatecompaniesneedtocollaboratewith

counterparts worldwide. Such collaboration will help establishing international linkages,

buildinganimageofArmeniaintheglobalmarkets,andprovidingaccesstouniqueskills

andhighvalueaddedprojects.CooperationwithotherCIScountries(Belarus,Russia,and

Ukraine)maybeoneofthestrategiestojointlybuildregionalleadership.

InternalIssues

ImproveManagementPractices

Privatefirmsshouldpayspecialattentiontothegeneralcompanymanagement,aswellas

management of the software development projects. Many firms are managedby people

with technical background who do not have sufficient managerial knowledge and

experience.Companiesshouldinvolvemorebusinessgraduatesintheirmanagement.They

should also involve experienced project managers to improve software development

processes.Reverse braindrainthroughattractingArmenianprofessionalsworkingabroad

would be another option to acquire the best world practices. High salaries may be

compensatedby the latest project management, marketing, and technology expertise that

suchprofessionals

can

bring

to

the

companies,

thus

making

them

competitive

in

the

world


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30

markets. Such practice was successfully usedby Ireland, which, similar to Armenia, had

largepoolofprofessionalsworkingabroad.

Companies should focus on the improvement of internal processes, introduction of

documented

practices,

procedures,

and

standards.

They

should

start

acquiring

widely

recognized software process maturity certifications, i.e. CMM/CMMI or ISO. For the

companiesoutsourcingtoforeignmarketsobtainingsuchcertificationswillbeamajorstep

towardsaccesstolargerandmorelucrativeprojects.

EnhanceEmployeeDevelopment

Local companies should concentrate on training and employee development, for which

budgetsandstrategiesshouldbeestablished.Betterutilizationofthepersonnelwillenable

companies to increase output and perform activities with a higher and more consistent

quality. Again, the Government should create tax incentives for the companies to invest

heavilyinemployeedevelopment.


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APPENDICES

APPENDIX1:ABOUTENTERPRISEINCUBATORFOUNDATION

Enterprise IncubatorFoundationorEIF isabusinessdevelopmentand incubationagency

operatinginYerevan,Armenia.EIFwasestablishedbytheGovernmentofArmeniawithin

the framework of the World Banks Enterprise Incubator project to support the

developmentof InformationTechnologysector inArmenia.Ourobjectivesare to improve

competitivenessofArmenian ITcompanies intheglobalmarketplace,build linkageswith

business communities in key technology markets, improve access of local companies to

knowledge and information onbest practices and experience, and assist Armenian firms

withattractinglocalandforeigninvestors.

EIFprovidesacomprehensivepackageofservicesviaitsthreeinterrelatedcomponents:

Business Services unit focuses on assisting local technology firms in a variety of areas

including business development, marketing and promotion, networking, management,

accounting and finance, legal, and other areas vital to the success of a firm. Business

Services unit helps existing companies in growing theirbusinesses within Armenia and

internationally,facilitatesthedevelopmentofITstartups,andassistslocalentrepreneursin

buildingtheirideasintosuccessfulbusinesses.

SkillsDevelopment component promotes the improvement of professional andbusiness

skillsofITsectortodevelopandbuildonlocaltechnicalandmanagerialcapacities.Italso

supports thecreationof learningpartnershipswithin the industryand theuniversitiesby

initiating

specific

projects

to

foster

mutuallybeneficial

relationships

among

technology

private companies and universities to reestablish linksbetween private and educational

sectors,andtomaketheeducationalprocessmoreinlinewiththeITmarketrequirements.

Facility Services component provides highend facilities to existing IT companies and

startups. Options included in thebase package are office space, shared meeting rooms,

sharedresourcecenterwithaccesstoliteratureandotherinformationresources,highspeed

Internetconnection,receptionistandsecurity,24/7accesstothebuilding.

EIFsignifiesthedevelopmentoflongtermrelationshipswithorganizationsandindividuals

worldwide interested inmutuallybeneficialbusinesscollaboration.

Documents

EIF Armenian It Industry Report 2003 ENG