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De Novo CEO Maxim Ageyev: Ukrainian IT Outsourcing and How to Talk To Adding Machine

Q: Judging by recently published statistical reviews of IT market in 2014, despite overall negative market dynamics, cloud services turned out to be the only segment to show growth. Were you expecting things to turn out this way?

A: Actually, my expectations of cloud market growth proved to be correct. The market grew around 40% despite the hryvnia devaluation. If there was no devaluation, with a stable hryvnia/dollar ratio, it could have been 60-100%. Ironically, the year was devastating for almost all sectors of the economy, but for cloud segment it was successful despite all the negative factors.

Q: What were the main reasons for that?

A: First of all, the country found itself in a state of war with no money to invest, so all the strategies and plans made in 2013 were scrapped. The businesses had to adapt on the fly. I’ll put it this way: when you need a car ASAP, you don’t run to a dealer to buy a car, you call a taxi. That’s how it works in our case: cloud services allow businesses to rent computing power and make decisions faster, while saving money, all without the burden of thinking about 3-5 years perspective.

The second contributing factor is the businesses migration from the east of Ukraine. In a situation at the time there’s simply no alternative to cloud technology. They’re literally moving their stuff from the war zone and they had neither resources nor time to buy new equipment and unfold new IT infrastructures in Kiev.

Q: What was the percentage of the clients from the east of Ukraine vs. all clients acquired in 2014?

A: I think it’s around 10%. It terms of revenue it was 20%. In general, war, crisis and devaluation were all powerful factors that pushed the service businesses growth – not only for De Novo but also for other Ukrainian IT companies.

Q: At the same time, when we look at actual figures, it’s still a small market…

A: Of course it’s small. The Cloud brought roughly 15% share of De Novo revenue last year. We also have other service business – Commercial Data Center services, and these need to be looked upon as one, as a stack of infrastructure outsourcing services. Depending on the task the customer can rent an equipment space in the data center or processing power of the Cloud which is located in the same data center. The Cloud and Data Center services combined get us around 50% of revenue. The remaining 50% – that’s migration projects. In particular, our biggest project last year was the migration of the First Ukrainian International Bank (ПУМБ) from Donetsk. We had to transfer its infrastructure to Kiev with no interruptions in bank’s operations.

Q: Is this project now complete?

A: Yes. I gotta give credit to the bank employees. While we did our part in the comfort of our office, those guys leaving Donetsk were diving headfirst into the unknown. But despite all the difficulties, the equipment was extracted, moved, installed and connected, with the bank remaining operational in the process. The complexity of a project like this can only be realized by an engineer who understands how to make banking systems located in two cities 700 km apart work.

Actually, 2014 is the first year when De Novo Data Center and Cloud services came to be our financial backbone. As far as I know, 2014 was successful for the other service providers too. Now, going back to your question about cloud market volume, I agree with you – the market is just beginning to develop, but it has great future ahead. It is important to evaluate it not only in terms of services sold, but also in terms of the tasks that are implemented and functionality which is realized via these services. For example, the cloud market is $8 million worth of services sold, but at the same time these services provide the platform for other services and tasks worth of hundreds of millions. And if there were no such infrastructure sites like De Novo Cloud and Data Center, there would be no way to provide all these services, and that means businesses would lose all those hundreds of millions of revenue. That is the importance of this emerging outsourcing market.

Q: What’s your share in it?

A: Have to tell you, I love my company too much, so I’m obviously biased. That said, I think we’re way ahead of the competition due to several factors. In 2014, the players clearly have chosen different strategies. Some froze their prices in hryvnia and did not revise the tariffs, some had a little revision, some have gone all the way and raised them a fair bit. So, when we factor in hryvnia/dollar ratio, it is clear some people gained and some lost. Speaking of the Data Center and Cloud services, we’ve grown 35-40% in dollars in the past year. As of now, our share in the Data Center market is in 22-25% region.

Q: Did your company increase prices?
A:
We had a partial revision after some difficult negotiations with customers. We realized that businesses would not go as far as to double their budgets in hryvnia, but we defended our positions pretty well. There were companies that didn’t negotiate with their clients, thus forced to provide the same amount of services while earning less.

TRENDS OF THE OUTSOURCING MARKET IN 2014-2015 AND THE ROLE OF THE BANKING SECTOR

Q: If we look at the data center market as a whole, what trends are influencing its growth?

A: These trends are very similar to the ones of the cloud market. Services are evolving into something more complex. The first step was collocation services, and then came the clouds. What we have now is a transformation of the pattern of IT services consumption. Now when you need a ride you stop buying cars and start to use taxi. Taxi has become so affordable that the profit is obvious.

Q: How big is this trend?
A:
It was detectable back in 2013, now it is gaining momentum. In 2012-2013, businesses that wanted to move forward began the transition to outsourcing that allows them to save money and move forward faster. Data center market is growing dynamically and will continue to grow. Although there’s a thing about this market to be considered – building a data center means huge investments with a pay-off period of 7-10 years or even longer.

Q: You’ve opened the data center a few years ago, has it already paid off?
A:
No. It’s not even close. It is almost always a very long project which is a constraint for many companies and investors. Ukraine is not too attractive to foreign investors. The permanent uncertainty, the notorious levels of corruption, it’s difficult to do business here. At the same time, the investment appeal of the data center market has been and remains quite high. The comparative analytics from neighboring countries suggests that this market in Ukraine is severely underdeveloped. Its capacity is many times higher that the actual data centers have on offer today.
In addition, the data center market is really sensitive to what is happening in other industries. After all, we are the service company, and if something negative happens to our clients’ markets, we get affected. Here’s an example. De Novo is a leading data center services provider in the banking sector. At least 35% of all banking transactions in Ukraine are made here in our Data Center, with the number reaching 50% this year. These days, however, the banking sector is sick. Therefore, at this moment, when we’re helping and supporting a sick patient, it is hard for us to develop dynamically. On the other hand, small data center companies have their own drama going on because small businesses go through tough times too, and it is sure a deterrent. I guess we’ll see a huge leap ahead in two or three years. It is the time the market needs to realize that there is nothing scary or wrong about commercial data centers, while the need for computer-driven transactions and business processes will also grow.

Q: With banks having problems of their own, do you think of alternative sources of income?

A: The banks gave the initial impulse to data center market. First of all, banks are businesses that are very dependent on IT. By and large, there’s nothing more to the bank than its IT. Bank is essentially an array of huge server machines, a large number of software applications that process vast amounts of information in real time. The same applies to retail, logistics and telecom. All of those businesses can not operate without IT. A bank’s server failure, for example, means all ATMs are dead, there are no transactions and so on. The consequences are disastrous, so they need to pay close attention to continuity, processing power reserves, backup capacity.
Second, banks in Ukraine have come to the same conclusion as the European banks – they need to concentrate on what they’re here for – banking, and accept the fact that IT infrastructure challenges are unavoidable evil that they just have to deal with. Therefore, if there is a possibility to rent the IT facilities and let somebody else worry about them, banks are happy to go that route.
Few things are worth mentioning regarding the outsourcing market in Ukraine. Statistics show that in other countries data center services are popular among companies which are not very IT dependant. In our country SMB segment has no significant impact on IT market. In other countries the public sector is the locomotive of IT, but Ukraine as a state is still not a consumer of IT services. In this respect, Ukraine defies the logic of standard development of national economies. At the same time, the small and medium-sized businesses and public sector form a pent-up demand, which can be considered while making forecasts for longer periods of time.

WHY THE STATE DOES NOT NEED A CLOUD, AND HOW TO COMMUNICATE WITH AN ADDING MACHINE

Q: You mentioned the state authorities are someway reluctant to use clouds… Can we talk a bit more about De Novo offer to the authorities? What was the outcome of this initiative?

A: When the revolution happened, the spirit of war was in the air, and at that time, out of plain patriotic reasons we decided to do our part and offered state authorities an 80% discount good for a year of use on cloud services, data center services and, of course, our expertise. The latter is necessary, because the transition to the cloud is rarely a painless process, you need the professionals’ help so you don’t lose one bit of your precious data.
The result? Nothing. In a way, this is a plus – we didn’t have to suffer losses serving a customer below our margins. On the other hand, it became evident that nothing changed in the way the state acts. It was and still is a dull adding machine. How do you talk to adding machine? You are trying to reason the rusty mechanism that spits oil at you, and doesn’t want to save money, and has no motivation whatsoever. It just stands there, panting and dripping oil. I think the adding machine didn’t even notice us trying to help.

Whom were you talking to?
A:
We’ve sent formal requests to all central bodies of executive power and also held a series of meetings.

Q: Were there any replies?
A:
Yes, from one of the offices. They asked if we have a license to handle information that may contain a state secret. In general, this experiment showed that we’re so far away from restructuring our public sector, I’m afraid our children would still have enough work to do in that regard.

Q: Where do you think the problem is?
A:
There is no motivation. People working in the public sector have used to use the budget. Now the budget was taken away, and they feel depressed. They go around and tell stories about equipment getting obsolete and beginning to break down. But when someone offers a concrete solution they start talking about state secrets.

Q: What about Dmitry Shimkiv who went to work in the public sector?..
A:
Has it changed anything? Again, he got into the adding machine, climbed in there and disappeared. The state in its present form is not working, unfortunately. There’s no official you can come to and say “You can not live like this, this and that can be done differently”.
Recently we were participating in a round table organized by National Commission on State Regulation of Communications and Informatization (НКРСИ). There the state’s message for business audience was: if you need something, tell us about it. My response to that was I don’t need anything. We are serving the business users’ needs, not without issues but still we’re doing pretty well. But if you guys, the State, need something, let us know.  But, apparently, the adding machine doesn’t need anything. At the same time officials say that soon server systems will begin to collapse, because no budget was allocated for an update, neither in 2014, nor in 2015. We’re talking state registries, tax, treasury – serious stuff. It is a strange situation, and I was once again convinced – all this has its own reasons. Putin is not to blame here. This was bound to happen, the Russian aggression just added some wild drama to it. The state is dead, and we are standing at the bedside of the deceased. What do they do with the dead body? Bury it, apparently.

Q: What do we do with the country?
A:
At the abovementioned round table someone said: we and the state exist in parallel worlds. We do not interact anywhere, ever… maybe only at the round table. When we talk about the development of our business for the private sector, we understand that the game rules are not that different from the ones in Poland, the US and other countries. To compete, you always need to provide better quality services, and you need to invest. When situations turn tough, in the business world you can always negotiate. For example, in the past year we had a series of negotiations with clients who could not keep up with their contracted payments schedules. In such cases we’ve always reached a compromise because everyone understands they must pay for what they get. At the same time, the State believes that everything can be free, that it’s ok to not pay for two years in a row and then not to appear in the court afterwards.
At the round table we were asked to form a workgroup and “start to write things down”. I was like, wait a minute, we are not lawyers. We do our job, pay taxes, we make sure the transactions are coming through, we create jobs and attract investments. And you have to do yours. As it stands, it doesn’t matter who’s our Prime Minister now, the system itself has not changed, and thus the state will not do its job. We, the citizens, will be confronted with this more and more, until the old steam engine does not break. I honestly do not know how to change it slow and steady. I would just fire them all without giving a damn about Labor Code and courts. Then I’d be building something useful.

UKRAINIAN IT: THE PROSPECTS AND CHALLENGES FOR 2015

Question: I meant to ask you what the state should or should not for the industry, but considering all that’s been said above I don’t think there’s a need… But still, let’s imagine it’s not some kind of old rusty steam, but a normal healthy state mechanism. How could the industry benefit from that? Tax reduction maybe?
A:
I believe that incentives in a form that is on the table now are not needed. First, they’re not meant for the whole IT market, but for offshore software developers only. I never understood why a segment that is growing 30% a year needs incentives. The developers are modern factory workers who send the code somewhere to the States and then it comes back to us as expensive software application.
I think the key thing the government should be doing now is the creation of consumer markets to revive the country. The state itself is potentially a huge consumer of IT. Let’s take e-government project – an interesting initiative to say the least, and once launched it would eat through huge amounts of IT resources. But the state is not in a hurry to do it, because there’s a risk e-government will render lots of bureaucrats in nice suits unemployed.

Another task for the state is to formulate and adhere to the certain rules of conduct between the authorities and the market players. I’m not talking about IT industry as a whole but data center and cloud providers need an answer to a question: who’ll finally stop security and law enforcement agencies attacking the data centers?

Q: Hadn’t they been stopped with the coming of the new government?
A:
No. As a matter of fact, in 2014 as an extra protection we’ve welded huge metal bars that’d take hours to cut through on the entrances to our data center. Although they never visited us. But an attack on any data center stimulates the customers to flow abroad. In 2014, many businesses were searching for a way to move their IT systems somewhere abroad. One of the reasons for that was a pathological fear for their data.
The problem is that the security agencies are not familiar with the concept of cloud. The existing legislative framework describes the concept of physical evidence, which can be extracted physically. Nobody considers the fact that one physical server can be a home to ten virtual servers and twenty companies. They just rip the server out of the rack and no one is responsible. It’s just wrong. They need to resolve this issue. Ukraine has a great potential as a service site, because Ukrainians are always able to do things for less money than others. Our data centers win hands down over, say, Polish ones in terms of price. These days we can offer a price that the competition abroad simply cannot match. But in order for this to work we need predictability and calm landscape.

For the most part, the new government did not change the traditional attitude. And this is what really limits the development of IT. We are very far behind, giving in to even small countries like Bulgaria and Slovakia; the numbers of IT saturation in Ukraine are worse that anywhere in Europe. But I hope we have a brighter future ahead.

Q: One last question regarding the future. I know it is difficult today to predict anything, but maybe there’s something on individual market segments or market trends in general that you feel is probable.
A:
We have entered a very difficult year. In early 2014, we did not know what’s ahead. Now we know the war won’t end this year, things won’t just magically turn good, the state budget is scarce.

With this knowledge we are preparing our plan of action. According to my own estimates, last year took us back to 2004 in terms of the market volume. Will the market regain its growth in 2015? I think not. Some analysts still predict 10% growth, because there is a huge pent-up demand and the chances of a massive infusion of donor funds remain. In any case, this year will be dramatic for IT companies which used to trade for years, but will be really fruitful for service providers. Data centers and clouds are killer products for system integrators. The market will change, outsourcing is gaining momentum. At the end of last year we’ve been green lighted by our shareholders to begin the construction of the second phase of De Novo Data Center, and since the shareholders agree to spend money in such circumstances, then the future of Ukrainian outsourcing is looking rather optimistic.

Q: So there’ll be a new data center facilities, where?
A:
At the same location. We’re going with the second stage to cater to medium-sized companies, hence the service that’ll be simpler, cheaper and easier to adapt to.

Q: When will the construction begin?
A:
We’re already underway with the design and the plan is to launch in December 2015.
To sum up all that’s been said above, we all have to learn to work in an environment where state’s budget can’t just be used, where life changes the traditional ways of doing things in Ukraine. On the one hand, many declare they’re moving their IT abroad, on the other – providers from other countries are declaring their intentions to enter Ukrainian market. In addition, the competition grows between local players like Ukrtelecom and Kyivstar which are planning to provide cloud services. De Novo won’t rest on its laurels. And this is how it has to be. You either die young or you make sure you’re fit and slim and reach old age. This year, the outsourcing market will grow with De Novo actively participating.

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