Our CEO Erki Lipre gave an overview to Indrek Kald at Äripäev about where the IT sector in Estonia is heading and about the challenges many traditional ICT companies in this region are facing.
The original article is available here:https://www.ituudised.ee/uudised/2023/01/12/ridango-juht-odavat-it-teenust-eestist-enam-ei-saa-mis-seab-mitmed-firmad-probleemi-ette
According to Erki Lipre, CEO of the IT company Ridango, wages in the sector have grown so fast that low-cost services and products are no longer available in Estonia.
“This is somewhat good, but it also poses a challenge for many traditional ICT companies,” he explained in an interview.
How optimistic are you about the near future of the ICT sector, which drives Estonian GDP growth? What will have the biggest impact on the market in the next six months?
The growth of the Estonian ICT sector is driven by well-financed new start-ups and several advanced technology companies that are competing on a global market and whose service/product is controlled. In the upcoming period, the performance of local software providers will be affected by the continuation of orders from the state and municipalities, and investments in digitization of large corporations in the local market within the next 6-12 months.
The first layoffs have reached the ICT business both in Estonia and globally. What impact has this had on the sector and also on Ridango employees?
In the sector, fluctuation of the workforce is decreasing because uncertain enivronment makes people more careful about their career changes. As uncertainty increases, so does a person’s satisfaction with their current job.
In the last six months, our global reach has grown In Ridango’s Estonian office, we recruited more people in the second half of last year, because there was workforce fluctuation at the beginning of the year and there were also bigger projects at the end of the year where we needed more resources.
Some believe that the next crisis will come among start-ups. How likely do you think this is and what is most likely about it?
I believe that during the next six months, unfortunately, many smaller startups will have to review or close their business, because they will not be able to raise more capital. Startups, whose track record is not as promised or whose product-market fit was not established, are definitely in a more difficult position. There will be both downrounds and complete closures.
Estonian startup entrepreneurs have proved to be very persistent compared to peers in other countries. Therefore, they could continue operations at their own expense until a market niche is found. We hope that downrounds or closures won’t be massive, but a little cleaning won’t hurt. This is required to create a reality both for the startuppers themselves and for the investors, realizing that every idea “doesn’t fly”.
How competitive are Estonian ICT companies?
In the international arena, Estonia has reached a status where our input price has grown so fast (labour costs) that you can no longer get low-cost services and products from here. This is somewhat good, but also presents a challenge for many traditional ICT companies.
We have to work towards an ongoing increase in added value per employee and turnover per employee. Increasingly, ICT companies have offices in other CEE [Central and Eastern European] countries or further afield in order to maintain their input price and also to recruit talent.
However, I do not believe that we have lost our faith in competitiveness internationally. Rather, more and more international business is done, and this accelerates the export share of the ICT sector every year. Estonian companies are no longer cheap, but rather high-quality.
How could Estonian ICT businesses export more?
Contacts and networks help the export of the ICT sector. I believe that Estonian companies are also reaching or have reached a phase where mergers and acquisitions should be considered more by executive leaders.
In the past an Estonian business was often built with the aim to sell it to a bigger enterprise in the West, today the journey is moving rather in the opposite direction. There are also examples of these in our sector, be it Ridango, NetGroup, Nortal, etc.
At the same time, the country has also invested certain resources to speed up ICT exports, be it a presence in Singapore or some other country, where diplomatic and business development support from the country is very important so that companies can finally open their doors.
To what extent has economic uncertainty changed Ridango’s customers’ behaviour?
Ridango’s customers plan their projects very carefully because those are large technological investments. These are not projects with a view of one, two or six months. Their preparation can be a year or even two.
Since our customer base is today in more than 20 countries and we operate in very different regions, this uncertainty has not started to reflect yet. Rather, the public transport sector, in general, has been in crisis for three years already, since the start of the Covid-19 pandemic.
Initially, it was necessary to reorganize line transports and deal with operational activities to limit the infection, then demand decreased with cash flows, and investments were secondary in this period. Today we see a lot RFIs going on, i.e. information requests for the pre-procurement period, and digitalization is still at full speed.
What change – compared to a year ago – do you foresee in Ridango’s sales revenue and profitability in the next six months?
The year 2022 has been rather modest for us and a year of large investments, including the integration of Estonian and Slovenian businesses. By the end of this year, we will see turnover growth of approx. 15%, and optimistically over 30%.
However, we are carefully monitoring what is happening in the markets and the sector, and whether it could somehow drastically change our forecasts because not all contracts have been signed for the year yet.
What are the 2-3 main concerns in Ridango that you are looking to solve today or in the near future?
We see strong growth in input costs in every area, eg. labour, outsourced services, hardware components, etc. We have long-term contracts where prices are often fixed. This is the case in many sectors, but unfortunately, it also affects us.
We are reviewing how we acquire and manufacture hardware, and whether we can speed up component deliveries, as there is currently a large shortage of electronic components and this is affecting our ability to grow and sign new contracts.
Since we bought a new business in Slovenia last year, today it is also acute to assemble and connect these businesses and win joint projects.