Despite the worrying global economic situation Pentalog will report an 80 % growth for the fourth quarter. This performance is due to the 2 recently created branches of Pentalog Romania, Iasi and Sibiu, each employing now over 30 people and working at their full capacity. During this quarter Pentalog has reached a level of more than 300 employees. The 9% bench time rate at the beginning of the quarter fell under 6% in November and December.

Business has been going well. A series of new deals have been signed: in Germany with LHS, belonging to the 5 biggest German software editors and number one on the global mobile phone invoicing market, and in France with NG Travel in the tourism industry and finally with Mousset in the logistic sector.

Following these quarterly results, the annual growth will be of about 60% with a sales figure of EUR 8, 5 - 9 M, whereas the annual growth objective was 30%, which means the group achieved twice the expected results.
Pentalog has also been granted a “Deloitte Technology Fast 50″ 2008 prize.

The Vietnamese branch may not have a significant contribution to the turnover until the second quarter of 2009.

Pentalog signs the first big contract with Germany.

This contract doubles the actual operations volume we had with Germany. This contract will bring more than 1M€ per year. For now, I don’t know if I can reveal the name of the client, but let’s say it’s one of the major software editors in Germany. In several months, this contract will gather 20 to 25 persons.

Fred already mentioned on this blog the imminent launch of our new website dedicated to ultra low-cost services (BPO and Testing).
Now, there it is: www.madeinoffshore.com.
Enjoy and feel free to comment on it!

50% output increase for the second quarter

Pentalog will report a 50% production increase for the second quarter 2008 compared to the same period in 2007.This booming activity was mainly drawn by the expansion of Eastern-European business (bank, telecom, industry). On the German side, the Frankfurt subsidiary, focused on java and dotnet development activities achieves 7% of the sales figure and 20% of the group’s total growth. The Ukrainian subsidiary is still at an embryonic stage and thus will probably not contribute significantly to the group’s growth before the 4th quarter. The Kiev team is currently working for a local subsidiary of the European leader in the banking sector.

If we look at the offshore production, a certain number of clients (particularly innovative companies) have clearly increased their development operations. During the second quarter the group experienced its first failure with an offshore client and will make sure that this does not happen again in the future. Regarding engineering activities, the trend is a rising demand in R&D (especially in embedded software) which jumped by 100% in Pentalog’s business. These activities represent 45 employees and several bids are still being analysed.

The BPO contracts have significantly contributed to the company’s growth, with 22 persons involved in the contact centre (call and data management), 10 in finance and accountancy, 5 in DTP and content management. This business does not yet account for a big part of the sales figure since the prices are very low. However the net profit ratio meets our objectives.

By the way the group is searching for a partner to manage and market the “contact centre” offer.

After reassessing the growth rate to 5% for the first quarter, the company should confirm a 50% progression in turnover for the first semester, with 80% of organic growth, far ahead from the usual 6% expected in most of the Western European countries.

Pentalog will have at least 240 employees by the end of June and sales will exceed the 2006 level by the 15th of June. For this year, the sales objective is EUR 7 – 7,5M. The operating margin meets the group’s strategic expectations.

A couple of days ago I wrote about middle management-related overheads. Today, I would like to discuss the issue of general overheads.

In broad lines, the idea that I would now like to stand up for is that overheads are like cholesterol, there exists good-ones and bad-ones.

So as not to get you bored and state the obvious, I am only going to talk about “good cholesterol” and show how certain structures contribute to cost-reduction and strengthen the offer at the same time.

As I was saying two weeks ago, last week-end we held the quarterly managers meeting, governed by the topic of costs and productivity.

In short, operating costs have been cut in our offshore subsidiaries. Let me add that one of them experienced a salary cut while in the other-ones salaries have increased.

So, how can costs be declining?
First, I would say that the training policy of Pentalog seems to bear fruit in several ways:
- integration of better-selected and prepared young people, who quickly become operational on “simple” developments and QA operations. Around 20 people went through our training programme this year and a dozen have become full-time employees
- the training programme also ensures continuing education. Many project managers have been trained during technical training sessions we organized. Thus, the idle time between projects could be reduced, project start-up was made easier and every one was able to improve their reactivity for new businesses.
- Some interesting personalities, even though young, could be trained on high-standard tools, generating high added-value to the company’s offer.
Secondly, I would say (I am currently flying to Kiev from Budapest where I could notice that the same situation applies to everybody) that the resource usage rate in almost all offshore companies that I know is not satisfactory, despite the demand is extremely high. In fact, they employ people who do not have the required skills for new potential business or they do not have business leads to match with their available resources. What if I told you that they all have to deal with a minimum of 25% of collaborators that are not charged to any customer? Well, this applies even to the best of them. As a comparison, this rate is around 7% in our company. Imagine the impact of this gap on the operating costs. This is huge and it is part of their business model.
With us, this problem hardky exists, thanks to the local and international sales structures (e-marketing, multi-lingual web sites, newly created call centre), plus the presence of Pentalog subsidiaries, both in France and Germany. Thus, we benefit from a much closer contact with the market, which allows us to minimize bench time, and to show a high organic growth rate.
I should also mention the technical infrastructure that increases everybody’s productivity (redundant internet access, VOI, …); whatever the reasons, we are happy to notice that our investments (training programme, sales, marketing and recruitment tools) contribute to the reduction of our costs.
In “mature” subsidiaries, we notice that our operating costs are going down while salaries keep going up. Very little companies with a couple of collaborators and without a strucutre confess that their operating costs exceed ours.
I think that wise buyers should care about operating costs and long term cost trends before starting a serious relationship with an outsourcer for several years.

Before starting to discuss this topic, I would like to cheer all our middle managers up… we do love them!
So, after taking these precautions, let us start the difficult part. Middle managers are the gear box of any offshore / nearshore formula 1. It is easy to have a 2000 HP engine, but without any drive train, one would not get much out of it.
The lack of middle management usually is the main problem causing offshore operation failures… in other companies, of course!
And middle managers are rare in offshore countries, and sometimes also undertrained. I will not insist on this topic, but the reasons for this lack are mainly economic and demographic. In fact, many people aged between 30 and 40 fled their countries in the 90’s before digital globalization… and most of them have not (yet?) returned.
As a result, very few are still there and they are expensive in comparison this their level of experience. Since they have little experience, the number of collaborators or type of situation they can manage is limited… which leads to a high level of committed costs per collaborator.
To me, the economic burden of an expat is only acceptable in the case of projects with more than 15 collaborators. Let’s not mince our words, committed costs for a productive offshore collaborator can easily exceed two times his salary costs. This situation is not only due to middle management costs, but also real-estate costs (almost as high as in Western Europe) or technical infrastructure costs (sometimes even higher).
So, it is absolutely crucial to succeed in creating and maintaining an accurate middle management policy: growing managers in-house or drawing them to the company and then keeping them. In any way, this is going to be expensive.
As regards the choice of creating them in-house or drawing them in, Pentalog chose its way: growing. There is nothing more motivating for a manager or future manager than see his/her company create tens of such workplaces every year. Thus, with Pentalog we have probably created about 20 such workplaces during the past twelve months.
As regards finding them, in our turn, we chose promoting the uterus way (internal promotion) to adopting (external recruitment). We ceaselessly identify those that will be the young collaborators capable of imposing themselves as managers in the years to come.
The resulting cost analysis seems extremely positive to me. The recruitment cost is cut to zero, whilst the company overall turnover is reduced under the force of a virtuous circle through which staff becomes committed driven by the involvement of the best ambitions. The necessary ‘weaning’ process of the future project manager or branch manager is achieved in a privileged environment of communication with his/her peers. The result is a manager, who obviously still lacks experience, but is definitely an expert in the company’s strategy and its leverages. Pentalog can boast about having generated an incredible generation of project managers and branch managers who are between 24 and 31 years old. Some are managing project teams of 10, up to 20 people whilst others run branches or subsidiaries of more than 50 collaborators.
In other words, linked to the costs analysis, this young collaborator, absolutely aware of the investment made in him/her is, for a while, able to admit the principle of transition remuneration (on condition he/she does not step aside from training and coaching). Since January 2007, some tens of employee/day units have been dedicated to the training of Pentalog Project Managers and also hundreds of hours to coaching the same people.
When you know that most of European offshore projects involve between 3 and 15 people, why not put aside the smallest projects to the youngest, projects that suit them?
I see several effects that are very positive for the company:
1. at the level of direct costs and the net margin : these young managers are less expensive temporarily
2.paradoxically, they have higher salaries than those of their average age
3. at the level of company growth : they understand very fast that they can move from a first management level to another in which they will be able to progress from the point of view of remuneration and of the attractiveness of the proposed jobs.
4. on reaching the next level, they know the company, its policy, its peculiar culture.
5. preparing future plans is simplified. I find it enough to glance at and challenge them. At any time, there are 8 new potential Project Managers and 2 Branch Managers. Without great efforts, this means a management-ration per year of 50 more people, that is an increase of almost 30% (without any additional budget).
6. this contributes to creating a climate of commitment to the company’s culture
Would results be poorer had we recruited from outside ? You decide, but the 2007 organic increase rate of Pentalog Romania-Moldavia is simply the highest countrywide for companies that have been in these two countries for more than 5 years: we will experience a 100 % internal growth in the Balkans this year. We have not purchased any companies, thus creating a fuss inside our organization. We will generate an extra €2m in East Europe this year for an additional working capital worth €200k … is that not enough?
The weakness of this method? It implies tremendous moral involvement on behalf of our top managers, who, believe me, should surrender to the youth’s demands. Sometimes we may be tempted to think that we could go much faster if we took people from outside just like other companies do … Our results prove that we are right and that, of course, we know to do it whenever necessary.

Article taken from “Loiret Eco” magazine, issue 7, October 2007, from Loiret CCI
Read the article ((pentalog_cci_oct2007.pdf)

THE LOW COST: A PAY OFF STRATEGY FOR PENTALOG
Set-up in Orleans, Pentalog High Tech is the French leader in IT and low cost offshoring. And its GM is a European specialist in this respect. Frédéric Lasnier arranges foreign banknotes into his wallet: in a couple of hours he flies to East Europe, an area where his company develops. Founded in 1993, Pentalog is a SSII (network management, software publishing, business intelligence, Business Process Outsourcing …) whose fame is reaching beyond the original Orleans site: Germany, Belgium, Bulgaria, the USA, Kenya, Holland, Luxemburg and Switzerland … However, at the beginning, nothing anticipated the small communication company with an international future. ‘Until 2002 we subsisted’, confesses Frédéric Lasnier. In 2000, Pentalog was set up in Romania without any direct results. 2002 marked a change of strategy. We became aware that all jobs evolve under the influence of two joint actions, the importance that the web and globalization would have. We are starting to explain our customers that we can be partners in R&D and in software maintenance with lower costs than they are used to. This has transformed us progressively.’ As a proof: 5 set-up sites outside the head office (Bordeaux in France, Bucuresti, Brasov and Iasi in Romania and Chisinau in Moldavia), a turnover of €5m in 2007 (+60% in one year!), 160 collaborators and 150 customers. ‘With our customers we accomplish a business model that, due to costs that are two times lower than market’s standards, maximizes the leverage effect of their investment and provides us with a base for sustainable growth. Furthermore, we are the only ones in France and Europe to sell the competence of our collaborators in a transparent manner: Pentalog displays its strategy on-line.’

ONE OF THE 10 CONSULTANCY COMPANIES IN ROMANIA
The risks to be copied? Frédéric Lasnier does not even conceive it: ‘Pentalog is always two or three steps ahead’. And that brings results! ‘In addition to a low-cost capacity that everybody will request from now on and commercial aggression, customers want innovating companies. Pentalog is one of those, it is a complete actor.’ This is why many numerous accounts and emerging companies bet on Pentalog: Lexmark, Loxam, France Télécom, Valéo … but also DMailer, world leader in USB flash memories that outsources 50% of its R&D operations to Pentalog, Coronis Systems, world leader in wireless OEM solution (15 trial-engineers are working for them in R&D), Parrot, leader in automotive equipment (Pentalog provides functional tests for equipment). ‘We are one of the ten consultancy companies in Romania, we lured BRD (Group Societé Générale) here, Orange Romania and Elite (coffee leader in the Balkans). Finally, we are about to sign up our first Moldavian customer.’ It is no wonder that Pentalog makes people turn green with envy: ‘We are receiving many buy-out offers, but we are not willing to sell’ concludes Frédéric Lasnier.

This is not the least of the news for European offshorers. The competition with India for all companies located in the euro area will become more and more sensitive.
In exchange, the attraction force of salaries on engineers from those companies that sell in euro will become stronger in the months to come. I don’t know anymore how it’s been since I last heard in Romania and Moldavia the cliché according to which Americans would pay better than Europeans.
The reality is rather the opposite, the loss of attraction of $ companies does nothing but increase the profit of French, German, Austrian and other entrepreneurs
The most uncomfortable situation (perhaps unbearable in the area with high salary companies that mainly sell to the USA).
The ‘Palme d’or’ goes to the company located in the $ area that sells in the euro area – that is our case in Moldavia (joint area euro/dollar). But I’ve already said that and don’t want to repeat myself.
Wherever things get complicated, it is because of the fact that nobody knows what will happen in the next months. The Fed has just seriously decreased its base rates, and this will only feed this movement.
On the other hand, Alan Greenspan, the former Fed governor repeats to those that are willing to listen to him, that the inflation is about to take off and that the great treasurers (both American and European) will be forced to increase their rates a lot in the next months.
So, must Pentalog change the pattern of its set-up policy?
No, we will reinforce it. Our Moldavian choice is performing better and better, but at the same time it could not meet our needs. We have recently adapted it, deciding to protect our employees from the salary fluctuation that is caused by the yo-yo like Moldavian leu/dollar exchange rate (our former salary currency in Moldavia). Just like Romanian salaries have been expressed in euro since August. Thus, our employees avoid the currency erosion related to the depreciating exchange rate between the dollar and the national currency … which does not impede us from remaining in the dollar area.
Concretely, I can see a series of effects that are both positive and harmful to what is happening on the trade market.
1. The competitive character of the European offer (already explained here and there) : the depreciation of the Romanian leu during the last two months is definitely good news for us. Euro companies have little to suffer from the demands to increase salaries than dollar companies. Since the beginning of summer, the Leu has lost 9% (representing a salary increase equivalent of one time the salary converted into local currency – without increasing production costs. Life is beautiful for everybody. However, pay attention to the competition with the Far East whose competitiveness has automatically increased.
2. Impact on the human resources: the engineers, developers and consultants that represent the backbone of our staff have an income that is much higher than the average salary in the countries where we operate. I think 3 up to 7 times higher. That means that their wish for imported goods consumption is greater than the average. From this point of view, it is plausible that the euro/leu competition is degrading against the former. Imports cost more … the euro salary remains an advantage here as well.
We must pay close attention to the currency distribution of our offer in the years to come. Ideally, we would benefit from a currency risk portfolio and take advantage of local and international circumstances. Nobody is able to state that the production currency can be changed overnight. On the contrary, having several production facilities whose continuous development will be kept at bay by the great tendencies of currency markets, undoubtedly constitutes the best strategy. Thus, if American medium-term interests decrease, I will direct myself to the dollar area.
To further complete this strategy, we continuously benefit from a benchmark country that allows us to be successful very quickly.

ZF (Ziarul Financiar), the Romanian peer of Financial Times or les Echos, asked me a couple of days ago about the strategy of the Pentalog branches in Romania and Moldavia See the article (in Romanian): http://www.zf.ro/articol_137705/in_outsourcing_e_riscant_sa_pariezi_100__pe_bucuresti.html
I had already tackled this topic in a previous article, explaining why our strategy for Bucharest has such a powerful local approach. Bucharest cannot be an offshore development centre anymore. That is understood if my peers started two years ago to shift to the province, in order to preserve their competitiveness.
It is true that nowadays the two main activities for Bucharest are:

• local market services that are provided in a traditional manner, of technical assistance, just like in Paris, London or other European capital,
• international consultancy activities.

One must not overlook the fact that the Romanian province does not have enough local companies, able to generate an enough IT services demand and that they must fully take advantage of offshore/nearshore IT. And that Bucharest, because of the way too high costs, still is of interest for the local needs.