Destino Insights – Quarterly Newsletter – Q2 2021
This edition of our quarterly ‘Destino Insights’ looks at the, in many ways still nascent, IT Services industry in Cuba. Since 2001, I have personally commissioned and overseen the delivery of over 250,000 hours of IT Services in Cuba. Working closely with technology partners in the US, Canada, France, Spain, the Netherlands, Germany, Sri Lanka and India, our engineers were always exposed to best practices in the wider world. We were one of the first companies in Cuba to apply scrum methodologies and to get our engineers certified as Product Owner or Scrum Master.
When receiving office visits from overseas partners, I would always proudly present our Cuban engineering team, who would respectfully stand up from their chairs to be acknowledged for their talent and their deep commitment. Even today, I admire their ability to transcend the often complex local realities and how they can manifest themselves effectively in a worldwide marketplace.
For this report we have held multiple direct and indirect interviews with people that currently work in Cuba’s IT Services industry. We have spoken with academics, executives from state companies and founders and managers of private sector companies. It also draws from extensive online resources. I would like to thank General Software Inc and Ingenius Software Cuba for their input. And a special thanks to the amazing team at Aleph Engineering, who operate Cuban.engineer, the largest and most qualified pool of Cuban software engineering talent.
Building on past experiences, we explore future opportunities in IT Services exports in Cuba. With every opportunity there come great challenges, and perhaps even more so in Cuba. But overcoming challenges is precisely what Cuban engineers are exceedingly good at. We will eagerly join them in their pursuit to develop an industry that is in many ways still nascent, but which one day may become one of the pillars of the Cuban export economy.
Eddie Lubbers –
Founder & Managing Partner
Destino Equity B.V.
The global ICT-industry
The global ICT-industry comprises the subsectors of Hardware, Software, Services, Telecom and New Technologies. In this summary, our scope will be ‘IT Services’ as the combination of the IT software and Services sectors. IT Services covers application development and – deployment and in general refers to any digital transformation efforts.
Within IT Services, we will focus on ‘cross-border outsourcing,’ meaning the outsourcing of IT Services to nearshore (neighboring) and offshore (faraway) destinations.
Worldwide, the IT Services sector accounts for an estimated 6.5% of the global GDP. Some 100 million people around the world are employed in IT services. The world market for IT Services is estimated at around $450 billion dollars annually, with developed countries spending the most on these services.
IT Services outsourcing by companies to offshore or nearshore countries for decades has steadily become more popular. The key drivers for this are the access to highly skilled global talents unavailable within their company or country, and the lower development cost. On average, cross-border IT Services outsourcing helps companies save an average of 30% of costs.
Top 5 of global IT Services exporter countries
Today, the largest IT Services outsourcing markets are India, China, Vietnam, the Philippines and the Ukraine. These countries thrive by having a large pools of existing and new graduate software engineers. For example: China produces around 600K engineers annually whilst India produces some 350K software engineers per year. Vietnam has been continually investing in technical education, with nearly 25K software engineers graduates every year.
Strong local intellectual property laws and high-quality vs low cost is another competitive edge for Vietnam. The high proportion of English language proficiency is considered a strength for the Philippines and Ukraine. The Philippines has about 210K software engineers and the combined revenues of its software industry are nearly $5B. The Ukrainian IT services industry is growing at the fastest pace ever. Nowadays, there are over 192K IT engineers working in 1,600+ IT outsourcing companies.
IT Services in Latin America & the Caribbean
The Latin American region is emerging as a steady exporter of digitization solutions. The concept of ‘nearshore’ has been widely extended to the United States, since Latin America has a privileged geographic location and time zone to provide these services.
The IT Services industry in Latin America and the Caribbean exports mainly to the United States and Europe, although in recent years it began to diversify towards the various countries of the region.
The development of an IT services industry is becoming a key new economic engine for the countries of Latin America and the Caribbean. It generates employment as a relatively labour intensive industry, requiring personnel in each stage of a service or application lifecycle, from the design, development to maintenance, updating and support phases.
An advantage of the IT industry is that it does not require complex infrastructure or logistics structures for its development, trade, and export, which makes it more attractive to potential investors in Latin America.
Below is an overview of the (most recently available) export value (in $USD) of IT Services by countries in the region:
Chile, Uruguay, and Colombia, despite their industry’s revenues being lower than the first three, have recently strengthened their presence in the international market by implementing policies and laws to protect the intellectual property of software developed in their jurisdictions.
There is an incentive for Latin American and Caribbean countries to focus on exporting IT Services since their local markets are still generally incipient. The sector is mostly organized by associations, generally non-profit, whose objective is to promote policies, improve markets and distribution chains, and help their associates to improve their competitive capacities. They generally establish a corporate body, made up of representatives from the government, the business sector, academic institutions and civil society.
In general, the industry is made up of small and medium-sized companies with few large companies. These companies offer employment to generally highly skilled professionals. Countries where the professionals are proficient in the English language, such as Costa Rica, have a competitive edge over others.
The largest importers of IT Services in the region are generally the same countries that offer exports, with Mexico and Cuba being the exception.
Cuba has been considered a viable destination for the production of software at an international level for quite some time. In the late 1990s, there were projects in the Berroa Free zone near Havana, where Spanish and French corporations outsourced IT development to Cuban state-owned software companies. At the time, through these projects, several hundred engineers were employed. Once the Berroa free zone was closed in the early 2000s, many engineers continued working for state-owned software companies that offer IT development services to the various ministries, such as GET for the Ministry of Tourism and Datys, working for the Ministry of the Interior. Meanwhile, other engineers became freelancers working on ad-hoc projects for international clients, both offshore and onshore.
Today, Cuba’s state sector IT Services companies still generally get their business from other state companies in other industries and ministries. Their exports are tied to Cuba’s geopolitical efforts in Latin America, with Venezuela and Bolivia as key partners and Pharmaceutical and (Cyber)Security as the main industries.
Cuba’s IT Services state sector exports in 2017 amounted to approximately $30 million, according to data from the Ministry of Communications (MINCOM). Whilst official figures are unavailable, we estimate there are some 20,000 software engineers working in Cuba’s state IT Services sector.
The pool of freelance software engineers increased in recent years as the internet has become more widely available in Cuba, at higher speeds and lower prices. Cuba’s government policies (Guidelines in 2015) to increase private sector participation in the economy allowed freelancers to become self-employed workers with licenses specific to software development.
Increased demand from international and domestic (non-state) customers has led some freelancers to create informal groups to handle larger projects. Others have joined groups to have a more stable income, especially since Covid-19 has made demand somewhat more volatile. Some of the groups have created legal entities outside Cuba to offer their international clients more substantial legal protections.
Currently, there are perhaps half a dozen such groups offering software development to an international client base. Many of these began operating from offices in the Bacardi building in Havana, under the watchful but permissive eye of the Cuban government. In March 2021, after a two-year pause, the government is again issuing new licenses for software engineers as part of the reorganization of self-employment on the island and the economy in general.
ETECSA, Cuba’s state monopoly telecoms company, started offering special internet access to persons holding a software engineering license.
The office spaces such as the offices in the Bacardi building are expensive, which is why some teams of programmers have chosen to work from their homes, in rented apartments while many even work from the offices of their state-company jobs, moonlighting from their government employment so they could use their company computers and internet access.
We estimate there to be currently some 10K engineers active in the Cuba private sector IT Services industry. We estimate that some $150 million is generated by the private sector. This would place Cuba within the top 6 countries in the region.
Professionals in Cuba’s private IT services sector generally get their work from software companies in the United States, Europe, or Latin America, who in turn outsource the programming work in Cuba. The large number of Cuban engineers who have emigrated are a particularly relevant source of outsourcing contracts. When Cuban IT Services companies work for end customers these tend to be SME companies.
Some local engineers generate work from platforms such as Total, Stack Overflow, Freelancer, and Cuban.Engineer. However, to be visible on these platforms often requires online credit card payments or bank accounts which are not generally available to Cuban engineers.
The vast majority of IT Services engineers in Cuba are young. Due to social and political factors (mostly related to migration), it is rare to find software developers over 40 years old. Cuba stands out for having a relatively high proportion of female engineers.
Most private-sector companies offer a combination of staff augmentation and bespoke application design and development. Cuba’s IT services labor force is ‘full-stack’, with skills covering all aspects of:
Salaries for Cuban IT Services engineers start around 350 CUC per month for graduate junior developers with little or no experience, willing to work for a low salary. More senior developers, analysts, product owners, scrum masters and project managers would earn between 500-1000 CUC per month. A lead developer with one of the larger private companies would earn more than1000 CUC per month. The average salary in Latin America is around
$1200 per month.
Here is a snapshot of Cuba’s state- and private-sector IT Services companies:
In Cuba there are a number of Technical Sciences studies that feed into the pool of engineers that work in the local IT services industry:
Below is a summary of the new-and active enrolment and graduates over the past 5 years:
Notable universities in Technical Sciences are CUJAE and UCI, both in Havana.
UCI was founded in 2002 and has CMMI Level 2 evaluation of its software development practice. Some 15K engineers have graduated from UCI and there are currently some 3,500 students actively enrolled. The UCI employs some 550 professors and 700 students are actively developing software for both national and international cooperation projects.
Known for its quantitative approach to education, the UCI has been key in achieving the massification of Technical Studies.
CUJAE was founded in 1964 and is considered to offer the highest standard of Technical Sciences studies. It offers a broader range of studies than the UCI, with some 3,500 engineers having graduated from CUJAE in the past 10 years.
New technological paradigm
The speed with which the digital economy is evolving is the result of technologies and innovations that continue to fuel exponential growth: from high-speed internet to increased processing and storage capacity, to a drastic reduction in the costs of IT equipment and data management.
Keystone technologies of the evolving digital economy include: cloud computing, sky computing, industry 4.0, big data, internet of things, robotics, augmented reality and virtual reality, digital manufacturing, artificial intelligence/machine learning and blockchain.
In this new technological paradigm and the resulting digital transformation, the demand for IT services will only increase. This makes it an essential sector for economic development for all countries, including Cuba.
However, there are important barriers that limit the growth of Cuba’s IT Services industry. These are linked to problems of industry organization, product quality, human resources, limited investment in innovation, no financial markets, company certification, and government regulations, among others. Here’s a deeper look into some of the challenges:
The challenges with the greatest negative impact on Cuba’s software development export potential are related to Organizational and Quality. Once these are addressed the challenges around Human Capital and Technologies and Financial are more easily addressed. This would lead to positive change across the entire sector which, in effect, is still at a nascent stage. The potential is there to position Cuba’s IT services sector as one of the pillars of the Cuban export economy, alongside Nickel and Rum. And perhaps, one day, it will reach past the levels of Tourism and Medical Services to be the country’s #1 export.
Key success factors
For Cuba’s government, the IT Services industry is of great strategic importance as it is considered to promote economic growth and competitiveness through increased productivity. A strong IT Services industry will benefit research activity, creativity, innovation, entrepreneurship, employment, health, education, and public services that together contribute to the increased well-being of the Cuban people.
The IT Services industry differs from other industries in terms of its export propensity and the high qualification of its human resources. It stands out for the creation of highly skilled employment and high added value in economic activity; it is considered a knowledge industry.
Key factors for a successful Cuban IT industry are:
What’s next for IT Services in Cuba?
There are important changes taking place in Cuba’s IT Services industry, fueled by two key objectives stated by the Cuban government in Guideline 108 of Economic Policy (2017):
However, there are no examples of a significant increase in state-sector export activities. Most of the recent increase in exports seems to have come from the private sector. This is set to continue as the private sector can now legally export services through state-sector intermediaries under new export regulations from the Ministry of Foreign Trade.
This is considered a welcome development, even though it will increase red tape and costs. It will offer foreign clients better legal guarantees as they are signing contracts with Cuban entities recognized by law.
What follows are areas of opportunity for Cuba’s IT Services industry to strategically expand: