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07 February 2011

So Krakow, you have world-renowned universities, award winning technology students, rejuvenated infrastructure, a beautiful cultural city where everyone wants to live and you're attracting international technology giants such as Google, IBM, Capgemini, Motorola and ABB.

 

But...do you really want to be Eastern Europe's answer to Silicon Valley as you purport? Or are you instead becoming Europe's Mumbai or Bangalore, an outsourcing centre that instead of encouraging innovation, offers its top graduates the opportunity to be at best, mid-management at European branches of global organisations, rather than founders and CEOs of high-tech home grown start-ups.

In short, are the only elements missing from the above list, self-confidence and ambition and is this stifling the potential for innovation and entrepreneurship?

Krakow (1.0)
There are over 400,000 students within the Krakow and Katowice catchment area. Of these around 8,000 are IT students and 5,000 study mechanical engineering (Source: TESTHR.pl and Capgemini). Institutions include Jagiellonian University, AGH University of Science and Technology, Krakow University of Technology and Silesian University of Technology. Graduates are often multi-lingual and have a strong grounding in fundamentals such as mathematics that makes them attractive on the global stage. In 2007 Polish students won the International Collegiate Programming Contest, the so-called 'Olympics of computer programming'.

'For Big Blue and other IT services companies, Poland's skilled workforce makes up for rising wages with skills that offset Bangalore's low costs.' - Spiegel online - 'As Good as Bangalore. Why Krakow still works for IBM'

The chart below from 2007 shows the numbers of people employed by the various firms within the technology, BPO (Business process outsourcing) and SSC (Shared service centre) sectors within Krakow.


Source: Ramon Tancinco presentation, 'Krakow, Poland A Technology Hub for Central & Eastern Europe' and TESTHR.pl

New office buildings have sprung up to house the legions of workers at these firms. The GTC buildings, 'Galileo', 'Newton' and 'Edison' on Armii Krajowej street and the Lubicz Business Centre are impressive examples. Krakow Business Park (KBP) situated in a tax advantaged 'Special Economic Zone' near Krakow's international airport, will comprise around 120,000m2 of Class A office space. Even then the commercial real estate market is struggling to keep up with the demand for A-class office space that these industries have generated.

With all of this against a background of a stable and growing Polish economy, this has undoubtedly been a success story. Krakow has succeeded in attracting these firms, which in turn have supplied much needed employment opportunities and real world training to graduates, who were previously starved of opportunities within Poland and were often forced to go abroad.

So what's the problem?
The theory goes that once these international firms are established in a city, wealth and knowledge will trickle down and you will see a new generation of home grown start ups that replicate and innovate on the technologies and business models they are being exposed to. 3 problems with that:

  • Outsourcing and even outsourced research and development often involves work that is at the building-out, testing and administrative processing stage of projects. The ideas come from somewhere else and while it depends on the particular industry, I would question whether the processes and techniques of technology innovation coming out of research centres really transfer fully to the outsourcing subsidiaries in other countries.
  • Secondly as most employees of outsourcing firms will tell you, you won't be buying that Porsche any time soon. The outsourcers are here to take advantage of low cost skilled labour, that's the business model and they're not keen to see wages rising or big changes in the labour supply composition. As a result contacts of mine have often commented that opportunities for career advancement are limited and they feel unmotivated and trapped in unchallenging positions for long periods of time. Not really a breeding ground for the entrepreneurs of tomorrow.
  • Lastly the beautiful new office buildings I mentioned earlier only have large spaces available to rent, because they are of course targeting the outsourcing operations and large multinationals. As a result small companies and start-ups are crowded out of the office market and there is a significant shortage of space suitable and available for them.

I discussed the issue with 2 young Krakowian professionals who have witnessed these changes and challenges first hand.

At the age of 25 Marek Godawski is already a serial entrepreneur and was involved in the setup of a Krakow based firm creating iphone applications. Marek points to Krakow's universities as a root cause for the lack of innovation. In Marek's opinion the hierarchical structure of teaching at Krakow's prestigious institutions creates a slow moving and inward looking culture. It takes too long for new courses and teaching talent to find their way into the system.

'People are great at the university, but the institutions are not. The university curriculum while producing well-educated people is not focused on the requirements of the IT market where the graduates are headed. People coming out of the system are experts, but they don't realise their own potential. There is not enough talent search within the system by companies to identify that valuable potential and there is not enough business education to allow students to recognise it themselves.'

'There has to be a focus on innovation and how to implement that through small companies. You won't have a second Silicon Valley here in the short term, not until you get the smart people in the market to stay here and be more involved in the company culture and education system.'

Funding is also a key issue in Marek's opinion.

'Polish investors are tough eggs to crack and angel investing is pretty much dead. A lot of the available investors made their money through old-school industries such as real estate or agriculture, privatisations in the 90's, or speculative stock investments, rather than knowledge based investments that depend on innovation. As a result they are sceptical about start-ups and don't necessarily see the value in people's skills'

Overall Marek doesn't lay much blame at the door of outsourcing institutions, which absorb a lot of talent.

'A lot of human capital is wasted, but you have to understand for a young graduate coming from somewhere like a village near Krakow, announcing to your family you got a job at IBM carries a lot of prestige. Polish people are naturally risk averse and starting your own company is definitely seen as risky.'

Barbara Wozniak (26) is a graduate of the Master of Science in Biotechnology program at Jagiellonian University. She is currently working abroad as a research assistant at the University of Lausanne, Switzerland. Like Marek she highlights the disconnect between universities and industry and the lack of support networks for potential entrepreneurs.

'Biotechnology in Poland is a very specific sector because actually we don't have a biotech industry here. There are only a few pharmaceutical/biotech firms in Poland and each year a minimum of 70 students graduate from Jagiellonian University alone. The problem is the university educates us but doesn't teach us how and where we can use that knowledge. That's why 90% of graduates choose to do a PhD and often go abroad, because they are intelligent and hungry for knowledge but don't know what else to do. Abroad students receive courses in 'Project management for research', 'Careers for biologists' and 'industry days'.'

'People from my industry (within Poland) including myself are afraid to open their own businesses. With a little support from the government in terms of funding and removal of regulatory red tape associated with research projects, the relatively untapped biotech potential in Poland could be developed. University start-ups, which are so common elsewhere in the world, are scarce in Poland. At the very least we could start our own biotech outsourcers and take advantage of our own low cost labour.'

An evolutionary jump
What seems increasingly clear is that there is a tremendous investment opportunity in high-tech start-ups in Krakow and shockingly, it simply involves connecting the existing dots and taking advantage of the talent and infrastructure that the outsourcers are already exploiting. There is also an opportunity for real estate developers to build 'serviced offices' with small flexible spaces, shared conference rooms and secretaries, perfect for start-up businesses.

So Krakow, to really be a Silicon Valley you have to look at all the elements that make up that Mecca of technology. Universities, infrastructure yes, but equally important are the availability of start-up venture capital, the entrepreneurial culture, the encouragement of research for the sake of research and the belief by students that their brilliant ideas in university are only a few steps away from making them the next Mark Zuckerberg. But it will take an evolutionary jump in thinking for those in charge to coordinate that change and continue to attract outsourcers and all the advantages they bring, while simultaneously creating an environment where innovation is encouraged and rewarded.