Pros and Cons of Outsourcing to Ukraine

Ukraine: Top Outsourcing Destinations

by Dmytro Ternovyi

Ukraine is hard to ignore when it comes to IT, since it boasts no less than 75,000 skilled developers and over 2,000 startups. The Ukrainian IT industry passed the $1 Billion mark a couple of years ago – valued at $5 billion now – and has continued to thrive despite some hardship. The country’s strong education system and on the job training are ranked slightly below Israel’s. This factor, coupled with a sizeable IT outsourcing market, is why Ukraine will maintain strong growth potential in the years to come.

In some countries, it makes sense for high-tech and IT industries to expect support from the private sector. But this is not the case in Ukraine. In the past, Ukraine’s IT sector did not depend on the private sector to grow, mature, and achieve a worldwide reach. And it cannot do so now, especially since the private sector suffers from public debt and high inflation, not to mention inefficient governance. Instead, it is up to the private sector as it has always been. The good news is that Ukraine’s IT industry continues to both attract investment, and harbor some of the most innovative tech startups in the world. As Richard Branson of Virgin Group recently put it, “Ukraine is a good place to invest.”

Impact of recent events

There were many positive changes brought about by Ukraine’s February 2014 revolution (or Euromaidan), like the increase in civil liberties and removal of certain corrupt figures. On the other hand, some negative change also occurred. A few weeks later a Russian takeover of the Crimean Peninsula occurred, along with fighting in the very east of Ukraine, in the Donetsk region.

But while some military operations continue, they are limited to a border region that accounts for less than 10% of Ukraine’s total area. The rest of the country is safe.

A good example to compare to here is Israel. The small nation has fought numerous wars, but continues to thrive as one of the world’s leading technology hubs. Israel’s startup ecosystem is only second to Silicon Valley, and boasts R&D centers run by companies like Google, Microsoft and IBM. But a few decades ago, the situation was in some ways similar to Ukraine’s.

Back then, Israel was mainly selling IT services to places like the US, but had not yet developed a mature industry. What changed that was legal and financial help from the government, but also the fact that big companies came to Israel looking for good engineers who simply cost less to hire. Eventually, those same engineers went on to start their successful businesses, and the result is what we see now.

As the case of Israel shows, conflict can spur innovation as much as stifle other parts of the economy. In the end, it is up to the people to decide which outcome they want, and create new opportunities. In that vein, there are positive signs that the right components are coming together in Ukraine.

The advantages of outsourcing software development to Ukraine

The world is more connected than ever. IT and outsourcing is a major aspect of this reality, especially since software does not require ships and containers to move around. Here are some of the benefits for outsourcing development to Ukraine:

Talented developers. There is always demand for tech talent, and it has exceeded supply for some time now. This has created a big incentive for skilled and highly motivated employees to enter Ukraine’s IT industry. As an example, a recent survey revealed that close to three-quarters of Ukraine’s IT workers have a STEM degree. And due to how ubiquitous English has become as the language of business, it is easy to find people with good language skills. Simply put, global demand has pushed for more growth in talent acquisition and creation.

Moderate costs. For everyone from industry leaders to up and coming startups, lowering overhead is one of the main reasons to outsource. Given Ukraine’s GDP and economic standing, costs can be slashed a bit compared to what they are in the US or Western Europe. The country has long been a favorite destination for offshoring IT talent. Despite all the global competition, Ukraine was ranked fourth in the world by the number of certified IT personnel. To reiterate, there is a deep pool of bright and entrepreneurial talent, not to mention the economic effect of the situation in the east, which has driven costs down even further.

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Weak spots

While Ukraine’s IT industry remains dynamic and resilient, there are some potential things to keep track of:

Government inefficiency. Slow bureaucracy and burdensome legislation are problems in many an emerging economy. A recent World Bank report on Ukraine stated that solving these issues “will require comprehensive and deep reforms.”

Negative Press. This is perhaps one of the biggest issues to affect the market. Russia’s actions raised a lot of alarm. Consequently, much effort was spent on making the situation direr than it was. During the height of the crisis, some way-overblown ideas were proposed, like a full Russian invasion of Ukraine, leading to war with NATO.

Brain drain. The recent events have led some developers to pack up and leave for nearby European or North American markets.

Market downturn. This has two aspects. The first is that Ukraine IT sector overheated after several years of growth, with some places like Kiev increasing wages and drawing investors to other locations. The other aspect is the increase in prices, and some people have lost jobs and even housing due to hard times.

Although the challenges above are difficult to solve right away, they are also opportunities. For example, the economic downturn has caused more dollars and Euros to flow into the IT market. Also, the smaller companies have greater incentive to consolidate, so as to better raise credit.

Finally, the situation in the east has brought more EU attention, and with that came significant economic and political attention. This eases the transition to a more advanced IT economy, as Ukrainian developers and businesses start getting more funding and support.

Ukraine and other destinations

There are several countries that are known for offering offshore services. The list includes among others:

Americas: Brazil, Mexico, and Chile.

Asia: China, India, and Indonesia.

Europe: Ukraine, Bulgaria, and Poland.

Africa: South Africa, Morocco, and Egypt.

All of them present a unique blend of advantages and disadvantages. On the other hand, Ukraine’s outlook is still that of one of the top IT offshoring destinations in the world. The country’s strengths far outweigh its potential and real weak points. Ukraine has always had a strong IT sector. Its front position harks back to Soviet days when it lead as a technological center. That legacy of science and education is still strong today, where you will find people like Ukrainian-born Max Levchin, co-founder of PayPal, and Jan Koum of WhatsApp fame, at top positions in the tech industry.

Due to its geographic position between East and West, and its proximity to both advanced and emerging markets, Ukraine has always had a distinct advantage. Despite any challenges, both local and multinational companies continue to extend their investments and footprint in Ukraine’s dynamic IT industry. In the end, there are numerous opportunities and niches to explore, and with the increasing expertise and maturity of Ukrainian developers, clients will always find the right fit.