Report at the II Ukrainian Outsourcing Forum November, 29-30 2005
1. Statistics and dynamics of IT and outsourcing industry development in Ukraine in 2000-2005
Despite of skeptic attitude of the many operators on the Ukrainian outsourcing market, our industry steams forward, and this is a good occasion to congratulate all of us members of this Forum.
As per modest empirical calculations performed by AVentures company together with Market Visio/Gartner Group research company, the Ukrainian IT services and products outsourcing market share increases: in 2001 it contributed with USD 39 mln; in 2002 - USD 50 mln (growth of 28%); in 2003 - USD 70 mln (growth of 40%). In 2004 - USD 100 mln (growth of 43%); the prospects for 2005 were USD 150 mln (growth of 50%).
Whereas we state lack of exact statistics, natural born modesty and critical score essential with our people when communicating with our state bodies, we can assume boldly that this year the software outsourcing market share will reach $150 to $200 mln.
Moreover, if we consider for our mentality and inventive power, the software outsourcing market share, including "grey" and "black" outsourcing (that are effected half-legally and utterly illegally by small groups and freelancing individual programmers), we can quite suggest it reaches $250-300 mln.
One should admit, that the research performed by AVentures company together with Market Visio research company after the methodology of Gartner Group, was built on a sampling population of 150 (of 300 addresses by AVentures) companies from Kyiv, Kharkiv, Lviv, Odesa, Dnipropetrovs'k and other cities that found it possible to give answers in complete to all the questions in the questionnaire. Whereas in Kharkiv only, by the most conservative estimate, there exist 40 major software developers which declared their existence by means of web-site in the Internet, it becomes apparent that the structure of operators on the outsourcing market, derived by AVentures and Market Visio is strictly empiric.
As stated by AVentures, of the IT services and products suppliers the 35 per cent market share belongs to minor companies (fewer than 15 employees) or independent groups of professionals, while the 65 per cent are major and mid-size companies.
(Note 1: As discovered by Web Style (Kharkiv) research in 2002 there are 275 web development companies in Ukraine not to mention developers dedicated to providing offshore outsourcing services exclusively and freelancers.
Note 2: As discovered by Ukrainian Association of Software Ventures (UASV) in 2004, total number of IT companies developing software in Ukraine is over 1000. Some 710 companies are engaged in software development, being their major activity, while offshore outsourcing software development is the core activity of 290 companies.)
We estimate the Ukrainian market as follows:
|Market share of the following companies involved in Ukrainian IT services and products export market, 2005|
|Large and midsize commercial companies||30-45%|
|Software development centres of international vendors||5%|
|Small companies (fewer than 15 persons), independent groups of programmers, individual developers||25-35%|
|Note: representative sample is declared to be 50%. Many outsourcing companies do not declare themselves on domestic market. Varied ownership pattern does not contribute to clear company identification||15-40%|
The number of professionals engaged in delivering outsourcing services and developing products in 2003 was estimated on the level of 8-10 thsnd. people. Open sources give even larger figures: 20 to 25 thsnd. people. At the same time, Ukrainian high schools yield 30 thsnd. graduates of computer science chairs and related yearly. The emigration tendency among Ukrainian programmers (some sources give about 2,500 persons yearly ready to emigrate any time) is almost reversed. Some developers come back to Ukraine to develop their own IT businesses.
2. Regional development of Ukraine; contribution of Kharkiv to Information Technologies
It is historically and geographically molded, that each region in Ukraine is distinguished by its own specifics, its own strong suits. The South-Eastern and especially Eastern region of Ukraine is the most developed in both industrial, intellectual and technological spheres. (At this, all the regions - and it is undoubtedly a major advantage of Ukraine - have almost smoothly developed telecommunications and social infrastructure.)
Recruitment agencies and HR-managers of our city, within the latest 3 or 4 years, observe a permanent interest in qualified human resources moving among Kharkiv, Kyiv, Zaporizhzhia, Dnipropetrovs'k, Symferopil, Sevastopil, Donetsk.
We estimate that IT market structure in Kharkiv is as follows:
|IT Companies by Branch||Number of Companies||Quantity of Employees|
|Developers||Domestic market suppliers||75+|
|QA and Testing||3+|
|System integrators, enterprise solutions automators||15+|
|Internet cafes and clubs||20+|
|Developers and network administrators within other companies and organizations maintaining business processes||50%|
|Others (freelancers, small groups, companies organized by and linked to Colleges and Universities' chairs of computer science, groups that are spontaneously formed to perform a specific project, newly founded ODC of individual Outsourcers (as Microsoft Development Center).)||30%|
The comparative analysis of the knowledgebase accumulated in Kharkiv and its region with the ones in other cities and their regions is a challenging task, since every indicator that might be applied, will be of its individual significance and specific weight within the integral combination of other indicators for a particular city (region). The most roundup indices are the number of scientists, R&D centers, and allocated funds.
Although, the core of scientific and intellectual potential of Ukraine - the research and development base of military and industrial system - suffered significant dissipation lately, Eastern Ukraine remains a pool for most of R&D institutions, associations and laboratories. Moreover, the new and unique research centers get founded here, as Institute of Information Technologies (IIT), Kharkiv, which concentrated on encryption and data safety issues.
The majority of distant learning centers within high schools system (unlike vocational training) are located in Eastern Ukraine: the four are in Kharkiv (Polytechnics National University, Pedagogical University, Space and Aeronautics National University , Technical National University of Radio Electronics), the one is in Donetsk, the one is in Sumy (National University).
It is in Kharkiv developed and implemented are
- technologies assisting in decision making: regional and municipal GIS
- ERP for the Ministry for Civil Defense, Emergencies and Disaster Response to prevent and control technological disasters
- Automation and information support systems for the Municipal Council of Kharkiv
- Power consumption monitoring and control systems
- Billing systems
- Encryption system solutions for laptops
- Software for telecommunications hardware
As to donations for the purpose of developing the academic base, in Kharkiv we ruefully lack them. In distinction from the capital region, the regional centers face difficulties in financing the information infrastructure upgrade. Despite that Kharkiv region manages vigorously with the challenge. Thus, Kharkiv region Authorities strikes energetic efforts in attracting foreign investment and perspective partners.
3. Some Blacks & Whites
Despite all direct and innovative advantages of a capital city, the major risk it presents is its political aspect. Political and social forces being unsatisfied with government or political bodies activities can paralyze the business life of the capital in no time. This was vividly demonstrated at the end of 2004, when the so-called Orange Revolution immobilized our capital for two weeks.
And this is the key political advantage of the developed regions. They are much less vulnerable when political rebelling and they are necessary and sufficiently independent.
Kharkiv is a typical example of the above thesis. It kept working stably during Orange Revolution and contributed to the country budget.
Being a contributing region Kharkiv can and does propose considerable benefits for building up business. Due to greater social stability and less political engagement multiplied by traditional dynamism and build-up innovation infrastructure Kharkiv is attractive with the following:
- Less geopolitical risks - and greater stability of business
- Linking center of regional settlement system - there available direct access to all industrially developed regions of Eastern Ukraine
- Less infrastructure costs - vaster production sites for equivalent or less costs
- Less restrictions for infrastructure build-up
- Relatively inexpensive life rate - wider range of personnel motivation methods
Highly skilled professionals
- 25 high schools that yield 27,000 Masters and Bachelors annually
- Over 1,000 programmer graduates annually
- 500 to 1,000 computer science graduates annually
- Over 5,000 computer science students willing to work before they gain their certificate of higher education
- Almost every major IT company takes care of their IT employees advanced vocational training
- Ability to monitor IT professionals market
- Possibility to invite IT professionals from neighboring regions
Science and engineering knowledgebase
Kharkiv can boast of the following:
- Big scientific pool on a variety of industries available in Kharkiv: numerous R&D institutes, scientific and professional associations. Due to this knowledge background non-trivial or fundamental approach is vastly applied.
- Fundamental science and education, is traditionally the strongest in Kharkiv than wherever across the country (which has been challenged by Kyiv lately).
- Distant learning (Polytechnics National University (KPI), Pedagogical University, Space and Aeronautics National University (KAI), Technical National University of Radio Electronics)
- The biggest in Ukraine software development companies for PDA and handhelds Gaming Billing solutions Security and encryption are located in Kharkiv
- Biggest Offshore Testing Centers (OTC) are located in Kharkiv
- The unique IIT (Institute of Information Technologies) which develops security and encryption systems for banks, government and uniformed services
- Kharkiv can boast of the vastest range of technologies and industries
- Kharkiv is in fact a European city and is almost completely integrated to Bologna process
- On the grounds of Kharkiv Technical National University of Radio Electronics (KNURE) created is the Antennae National Association, being the East Ukrainian Affiliate of international Institute of Electrical and Electronic Engineers (IEEE) which is one of the standard holders of IT industry
- Intense cooperation in IT area with universities of Great Britain, Finland, France, Germany, USA and other countries. Kharkiv universities research teams participate actively in fundamental and applied research studies which are financed by EU, USA and other countries
- Annual contests for young programmers (e.g., Validio (ex MIIK) specially for Kharkiv students carries out contests in various high schools of the city (namely in Kharkiv Technical National University of Radio Electronics (KNURE), Polytechnics National University (KPI), Kharkiv National University (KNU) and Space and Aeronautics National University (KAI).)
- Strong IT infrastructure: fiber glass rings, satellite, etc.
Transport infrastructure (six traffic arteries of state importance):
Kharkiv International Airport
- flight from Kyiv to Kharkiv or any major city in Ukraine costs from 25 to 50 USD
Well developed railroad infrastructure you can get from Kyiv to Kharkiv:
- in 6 hours by Capital Express (3 expresses in the morning) - 8 USD
- in 8 hours by firm train (traveling at night in a couch) or 4 to 5 through passing trains - 6 USD
Well developed highway infrastructure:
you can get from Kyiv to Kharkiv
- by car in 5 h
- by autobus in 8 hours (3 big companies with at least 5 voyages daily) - 12 USD
- Kharkiv International Airport
4. High Schools Graduating IT Professionals
Of 25 Kharkiv high schools 11 yield professionals for IT industry (KNURE, KAI, KPI, KNU, KEEU (Engineering and Economy University), KMA (Military Academy), etc.)
As per our conservative estimate this gives us 1,000 to 2,000 professional programmers and network administrators annually. (I must admit, that generally this information is often considered 'strategic' at our high schools and no official information has been provided.)
7 high schools of the above have dedicated computer science chairs.
Another 4 high schools also drill IT professionals.
Trends in Outsourcing and Our Competences: ODC & BOT
By now, the most promising are the Offshore Development Center (ODC) and Build-Operate-Transfer (BOT) models. For vendor with a mature development process and predictive requirements ODC and BOT provide the best balanced benefits.
These are these best-performance offshore outsourcing models can provide for the maximum raise in product functionality in the next 3 to 5 years while allowing to save considerably on R&D costs.
I say we are ready to plan and promptly execute a team transfer as it is described by BOT.
BOT: the definition
Build Plan and organize: site and infrastructure staff the ODC develop scheme of knowledge base transfer pattern Operate Manage the offshore structure: project management development QA and testing deployment updating and upgrading maintenance services Transfer Hand over: Business Registration of a New Offshore Affiliate for the Client assets transfer management transfer Value of BOT for independent IT vendors BOT enhances flexibility BOT shortens the management co-ordination sequences BOT enables cost management BOT speeds-up time-to-market factor Outsourcer's goal
The outsourcer, whose main activity is in developing software, depends critically on processes quality when developing, rigorous project management adapted by outsourcing companies as well as correctly formulated provisions of Service Level Agreement (SLA)). Those ones who engage outsourcing companies for the first time as concerned with Intellectual Property protection issues. While those ones who already accumulated some experience in interacting with outsourcing companies are most concerned with their ability to manage projects. These are ODC and BOT models that provide leverages for all these aspects.
Advantages in ODC and BOT models for outsourcers Less time-to-market time
BOT enables the outsourcer to shorten product development cycles and introduce their products to market faster and often earlier than their competitors. Such decrease of development time is due to the development cycle of 24/7 and already existent high quality technical resources pool fully dedicated to that project.
It is due to process maturity that developers can measure quality and improve it on the on-going basis. The majority of IT services suppliers that already deploy BOT model with their clients possess proved methodologies of growth based on quality standards. That outsourcer who chooses development according to BOT model 'inherits' all those quality standards when acquiring the outsourcing team.
Unlike typical outsourcing business model, which stipulates re-estimating budget and suspending the project development each time changes are needed to be introduced to it, BOT represents a much more effective process. The initial budget is strictly preconditioned and predictable, changes to project are adapted smoothly and on-the-fly, with no executional protraction and bargaining for better conditions. As soon as ODC is molded and ready to be handed over, the outsourcer 'inherits' the team ready straight to set up working.
ODC and BOT: differences ODC know-how ODC contains long-term advantages: - long-term cost stability - long-term risk avoidance
When acquiring offshore infrastructure, operations and staff direct costs raise. With evolution of corporate goals, market cycles and economic climate one can try evaluate whether it is worth including them into liabilities.
Some companies consider IP issues the most critical ones when choosing BOT rather than ODC since transfer of debits also warranties the transfer of intellectual property. As the operate phase comes to an end skills, business processes and team know-how are handed over subordinate to outsourcer. Thus, BOT for outsourcer is quite an easy and cheap way to benefit from globalization processes in economics.
In this light Kharkiv is the most attractive region for organizing an Offshore Development Center and transfer as per BOT model. And here are the strongest evidences:
- IT professionals market is less "high pressure" in Kharkiv than in Kyiv;
- Availability of "undeveloped" manpower bands on IT HR market (and QArea leads an aggressive policy in that direction);
- Relatively low costs for ODC start;
- ODC fast start and BOT ending phase handling (e.g. in India an average business start is made after 89 days, while in Ukraine it is possible after some 30 days);
- Opportunity to open/register affiliations in other regions. Thus, QArea monitors constantly the manpower market and business climate in the regions of Dnipropetrovs'k, Poltava, Donetsk, Symferopil', Sevastopil', Odesa. This allows to actively engage relatively inexpensive professionals to the existent ODCs in Kharkiv;
- Experience in deployment of integral ODCs (Analysis, Development, Testing, Deployment);
- One of the biggest Offshore Testing Centers are located in Kharkiv due to relatively cheap but qualified manpower. Some clients are provided with 24-hour testing or night-stand testing. As an example we can mention a client of QArea's. His team of developers, which is located in England, received Bug Report each morning. This contributed much to finishing the product and decreased their time-to-market.