IT Outsourcing & Risk Management in a Turbulent Ukrainian Economic Environmentby QArea Team on February 9, 2016
“The Chinese use two brush strokes to write the word ‘crisis’. One stands for danger; another one for opportunity. In a crisis, beware of the danger, but recognize the opportunity.”
The current situation in Ukraine is a perfect illustration for this quote. On the one hand, there are the devastating consequences of the ongoing war: a record 21.4% decline in industrial production, a slowdown in the key economic sectors, and a skyrocketing foreign debt.
On the other hand, there are emerging opportunities for startups and companies specializing in software outsourcing. Is it beneficial to invest in Ukraine? And if so, how to leverage all the risks involved in the process? Furthermore, why do world-famous visionaries show enormous interest in outsourcing to this emerging country? Let’s find out!
Software Market Overview
The Ukrainian software division is the only branch showing an exponential growth even in the times of the economic downturn. From 2005 to 2014, the IT industry experienced 4.5 times growth, totaling $2.3 billion in export volume. The experts state that this number will increase to $7.7 billion in 2020.
The Ukrainian presence in the international IT arena is increasing due to the following factors:
- Versatile software solutions. International vendors outsource a full spectrum of IT services: R&D, web/mobile/software development, testing, consulting, and security management tools for a variety of projects, from retail and financial to medical and automotive.
- Innovative insights. It is not surprising that local professionals offer an impressive range of services as Ukraine is in the top 50 most innovative countries, according to the Bloomberg Innovation Index. The country is a home for over 2,000 start-ups and 1,000 IT companies.
- The growing number of qualified professionals. Over 100,000 individuals are currently employed in the IT sector; the majority of them are involved in outsourcing activities. This number will grow in the future since around 36,000 alumni with technical education enter the job market annually.
Challenges Involved in Outsourcing
Taking into consideration exponential growth and other factors, the Ukrainian IT market may seem like an attractive investment venue. However, investors should keep an eye on and analyze potential challenges.
- Economic downturn. The GDP value of Ukraine reduced by 23% in two consecutive years. Furthermore, the government failed to pay $3 billion in debt to Russia on time, which led to a set of legal sanctions against the country. The overall forecast for the economic environment is not very optimistic since the IMF has lowered the expected growth to minus 9%.
Despite the economic crisis, the IT industry in Ukraine is steadily growing. According to the report published by EY last year, Ukraine is at the forefront of the IT outsourcing industry when compared to other Central European countries, i.e., Czech Republic, Poland, Bulgaria, Serbia, etc. Therefore, investing in this sphere is safe and beneficial.
- Lack of transparency. In spite of the fact that the transparency index has improved slightly in comparison with the previous year, backroom deals still take place in the country. To battle corruption, social activists and government officials take anti-corruption measures that presuppose criminal liability for people involved in illegal actions.
Moreover, transparency in the software market has been taken to a new level of excellence. The majority of local software companies work as contractors with customers from overseas, mainly the US and UK. They have high transparency standards, as it is a vital requirement for staying competitive in the outsourcing market and having a positive brand image. It is the prime interest of Ukrainian IT companies to quickly adjust to the current requirements to attract new clients, since more and more of them opt for outsourcing to Ukraine.
- Communication obstacles. The main obstacles for investors are often related to the language barrier and time zone difference. Just like some other outsourcing hubs, Ukraine is not an English-speaking country. Therefore, investors may face problems related to the language barrier when employing local professionals.
The good news is that average locals have a moderate proficiency level, according to the EF English Proficiency report. However, specialists in certain spheres, namely in IT, have much better English skills than the average population. Furthermore, leading software companies provide on-going trainings for their employees to make sure that their level is close to advanced.
Obstacles related to different time zones can be easily overcome since Ukrainian software companies have offices in many countries, e.g., in the US and Europe. Therefore, communication is well developed, and customers can always get professional support at any time, regardless of time zones.
Opportunities in the Ukrainian IT sector
In addition to controversial challenges, there are also benefits that investors and entrepreneurs consider:
- Low cost, high quality labor. International vendors outsourcing different projects to Ukraine get great results for a fraction of the price. This is easy to prove by simple calculations. An average developer in the US gets $120,000 annually. Outsourcing a project to an Indian IT specialist costs around $60,000 annually, while the price of hiring a Ukrainian contractor is as low as $12,000- $30,000 per annum. The cherry on the cake is that local developers are willing to do their best and deliver exceptional service. Therefore, such a moderate price does not affect quality.
How is it even possible? First, Ukrainian currency is extremely volatile and has a tendency to devaluate, so people are looking for jobs where the salary does not depend on the exchange rate. An average salary in Ukraine is $2,400 per annum, which seems quite shocking for anyone from the EU or US. That’s why talented Ukrainian developers are doing their best to get a job in the software development industry. Locals study IT in order to get entry-level positions, earn $350-$500 monthly, and then make their way up. This gives Ukraine an outstanding cost advantage over other outsourcing countries.
- Governmental support. The Ukrainian government contributes to the development of the outsourcing industry by offering tax exemptions for IT specialists – there is no VAT while the income tax is truly very low. Furthermore, it finances innovation parks where young people can get the needed training and improve their skills.
If there are any doubts as to whether potential benefits outbalance challenges, it is high time to investigate risk management techniques that can help in mitigating the above-mentioned risks.
Risk Management Tactics to Pursue
Establishing a new outsourcing relationship is quite a challenge, which can be successfully overcome by pursuing the following risk management tactics.
- Keep an eye on hidden costs
One of the main goals of outsourcing is cost reduction. However, it may include extra expenses that have not been discussed initially. Bureaucracy-related fees, currency volatility, and transition expenses are a few examples of possible hidden costs. Therefore, in order to avoid unpleasant situations, it’s vital to learn all about possible expenses involved in a new venture and carefully analyze whether this partnership will help you reduce costs or not.
- Improve communication
The best results can be reached only when an outsourcing relationship is handled by both parties. Otherwise, such problems as lack of transparency, loss of control, and poor communication may arise. To avoid those, make sure that your partners have a solid reputation. Check their portfolio, background, and testimonials. Some experts insist on contacting previous customers in order to find out everything about a given company.
- Ensure quality control
As soon as a contract is signed, it’s time to talk about quality standards. It may happen that the final product does not meet the initial requirements or has bugs because there are no benchmarking standards imposed. Therefore, it is beneficial to choose qualified vendors with a proven track record who have their own high quality standards in place.
- Check Data Security
Want to avoid corporate information leakage caused by outsourcing? Ask potential partners about their security and data encryption methods. Reputable enterprises always have successful examples and clear explanations to back those up. It’s also possible to check the company’s case studies to ensure that they know how to handle sensitive data.
Lead by Example: Successful Investment & Outsourcing Partnerships
The attractiveness of the Ukrainian market is backed up by numerous examples. Such multinational giants as Huawei, Boeing, Siemens, HP, and Google have established relationships with leading software and R&D services in Ukraine.
Furthermore, world-famous investors consider the Ukrainian IT market a lucrative venture. For instance, Richard Branson, the founder of Virgin group, has shown his interest in Ukrainian startups, especially in the IT sector. At the World Economic forum in Davos, he talked about his hopes to invest in Ukraine in the near future.
Another business magnate, George Soros, has invested $1 billion in the country’s economy. In addition, he bought an undisclosed stake in a Ukraine-based software company. Soros believes that young Ukrainians are well-educated individuals who can change the country for the better and build a new society.
To conclude, the IT industry is a fast-growing branch worth substantial international investment. Major risks related to turbulent economic times can be successfully mitigated by implementing effective risk management techniques. Therefore, it is not surprising why so many multinationals and famous billionaires collaborate with Ukrainian software companies and startups.
Do you agree that Ukraine is the best nearshore country for outsourcing or do you think otherwise?
If you have any questions or comments please let us know – contact us!
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