Benefits of Outsourcing to Ukraine
1. Executive Summary
Nowadays, outsourcing a business organization’s non-core software development and communication needs to other parties is becoming increasingly popular with companies and other business organizations in a variety of industries and locations worldwide. The primary reason for that is that this kind of cooperation allows companies to focus solely on their core activities, while leaving the secondary aspects of their functioning to vendors that specialize in the corresponding areas and, in most instances, can deliver a significantly more cost-effective and technologically advanced solution than can be provided in-house. More often than not, this scheme of cooperation involves an outsourcing partner at an offshore location, which normally affords the outsourcer a host of tangible advantages they would not be able to benefit from domestically. In the early 1990-s, Ukraine emerged as one of such offshore locations, drawing on its significant potential in a diverse number of fields.
An international party that is seeking to outsource its software development needs can count on and should be aware of the following potential benefits and disadvantages of selecting Ukraine for this purpose:
• Availability of high-qualified specialists;
• Technical eminence of the delivered solutions, including complicated solutions for a diverse range of industries;
• Nearly two decades of positive related experience accumulated in the country’s software development industry, including delivery of complicated solutions for a diverse range of industries;
• Very competitive rates for software development due to much lower labor costs;
• Well-established corporate culture within the vendor companies;
• High level of education;
• Favorable location in Europe;
• Cultural proximity to the West;
• Well-developed infrastructure for easy and safe business travel;
• Possibility of using offshore benefits while legally contracting with a Western party;
• Availability and support of the local professional organizations.
The drawbacks of the Ukrainian software development industry that can still create minor obstacles in dealing with Ukrainian vendors are as follows:
• Language barrier;
• Communication infrastructure;
• Legal and regulatory issues.
The above disadvantages are clearly understood by the Ukrainian providers and they have made significant progress in eliminating them. However, the absence of articulate government support still tells on many of the industry’s enterprises.
2. Offshore Software Development in Ukraine
General
Ukraine is an Eastern-European nation with a population of about 46 000 000 that gained independence following the break-up of the Soviet Union in 1991. The country borders on Poland, Slovakia, the Czech Republic, Hungary, Romania and Russia. The Ukrainian capital of Kyiv is a modern European city with a population of about 3 million inhabitants.
Having been able to avoid many of the woes that are still plaguing some of the former republics of the Soviet Union, the country has inherited from the Soviet Union and managed to preserve and develop a significant scientific and educational potential. Ukraine boasts one of the highest literacy rates in the world and can pride itself on a well-established system of higher education that makes it easy for Western businesses to recruit qualified personnel for their numerous business units located in the country. The number of institutes of higher learning in Ukraine currently constitutes about 900. The well-developed infrastructure and banking industry, as well as the high levels of safety and convenience for business travel, add to the country’s attractiveness as a place of business and offshore location.
After the dissolution of the Soviet Union, many of the more talented IT professionals had to leave their home country in search for better fortunes in the West. Many of them became industry leaders and top managers in Western IT companies who fully realized the potential of their home country and used their knowledge and connections to establish R & D centers of their companies in Ukraine. This provided a powerful basis for the development of Ukraine’s IT industry during its beginnings.
Ukraine’s major hub-centers for software development include such major cities, as Kyiv, Kharkiv, Odessa, Dnepropetrovsk, Lviv, Donetsk. These cities are home to a rapidly growing number of R & D centers of US, Canadian, British, German, Swedish, Israeli, Norwegian, Greek, and other international software development vendors. According to the Central & Eastern Europe IT Outsourcing Review presented by the Ukrainian Hi-Tech Initiative, in 2007, Ukraine had the largest number of software development companies with more than 5 employees among the countries of Eastern Europe (800), being followed, with a significant gap, by Romania (600), as well as the largest number of IT professionals involved in outsourced software development (14 000). The country also ranked top among the countries of the region by the volume of the market (some USD 544 million). As far as the labor costs are concerned, Ukraine appeared to be only slightly more expensive than Bulgaria, Moldova, Belarus, and Albania. According to the Review, in 2006, Ukraine was also included in the top 5 most attractive offshore software development locations in several Western countries.
Availability of High-Qualified Resources
There are a number of institutes of higher learning that train highly qualified programmers for Ukraine’s burgeoning software development industry. Along with the training courses offered to graduates by the vendors themselves, this allows Ukraine-based software developers to maintain a high-level of their employees’ qualifications. Most of those currently employed by Ukrainian software development companies have been working in the industry for several years now and have taken part in a number of projects for Western customers. Companies encourage their employees to keep their professional skills up-to-date by offering them all-round assistance and investing in their ongoing education and certification. QA engineers are recruited from graduates of technical institutes of higher learning.
According to the Global Skills Report published by Brainbench in 2005, Ukraine ranked the world’s fifth nation by the level of its programmers’ skills in C++, C#, IT Database Development and Administration, Web Development and Administration. The Report also ranks Ukraine among the top 5 countries well-versed in project management.
The traditionally high level of fundamental science and education in a diverse variety of fields including physics and applied mathematics allows product-driven companies to easily source and gainfully employ eminently qualified experts in some specific areas of their specialization. For example, a company that develops risk management software can easily locate and employ a qualified mathematician with a PhD degree.
Unfortunately, the high professional level of Ukrainian IT professionals results in a significant brain drain from the country. Ukrainian IT companies normally offer their employees excellent working conditions and relatively high compensation in order to retain their work force.
Technical Eminence of Delivered Solutions
Over the nearly two decades since the inceptions of Ukraine’s software development industry, Ukrainian IT companies have accumulated a wealth of software development and project management experience, catering for international clients in a wide range of industries. Almost every Ukrainian or Ukraine-based vendor can boast several successfully implemented projects and several thankful international customers. The product-driven IT companies that operate in Ukraine are experienced in the development of a wide range of software products for different industries, including bank systems, GIS, billing systems, trading software, credit scoring software, and others.
Labor and Costs and Rates
Significant cost savings have always been the main incentive for Western companies looking to outsource. In this respect, nearshoring to Eastern Europe, and, in particular, Ukraine, is no exception. The bulk of the expenses borne by the outsourcers is made up by the wages of the vendor’s employees and the production-related non-wage labor costs. This indicator can, thus, be considered illustrative in evaluating the attractiveness of an offshore software development zone in terms of its cost-effectiveness. The labor costs in most Eastern European countries constitute only a fraction of the labor costs in the well-developed countries of the West (for example, some 10% for Bulgaria and Romania vs. Germany). Although, the labor costs in Eastern Europe keep continually growing (an annual average of about 7.7% between 1996 and 2007 in the Eastern European member states of the EU), the narrowing gap is still more than enough for Western outsourcers to profit from.
According to the Central & Eastern Europe Outsourcing Review, Ukraine remains highly competitive among the other Eastern European locations according to the rates it can offer. The annual costs (wage and non-wage labor costs) of hiring a qualified IT professional in the country remain within the range of USD 25920-49600 against 32800-60600 in Poland and 32370-65520 in Hungary.Ukraine ranks 12-th by this indicator, yielding only to Bulgaria, Moldova, Belarus, and Albania.
Overall, Eastern Europe, including Ukraine, can not be considered the cheapest offshore software development location. The reason for that is the much lower wage labor costs in such countries, as, for example, India and China. For instance, hiring a Romanian programmer will cost USD 4.60 per hour, while hiring a programmer in China and India will cost only USD 3.60 and 2.40 respectively.
However, considering the other multiple advantages afforded by its Eastern European location, as well as the price-quality correlation offered by Ukraine, the country definitely represents an attractive nearshoring partner for Western European businesses.
Sources:
The Central & Eastern Europe Outsourcing Review (the Ukrainian IT Initiative);
The Global Skills Report (Brainbench in 2005).
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