“Ukraine’s glory hasn’t perished, nor her freedom,” starts Ukraine’s national anthem. Now independent, the Ukrainian nation, which lost several million people to Stalin’s “taming by hunger” in the 1930s, enjoys a democratic government and freedom of speech. Ukraine also counts the largest capacity of productive soil in the world, glorious cathedrals, Carpathian Mountains, Black Sea and Azov Sea resorts and…a growing outsourcing industry.
The victory of democratic presidential candidate Victor Yushchenko came as a result of the continuous nationwide protests of millions of Ukrainians, outraged with the forged results of the presidential elections. The voice of the IT industry was also heard among the voices of millions.
In early December 2004, more than one-hundred Ukrainian IT companies sent their representatives to the “Hi-Tech March” to show their support for the democratic presidential candidate. About 3,000 IT workers marched the streets of Ukrainian capital Kiev (Kyiv) wearing orange bands and waving orange flags. The participants of the march had not only the future of their country, but the fate of the rapidly growing IT outsourcing industry at stake.
Employees of Miratech, the only CMM-certified Ukrainian IT company, were among the most active proponents of the march. According to the company’s co-owner and COO Valeriy Kutsyy, 99 percent of Miratech’s employees have supported Yushchenko. “In addition to the patriotic feelings, most of us understood that Yushchenko would open up the country to the West, which would eventually help our business,” says Kutsyy.
Now Ukraine has a new, more appealing global image that contributes to turning the country into a new European business hot-spot. As Eastern Europe emerges as an outsourcing alternative to Asia, Ukraine now has all the chances to broaden its portion of the outsourcing pie. “This may be just a coincidence, but it is right in the first months of 2005 we signed several long-awaited contracts with strategic customers such as Philips and Siemens,” says Kutsyy.
Ukraine and Its IT Outsourcing Industry
The country currently has over 300 outsourcing companies that export ITO services. Analytical company MarketVisio, together with Gartner, estimated ITO services from the Ukraine to reach $150 million in 2005, which represents 50 percent growth in comparison to the previous year.
The current industry size is far below its potential. Among the factors that have hampered its development in recent years are the legislation and business climate. Ian Marriot, Vice President and Research Director at Gartner, still calls for caution when dealing with the country, as “Ukraine has been divorced from the international business community for a continuous period of time.”
In contrast to Belarus, another former Soviet nation that borders with Ukraine and hosts the largest IT outsourcing companies in Eastern Europe, Ukrainian IT companies tend to be smaller. The vast pool of IT labour resources remains untapped and attracts companies from abroad. SaM Solutions, one of the largest IT outsourcers in Belarus, opened a development centre in Kiev in summer 2004. The centre currently hosts 70 software engineers. “One of the key drivers for us to come to the Ukraine was the vast and high-quality labour pool,” says Larisa Rudak, Co-Director of SaM Solutions in Kiev.
Already, big foreign companies are rushing to explore Ukraine’s pool of talent. Flextronics, a major global electronics manufacturing services provider, has placed around 1,500 of its 7,000-strong engineer force in the Ukraine
The size of the labour pool, quality of education, and the labour cost base are all major criteria of offshore outsourcing decisions. Now Ukraine has high scores across all these dimensions. The country’s population (47 million) is the sixth-largest in Europe, and its capital
Kiev is a mere two-hour flight from major European cities such as London, Amsterdam, or Paris. To make the trip to Ukraine even simpler, its government has introduced a visa-free travel for the visitors from the EU, US, and several other countries. There is no wonder that this year the country expects to at least double its revenues from the incoming tourism.
Kiev is Ukraine’s major outsourcing location. Recently, companies started to look further for the skilled IT labour, with the primarily targets being Kharkov, Donetsk, Dnepropetrovsk, Lviv, and Odessa, each benefiting from a low cost of living and a continuous increase of IT graduates from well-established technical universities.
| City | Population, millions | Technical and General Universities |
| Kiev | 2.8 | National Technical University of Ukraine National University Kiev-Mohyla Academy National Taras Shevchenko University of Kiev |
| Kharkov | 1.7 | Kharkov State University State Polytechnical University State Technical University of Radio Electronics State Transport Technical University |
| Dnepropetrovsk | 1.2 | Dnepropetrovsk State University State Technical University of Railway transport |
| Donetsk | 1.1 | Donetsk National University State Technical University |
| Odessa | 1.1 | I.I. Mecnikov State University State Polytechnic University |
| Lviv | 0.9 | Polytechnical State University State Ivan Franko University |
With average monthly salaries of just $500 – $1000 for IT professionals in Kiev, the country is perfectly positioned to provide low-cost software development services. However, having an image of a low-cost labour country is not enough for Ukraine. SaM Solution’s Rudak says, “We need to change the image of Ukraine so it is also seen as a high-quality labour country.”
Indeed, Ukraine has historically been strong in education and science; there are almost a thousand colleges and 600,000 students. The National Academy of Sciences, whilst reduced in the course of the 1990s “brain drain,” employs almost 30,000 engineers and researchers. Today the Academy supports 170 scientific research institutes, including the internationally-renowned Glushkov Institute of Cybernetics, and eight techno-parks which address the challenges of innovation.
So Ukraine promotes itself by letting world business leaders speak on its behalf. According to the Ukrainian president’s press service, in January 2005 during the meeting of Victor Yushchenko and Bill Gates in Davos, Gates praised the high intellectual potential of Ukrainians and called for investing in Ukraine. The newly-announced Advisory Investment Council included Mr. Gates; the president of the European Bank of Reconstruction and Development, Jean Lemierre; Moody’s Investors Service’s Raymond McDaniel; and other prominent business figures, appointed to the Council by Yushchenko’s decree.
A final ingredient of the IT outsourcing industry success is governmental support, a lesson learned from India. “Ukrainian IT outsourcers need at least the same degree of support that our counterparts in Russia or Belarus have,” says ProFIX CEO Eugene Kochkin, whose company specializes in banking and financial IT-related business process outsourcing.
In 2004 Ukrainian IT companies created an industrial association called “IT Ukraine” to educate the government. SoftServe, being one of the largest Ukrainian outsourcers with its 500 employees, was among the founders of the association, together with ProFix and Miratech. SoftServe’s Executive VP Taras Ververga emphasizes, “One of the major tasks of the Association is lobbying the IT industry interests in the government, as well as PR inside and outside the country.”
Recently, members of the association sent a letter to President Yushchenko suggesting a number of measures to improve the situation. Hopefully, the president’s involvement will trigger faster changes.
Growth Perspectives and Challenges
Since the Orange Revolution, the new government has demonstrated its intent to transform the country. Despite a Ukrainian economy heavily dependent on Russian oil and gas, Yushchenko is firm in his commitment to develop strong ties with the West. At the summit of NATO foreign ministers in Vilnius, Lithuania in April 2005, Ukraine was invited to begin an intensified dialogue on membership aiming to enter NATO in 2008-2009. It is also expected to enter the World Trade Organization by the end of 2005, and looks set for eventual membership in the EU.
On the opposite side of the news spectrum, the country’s political and economic environment is far from stable. The fall out between President Yushchenko and his Prime Minister Julia Timoshenko led the President to dismiss the Cabinet in September, which posed a question mark over the political stability in the country in the face of parliamentary elections that will take place in spring 2006.
But even if the government succeeds in sustaining stability and economic reforms, there are other factors crucial for the establishment of the solid outsourcing expertise in the country. Marriot asserts, “Once the large captive operations are established in Ukraine, it will raise its profile. This will increase the skill level and allow people to move into the IT industry more easily. It would have a knock-on effect on existing providers. Ukraine needs to have a strong value proposition, the right focus on skills, and the right type of organisations and marketing.”
The outsourcing industry is already raising its profile by organising the country’s second Ukrainian Outsourcing Forum on the 29-30th of November, 2005. For outsourcing entrepreneurs, reaping the benefits of the Orange Revolution is just a question of time.
About the authors:
Ulad Radkevitch is doing his PhD in management at Rotterdam School of Management, the Netherlands. Prior to starting the PhD programme he worked as Marketing VP at IT outsourcing provider ScienceSoft in Minsk, Belarus. Ulad can be reached at u.radkevitch@rsm.nl.
Natasha Starkell is an entrepreneur from Siberia, Russia who has lived in Switzerland and the UK. She founded her company, GOAL, to bridge the gap between Eastern European technology companies and Western businesses. Email her at natasha.starkell@goaleurope.com
The impact of the choice for democracy Ukrainians made in late 2004 spreads far beyond politics. This article elaborates on how the Orange Revolution can help the Ukrainian IT outsourcing industry to gain momentum.