Challenges, Setbacks, and Predictions for the Future of the Ukrainian IT Industry

Ukraine has long been known as the “Breadbasket of Europe”, feeding all corners of the globe. However, since 2014, the Ukrainian IT industry has become one of the country’s economic pillars and an important aspect of its worldwide image. In 2013, the IT sector accounted for just 1.6 percent of Ukrainian exports, but according to the latest estimates (2021), it now accounts for 8.3 percent, bringing it closer to agriculture and metallurgy year after year. Its power and resistance to yield to external influences such as the 8-year war since, 2014 and the COVID-19 epidemic have been recognised, and the unquestionable development and potential for this industry were previously described as unlimited. Of course, this was before Russia’s full-scale invasion of Ukraine broke out, on 24th February 2022. Now, the future is somewhat up in the air and the Ukrainian IT sector is trying to hold down the economical fort. 

In order to look back on Ukraine’s success in building its IT sector and to try to predict what the future has to hold for the tech industry, we gathered Peter Bendor-Samuel, CEO of Everest Group, and Anna Dziuba, VP of Delivery at Relevant Software. 

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Peter’s years of expertise tackling some of the biggest challenges disrupting the industry and Anna’s intimate understanding of the Ukrainian IT landscape helped us reflect on why Ukraine has been so successful and how Ukraine will continue to carry out its contractual agreements, whilst growing in GDP percentage despite the pressures of the Russian invasion.

Why has the Ukrainian IT sector grown so fast?

For some years, Ukraine has been one of Europe’s top exporters of IT services, and it is considered as one of the most attractive nations for the software development services. Currently, Google, Samsung, and Boeing have engineering centers in the country. Furthermore, the country has developed as a software outsourcing hotspot, competing for clients with India, the industry’s formally unchallenged leader. The government’s attitude to reducing red tape, the professionalism of Ukraine’s IT professionals, and the absence of government meddling are widely seen as critical for the continued development of Ukraine’s IT sector and the reasons for its success.

Anna believes that one of the reasons companies resort to Ukraine for outsourcing is, first and foremost, the low cost in contrast to other countries. She explains how, following the 2008 economic crisis, Ukrainian engineers launched their market entry by giving high-class services and a suitable culture to western corporations while pricing themselves on the cheaper end of the scale, in comparison to the west, a practice that continues to this day.

“They respect clients’ time, they deliver considerably better than a lot of other outsourcing areas on the market, and they have a strong technical education, with a very high level of expertise all over the country.” 

Anna shares that the decision to come to Ukraine for outsourcing is weighed more strongly on the results people heard Ukrainians were producing than because of the lower price. Telling us that the most important factor when selecting a partner is loyalty and references.

“The more clients we have, the more we get every year. We have seen exponential growth because we are doing good things and doing it constantly. Even though services are getting more expensive, it is the level of loyalty that matters.”

According to Peter, Ukrainians, unlike many other nations, do not have a high amount of churn and turnover of engineers, perhaps because of a lower level of aggressive poaching culture, which is seen throughout India. He believes Ukraine has mastered its recipe of mixing a service of very high quality with persistent teams, during a global shortage of engineers and therefore cashing in on the market just when it was needed.

Peter mentions how proximity was another factor. “Ukraine is in a better timezone than some other places in the world, and the engineers have good language skills”. He mentions that although they have been blessed with good investments, their culture is, perhaps, another reason for their success, citing “it’s a conservative culture, they tend not to want to overstate what they can do.” 

Stead-fast Ukrainians holding the line: Persistence and loyalty

The IMF believes the Ukrainian economy is expected to collapse by about one-third as a result of Russia’s military onslaught. The World Bank is even more pessimistic, forecasting that the Ukrainian economy would collapse by 45 percent by the end of 2022. However, the European Bank for Rehabilitation and Development estimates that Ukraine’s economy would grow by 25% in 2023, up from 23% in March, if a cease-fire agreement is reached before then, although reconstruction of the state will not begin until 2023. 

The persistence of the Ukrainian labour pool is undoubtedly one of the factors which bring companies to Ukraine, coupled with what many say is the loyalty of the Ukrainian engineers. Peter tells us how this persistence likely comes from Ukraine’s culture, which this war has only confirmed to the world. 

Anna tells how the war has shown how the Ukrainian IT community continues to work, after taking just a few days off to come to terms with what is happening. Ukrainians had their backup plans firmly in place for months, if not years, before Russia’s invasion. 

Why did vs why will customers come to Ukraine for outsourcing?

Peter is taken aback by how Ukrainian companies and engineers can deliver despite current challenges. He emphasises that the support Ukrainian companies are currently receiving in the face of Russian aggression and clients staying with Ukrainian companies is an act of solidarity. However, stating that this support, over their own business strategy, cannot last forever.

“Ukrainian firms are managing to shift operations either to parts of Ukraine, which are less war-torn, and with good telecommunications in place, thanks to Starlink and other vehicles, or they’re able to set up operations elsewhere, knowing that this will be a continuing issue.”

A global shortage

“The demand building for engineering skills looks like it’s going to outstrip our ability to stand up new supply. So, I think the favourable demand situation is likely that whatever happens in this war, as long as Ukraine remains part of the West and not doesn’t become part of Russia, where likely it will be impossible to do business. Ukraine is well-positioned. The world is suffering from a dramatic shortage of heavy-duty engineering tech capability. If you have that capability, the world will come to you. Ukraine has that and likely will again once this war ends.”

Anna discussed Ukraine’s future, focusing on the importance of engineers receiving an official technical education, such as a degree from a university, or the possibility of fast-tracking the education to try to fill the void with engineers and help Ukraine maintain its position as one of the top places to go for outsourcing.

A risky choice

How safe is it for engineers to go to Ukraine? Anna and Peter said working from home boosted COVID-19 and the tech industry. The war had an impact, but they were prepared. Peter said he wouldn’t turn to Ukraine for new dev teams at this moment, but clients have indicated that contracts currently signed would not be terminated as long as engineers can accomplish their jobs to the required level. Stating that, the more Ukrainians prove they can adapt, the less likely contracts will be pulled.

Peter notes that, like COVID-19, corporations want a diversified labour pool because of the high premium. It also gives the opposing side the security of knowing the crew is distributed, and the project is less likely to be damaged. Peter thinks Ukraine can’t secure contracts with new enterprises. 

The looming recession: The end of the rising salary

Peter mentions that despite all this, the fundamental demand in the balance of demand-supply will create upward pressure, meaning that it will be significantly harder to find this supply as we move into a recession. 

“Product management, data science, and deep engineering will continue to be in demand, and it’s likely those wages will continue to rise well above inflation, even in Ukraine. It’s just a factor of demand and supply.” 

“There could be a time when there’s excess demand over supply, and a really deep recession could put that there, but it’s unlikely to last very long because of the pressure building in this digital transformation, and just how much tech talent will be required globally, to convert these companies, from their traditional industries into tech companies.” 

Anna mentions how, until the end of the war, we should not expect a major raise. “We need to be happy at least to receive a stable wage, with perhaps what we started with.”

“The main component here is international currency and what happens to different currencies since currency movements frequently overwhelm any specific wage inflation or deflation. Forex concerns frequently determine whether a country or area is appealing over time. However, it is those 4x issues that will be extremely detrimental in the future. A country at war will force the currency to fall, resulting in an increased appeal in Ukrainian labour. It is dependent on how the war unfolds and how much risk would be recognised in the delivery system.”

Times of trouble: Maintaining the momentum

Due to a shortage of fuel, access to seeds, fertilizer, and equipment, up to 20-30 percent of Ukraine’s agricultural land is predicted to go unharvested in 2022, putting the burden of keeping the Ukrainian economy afloat squarely on the shoulders of the IT sector’s warriors. 

Although, the war hasn’t slowed down the first quarter of Ukraine’s IT sector. A record-breaking 2 billion dollars has been made in IT exports in the first quarter of 2022, a 28 percent rise over the same period last year, the National Bank of Ukraine said in a statement.

Throughout the war, the Ukrainian IT community has demonstrated its strength and tenacity by not only retaining existing clients but also signing new contracts. The success has not gone unnoticed, and some speculate that it will continue to demonstrate Its willingness to expand its year-on-year growth. However, the success of the first quarter could be attributed to the fact that the war did not begin until well after halfway through the first half. Many contracts were already nearing completion.

“From what I’m seeing right now, the first quarter was quite successful because we were halfway through it, but what we are now seeing is what is called the long tail in statistics, that is to say, we are riding on the success of the agreements we managed to close before the war,” Anna explained.

Peter adds that even though the risk is there for Ukrainian companies, it isn’t so easy to find an alternative. “These options involve months of effort; just look at Ukraine; it took years to establish that delivery capability, and it will take years to build it elsewhere.”

Who is profiting from the misery of Russia’s war on Ukraine? 

Someone always profits from every catastrophe, every political crisis, every war. But I was curious to know where that new flow of labour might lead. Who has the capacity to take on the additional load at the level Ukraine is capable of providing? 

Peter describes how India lacks experienced engineers at this point in the struggle. They can bring in thousands of freshers and young people out of college, but they must retrain them, which takes time.

“Only after five years, you can find someone with five years of experience, right?! It’s been an incredible two years for anyone who is a service provider; they’ve had an incredible run because of the need for experienced personnel; their stocks are currently down due to the anticipated recession, but their earnings continue to climb because there is growth there. It’s been a fantastic year, but it would have been a good year for these service providers anyway.”

Peter describes how this success was available for the taking prior to the war, owing to the overcrowded market. “The war will merely add five knots of wind to those other retailers searching for a place besides Ukraine, in an already strong storm blowing into the wind of the sails.”

Peter argues that firms will encourage the division of their operations to some extent to ensure that their customers receive whatever happens.

“People flee wars, and that will always be the case. This is going to happen with the tech community as they are more mobile than any other point, in terms of employment.”

Even in the midst of the war, IT companies and personnel already have the essential experience to operate wherever it is needed due to COVID-19. It is rather simple to up sticks one day and to relocate to another location, where one can quickly set up shop. In many circumstances, all you need is your laptop and a stable internet connection, which Musk has provided.

Anna agreed, adding that she believes many people will leave Ukraine, which will have an impact on the sector, but they are doing so by searching for a more secure and predictable life overseas. This does not indicate that they will stop working for a Ukrainian IT firm; rather, they will seek a more comfortable environment. For the time being, however, many people are unable to leave because men, as long as martial law is in effect, are bound by law to remain in case they are called up to fight.