Outsourcing in the Ukraine: benefits and drawbacks

The Ukraine offers highly skilled IT specialists at a low cost for companies looking to develop projects within Europe. But while the honesty of its people appears to be a key selling point, problems of corruption and the possibility of social unrest remain.

When UK companies consider the option of offshoring, India tends to be the first port of call, due to its technical expertise and the cultural ties between the two countries. But that could be changing, with nearshore locations such as the Ukraine vying for a share of the market.

Figures from the Ukrainian Hi-Tech Initiative, the country's outsourcing software development alliance, reveal the Ukraine's outsourcing industry is estimated to have grown by 20% in 2010.

It looks set to face India head-on, with software development the most popular outsourcing service, followed by software testing and application maintenance.

In the Ukraine, 18,100 IT specialists worked in the outsourcing industry in 2009. That figure is estimated to have risen by 2,400 last year.

Pros and cons of outsourcing in the Ukraine

Max Ishenko, founder of an online community for the country's developers, says the Ukraine previously had a large number of programmers but relatively low domestic demand for them.

Ishenko is frank about the pros of cons of outsourcing in the Ukraine. "One of the problems we have is English skills, which on average are quite poor. Also, people can often be stubborn, although in a good way. If they are given a task that is wrong, they will argue with you and say it is a short-sighted thing to do, but it means people are thinking before doing. The other good thing is that programmers usually have a good education in maths or physics so they can often tackle problems that are technically complicated."

Christophe Lemoine, chief technology officer at UK-based mobile application company Chartsnow, outsourced its development work to the Ukraine several years ago, and agrees that a collaborative approach is the only way to succeed. Lemoine spends around 70% of his time in the country overseeing project work.

"Originally I was completely against the idea of going out of Switzerland [where I was based at the time], as I'd heard so many stories about projects going wrong. But as the company was starting up, nearshoring provided the best value for money with our limited resources."

Lemoine says he decided against developing in Asia because he wanted people who shared a similar culture and were based nearby. Instead he opted for the Ukraine. "Including transport costs, we spend nearly half of what we would back home for these services," he said.

Torben Majgaard, CEO of Danish outsourcing company Ciklum, says the key to success is seeing the customer as the project leader. "The responsibility of the success of a project lies entirely with the customer, but we are aware that if the customer messes up they will be leaving us. So our employees guide the customer with a firm hand. But the customer has the final say," he said.

Majgaard believes Ciklum's unique selling point is the honesty of its people. "We offer the customer transparency, [a lack of which] is a classic problem with an outsourcing businesses."

Majgaard says he chose to base Ciklum's main outsourcing operations in the Ukraine after considering other options in Eastern Europe. "Labour is so much cheaper here. I looked at the Baltic states but decided they were too small and would join the EU, which would inflate costs. And while there are a lot of resources in St Petersburg and Moscow, they are too expensive," he said.

Cost of skilled labour

However, growing technical expertise and demand for developers has led to increasing labour costs. According to the European Business Association (EBA), the monthly earnings of IT specialists in the Ukraine has risen by $300 to $1,500 since 2010. In 2005, monthly pay was just $500.

With increasing demand for developers, wages are likely to continue to rise. And wage reduction is not an option as it could lead to a brain drain abroad. According to figures from EBA, the Ukraine currently has a shortage of 6,000 jobs for IT professionals. All of which could lead to the Ukraine becoming a more expensive destination of choice in the next five years.

Certainly demand for the Ukraine's technical expertise appears to be increasing. Dmitry Pretayev, a senior developer at Ciklum, says he has had around 30 job offers over the past four months, at three to four times his current salary. "I didn't want to go abroad because this is my home and my wages are comfortable here," he said.

Rising costs are not the only consideration for countries looking to move to the Ukraine. Michael Borg-Hansen, who has worked as Danish Ambassador in the Ukraine since 2009, said: "There is a running battle every day between the old system and the new. Official corruption is part of the culture here. The best way to combat that is for Western businesses to come here to invest."

Change is brewing, he says. "I wouldn't exclude the possibility of social unrest, similar to what happened in North Africa and the Middle East - those situations are being watched very carefully by the government here."

But the country's biggest asset remains its educated young people. "Many speak English and are internet literate. Companies employ these youngsters, and that's why they thrive," Borg-Hansen said.

With highly skilled labour that is still far cheaper than in Western Europe, he says there are big rewards for companies looking to do business in the Ukraine: "You have to be really resilient in business to make it here, but it's the same case in a lot of emerging economies."