Ukraine may become the next India for IT outsourcing, experts predict.

The upswing in Ukraine IT industry can be seen from different perspectives

Sergey Atamas, a managing partner of Kreston GCG, shared his views on the present state of the IT industry in Ukraine with Finance.ua and predicted the country may become the new outsourcing giant.

Real estate is a very popular business sector among Ukrainian entrepreneurs. But, according to Mr. Atamas, the upswing of IT area these days makes this field no less attractive for income generating activities. The majority of Ukrainians grasped this point long ago, and now either they, or their relatives, or neighbors are somehow connected with IT area.

Sergey suggests to have a closer look at the present IT state in Ukraine.

Ukrainian IT market situation

1. According to NBU (National Bank of Ukraine) data, the 2018 growth of revenue from IT outsourcing came to 3,204 billion dollars, which is 29% compared with the last year figure.
2. As stated by the Ukrainian Statistics Service, in 2018 profits from the IT outsourcing amounted to 1,578 billion dollars with the growth of 20% by contrast to 2017.
3. As follows from Ukrainian programming source DOU, by the end of 2018 the headcount in IT outsourcing totaled to 159,687 professionals. Since January of the same year, when there were only 125,000 officially registered specialists, the increase totaled up to 26%.

The above information enables to make a rough assessment of Ukrainian IT outsourcing, where the difference between revenues and profits and the shadow business existence are taken into account.

1. The average headcount of outsourced IT professionals is 143 385.
2. Their average hourly pay is $25 per hour.
3. The average number of man-hours with a 30% reduction rate is 1,344.
4. The average profit is 4.8 billion dollars.

By the end of 2018 the headcount in IT outsourcing totaled to 159,687 professionals.

Conclusions

1. As before, IT outsourcing is one of main contributors to Ukrainian taxation system partially thanks to enterprising and non-residential labor. Although, the difference between statistical data and the real income might be as high as 70%.
2. All the above data (revenues, profits and headcount) for 2018 show stable average growth of a 20-29%.
3. As per NBU, the 2018 total revenue from overall Ukrainian goods and services outsourcing was 59,117 billion dollars, where IT share comprised of only 5.4%. The transportation share was, for example, 10% (5,923 billion dollars).”

Global statistics and trends

1. The data of total IT area and its growth (without Hardware: Enterprise Software, Data Center Systems and IT Services) is:

• 3,699 trillion dollars and 4.5% – according to Gartner;
• 3,779 trillion dollars and 5% – according to IDC.

2. The size of the IT services market and its growth rates:

• 987 billion dollars and 5.9% – according to Gartner;
• 1 trillion dollars and 4% – according to IDC.

In general, Ukraine’s share in the global IT services market roughly amounts to 0.5%. Since IT outsourcing greatly outnumbers IT outstaffing and product development, this fact provides basis for the following estimates:

With reference to Statista agency information, in 2018 the Ukrainian ITO (Information Technology Outsourcing) results totaled to 62 billion dollars with a slight drop of 3%.

The main leader of this IT segment was India and, in particular, Tata Consultancy Services with a staff of 335 thousand people and more than 15 billion dollars income. The 2018 Ukraine data for this segment was 7.8%.

In general, Ukraine’s share in the global IT services market roughly amounts to 0.5%.

Outcomes for the IT industry

The global IT market growth is not too high – about 6 %. But Ukrainian IT companies have found their own formula for success. 20-29% increase in IT sales and the forecasts for its further growth lead to following conclusions:

• the growth is induced by competitive advantage;
• Ukrainian share of global IT market is still too modest. The boost of this share will lead to further stable development of IT business in this country.

Ukrainian IT landscape

“As per DOU statistics, based on January 2019 data, 45,471 of specialists were employed in top 50 Ukrainian IT companies, which represented about 29% of the total data processing headcount for the country,” states Mr. Atamas.

“Top 200 Ukrainian IT companies consist of 5 companies with more than 1,500 staff, 11 companies with 800 -1,500 of employees, 67 – with 200-800 and the last 122 – with 80-200 headcount.

About 30 companies from the above list focus on the product development and the rest – on outsourcing and outstaffing.

During 2018 the number of data processing specialists grew to 32,697. Nevertheless, the annual amount of Ukrainian IT graduates is only 16,000. The main reasons for such a difference are:

• some schools and academies are based on the companies’ grounds enabling their future staff to receive qualified training on the sport;
• variety of retraining courses that re-qualify people for IT employment;
• the return of specialists who previously left Ukraine

The central idea is that large Ukrainian IT companies, even though they do not employ the main force of IT professionals, represent a major driver for the evolution of this industry”.

About 30 companies in Ukraine are focused on product development, the rest – on outsourcing and outstaffing.

Development prospects

“The detailed analysis proves that Ukrainian IT industry is booming nowadays,” specifies Mr. Atamas. “And this boom can be explained by the following:

1. The rate of IT sales growth quintuples total global growth rate.
2. The international reputation of Ukrainian IT companies is gradually improving by means of growing investments in new startups, large-scale M&A acquisitions and significant international IT agreements.
3. Large clients prefer dealing with joint IT service providers, thus promoting higher earnings of Ukrainian companies.
4. These days we can observe a global trend of increased focus on successful IT solutions of business problems. As this is considered by many clients as more important aim than outsourcing, Ukrainian firms are forced to adjust by hiring extra analytical staff.
5. An increasing government involvement in Ukrainian IT industry progress facilitates its international public relations course.
6. The integration of IT companies into Ukrainian higher education system gives a boost to readjustment of academic programs and creates high demand for skilled specialists.
7. Successful IT firms bet on formation their own training programs and academies.
8. IT clusters that locally unite their participants are created in 17 Ukrainian cities.”

Obstacles

Mr. Atamas points out that there might be a few obstacles to growth momentum of Ukrainian IT industry, which are as follows:

1. Failing management systems of many IT firms may slow down their quick development.
2. Personnel qualifications in some companies do not meet the customer requirements.
3. These days the market for IT outsourcing is oversaturated with low-cost Indian and Chinese competitors with much superior abilities and properties.
4. Customers are now less interested in dealings with the only one IT service provider, thus jeopardizing the growth of current sales.
5. The inability of some IT firms to adjust to rapidly changing technologies leads to the risk of losing customers.
6. USA, which is a single largest consumer of Ukrainian IT services, is planning to pass anti-outsourcing legislation.
7. European requirements to personal data safety may create difficulties for further international expansion of Ukrainian IT business.
8. Further taxing optimization in Ukraine may pose limitations for the country sole trading system, which would have a negative impact on salaries growth.
9. There might be a shortage for highly qualified IT staff due to insufficient number of IT graduates.

Is it worth to invest?

Mr. Atamas is convinced that Ukrainian IT industry opportunities attract many investors. The main point is to make a careful choice of the most appropriate strategy towards the current situation. These days witness trend for business ecosystems, when consumers, suppliers and competitors are all partners that coexist in one business model. And those who have learned to manage cooperation will receive the greatest benefits with minimal financial costs.

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