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By David Packwood, Vice President of Sales and Marketing
“In the past three years Ukraine has undoubtedly become the most attractive outsourcing destination in Eastern Europe. With the second largest population after Russia, a legacy of Soviet science and success-hungry entrepreneurs, the country boasts the fastest-growing software development industry.” - Natasha Starkell, CEO, GOAL Europe
Offshore Software Development Outsourcing: A strategy that is here to stay.
Offshore IT outsourcing has gained both momentum and credibility in recent years, and today it is an integral component of the IT strategies of many major corporations in both the United States and Western Europe. The increasing shortage of technical professionals in their own countries, coupled with the ability to obtain high-quality IT services at a lower cost in emerging nations, has compelled a wide spectrum of companies to send technology and software development projects offshore.
Industry analysts, academics and practitioners are predicting steady growth of demand for IT offshore development. According to the CIO.com “2008 State of the CIO” issue a recent survey conducted with 558 heads of IT showed that 46 percent said they outsource or otherwise contract out 1-10 percent of their IT functions, up from 41 percent last year.
The declining allure/attraction of traditional offshore “hot spots”
Historically, countries such as India and the Philippines were considered “hot spots” for offshore services, and rightly so. Labor rates in these nations were incredibly low, talent readily available and projects were getting done. However, the burgeoning demand for offshore development services in these countries has led to a proliferation of international IT service providers, an increase in labor costs and a heated competition for skilled IT talent. As project team members are increasingly lured away to competitors, attrition rates have climbed, projects have stalled, and service and quality levels are dropping in some of these traditionally favored offshoring destinations.
For example, in the world’s number one offshoring destination— India—the number of available skilled workers has decreased as many top professionals move to Western countries where they can earn three-times their Indian salary. According to a survey of 540 companies in India conducted by Hewitt Associates and completed in January, 2008:
• Salaries in India rose 15.1 percent in 2007, up from an average of 14.4 percent the previous year
• In 2008, compensation is expected to increase by an average of 15.2 percent, making it the fifth year in a row that salaries have risen in excess of 10 percent
• IT staff turnover has reached an all-time high in India, with the information technology services industry at 28.9 percent
“The struggle for talent and sustainability is large and rapidly growing in India. Organizations are using compensation as a strategic lever in attracting, retaining and motivating talent,” said Sandeep Chaudhary, head of Hewitt Associates’ India consulting practice.
Adding to the mix, the Indian rupee rose more than 11 percent in value against the U.S. dollar in early 2008. A continued decline of the dollar could make it more difficult for U.S. service providers in India to absorb the increasing costs and negatively impact both service and delivery quality.
Due Diligence is Key When Selecting an Offshore Partner
Although the draw of a “lower-cost” country for offshore IT oursourcing is compelling, it’s critical to consider a number of equally important factors when deciding in which nation(s) to establish offshore operations or partnerships.
Among the considerations to take into account:
• Availability of skilled IT labor
• Competitiveness of service providers
• Cultural compatibility
• Language proficiency
• Government support
• Educational system
• Infrastructure
• Intellectual property protection
The value of a multi-national offshore approach
As a result of the changing dynamics in India and other popular offshore destinations, an increasing number of companies are starting to expand their offshore locations to include other emerging countries. This multi-country strategy enables these organizations to reap the benefits associated with up-and coming offshore destinations, such as greater workforce availability, language proficiency, cultural compatibility and a shorter timezone difference.
Globally diversifying offshore IT projects allows buyers to minimize the risks and maximize the rewards associated with international outsourcing. It allows companies to:
Ensure business continuity if unforeseen logistic or political issues disrupt the supply chain in one country
Rapidly scale bandwidth to meet production requirements
Encourage healthy competition among different providers to drive the best prices and service quality, increasing the vendors’ desire to add more value to the services they provide
Expand their access to different skills and varying technology
Transfer best practices from one vendor to others
Capitalize on the Ukraine advantage
In a 2007 KPMG survey of more than 100 companies, over half of CIOs said they planned to boost spending on suppliers in Central and Eastern Europe, less than a third forecasted similar increases in Asia’s emerging markets. The survey found that although Eastern Europe still charged more for IT outsourcing than Asia, the cost was counterbalanced by the high quality, innovation and ability to cater to local needs.
Increasingly, companies are choosing offshore providers in Eastern European countries such as Ukraine, where language skills are better and outsourcing providers appear to have a more in-depth understanding of their clients than competitors farther east. Ukrainian offshore outsourcing companies have been providing software development services since early 1990s, when its highly educated engineering and scientific workforce refocused direction after the Soviet Union disbanded. According to a goaleurope.com study conducted in 2007:
Ukraine saw a 47 percent increase of IT services in 2006
Its offshore outsourcing industry accounted for $246 million in revenue, and employed over 7,500 people
There are 30,000 IT graduates entering the workforce each year
The high-value solution
Outsourcing IT projects to offshore providers has proven to be a viable and effective strategy for companies seeking to decrease costs while maintaining product quality and innovation. As the number of offshore IT providers and locations multiplies, organizations are well served to thoroughly evaluate their options in order to implement the most profitable and risk-averse offshore solution. An ideal venue to consider is the Ukraine— where highly skilled workers, innovative processes and results-driven services are the norm.
About the Author
David Packwood, Director of Global Solutions, TEAM International, has a distinguished career in high technology and a tremendous amount of international business experience working with clients in India, Australia and UK on offshore application development, growth strategies and improving efficiencies and profits. During his 30 year professional career David has been President of two software solutions companies, has held senior executive posts at three consultancies, and has held management positions with Xerox in the UK.
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Why Ukraine? |
| Lower Cost |
The region offers low wage levels and is expected to stay that way for the next 15 years. Additionally, because of the recent decline in the U.S. dollar against the pound and the Euro, Western European companies working with American-owned Ukrainian firms have seen an added discount upwards of 50 percent in their offshore costs. |
| Education System & Abundant IT Labor Pool |
Ukraine has a superb educational system with 87 percent of high school graduates going on to higher education. Of those, 35 percent choose information technology related disciplines. In 2007, there were 670,000 technical students and more than 30,000 computer graduates. |
| Communications |
Higher education in the Ukraine provides foreign language courses for students studying computer disciplines, so that software developers can communicate effectively with counterparts across the globe. |
| Western Company Presence |
A significant number of Western companies have established their presence in Ukraine. Amongst them are Hewlett-Packard, Johnson & Johnson, Ericsson, Siemens, Kraft Foods, Cisco Systems, Deloitte, PwC, KPMG, GE and Mittal Steel. |
| Geographic Proximity to Western European and U.S. Markets |
Ukraine’s closer proximity to Western Europe and the U.S. makes travel more convenient and allows for work schedules to overlap for at least a few hours, enabling much closer collaboration, more frequent communication and greater efficiency. In addition, the lack of visa requirements for EU and U.S. visitors makes it easier to travel to and from Ukraine than other offshore destinations. |
Media Contact
David Packwood
(407) 708-1143
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