State of IT Outsourcing In Ukraine

from the
State of CEE IT Outsourcing and Offshoring in 2021 Report

Ukraine as a software development outsourcing destination - highlights

+200,000

IT professionals on the market

+60%

of Ukrainian IT talent is being outsourced

$4.17 billion

value of the IT export in Ukraine in 2019

+20,000

IT graduates annually entering the market

IT Outsourcing and Offshoring in Ukraine

 

Ukraine — Key Facts

Size: 603,550 sq km, ranked 47st in the world by area (comparable to Texas)

Population: 43.92 million, ranked 33rd in the world by population

Time zone: (GMT+3)

Government: semi-presidential republic

Official languages: Ukrainian

GDP per capita, PPP: $13,341 (2019 est.) 

Human Development Index: 0.750 (ranked 88th | high)

Currency: Ukrainian hryvnia (UAH)

Economy: mixed economy, emerging 

Main industries: power generating, fuel, metallurgy, chemical and petrochemical, machine-building, forest and wood-working, construction materials, light, food 

Major urban areas (over 500K people): Kyiv, Kharkiv, Odessa, Dnipro, Donetsk, Zaporizhia, Lviv, Kryvyi Rih

Ease of doing business: ranked 64th, DB score - 70.2

Digital competitiveness index: #60 out of 63 | #40 Knowledge #61 Technology #62 Future readiness

Corruption perception index: 126/198 (-6 places since 2018)

The WE Forum Global Competitiveness Report: #85, with a downward trend

A.T. Kearney Global Services Location Index: 20th

Universities: est. 280-800 HE institutions – huge discrepancies in the number depending on the source; six universities listed by QS World University Rankings® 2020 (one ranked 491, the rest >500)    

The largest IT companies: SoftServe, InfoPulse, Intellias, N-iX, Sigma Software, Grammarly 

IT industry market share: 4% of GDP, 1.3% share in employment, 5,600 IT companies, ca. 200,000 IT specialists

EF English Proficiency Index: 52.13 *(below average)

International Olympiad in Informatics: 88 medals, 10 gold, 32 silver, 46 bronze

IT outsourcing in Ukraine at a glance

 

Ukraine is systematically gaining weight as a go-to CEE IT outsourcing destination, mainly due to two dominant factors – a vast tech talent pool combined with low labor costs. The largest by size and population of the four discussed countries, the country has a vibrant tech community actively engaged in regular meetups, seminars, and conferences.

The Ukrainian ICT market, comprising over 5,600 companies, is the third-largest exporter of services in the country. 60% out of 200,000 software specialists work in outsourcing businesses. The gigantic pool of IT professionals is regularly expanding as, each year, about 20,000 tech students graduate from Ukrainian universities.

Renowned for its citizens' contribution to technological development, Ukraine regularly attracts foreign investment, hosting over 100 R&D centers of multinational tech giants like Microsoft, Ericsson, Siemens, and Oracle. It is also home to worldwide startups and organizations, such as GitLab, Grammarly or Template Monster.

 

Development rates in Ukraine

 

Attractive development rates are the country's strongest outsourcing asset.

  •  A person working in the IT sector in Ukraine typically makes around $800 per month.
  • Entry-level professionals get about $500 per month.
  • IT&C managers earn ca. $1,200 on average.
  • Average hourly rates range from $20-$40/hour, depending on experience and technology. Considering that Ukrainian developers score 8th in a global ranking of IT skills (Poland's 5th, Romania - 19th, and Belarus 21th), this is excellent value for the money.

While all these factors make Ukraine an increasingly popular outsourcing destination, the country struggles with several ongoing challenges that may hamper foreign engagement.

Despite gaining independence from the USSR in 1991, Ukrainians have been continuously fighting for survival as an autonomous nation. Ukraine remains in a de facto state of war with Russia over the status of Crimea and Donbas. About 7% of the country’s internationally recognized territory has been annexed by Russia or is controlled by pro-Russian circles.

The political risk remains the most significant deterrent for foreign engagement with Ukrainian businesses and providers. Eight out of ten foreigners who have decided to pursue business opportunities admit that Ukraine is difficult to do business.

Internally, complaints persist about widespread corruption, flawed judiciary, ineffective governance, and obscure legal system. Indeed, Ukraine ranks 126th out of 198 countries for corruption, down by six places since 2018. The country also has lowered its global competitiveness index score, and scores the lowest out of the featured countries in ease of doing business. The English proficiency index in Ukraine remains below average, even though most IT professionals probably speak the language at an intermediate level.

Many Ukrainians demonstrate pro-European sentiments, hoping for closer integration with the EU. They quickly adopt Western values and work ethic, seeing them as a chance to break free from the Russian sphere of influence. The country authorities are actively seeking reforms to crack down on informal business practices and stamp out corruption. However, as long as Ukraine remains entangled in a military deadlock and political unrest, significant obstacles to international business remain.

 

Investing in the Ukrainian IT market

 

Ukraine's huge software development market comprises over 100 R&D centers, a majority of which are owned by multinational businesses. The United States remains the country's leading partner for software consulting activities, followed by the EU and Israel.

As in Romania, in Ukraine, the export of IT services serves as an essential pillar of the country's development, contributing $4.17 billion to its economy in 2019 (a 30% growth compared to the previous year). The local IT&C outsourcing services mainly focus on finance, healthcare, eCommerce, and telecom, with the gaming industry playing an increasing role.  

Major foreign investors

According to Hi-tech org, "a majority of foreign investors indirectly entered the Ukrainian market through M&As, joint R&D with an outsourcing component, or outstaffing service companies." Skype, eBay, Microsoft, Ericsson, IBM, PWC, Ubisoft, Upwork – they all chose Ukraine as one of their outsourcing destinations, either establishing regional branches or delegating projects to local outsourcing teams.

Incentives to invest

The Ukrainian authorities are regularly revisiting the state's existing fiscal regime to attract foreign investors. The main tax reform was conducted in 2017 to simplify the administration of taxes and decrease their number. Still, the Ukrainian tax laws remain relatively complex and obscure. 

  • Legislative advantages for local and foreign investors include customs duty and import VAT reliefs, a feed-in tariff, and fiscal benefits for the IT sector.
  • According to Moore Global, "the most widespread business model used by foreign businesses for outsourcing software development to Ukraine is the establishment of a local Ukrainian entity to retain and coordinate the work of local developers."
  • Most Ukrainian software developers are self-employed. As such, they are eligible for reduced tax rates on income.
  • Transactions in software supply and transactions with software not deemed under royalty are exempt from VAT. However, IT services, in general, are VAT-taxable. These provisions alone demonstrate the intricacy of the Ukrainian fiscal regulations.
  • Last year, Ukraine launched its pioneering legal and economic model, Diia City, to support the IT industry through a series of legislative and fiscal benefits. These will include, among others, replacing corporate tax with dividends taxation at a 10% rate and introducing a 5% personal income tax rate for IT employees.
  • In 2020, the President declared that Ukraine would ensure the support of multilingual, around-the-clock nannies for children of entrepreneurs contributing $100 million or more to the country's economy.
  • In the same year, the country imposed a corporate tax on foreign investors selling out their Ukrainian businesses.

Deloitte provides a comprehensive overview of Ukraine's taxation legislation.

 

Higher education in Ukraine

 

Determining the number of higher education institutions in Ukraine is somewhat challenging since even the official sources fail to agree on their count. 

As Сегодня portal reveals, in 2019, there were 1388 institutions entered in the country's Register of Higher Education Institutions. They included public and private universities, institutes, colleges, academies, vocational schools, and other facilities considered tertiary education institutions. Significantly, about 241 of these establishments existed on paper only, with not a single student enrolled. 

The proliferation of fake or substandard HE schools that lack accreditation (often set up to extort tuition, exert political influence, and provide illegitimate degrees for money) is a broadly-discussed issue in Ukraine. Finding the way to consolidate and standardize tertiary education and make schools more transparent and accountable has been on the Education Ministry's plan for several years. 

Academic corruption is a prevalent issue in tertiary education in the country, negatively affecting education quality in many Ukrainian schools. Other problems troubling Ukraine's HE sector aside from bribery in admissions and examination fraud include outdated curricula, inadequate facilities, and lack of research institutions' autonomy.

These issues negatively impact the perception of Ukrainian higher education and contribute to the mismatch between education and labor market demands.

All the same, Ukraine can boast some prominent universities that are listed on global school rankings. They include the National Technical University of Ukraine, Kharkiv National University of Radioelectronics, and the Ivan Franko National University of Lviv.

  • At 99.97%, Ukraine has the highest literacy rate of all the featured countries.
  • The number of students is estimated at between 1.3 and 1.5 million. Again, these figures are tentative, depending on what counts as a higher education institution.
  • As opposed to other countries in the CEE region, in Ukraine, public universities charge tuition. About half of students are exempted from fees on account of excellent grades or tough financial situation. The rest have to pay for studying, albeit charges remain rather low (ca. $1,000/academic year on average). 
  • Next to Belarus, Ukraine is one of the countries with the highest tertiary school enrollment ratio (by far exceeding Poland and Romania) in the world. However, the quality of education in most establishments remains highly disputed. 
  • Kyiv Mohyla Academy is the country's oldest HE establishment. Founded in 1615, it has survived periods of glory and neglect, e.g., serving as a navy school during Soviet times. 
  • Ukrainian institutions provide the same degrees as Polish, Romanian, and Belarusian HE establishments, i.e., Bachelor (4 years), Master (1-2 years), and Ph.D. (3-6 years).
  • Ukraine has one of the largest share of computer science and STEM graduates in Europe, nearly 10%.
  • The fees for international students vary greatly, starting from $1,200/year up to $5,000, depending on the study program.
  • Courses are taught in Ukrainian and Russian, with English-taught programs widely available.

Ukraine's startup ecosystem

 

Year by year, Kyiv is climbing up the Global Startup Ecosystem Ranking. In 2020, the Ukrainian capital ranked as the 32nd best city for startups, the highest of all CEE regions. Leveraging its large pools of highly capable tech talent, low service costs, and substantial market size, the Ukrainian metropolis has been developing an entrepreneurial spirit for at least a decade. 

As opposed to the Polish or Belarusian counterparts, Ukrainian startups are heavily orientated towards foreign investment. "According to the Ukrainian VC Association, 90 percent of investment in Ukrainian startups comes from a foreign investor," says Dominique Piotet, the UNIT CEO.City Innovation Park in Kyiv (source: Emerging Europe). 

In terms of the investment volume, it exceeded a half-billion mark for the first time in 2019, with an average deal size of $5.7 million, a 78% increase compared to 2018. 2020 was another record year, with VCs pouring over $1.5 billion in Ukrainian startups. These numbers suggest that entrepreneurship develops vigorously despite the country's shaky economy.

Key startup cities

Kyiv, Lviv, Odessa, Kharkiv, Ternopil

Startup ecosystem in numbers

  • Ca. 500 startups
  • Ca. 35 VC firms
  • +100 incubators and accelerators
  • Estimated 200,000 software specialists

Focus industries

SaaS, eCommerce, security, ML/AI

Success stories

  •  Grammarly – one of Ukrainian unicorns, Grammarly’s AI-based online writing assistant, first released in 2009. It gained international traction (and a $1 billion valuation) nearly a decade later, reeling in two funding rounds totaling $200 million.  
  • GitLab – founded in 2014, this web-based Git repository manager was an instant success among users. It didn't take long before the company obtained funding to develop the platform. Altogether, GitLab has raised $434.2 million over nine rounds, joining the unicorn club in 2018.
  • Preply – Preply connects students with over 30,000 private tutors via online chat, using AI algorithms. Set up in 2012, it is funded by 25 investors who have jointly contributed $15.5 million to the platform's development and expansion.
  • People.ai – another AI-focused Ukrainian startup that develops artificial intelligence. The company has already gathered over 50 globally-recognized brands in its customer portfolio (including Zoom, Zendesk, Lyft, Malwarebytes, and Randstad) and raised $100 million in funding over five rounds from a variety of private investors.
  • Ahrefs – a popular toolkit for backlinks and SEO analysis, Ahrefs was founded in Ukraine ten years ago. Today, it generates $40 million annual recurring revenue. Interestingly, it is a self-funded venture that never obtained any external investment.

Challenges

  • Unstable venture market, weak judiciary system, and high corruption risks
  • Possible overreliance on foreign capital caused by limited local funding opportunities
  • Mass exodus of founders looking to safeguard their investments abroad

Pros of software development outsourcing in Ukraine

  • Well-educated, talented workforce
  • Diverse tech skill set covering various technologies and languages
  • Innovation hub, and home to many prominent IT companies
  • Excellent quality-to-price ratio with low labor costs
  • Visa-free entry for the majority of countries
  • Well-established center for outsourcing services
  • High score on the Global Services Location Index

Cons of software development outsourcing in Ukraine

  • Below average score in English proficiency
  • Low competitiveness and ease of doing business scores
  • Endemic corruption with little signs of improvement
  • Political instability and strong dependence on Russia
  • High rates of inflation and fragile economy
  • Complex regulatory environment and lack of transparency
  • The abundance of red tape and administrative hassle
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The State of CEE IT Outsourcing and Offshoring 2021 Report
Belarus • Poland • Romania • Ukraine

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Best devs in the world

CEE countries are world-renowned for their software developers who are said to be one of the best on the globe.

Huge talent pool

There are over 1 million software developers in the CEE region, skilled in various technologies and experienced in every industry.

Competitive rates

Software developers' hiring rates in the CEE region can be 2-3x lower when compared to the US and Western Europe.

Cultural proximity

Great English skills and vast experience in working on international projects. CEE devs have been supporting startups worldwide for years now.

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