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26 March, 2015  ▪  Anna Korbut,  

Catching Up With the Future

The present and future of IT business in Ukraine

Diners browse menus and order food, show presentations to partners while having an afternoon espresso, and call a taxi at Ebony, a restaurant in Dubai, from interactive tables that look more like giant tablets. Grammarly finds and corrects mistakes in English texts written by students, writers, journalist and businesspeople all over the world. A new device called Petcube enables you to watch your pet, talk to it through a mobile app and play with it with a laser ray when you’re not at home. “In the future, I will live at pet shelters, so everyone will have a chance to play with rescued animals, and maybe adopt one of them,” says a voice from a little steel cube in a good-quality promo video in English. Software developed for a huge European bank automates its loan-issuance decision making process. One thing all these innovations have in common is Ukrainian developers.

Interactive Restaurant Technology developed by the Kyiv-based Kodisoft developer

 

 

 

 

 

 

 

 

 

When most Ukrainians think of IT business, they picture hi-tech future, stylish offices, and windfall profits. This is hardly surprising: an average salary in most IT-companies in Ukraine ranges from USD 500-600 for beginners to USD 3,400-4,000  and more for experienced specialists and project managers, compared to around USD 100 for a doctor at a public hospital or USD 300-400 as an average salary in a big city. IT-firms offer good working conditions and an opportunity to move to a European country, Canada or the United States. Since most of these firms are branches of Western companies or work with Western clients, their US dollar or euro-denominated income makes them ever more attractive in the eyes of employees and more competitive internationally given the plummeting hryvnia. Can these companies drive Ukraine’s economy, as is widely assumed? Can the IT business, as it is now, turn Ukraine into a regional leader in innovative technology in the foreseeable future?

Brain drain

Ukraine has been a leader in exports of software since 2007. Country Profile 2015, an analytical publication by the American Chamber of Commerce, quotes Yevhen Sysoyev, a managing partner at AVentures Capital, projecting that the export of software will grow from USD 2bn in 2013 to USD 4bn in 2016. DOU.ua, a website that covers IT industry in Ukraine, estimated the expansion of staff in top 25 IT companies in Ukraine at 34.9% in August 2012 from August 2011, 17.9% in August 2013 from August 2012 (many blame the slowdown on the Yanukovych regime under which business owners and specialists saw no prospects in Ukraine and were slowly leaving the country), and 15.8% in July 2014 from August 2013, despite even the political turmoil and the war in the East. The number of new vacancies shrank 17% from August 2013 to July 2014, however.

The problem with outsourcing is that what resides of it in Ukraine is mostly salaries that local specialists spend on the domestic market and their experience (many experienced IT-professionals eventually leave Ukraine to work abroad). Most outsourcing service providers have their head offices in Western countries, so taxes and intellectual property rights remain there. This is somewhat similar to outsourcing in China. Most European and American product companies have their manufacturing and compilation facilities there, but brand value and image, added value of the product, as well as reputation rest with the Western brand owner, not the Chinese subcontractor.

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Meanwhile, the domestic Ukrainian market is too underdeveloped. According to IDC, an analytical firm, IT services produced for it amounted to USD 320mn in 2013. The domestic market for IT services shrank 40-50%, while the outsourcing market grew 20-30% in 2014. This is partly due to a serious slack in demand or availability of funds to invest into customized solutions and software products in both private and public sectors in Ukraine. Meanwhile, when Ukraine does not implement it and other countries do, it loses competitiveness. “The IT industry is an important, independent economic factor as an ‘enabler,’ or driver of other sectors: As a cross-section technology, the IT industry has become indispensable, especially to Germany’s showcase industry, the automotive sector,” says Ralph Haupter, Board Chairman of Microsoft Deutschland, in an interview for International Trade News. According to Mr. Haupter, IT not only generates economic growth but can solve social problems by providing equal growth opportunities through individual education; improve the balance of work and private life by providing flexibility at work; simplify administrative processes, or offer better quality of healthcare. However, IT solutions and technologies should be used and promoted properly to achieve that, Mr. Haupter concludes.

Ukraine is seriously behind even its Eastern European and CIS neighbors in that respect, although the infrastructure of the future will largely be shaped by what countries currently invest into computers, mobile connection networks, internet-infrastructure and other communication channels. According to IDC, an analytical firm, IT spending per person is USD 53 in Ukraine compared to USD 90 in Belarus, USD 108 in Kazakhstan, USD 278 in Poland and USD 522 in the Czech Republic. Ukrainians will hardly start spending more on IT products unless the economy begins to grow again. 

The developers of Skwibl, a tool for easy interactive communication between designers and their clients, completed a program at Eastlabs, a Kyiv-based accelerator, before heading to Australia seeking an international launchpad for their product through ANZ Innovyz START, an Australian accelerator. “Our participation in the program was extremely useful given how big and design and technology savvy the Australian market is,” says Tetiana Protasova, member of the team behind Skwibl. The basic tool is free to use but extra tools will be available for a monthly subscription. For now, this would hardly be an option in Ukraine, a 40-plus million market, due to the lack of money or culture of intellectual product consumption.

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The war, coupled with political and economic instability, is pushing outsourcing companies to relocate their offices to Ukraine’s quieter neighbours on a massive scale, causing huge brain drain. “I think four people from my former team of five have left Ukraine in the past year,” says Oleksiy, a long-time IT-specialist. “Two went to Poland, one to Germany, and one to Canada. They do not start their life from scratch in a foreign country: companies create comfortable living conditions for them from day one of emigration.” Most of the people who leave are experienced specialists.

At the same time, many lament the declining qualification of IT specialists in the past few years. When the “software rush” only began, it lured people with degrees in mathematics and similar fields. “Such specialists have well-fit thinking, logic and technical approach,” Ihor Lushchyk, a developer at Datamart Llc, comments. “Today, many people come from completely different fields. This is not always good. They can do simple things from the beginning and numerous companies, especially outsourcing service providers, hire them.” Eventually, however, they gain narrow skills, and that affects the quality of their work in the future. They will also hardly be able to create something innovative or unique. “That’s why we are now seeing a slight slowdown in this. And it is likely to get worse,” Ihor concludes.

Despite all this, outsource companies are extremely important for Ukraine: they create jobs and give people expertise, as well as a sense of stability.

In pursuit of innovations  

Product-oriented startups are mushrooming in Ukraine but few become really successful. The ones that have managed to bring a new product to the market are mostly based in the United States and pay taxes there. Indeed, it is easier for a Western market-oriented startup to have its head office in the US or Germany than in Ukraine or Russia. This will continue until Ukraine’s domestic or regional market becomes big and dynamic enough to offer attractive prospects to startups and products. Another critical factor that reveals actual progress in the industry and business is the number of R&D centers operating in a country. These require huge investment that does not necessarily pay off soon. Even if Ukraine has no spare money to invest into R&D, it can create an attractive climate for investors that can do that. Israel has a government program to encourage the opening of R&D centers through tax incentives, government guarantees and opportunities to promote innovations. In the United States, business representatives begin to search for their future talents in universities. They do so by funding R&D centers, giving grants to talented students, and holding annual conferences where potential tech-stars can meet with their future employers. The universities, in turn, are interested in inviting business professionals as lecturers: this adds to their prestige and increases the value of their education. In Ukraine, outsourcing companies are mostly luring talented professors from universities, leaving few enthusiasts to educate and motivate young geeks.

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The ACC’s Country Profile points at three main challenges for Ukraine’s IT-industry this year: the war in the East, the deficit of qualified specialists, and corruption that scares off new investors. Eliminating the first one is difficult indeed. The other two, especially corruption, are only a matter of political will and strategic thinking. 


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