IT Outsourcing to IT Service: Opportunities for Ukrainian Tech
By Dathan Duplichen
The Ukrainian tech sector is poised to cross ten percent of GDP, generates $360 million US Dollars (USD) in tax revenue, and accounts for over $5 billion USD in exports. As a percentage of commercial services as a whole it equated to 53.05% in 2019. The growing significance of this sector to the Ukrainian economy is evident. In order to continue rapid growth, the sector is beginning a shift from IT Outsourcing to IT Service. A brief history of the Ukrainian tech sector allows for insight into how a sector that once could not afford to keep the telephone on, is now the second largest exporter in Ukraine.
Ukraine in Transition: Adapting to Independence
During the Soviet period Ukraine served as the second largest research and development region, second only to Russia. This resulted in a high quantity of technically trained talent during the period; however, their research focused primarily on material science and mineral extraction. After independence in 1991, the tech sector entered a period of stagnation. The largest purchaser of goods, Russia, was no longer a major market for the sector. Leadership struggled to carve a unique path for the industry, weighted down by nomenklatura appointees. Finally, foreign direct investment focused heavily on Russia as the presumptive heir to the Soviet Union, along with their nuclear stockpile. The side effect was a market slippage of 36%.
Post-Euromaidan: Tech Finds Momentum
Prior to Euromaidan, the IT Sector accounted for only .06% of GDP (2012). In 2020, it was estimated to cross 10%. The sector averaged over 20% growth rates in the last five years. The high-quality tech talent, business shifts toward IT outsourcing, and fiscal stabilization measures served as fuel for this growth. In 2016, Ukraine became the largest IT outsourcing destination in Europe, third globally. In addition, Ukraine ranks third globally to locate advanced technical skills. Inflation rates, once 10,000 percent in 1993, came under control to six percent in January 2021. The unicorn status of GitLab and WhatsApp, as well as the pending status of Grammarly and Preply, has observers wondering if Ukraine is the next “unicorn factory.”
This recognition and reputation is not going to waste. Businesses in Ukraine are beginning to shift models. IT outsourcing laid the groundwork for building reputation a for talent in the region, but the sector must diversify in order to continue growth. To accomplish this, a model of IT service consulting is being adopted. This model places Ukrainian tech companies at the center of the development process of projects rather than simply working on a singular element. The expansion comes with new opportunities and challenges. The requirement for growing numbers of technical specialists is beginning to impact the sector. For the 16,000 graduates entering the market in Ukraine annually, nearly 30,000 jobs are created.
Future Opportunities
As the tech sector in Ukraine shifts there are several opportunities for the government to enable growth. First is through targeted taxing opportunities. Research and development centers are becoming commonplace in Ukraine. Google’s R&D center, opened in 2020, joined Samsung, Amazon, Siemens, Huawei, Oracle, and Boeing’s existing centers. For each new job created at an R&D center four supporting positions are created. By targeting tax incentives to support the creation of these centers, the Ukrainian government could provide an avenue to address the World Bank reported 8.93% unemployment rate.
A second opportunity is expanding sector integration across the mining and agricultural sectors. These sectors rank first and third in exports and comprise a major portion of the Ukrainian economy. Unfortunately, only ten percent of agribusinesses use new technologies. Adopting new technologies can increase crop productivity, decrease input costs, increase worker safety, and increase overall agricultural efficiency. Perhaps the most important side effect of new technology is the more efficient use of chemical pesticides. Doing so will help prolong the cultivation cycles of the critical black soil deposits of Ukraine.
The Ukrainian IT Creative Fund was developed to prioritize the creation of direct academic pathways for technical specialists, increase funding opportunities for education, and provide grants to junior academics working in the tech space. This fund is a great opportunity for talent generation and support. It does not address talent retention. Emmigration of talent in Ukraine continues to be a challenge as qualified workers exit the state. A scholarship for service option could increase the longevity of the domestic talent workforce by requiring government, or non-profit, service for a period of time in exchange for scholarships. This would invest in local talent and allow the government to incentivize work in high priority areas.
The July 2020, the creation of the National Intellectual Property Authority(NIPA) was a significant step taken by the Rada to address a growing concern. As the tech sector moves toward a knowledge driven business model that relies on proprietary consulting strategies and unique software development, intellectual property(IP) rights are becoming increasingly important. Additionally, IP theft is a deterrent to foreign investment in research and development centers. Queen Mary University of London provides several recommendations that should be considered to continue strengthening these rights. Amongst the recommendations is the decentralization of the IP court from Kyiv to allow greater access to Ukrainians. Secondly, IP law fails to adequately address the jurisdictional status of non-private IP claims, such as tax and customs disputes. This ambiguity should be addressed. The report suggests all IP related claims fall under the authority of the IP Court. This would serve an additional value of centralizing court systems that would be required to deal with technical data, leading to a final recommendation of note. The creation of a scientific panel of experts should assemble to advice the IP court regarding matters of technological detail to ensure consistency and impartial judgement.
Moving Forward
The Ukrainian tech sector continues to grow despite the ongoing pandemic and conflicts in the region. An opportunity to accelerate that growth is available with several tailored government policies. The Ukrainian government recently decided to increase taxes on foreign tech corporations operating in Ukraine to generate revenue. Additionally, this strategy is designed to counter foreign-owned corporations competing with domestic entities. This strategy will raise revenue after implementation in 2022, but may undermine the very element that has allowed for rapid growth. After all, Ukraine is not the only country with aspiring tech talent and low labor costs, hello Poland and Romania.
About the author: Dathan Duplichen is a master’s student with FSI’s Ford Dorsey Master’s in International Policy program concentrating on Cyber Policy and Security. He is a career technology specialist for the United States Department of Defense that focuses on international cooperation in the cyberspace. All opinions expressed in this article are that of the author and do not represent the United States Department of Defense or the Freeman Spogli Institute for International Studies.
