The Digital Roadmap has long since become a Top Priority in most companies, but at the same time the German industry association bitkom reports an increasing shortage of IT specialists year after year (2017: 40.000 | 2018:80.000 | 129: 124.000). Most of the IT companies I know pursue already a nearshoring or offshoring strategy (let alone large companies). It’s not a question of WHY or WHEN, but rather a question of HOW.

Ukraine is a location that deserves special attention, because the country has the largest number of IT professionals in Central and Eastern Europe. There are currently about 185,000 IT specialists working in the country (some of them are software developers). Ukraine is low-wage country, salaries for senior developers in JAVA (>5 years of experience), for example, are in the order of 3,000 EUR (Overview of costs for IT developers in the Ukraine); if you implement an IT development center in a B-class city (longer travel times), you can calculate with significantly lower costs, but have to put up with a longer ramp-up period (recruiting, training).

In terms of taxation, Ukraine has a special tax regime that favours IT operations: First, the tax rate for corporate profits is comparatively low, at only 18 percent. Second, IT specialists in Ukraine are typically not directly employed, but are employed as freelancers: This means that companies only have to pay a low flat tax rate of around 4%. This low taxation compares against a taxation rate of 52% for permanent employment (of which approx. 20% is income tax, 20% social security contributions). However, insiders assume that this tax regime will not be maintained in the medium to long term: Software developers would then also be subject to standard taxation (+52%). As an investor, you should follow this development closely.

Incidentally, today it is mainly US and Israeli companies that are setting up IT development sites in Ukraine.

Options for IT Nearshoring in Ukraine: IT Outstaffing, IT Outsourcing, IT Insourcing

As for IT professionals from countries such as India, Romania, Bulgaria, etcetera, there are several options for using developer resources.

A widely used approach is to assign development projects to IT service companies, this is classic IT Outsourcing. A list of IT outsourcing providers is just a click away. The hourly rates are shown in the overview. Especially if you are interested in Outsourcing on the long-term, IT Outstaffing must be considered. You get as a client Dedicated Development Teams, which are permanently assigned to you as a client. This does also include recruitment of developers with a specific expertise and qualification.

In individual cases, Ukrainian IT outsourcing companies also offer the build-operate-transfer model: In such cases the Ukrainian partner company establishes a Dedicated Development Team, which is later spun off into a separate legal unit (a subsidiary of the client) and becomes the nucleus of a Ukrainian IT development center. The company brightgrove offers such a build-operate-transfer (BOT) model. Mostly, these BOT-contracts are based on a cost structure that comprises the actual salary of your Dedicated Team members plus a Management Fee. The Management Fee includes costs such as recruiting, office, hardware/software, HR administrative costs. The Management Fee for IT specialists is in the range of 1,000 to 1,500 EUR per developer/month (depending on the location).

Of course, a company with a need for skilled personnel can also set up its own IT development center from the very beginning. Recruiting is done with the help of a recruiting agency, a service provider from Germany is for example the Jobnet.AG. The costs for this service are about 15 to 20% of the annual net salary of a developer.

Last but not least IT Insourcing can also be an option. IT professionals interested in a long-term perspective in Germany are identified in Ukraine; the IT professionals and their core family get a “cultural training”, language training (which facilitates integration in Germany). This includes also visa application and relocation services. The above mentioned Jobnet.AG also has experience in this area.

IT Nearshoring: Choice of location in the Ukraine

Remote management methods for software projects today allow close collaboration without the need for all team members to meet physically. The advantage of “easy reachability” of the major Ukrainian tech cities (1st tier cities: Kiev, Kharkiv, Dnepro, Odessa, Lviv) over the second or third tier cities is thus diminishing; especially after the ramp-up phase quarterly on-site workshops are sufficient, the main communication is done remotely (conferences, chat tools such as Slack, mail or the telephone).

The decisive advantage that the first tier cities (Kiev, Kharkiv, Dnepro, Odessa, Lviv) have over the second/third tier cities is the larger talent pool. Around half of the IT specialists today work in the Ukrainian capital Kiev; those companies who want to scale development teams quickly will find a big enough talent pool in Kiev or Kharkiv. It is also true that the top developers are more likely to be found in the tech metropolises; this is where the software developers come who want to make a career and bring the necessary talent (this is no different from the situation in an Offshore location like India). However, there are two disadvantages: Firstly, the fluctuation in the tech metropolises is somewhat higher than in smaller cities. Secondly, salary costs (as well as office costs) are significantly higher in the big cities, by a factor of two.

If companies accept a longer ramp-up phase in setting up a development team (recruitment, training) in order to realize the cost advantage in second/third tier cities, then it makes sense to select a university city with a technical university. Since the educational institutions also have different specialization, the selection of the location should consider the best match between the “required technology stack” of the company and the “spezialisation of a tech university”. Another criterion is the language of instruction: There are universities in Ukraine where a substantial part of lectures and seminars are held in English. Example: Poltava. This facilitates communication significantly.

Success factors for an efficient development team in the Ukraine

Of course, the general success factors for leading a development team are: close communication, an open communication culture, broad use of communication media (web conferences, mail, video, chat), investment in technical training, proven processes for QA, and clear guidelines, for example via coding guidelines.

In addition, there are some location/culture-specific aspects that need to be taken into account in Ukraine. Two things in particular are crucial. First, Ukrainian IT professionals are task-oriented. This means in practice: If you put them on undemanding tasks (and don’t offer a growth perspective), you’ll face above-average attrition. Second, make it a point to develop personal loyalty. Loyalty has a high value in the Ukrainian culture, which is good news actually. Pay regular visits to the office in Ukraine, hold regular (e.g. quarterly) on-site workshops. Don’t miss on the social events such as a common dinner with the entire IT team.

Not only in countries such as India, but also in the Ukraine, a culture of responsibility and ownership must be proactively developed. Else you end up in micromanagement. From the very beginning, it must be clearly communicated to the team, that you expect independent problem-solving and decision-making; then it will work.

And last but not least: The education at the universities is usually still very theory-based. Therefore, a trainee program should be offered for university graduates, or at least coaching for a self-learning approach.

Sebastian Zang
Author

The author is a manager in the software industry with international expertise: Authorized officer at one of the large consulting firms - Responsible for setting up an IT development center at the Bangalore offshore location - Director M&A at a software company in Berlin.