KyivPost - April 19, 2006 - Orysia Kulick
Ukraine's software development industry is underdeveloped but growing fast. However, as domestic and foreign firms position themselves to take advantage of the global trend toward more outsourcing, the industry is feeling the pinch from a limited number of programmers and rising operating costs.
Although Ukraine has anywhere from between 300 and 400 software development firms, the country's market is far from mature. About 70 percent of these companies are small or medium-sized businesses, said Dmytro Shymkiv, co-chair of the American Chamber of Commerce's IT Committee, a sign that the market has not yet stabilized or consolidated.
Moreover, in terms of the global software development market, which some estimates put as large as $50 billion, Ukraine's share is currently estimated to be only around $110-150 million. According to Bohdan Kupych, vice president of Kvazar-Micro, a multi-profile IT company, this is "statistically zero on a global scale." Citing the International Data Corporation, a global market intelligence firm, Kupych said that U.S. companies spent more than $17.5 billion dollars on outsourcing in 2005, a three-fold increase from $5.5 billion in 2000.
As the majority of Ukraine's clients are in the U.S. and Western Europe, this means there is considerable room for growth and improvement.
Nonetheless, industry trends indicate that Ukrainian firms, both small and large, are expanding, hiring more programmers, project managers, software engineers and IT specialists to increase their client base and take on larger projects.
Attractive market, faster growth
In recent years, Ukraine has become a more attractive alternative to highly competitive outsourcing markets like India, due to Ukraine's geographic proximity to the European Union, its abolition of visa requirements for most Westerners and its reputation for having a highly skilled workforce.
Foreign companies like Sonopia Corporation, a relatively new firm established in the U.S., which specializes in mobile and Web communications, and EPAM Systems, which is considered one of the largest providers of software engineering outsourcing services in Central and Eastern Europe, have both recently opened offices in Ukraine. Sonopia closed a major financing round in February 2006, raising capital from two different tier-one venture capitalists, ComVentures and Sevin Rosen, Sonopia's press service reported.
Ukrainian software development firms have also continued to grow.
Lviv-based Softserve, one of Ukraine's largest software development and outsourcing companies, expects at least 50 percent growth next year, said Taras Vervega, the company's vice president for sales and marketing.
Kvazar-Micro established its own software development division, called KM-Soft, in 2003. It currently employs about 180 fulltime developers. Kvazar-Micro's revenues have grown by 65 percent since 2004, according to Kupych, who noted $335 million in revenues in 2004, and approximates $480 million in 2005. In July 2004, Sistema, one of the largest providers of private sector consumer services in Russia and the CIS, bought a 51 percent share in Kvazar-Micro.
Industry experts say that Ukraine's and Russia's software development markets are developing three times faster than those of Western Europe, and, as a result, companies like Kvazar-Micro, with offices in most of the former Soviet Union, are working toward a pan-CIS presence in the region.
Kvazar-Micro had been doing software development as a part of their systems integration for business for quite some time, Kupych said, mostly focusing on Ukrainian customers. However, with the establishment of KM-Soft, Kvazar-Micro started making its move into other markets in Russia, all of the former Soviet Union, and Central and Eastern Europe, he added.
EPAM, a U.S. corporation registered in Princeton, New Jersey, opened its newest regional office in Kyiv in November 2005. EPAM currently employs about 1,500 people in Belarus (800), Russia (300) and Budapest (250), reporting $42 million in revenues for 2005. EPAM, whose ownership is 87 percent American and the rest European, currently employs 40 Ukrainians and has announced plans to employ at least 200 by the end of 2006.
Karl Robb, EPAM's Executive Vice President of Global Operations, noted that they have already hired four or five people in the last two weeks and that they "recruit Ukrainian programmers as fast as they can find them," adding that the market for programmers and IT specialists has gotten tougher and more competitive in Ukraine. Programmers and IT specialists are not "grateful just to get a job," they want to know what kind of company they'll be working for and what kind of programs and software tools they'll have at their disposal, he said.
With the entry of companies like EPAM and Sonopia onto the market, and the expansion plans of larger firms like Softserve, Miratech, Kvazar-Micro and Softline, smaller and mid-sized Ukrainian software development firms like Firejuice are now "feeling the heat," said Mark Halaway, Firejuice's managing director. There has been a palpable increase in competition within just the last six months, he said. Halaway's company is one of close to 200 smaller software development companies fighting it out for a share of the market.
Nevertheless, within this same period, Firejuice has grown from 16 to 23 employees, he added.
For larger firms, the high number of smaller companies "increases the competition while expanding the market by encouraging more and more clients to come to the [Ukrainian] market," said Softserve's Vervega. However, he added, "bigger companies like Softserve have the ability to gain a significant percentage of this new commerce," because smaller outfits have a much harder time beefing up their staff for larger projects.
Higher demand, higher salaries
Along with greater competitiveness in the software development market, salaries for IT specialists across the board have nearly doubled in the last two years, and especially last year, according to the American Chamber of Commerce's Shymkiv. If the monthly salary for an average programmer was $300-400 and a project manager $700 two years ago, now companies can expect to pay $600-1000 for a programmer and $1000-2000 for a project manager. The most experienced and advanced IT specialists get $2,500 per month, he said.
Salaries are contingent on experience and skills, for example, how many programming languages and tools one knows.
The overall trend on the Ukrainian software market indicates that the competition for software developers and other IT specialists will remain intense in the near future. For smaller firms, wages constitute 50-70 percent of their total costs, and with greater competition for a limited number of specialists, their business costs have risen accordingly.
Techinvest, a Ukrainian-based venture capital firm, reported in its annual IT export market review that the total number of IT professionals working in Ukraine's IT and services and products export market reached 15,000 specialists by the end of 2004, an increase of 50 percent over the number of specialists in 2003. The numbers for 2005 will probably reflect similar growth, according to Techinvest. Large and medium-sized companies account for as much as 65 percent of Ukraine's IT export market, which Techinvest attributes to the market's continuing consolidation.
Torben Majgaard, Chief Executive Officer of Ciklum, a Danish software development company that has provided outsourcing services to Scandinavia since 2002, said that the retention of programmers and other IT specialists has been difficult because of high demand and low supply. He noted that even if a contract is signed and then broken, Ukraine's legal system is such that companies like Ciklum have no recourse.
Roger Nolan, Sonopia's vice president of engineering, has the task of recruiting 150 software engineers, programmers, and product and program managers by the end of 2006. His job has been more challenging than anticipated, because "we aim for the top 5 percent and have a stringent recruitment process and policy," he said.
Sonopia Corporation hired its first Ukrainian programmer in July 2005 and currently employs 35 people.
Nolan added, however, that Kyiv Polytechnic University's large and skilled student body was a significant factor in Sonopia's decision to open an office in Ukraine.
Other dimensions of doing business in Kyiv do, however, make it considerably more expensive to choose Ukraine over neighboring countries.
EPAM's Robb noted that compared with Budapest, where the rental of Class A office space with parking and full services costs 10.5 euros per square meter, and 10 megabits per second of Internet access costs 1,000 euros, "Ukraine is considerably more expensive, at $35 per square meter, and 1,200 dollars for 1 megabit a second."
One solution would be the introduction of breaks on import tariffs for computer hardware and export tariffs for software sold abroad, and reductions in the social security taxes paid by employers. Belarus has already implemented similar incentive packages, according to Robb, and Russia is in the process of doing so as well.
However, AmCham's Shymkiv believes that the answer lies not in providing incentive packages for businesses, but investing more directly in Ukraine's future programmers and software engineers.
The Orange Revolution "put Ukraine on the map," Kupych said. But local companies have been working over the last several years to draw attention to the Ukrainian market.
The seeds were sown prior to the revolution, as Ukrainian firms worked to expand their client base, Shymkiv said, and "now we are experiencing the harvest, but don't have enough hands to gather it."
"If the industry wants to survive, it's going to have to make sure that it has the people and resources that it needs," stressed Firejuice's Halaway.
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