Ukraine IT outsourcing dips, but startups bring new energy

Ukrainian IT services exports declined 9.3% in the first half of 2023 amid war and global economic slowdown. Resilient infrastructure and AI startups offer bright spots, however.

Ukrainian IT services exports declined in the first half of 2023 as the 18-month war with Russia grinds on.

The IT Ukraine Association reported that exports dropped 9.3% on a year-over-year basis. That's particularly significant since Ukraine IT outsourcing has become a reliable portion of the economy in recent years, with companies in the U.S. and other countries offshoring IT to bolster their software development talent. The Ukrainian government estimates the IT sector contributes nearly 40% of the nation's services exports.

But IT services providers in Ukraine continue operations while numerous technology startups add to the country's business roster. Ukraine's infrastructure, which has withstood Russia's bombing campaigns of late 2022 and early 2023, has kept IT open as an economic front.

Mixed economic trends, AI a bright spot

Alexei Miller, managing director at DataArt, a software engineering firm based in New York City with operations in Ukraine, said the economic trends in Ukraine point in opposing directions. On one side of the ledger, the war remains as a risk factor in the eyes of many IT services consumers. Attrition does occur when services contracts expire and buyers reevaluate the risk of the ongoing hostilities, he noted. On top of that, Ukrainian companies face the same economic slowdown that has dampened IT spending worldwide.

On the other hand, a "healthy population of customers are willing to support Ukraine," Miller said. Businesses of all sizes are tapping companies in Ukraine to staff projects and obtain IT services. Even sizable enterprises, which might be perceived as more risk averse, remain in the market.

Some of the largest, most regulated entities continue to buy from Ukraine.
Alexei MillerManaging director, DataArt

"Some of the largest, most regulated entities continue to buy from Ukraine," Miller said.

Sergiy Fitsak, managing director and technical director at Softjourn, a consulting and software development company, also noted the complex conditions in Ukraine -- namely the ongoing war and the broader slowdown in IT spending. The latter factor has affected projects, while the decline in IT services exports also contributes to the company's economic situation. Softjourn is based in California and operates an R&D center in Ukraine.

That said, Softjourn continues to see strong customer demand for particular services, according to Fitsak.

"We have observed significant interest in services related to automating routine tasks and utilizing AI for data analysis," Fitsak said. "Clients are increasingly seeking to streamline operations and leverage AI to extract valuable insights from the abundance of available data."

In addition, old and new clients seek to augment their internal teams with Softjourn's Ukrainian R&D teams, he said.

IT infrastructure resilient in face of ongoing war

Another factor contributing to the decline in Ukrainian services exports is the perception that the country is grappling with substantial levels of instability, according to Fitsak. This narrative, which he said the media largely shapes, differs from the actual situation on the ground in many parts of Ukraine.

Sergiy Fitsak, managing director and technical director, SoftjournSergiy Fitsak

While the narrative can make potential clients cautious, business operations continue without disruption, Fitsak said.

Indeed, Ukrainian IT companies withstood Russia's attacks on the country's power grid in late 2022 and early 2023.

"The infrastructure attacks would have created a massive risk if they succeeded," Miller said. "They didn't succeed, and the ability to deliver services out of Ukraine remains the same."

Alexei Miller, managing director, DataArtAlexei Miller

That ability might even be better than it was earlier in the war, as Ukraine's internet infrastructure is now tested, resilient and more distributed, he added.

Sigma Software, a custom software development company, also cited infrastructure resilience, noting that IT companies are well prepared for any situation. The company was founded in Kharkiv, Ukraine, and now has offices in 17 countries.

"Fortunately, power outages in our country are not a major issue at present," a company spokesman said.

Sigma Software uses multiple internet channels and has diesel generators on hand with fuel capacity to keep them operating for at least two weeks, he said. Remote workers have access to portable power stations and Starlink connections, he added.

Fitsak said the use of alternative sources such as Starlink and generators has contributed to increased resilience. "While some challenges persist, the situation has improved," he said.

Startups bolster Ukrainian tech

Another plus for Ukraine is a vibrant startup ecosystem. "There's a lot of energy to develop solutions, many of them inspired or influenced by the war effort," Miller said. He cited AI-based applications for demining, cybersecurity and image analysis as examples.

Miller, who visited Ukraine earlier this year, said early-stage companies are now generating business for DataArt.

"We get requests from Ukrainian startups that need to deploy AI," he said.

Venture capital funds local to Ukraine continue to invest in companies, especially in the military and defense technology sectors, according to the Sigma Software spokesman. In 2021, Sigma Software co-founded SID Venture Partners, a venture capital fund focusing on early-stage technology companies.

The fund added three companies to its portfolio in the first quarter of 2023: Input Soft, which provides aviation industry software; Haiqu, a quantum computing software startup; and NewHomesMate, formerly Propertymate, a platform that helps buyers search, compare and purchase new-construction homes.

Facing reality

A year and a half into the war, a painful realization is setting in, Miller said, noting that no one can predict when a decisive breakthrough will occur.

"This will take longer than most of us anticipated even a few months ago," he said. "As awful as it sounds, clients, suppliers and observers will have to assume that this is the reality and just deal with it."

For IT services customers, that means planning for risk appropriately and building mixed teams across regions, Miller said.

The Ukrainian IT sector, meanwhile, intends to retain its resilience.

"The energy of Ukrainian IT professionals and entrepreneurs -- to do something productive and invest back in their country -- has not diminished," Miller said. "In fact, I've seen some fairly senior members of our team who had opted to leave in the early days of the war have been returning to Ukraine. They are absolutely adamant they will invest."

John Moore is a writer for TechTarget Editorial covering the CIO role, economic trends and the IT services industry.

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