6 Reasons Why IT Outsourcing to Ukraine Could Be Risky

April 17
Outsourcing in Ukraine

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Companies around the world increasingly turn to Europe for IT development. Low cost, high quality, and quick turnaround lure tech startups and mega tech companies alike. For many of them, outsourcing to Ukraine has become the de facto strategy for product R&D.

And for good reason.

Ukraine rightfully boasts as one of the best tech talent pools in the world. You can find lower-cost developers in India, and higher priced ones in the U.S., but better programmers are rare as hen’s teeth.

But while Ukraine IT outsourcing offers innovators and investors some undeniable advantages, understanding the associated risks is necessary to determine if Ukraine development is right for your company.  

6 Risks of Outsourcing IT Work to Ukraine

In this article, we look at 6 of the greatest risks you need to consider when hiring Ukrainian offshore developers.

1. Continued Corruption

One of the top risks when doing business in Ukraine is encountering corruption as you seek to forge a business relationship within the country.

How big is the problem? In February of 2018, Transparency International ranked Ukraine on par with Iran for corruption, bribery, tax evasion, money laundering, and fraud.

The reluctance of the government to prosecute high-level corruption has driven thousands of citizens to the streets, and frustrated efforts to attract foreign business. The rife infestation of corruption within nearly every level of government poses risks to outside business partners that cannot be overestimated.  

Many Ukrainian IT companies offer more than coding; many also offer offshore models that allow you to eventually establish legal ownership of your R&D operation. As you progress from hiring a team of rent-a-coders to owning the lab, you will inevitably have to deal with regulations that affect businesses of all types, and business ownership by foreign entities in particular. The regulations are murky at best, but if the officials you deal with are corrupt, you can find yourself entangled in an endless web of red tape, which can only be resolved by paying officials a series of “unofficial” payments. Worse, failure of officials to complete required paperwork can jeopardize your ability to operate your team.

Just this year, Ukrainian President Petro Poroshenko announced the formation of a long-awaited special court to judge corruption cases. Specially-selected judges will be empowered to bring justice where there has been none. The corruption court is being set up in response to the IMF loan agreement, with hopes that it will route out and prosecute crooked officials, regardless of their position or influence.2

2. Weak Enforcement of Intellectual Property Rights

Just last year, the Office of the U.S. Trade Representative (USTR) issued a report in which Ukraine was placed on a Priority Watch List because of continued violations of intellectual property rights. The report follows a long history of violations noted by concerned parties both foreign and domestic. To be sure, the problem is nowhere near as bad as what you would experience within India, but it is worth noting.

Types of violations range from failure of authorities to enforce payment of royalties to outright illegal use of software by government officials.

Despite promises and initiatives toward reform, Ukraine remains a risky environment in which to develop intellectual properties such as software. The best defense to avoid pitfalls is to hire a reputable R&D firm, and there are many. Even so, if your proprietary code falls into the wrong hands, you can expect little help from the authorities in addressing the situation.

3. Uncertain Economy

Amidst war and rampant corruption, Ukraine managed to grow its GDP to 3.3% in 2018, pushing exports beyond $130 billion. Companies and banks that were previously in the red began turning a profit. And the country’s PFTS Stock Exchange ranks among the top performing exchanges in the world. Still, there are concerns that can affect IT exports and trade as a whole.

The seeming economic growth enjoyed by businesses and the populous in general did not come without strings attached. Actually, good as it may seem, economic development has been far from organic. With all due respect to the hard work done by the Ukrainians, the road toward economic growth has been paved by mass infusions of cash by foreign companies, governments, and international organizations.

A new $3.9 billion loan from the IMF, and a $750 billion loan guarantee from the World Bank represent international efforts to float Ukraine’s economy until it can swim on its own. The result is fresh cash to keep Ukraine on its charted course since most in the international community see no benefit to the world economy if Ukraine fails.

The cost of outside help is a hefty bill that must be paid back. Whether the country can make payments on its debt and continue toward an economy that is stable in the long term is the question. Investors obviously believe they can, but it’s not happened yet.

Choosing to anchor your bread-and-butter projects in a country that is admittedly borrowing its way out of debt is a risky business. Especially if your long-term viability depends on the long-term stability and growth of your R&D program’s host country.

4. Hidden Costs

One of the top problems of IT outsourcing in Ukraine is the risk of hidden cost. Knowing what to look for can help reduce the risk of going over budget.

Minimizing your risk begins with selecting the correct outsource model. Variable rate, fixed rate, and cost plus are but a few of the many options available. You must carefully select the pricing model that best suits your project. Pick the wrong one, or fail to read the fine print, and you may be obligated to a larger R&D cost that you expected.

Depending on who your contacts are in Ukraine, corruption can lead to other hidden costs in terms of “fees” demanded by local officials. Your outsource providers should protect you from most such issues, but when you are doing business in Ukraine, expect surprises.

Finally, don’t overlook the unexpected cost of doing business with a team whose primary language is not English. To be fair, a high percentage of the population speaks English, with an even higher percentage of efficiency among IT professionals. Still, for some companies, there is no substitute for native English speakers on complex IT projects to avoid costly misunderstandings.

5. Time Difference

One of the top selling points touted by Ukrainian developers is that the region is roughly 7 hours ahead of the U.S., 1 hour ahead of Eastern-most Europe. That’s also a bad thing.

While it is true that Ukrainian developers actually work on projects nearly a full workday ahead of their U.S. clients, the effect on projects is not always positive. By the time you evaluate how your project is progressing, the shop is already getting ready to close up for the day. If you want changes, you may have to wait another full day to see them implemented. Essentially, your development team stays a day ahead of you in development, and a day behind you in getting change requests completed.

But does the time difference really pose risk to your project or your bottom line? Some say yes. For projects that you expect to evolve frequently during development, the significant lag can chip away at your project’s progress, and your budget. Since the delays never end, the effects are cumulative and must be anticipated when planning your time-to-market strategy.

6. Opaque Regulatory Environment

The level of government corruption may be at least on the forefront of reform. But Ukrainian regulations on business is a whole other matter. When doing business in Ukraine, the administrative hoops one must jump through can be daunting to the uninitiated foreigner.

Although hiring a development team to write your IT software is not the same as starting a business, you should be aware that your outsource provider will face all of the challenges we will mention and more, if they haven’t already.

Obtaining business permits, arranging for utilities, and paying taxes are among the three biggest challenges for any business operating in Ukraine. The requirements are quite different than those in the U.S. or Canada, and they are even more restrictive toward foreign investors.

The tax implications of hiring staff can be formidable. Your risks are heightened if your outsourcing model allows you to hire your own people.

Conclusion

Ukraine IT outsourcing makes sense for a growing list of companies. But it isn’t for everyone. Loss of control, government corruption, and other challenges pose risks you might not be prepared to take.

For companies not ready to tackle these issues, IT development companies in the U.S. and Canada offer a comforting alternative. One such company is Technorely. If you want the advantages of moving your R&D out of the house, but want to avoid the drawbacks that come with outsourcing to Ukraine, we invite you to contact us today for a free consultation.

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