How Outsourcing Software Development in Ukraine Nurtures Product Companies

When IT outsourcing turns into a forge of Ukrainian programmers

Nikolay Palienko is a sample of the classic millennial start-up. In 2007, working as a programmer in an outsourcing company, Palienko and two friends decided to write the code of the first marketplace in Ukraine – an Internet site for the sale of goods by small entrepreneurs. Then they began to spend their salaries on advertising. That’s how prom.ua emerged. For the last 10 years, the project has outgrown the startup into a company with 800 employees. In his interview with “Focus” Nikolay answered the questions about Ukrainian IT market.

There is an opinion that Ukrainian IT companies are mainly engaged in outsourcing and do not create products that would bring economic benefits and fame to the country. Is it true?

Indeed, most of our IT companies sell development resources, not a finished product, but there are many successful product companies. In my opinion, this is not good and not bad, just a stage of market formation. Outsourcing companies educate a large number of technical specialists, who gradually move to work in companies that develop already ready products. The quantity thus turns into quality. This is very noticeable in Belarus, where, thanks to state support, the IT market (primarily outsourcing) developed faster than Ukraine, and now there is a boom of product companies.

How does the work of the product company differ from the outsourcing business model? Why at this stage outsourcing is more common in Ukraine?

The attitude to the product and to the developers in the outsourcing and product company is fundamentally different. For example, in an outsourcing company, programmers are the resource that generates profits, which must be sold at a higher price, not much looking at quality. In the product company, developers are an integral part of the future company, the basis of the team.

Now more and more companies are rethinking their attitude to IT systems, thereby forming a key advantage. They begin to create an IT expertise for the needs of their company, and not to outsource it. Working within the company, the developers are closer to the product and to the client, and this positively affects their development, efficiency and motivation. The flow of frames, all other things being equal, will be much lower. Outsourcing is more common in Ukraine, as our market is small, corporations are poor by world standards and yet do not spend much on IT, but the situation will change rapidly.

Is it possible, and under what circumstances, to transform Ukrainian IT outsourcing companies into product ones? Is a mixed model possible in practice? Were there examples of the transition of outsourcing business to the grocery business in Ukraine and the world

There are very few examples of transformations because DNA and values are very different. It’s one thing to sell a development resource to a customer, and quite another is to be responsible for the product, marketing, thinking about the needs of millions of customers. At the same time, there is a significant migration of specialists from outsourcing “into the product.” In the long term, the role of outsourcing is reduced to becoming the forge of highly professional personnel for creating products in other companies.

Why are the most successful start-ups, as a rule, leaving Ukraine? Is this phenomenon inevitable, or can Ukraine create conditions in order for high-tech start-ups to remain in the country and bring economic benefits to the economy?

This is rather a rare phenomenon, it’s just that media creates a false impression of startups moving abroad in great numbers. In practice, development centers in Ukraine are rarely closed after buying, we have good specialists for reasonable money. And companies are structured in other jurisdictions because the rule of law and the protection of intellectual property is better developed there. And even under such conditions, the effect for our economy is positive, as the industry grows and the company invests a lot of money into the development of business in Ukraine. People receive salaries and spend them internally.

What prevents the development of the product business in Ukraine? What changes,  also in the legal context, are necessary to create incentives for the development of product companies in Ukraine?

The main problem is the lack of the rule of law. Contain the development and not quite adequate actions on the part of our law enforcement agencies. Still, it would be a desirable improvement of the economy and of the internal market, it will revive b2b a segment. We are optimists here, and already anticipating this, we begin to invest in b2b. One of our latest developments for the domestic market is the cloud-based online service “Vchasno”, intended for the exchange of legally significant electronic documents using an electronic digital signature. The service saves a lot of time for preparing, printing and sending documents, negating the cost of printing and sending documents. We launched it in March, and today more than 10 thousand companies use it in their work. This is just one example of how an IT solution instantly simplifies and reduces the cost of business processes.

What are your forecasts regarding the development of the product IT business in Ukraine (can you describe the basic, optimistic and pessimistic scenarios)?

If there is no strong force majeure, there will be an annual growth of 20-30% (in people, revenue, etc.) over the next 5 years. This is one of the most promising industries for work: there are more excellent IT specialists, the number of success stories and experiences is growing, international relations are getting stronger, and this all in a complex enhances the transition of quantity to quality.

The article was originally published on Focus. Author – Maria Babenko.