Offshore Software Development in Eastern Europe (Part II)

Here is part II of my post on software development offshoring in Eastern Europe.  Let’s talk about some of these Eastern European countries in a little more detail.  Based on my last post, I think the following are the most interesting countries if you are cost sensitive, and are looking to locate somewhere with a good critical mass of software engineering talent:

Ukraine – Ukraine has the most developers of any of the countries shown in the table in my last post, and the costs are reasonable (although the costs have been rising continuously, with a few lulls, for the past decade).  I’ve been working with software development teams in Ukraine for over a decade now, and I’ve seen very good results.  Politically, it’s a flawed democracy.  They had the Orange Revolution back in 2004, and everyone was optimistic about the future, but there’s been some backsliding lately and people are generally pretty cynical about their politicians.  No shit, right?  OK, but I think people’s cynicism is even worse than in the USA.  I think it’s better than Russia, in the sense that they actually had a peaceful transition of power in the last presidential election, but there’s still some doubt about how it’s all going to work out.  And every couple of years there is some dust-up with Russia during the winter time, and the Russians threaten to shut off the gas and make half of Europe freeze.  (I was planning to go to Kiev one time when the Russians were threatening to shut off the gas.  I asked a Ukrainian colleague if I should be worried about coming over there during the dispute, and he said “Don’t worry, they’ll steal plenty of gas ahead of time from the Russians!  It will be fine.”  Sure enough, my hotel was warm during my stay.)  How does this affect you if you’re going to do some software development in Ukraine?  Not much, in my view.  In a weird way it might even be an opportunity.  With former PM Tymoshenko in jail, and Yanukovich in power, Ukraine isn’t joining the EU any time soon.  So rates for software developers should continue to be below those in Poland and other EU countries.  Unlike Belarus, the government doesn’t seem to have as well-thought out a strategy for attracting software-based businesses, but plenty of name brand named Western companies are doing development in Ukraine these days.  It’s a far cry from the early 2000’s when I first started visiting Ukraine.  There were not really any big shops back then and maybe I was deluding myself, but I felt that with 15-20 developers we were a “player”.  Now I hear that Luxoft has around 3,000 developers!

Belarus – For quality of developers, “critical mass” of developers, and cost, Belarus rates very highly.  If you compare it to, say, the most economically advanced countries in Central and Eastern Europe, Belarus is around 17% less expensive (see my previous post), and the quality of developers is strong.  People claim that Minsk was one of the top three “technology centers” in the old USSR, alongside Moscow and St. Petersburg, so it has a legacy of producing good technical talent.  (Interestingly, people claim the same thing about Kharkiv, Ukraine, so I take these claims with a grain of salt.  But, anyway, the point is that you can find good developers in Belarus, and in Kharkiv for that matter.)  Additionally the domestic IT market is relatively small in Belarus, so this leaves a good supply of developers available for the IT export market.  The only problem with Belarus is that it’s the last dictatorship in Europe, so this tends to make people nervous about investing there, since it looks like the place is sure to see some political excitement over the next few years.  If you invest in Belarus, you are hoping that they can have a “velvet” or “Orange” transition of power, with a minimum of violence and disruption.  Even though politically it’s a basket case, Belarus has apparently created efficient legal structures and a “Hi Tech Park” that facilitates the creation of software-based businesses.  Additionally, the tax system for IT companies is quite clear, and advantageous.  This means that companies can focus more of their energies on software development, and less on figuring out how to deal with the government, which is an issue in other Eastern European countries.

Romania – I know less about Romania but have heard some good things about it.  From the numbers, the cost is bit higher than Ukraine or Belarus, but still much lower than Poland or the Czech Republic.  But if you value the idea of being in the EU, and having legal and IP protections that are at the EU standard, you might be willing to pay a little more to get that.  Romania’s not quite the lowest cost EU country in the table—that’s Bulgaria –but it has a good combination of cost and critical mass of software developers.  So I’m going to put it on my “up and coming” list and try to check it out in a future trip to Eastern Europe.  The flip-side of being an EU country, though, is that we might see wages converge with the other EU countries over time.  And you need to adhere to EU labor standards, so it’s not as easy to dismiss bad employees.  The other issue is that the people in Romania are now more mobile, since they can take jobs in other EU countries.  So your key developer can leave and take a job in Germany tomorrow.  This risk is lower in Ukraine or Belarus, which are not EU countries.

OK so what about that other Eastern European country that isn’t on my list?  Lithuania?  Albania?  No, I’m talking about Russia.  Of course, Russia does have plenty of software developers (and credit card scammers, virus writers, zombie network owners, etc.) and has even produced some software innovations of its own (e.g., Kaspersky Labs), but right now it’s not as popular an offshoring destination as the other countries on my list.  For one thing, it’s more expensive than other Eastern European countries.  The oil sloshing around in the economy raises the prices of everything else—real estate, hotels, and software developers.  I’m sure you’ve heard that Moscow is the most expensive city on the planet to do business.  There’s also the issue of legal, IP, and property rights.  It’s doubtful that some Komisar could grab your IP.  What would he grab?  Your source code?  You’ll have that backed up in your home country.  Still, outside of the oil and gas sector, Western companies just aren’t interested in investing in Russia, since they don’t feel like ending up having their business stolen from them and ending up in a cage in some kangaroo court.  So despite the talent in Russia, it doesn’t make a lot of people’s lists as a viable offshoring destination.  Maybe they’ll get their act together one day, but there doesn’t seem to be much incentive as compared with other Eastern European countries that don’t have oil and need to spur investment in other industries.

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5 thoughts on “Offshore Software Development in Eastern Europe (Part II)

  1. Hey Mike,

    I am adding several comments on your article that is otherwise very useful:

    1. Critical mass of software developers as you call it should also be correlated – in my view – with the density or the total population of the country. The idea is to get the critical mass concentrated in several cities.

    2. Another important factor is accessibility. Some people make a difference between offshore and nearshore. Of course you readers will mostly be in US so this point will not make a big difference between the presented options.

    3. Culture: almost all countries you have mentioned actually have a Slavic languages and culture. Many subtle differences arise from this fact but one thing is obvious: they write using a different alphabet. Romania is the only one with a Latin based culture and language (very close to Italian).

    4. Still on Romania (I am familiar with this market as you know): the issue of people taking up jobs in other EU countries is not that much of an issue for several reasons:
    – Most of those willing to leave have already left to US and EU;
    – IT specialists are exempt from paying 16% wage tax in Romania;
    – Most of them would rather stay for a lower salary than EU if it’s decent and conditions are fair.
    (we had this issue more before being EU than nowadays)

    5. I would also consider Bulgaria as an option as even if the critical mass is low it is very present in just a few cities. Also, for someone that wants to diversify a combination Romania/Bulgaria is possible. A head office in Bucharest is at 60 km away from Ruse (one of the main cities in Bulgaria)

    Good luck!

    • camiapp says:

      Great comments Claudiu! (I’ve corresponded with Claudiu on Romanian software development before).

      1) That’s a good point. On that basis, Romania (population 21.4 M) has a higher density of software developers working in offshore development than Ukraine (pop. 45.9 M). And Belarus (pop. 9.5M) and Bulgaria (pop. 7.3 M)–both countries with relatively small populations, but a decent number of developers–have an even higher density than Romania. Additionally, and I think, to your point–when we choose a place to do offshore development, we’re not just choosing a country, we’re choosing a city, and that city needs to have a decent critical mass of talent clustered in one place. If you really need someone with Oracle DBA skills, and there’s nobody that fits that description in the town where you create your team, it doesn’t do you much good if the costs are low.

      2) Right, for those of us in the US, the distance from New York to various European destinations is not all that different, but if you are in Western Europe that might affect your decision.

      3) I’m not a knowledgeable commentator on culture, but you are right, the fact that Romania uses the Latin alphabet is nice. I’ve had a tough time now and then in Ukraine trying to figure out what street I’m walking on, and overall I’d rate the English skills there as “adequate” (but improving). And as I understand it, the overall language skills in Romania rate higher than in many other countries (according to Gartner).

      4) OK that’s interesting.

      5) Yes by the numbers, and considering my decision variables of cost and critical mass of developers, Bulgaria looks interesting. I think it just doesn’t make many people’s lists for consideration because the population is small, but perhaps it might be worth considering for small or medium-sized projects, since it’s unlikely that some huge multinational that needs to hire hundreds of developers would bother coming into the country. So you might find that you could attract a good team, and wouldn’t need to compete with Oracle for developers.

  2. Ilya says:

    Hi Mike,
    I enjoyed reading your review.
    I understand that most of your experience is in Software outsourcing to eastern Europe, but I’d love to see a similar review on Hardware.

    • camiapp says:

      Thanks, yes I’m less familiar with hardware development. My perception was that a lot of hardware design work is being done offshore these days, but that contract manufacturers in Taiwan, etc., are doing a lot of this as part of their services. Have you had some involvement in doing that in Eastern Europe or other offshore sites? (I suppose Israel is also considered “offshore” with respect to the US, with Intel and others doing R&D there).

  3. Ilya says:

    Thanks for your reply.
    Actually I haven’t had any involvement in offshore activity whatsoever. However, I’m curious to learn more about the field and get a better understanding of the area in Eastern Europe and especially in Ukraine.

    Regarding Israel – you’re right, I think that the US companies activity in Israel could be called “offshoring”, up to the mid 90s. However, since then I think that most of the activity of western (as well as Eastern Asian) companies could be better described by the term “Strategic Investment” or “Strategic R&D Activity”, and is mostly based on acquisition of Israeli startups, followed by opening R&D facilities based on the existing infrastructure (relatively recent examples – IBM acquisition of storage startups like XIV, Broadcom acquisition of Dig. Comm. startups like Provigent).

    However, a growing vector in the activity of Israeli startups is actually offshoring of SW (but recently also HW) development, mainly to India/China but also to Eastern Europe.

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