Article | Francisco Rhodes on "The consequences of War on the IT Outsourcing landscape"
By Francisco Rhodes (April 22nd 2022)
The war in Ukraine is a tragedy from any point of view. This is especially so for Ukrainians that have seen their country invaded, their houses destroyed, their lives interrupted, and many relatives and friends being injured or even killed.
It is also tragic for Russian and Belarusian people that are against the war and get involved (directly or indirectly) in it, suffering from the sanctions that were fairly imposed by the US, EU, and allies, as well as from internal repression in their home countries.
Finally, it is a tragedy for the world. Who could imagine that in the 21st century one of the largest armies in the world would unfairly and illegally invade another country and use all its might to destroy and submit the latter to its will? What will be the geo-socio-economical-political consequences of such move from Russia?
Certainly, there will be many. This is already being made clear with the increasing isolation of Russia, pushing Europe, as well as most of the Western World, to become less dependent, not only of Russia, but also of any other geography. This increased independence, by the way, is a need that had already been identified at the beginning of the Covid-19 period, and that is now becoming even more urgent, not least because of the fear that China will eventually make a similar move against Taiwan.
This is a broad and complex topic, far beyond the scope of my expertise. For this article, let’s focus only on the consequences of this war on the IT Outsourcing (including, onshore nearshore and offshore) landscape. Eastern Europe, such as Asia and Latin-America, are probably the largest hubs for IT Outsourcing. Within Eastern Europe, the main countries for such services are Poland, Ukraine, Belarus, Czech Republic, Hungary, Romania, Croatia, and Bulgaria. Amongst them, Poland is probably the most well-known, not only due to being a member of the EU, but also due to the high number of IT skilled professionals – approximately 250.000 – and the great promotion it did to position itself as a top IT Outsourcing provider.
Second to it comes Ukraine, with approximately 200.000 professionals, a top-skilled pool of labor, and lower costs when compared to Poland. The other above-mentioned countries vary on the number of IT professionals and costs but are all on a second tier compared to these two giants.
The war is dramatically changing the landscape. In Ukraine, most providers are understandably not able to comply with their commitments. The required infrastructure for service provision, including networks and internet providers, has been knocked down, and even office and other facilities might have been destroyed, or, at least, damaged. Their professionals are requested to join the defense forces, volunteering to help the country in non-armed activities, hidden, trying to run away from Ukraine, or perhaps dead.
Since men aged between 18 and 60 are not allowed to leave the country, and considering that the majority of IT workers are males (accounting for approximately 75% of the total in Ukraine), it is reasonable to assume they are defending the country and will not be able to go back to their jobs anytime soon. Even amongst the 25% of the workers that are women, many have decided to stay to help with the war effort, and those that left the country are unlikely to be able to start working elsewhere in the short run, as they need to find shelter and a new life, providing support to their families while adapting to new countries, habits and cultures. And once the war is over, how many of these people will be able to return to their former positions? Will they have mental or physical traumas that prevent them from working, or at least from performing at 100%? Will they want to work on IT to provide services to foreign companies when their country is destroyed and needs all their attention? How many will change jobs, will be dead, or just quit the marketplace? And their employers, how many will survive, not to mention thrive, after all this?
"There will likely be a significant brain drain in Ukraine, even after a solution to the war is found. It is sad to see such brave people, not to mention competent providers, in such a dire state of affairs."
The consequences will go far beyond Ukraine. Belarus, due to the alignment of their government with Russia’s, despite the will of their people, will be excluded from western cooperation for a long time. Even if Lukashenko’s regime ends soon, international entities will be reluctant to go back until assurances are extracted from a new government. The same happens with Russia itself, though at a much larger scale.
What about Poland, Romania, and others, what will happen there? At a first stage, they are dealing with a massive humanitarian crisis, with millions of Ukrainians seeking refuge there. Of course, many of these refugees will then be relocated to other countries, but pressure is being piled on these first ports of call. This also implies a reorientation of their priorities and will certainly have impact on the services they are providing.
By an estimate, Poland has already received more than 2 million refugees. How can a country of its size keep its regular day-to-day activities with such a large pressure in such a short period of time? And how can Polish people be focused on their jobs when so many are providing as much support as possible to the Ukrainian refugees? The same goes for Romania and Hungary, though at a smaller scale at this time. In the medium term, these, as well as other countries which may receive these highly skilled refugees, may have some economic benefit in terms of “brain gain”. For now, however, and for the reasons described before, the influx will mostly be constituted by children and retired people. Even assuming that some skilled workers were able to leave, their immediate concerns are unlikely to be compatible with the ability to find a suitable IT job and perform successfully.
What are the alternatives then? India, with its large set of skilled resources, is always an option, but after the Covid-19 chaos there many foreign entities left or reduced their presence and are unlikely to reinforce it anytime soon. Some are expanding into other countries like Nepal and Vietnam. Latin America (especially Brazil) and Africa (Morocco, Egypt, and South Africa) are also valid options, with the former more focused in the US and Canada, and the latter in Europe. But, in general, these alternatives are far from the end-markets (geographically and/or in terms of time-zones), suffer from political instability, and some are perceived as having a corruption problem and as not respecting labor rights. Many are simply unable to provide services in English. Furthermore, many end-clients want to have their suppliers within Europe to assure compliance with GDPR and to ensure that data does not leave the European area.
As such, there are still two other competitive IT Outsourcing areas in Europe: the Baltics and Iberia.
The Baltics are very competitive and have a very large skillet. The difficulty is that the number of IT professionals is low, and they are neighboring Russia, not very comforting nowadays.
We then turn to Iberia, with Spain and Portugal. Spain is a powerhouse, home to several of the largest European IT providers, with many IT software developers (more than 250.000). It is, nevertheless, limited in language skills, and their providers are typically more expensive than most other European alternatives. Portugal is usually seen as the new kid on the block, but it offers many interesting advantages regarding IT Outsourcing:
European ethics in culture, legislation and business - member of EU and Eurozone
Highly rated business environment
Excellence in IT: highly qualified, experienced, language-skilled (7th in proficiency index in 2020 by IMD) and adaptable workforce
Quality of education and research internationally recognized – 2nd highest rate of engineering graduates in Europe
Competitive cost structure and low inflation rates (at least lower than other European countries)
Attractiveness due to geography, climate, quality of life (3rd in world’s best quality of life for expats by Internations), political and social stability, and security (4th in the World Peace Index)
Innovation – according to the European Innovation Scoreboard Portugal rates above average in such items as digitalization, use of information technologies, and attractive research systems
5th country in the world with more favorable Immigration laws (IMD), including the Tech Visa, targeted at attracting highly qualified and specialized labor
Advanced accesses, communications, and technological infrastructures
Lisbon as a hub with direct flights to most European capitals
All these reasons, among others such as the organization of the Web Summit in Lisbon from 2016 onwards, led Lisbon (and, to an extent, Porto) to become a leading European tech hub, attracting several IT centers of excellence, boosting a startup ecosystem that has created 7 Unicorns (Farfetch, Talkdesk, OutSystems, Remote, Sword Health, Anchorage and Feedzai) – this is an amazing achievement when looking at a per capita analysis. Apart from the growing IT Portuguese based cluster, there is also a large set of international companies that installed IT related European and global centers in Portugal.
For all the above, Portugal is a very competitive destination for Nearshoring for the European countries, presenting an advantageous price-quality ratio combined with the certainty of a mature and stable democracy, aligned with EU values, legislation, and ethics, supported by a recognized quality of life and safe environment. Furthermore, Portugal is on the western-most part of Europe, far-away from the current war and political instability. In all, it is a tolerant society that welcomes diversity and offers a pool of skilled labor, capable of speaking several languages.
Whatever the result and the length of the war, the consequences are here, and no one can pretend not to see and act upon them. Entities need to protect their businesses and activate contingency plans. In an ever-growing digitalized world, it is essential to count on reliable IT services providers that offer stability and resilience over time. This geo-analysis is key to guarantee those matters.
Francisco leads International Business Development activities at Unipartner. After having studied and worked on three continents and with more than 15 year of professional experience, 10 of them in Business Development in the IT sector, he effectively advises companies on how to out-perform their competitors. He holds a BA in management and an MBA from Vlerick Business School.
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