In 2007 most of top 1000 Western European companies introduced nearshore software development outsourcing for the main purpose of cost reduction.
At that time Ukraine was the most attractive location for nearshore software/web development due to low IT salaries, high attrition, strong R&D heritage from the Soviet past, hightech education, innovation and available pool of IT resources.
BTW: Hungary was always number 2 behind Ukraine when you measure overall cost effectiveness (labor costs vs. maturity).
13 years later the situation has changed.
IT labor costs in CEE
In 2020 IT labor costs in CEE have balanced out. When you compare custom application development providers from Ukraine with similar sized and similar maturity level companies from Czech Republic, Slovakia or even Hungary you won’t find any relevant differences in their service fees anymore.
Why? Engineers are more mobile than ever before. The demand/supply dilemma in IT and SW over the past 10 years led to a more competitive landscape. This results in more commoditized services fees (hourly rates).
So, why are we outsourcing in 2020
The good news is that Western European companies are no longer expecting overall cost benefits when it comes to labor costs. Experienced companies understand that cost benefits in R&D and software development are long term and heavily impacted by:
- Communication and collaboration effectiveness
- Team stability and experience level
- Access to the right talent and skills
Communication and collaboration effectiveness is largely determined by proximity, time zone, language and business culture.
Team stability and experience level can be achieved by the right team set-up. A SCRUM team with 6 senior engineers is less likely to consist for 3 years than a blended team of 2 Senior, 2 Advanced and 2 Junior, right
Access to the right talent and skills at the right time is something that is very hard to achieve with a single vendor strategy. No single supplier in CEE can meet 100% of expectations and requirements of all customers. Requirements on skills, domain expertise and capacity are too different.
Some companies run a multi-vendor strategy and build teams from multiple sources. That is at the expense of communication and collaboration effectiveness.
Other companies try to work with “pre build” alliances. Such alliances have the advantage to bring all their best talent and skills to the client but with uniform “terms and conditions”.
What are the learnings
When you find a software development provider that can offer a significantly lower service fee there’s a high risk that this company is either not on the expected maturity level (not taking appropriate measures for quality assurance, training or team stability) or is too small and limited too scale with your future needs.
Since service fees became similar in CEE there’s actually no pressure to look for providers in Ukraine only. Suddenly the more traditional countries like Hungary, Czech Republic, Slovakia and Poland are attractive again. Characteristics like maturity, skill levels, proximity, time zone and business culture can be taken into account again without jeopardizing your cost structure.