Western firms have long looked to regions that can offer talented programmers willing to work for considerably less than their colleagues in the United States, Germany or Britain.

Western software developers have over the past few years subcontracted more of their work to Ukrainian developers, and some have recently launched projects of their own.

The Western‑owned software development outfits join a handful of locally owned companies that have been accepting Western contracts for more than five years.

“On the whole, the IT industry in Ukraine continues to see big growth, which is confirmed by the increasing number of IT majors each year and the continuing emergence of new IT‑focused companies,” said Michael Dolzhenko, secretary of the telecom committee of the American Chamber of Commerce in Ukraine.

According to statistics compiled by the chamber, the software development market in Ukraine is worth between $18 million and $45 million a year, Dolzhenko said.

Though official government figures put the value of software development exported annually at about $3 million, the country’s developers are believed to have done work worth much more as part of the nation’s shadow economy.

Viktor Spiridonov, executive director of the Ukrainian Association of Software Developers, estimates that Ukrainian programmers did work valued at $32 million in 2000 – most of it in unregistered deals.

Dolzhenko said Ukrainian programmers have expertise in most programming languages and platforms.

He said that while local firms don’t turn down local contracts if the price is right, their main objective is to land lucrative contracts from foreign companies.

Ukraine was not the first country to experience software development boom.

India has long served as a source of inexpensive, high‑quality programmers. But increased demand in the West coupled with tighter corporate budgets appears to be turning attention to Eastern Europe.

A recent report compiled by the American Chamber of Commerce found that the nation’s software development business is likely to continue to grow.

The report concluded that Ukrainian software firms are quickly gaining experience and recognition.

“The window of opportunity to discover and enjoy the work of the best talent in Ukraine is still open but disappearing quickly,” the report read.

According to the chamber’s report, Ukraine is currently home to more than 200 software development firms that work for foreign companies.

Most firms fall into two categories. Some are larger, employing 50 to 300 programmers. They tend to be either foreign‑owned or are Ukrainian firms that do contract work for foreign clients. As a result, they often have well‑organized sales and marketing structures in other countries. Kharkiv’s Telesen KSCL, Kyiv’s Miratech and Lviv’s Softserve fall into this category.

The second type of firm employs 10 to 20 programmers for smaller jobs, getting contract work through word of mouth. Most of the smaller firms are not even registered as companies. Dozens of development firms fall into this category.

Newcomers

Oleksandr Bernatovych, director of IT Consulting, says that while many of the new ventures have been attracting a lot of attention because they are legally established by foreigners, thousands of Ukrainian programmers have been silently working for Western firms for years, but have kept a low profile to avoid tax authorities.

One newcomer with foreign investment is Frogwares Ukraine, a software‑development arm of Dublin‑ and Paris‑based Frogwares. Established in Kyiv about a year ago, the Ukrainian branch specializes in computer games and currently employs about 20 Ukrainian developers.

Like many software development outfits in Ukraine, Frogwares is teamed up with big software‑development companies in Europe and the United States. The company claims that Western firms can save about 50 percent by outsourcing their work to countries like Ukraine.

“We have signed several partnership contracts with French game companies and keep working on two main projects,” said Serhy Heraschenko, project coordinator at Frogwares. “We have found that programmers in Ukraine are very talented; the work they are doing for our company is really top quality.”

Heraschenko said Frogwares is currently in the process of signing some new game contracts out of Los Angeles.

The American Chamber’s Dolzhenko said the software development industry benefits from the nation’s traditionally strong educational system. Today, a large component of the national curriculum includes software development, and many graduates say they are planning careers as software engineers, he added.

Another Westerner doing business in Ukraine’s software development market is American Andy Verich. In late 2000, Verich set up KIT Group with a staff of about 10 programmers and a number of subcontractors in Kharkiv, a city he describes as the Silicon Valley of Eastern Europe.

In Soviet days, Kharkiv was a major center of education and technology. When the Soviet Union collapsed, many residents were left unemployed. The area’s computer specialists, however, have been sheltered from much of the economic downturn, and are busy working for Western clients such as KIT Group.

“We have access to a vast pool of diverse IT talent at very low cost,” Verich said.

Monthly salaries range from $500 to $1,000. While these salaries are significantly lower than what Western programmers earn, they are much higher than average Ukrainian wages.

“Coupling Ukrainian source code writing expertise with American business know‑how allows KIT to successfully provide offshore outsourcing to Western companies,” Verich added.

The interest in Ukrainian programmers has even reached as far as Hollywood.

Atlantic Group, a Kyiv‑based media holding company, last year sold a controlling stake in Digital Design and Marketing, its programming, design and animation production company, to Los Angeles‑based DBA Media.

Business barriers

The combination of plentiful, inexpensive labor, relatively low overhead and modest start‑up costs means that offshore‑programming firms are easy to establish and very profitable when Western contracts start to appear.

But ventures do have obstacles.

“Barriers include the many legal issues concerning intellectual property, export and import, taxation, labor laws, company registration and reporting, and currency control,” Dolzhenko said.

Verich agrees.

“Local bureaucracy and taxes drive many foreign clients away; they don’t know how or have the patience to deal with Ukrainian companies,” he said.

Verich said one of the biggest challenges for Ukrainian firms is marketing themselves successfully in the West, an essential ingredient for landing lucrative contracts.

“Many companies [in Kharkiv] don’t have any way to make proper contacts in the West,” he said.

The KIT Group has recently partnered with a large Western consortium, which Verich says promises to bridge Western clients with Kharkiv software developers.

Some software firms in the past year also complained of a dwindling supply of available top‑grade programmers.