Outsourcing or Owning a Development Center: How to Better “Way Out” From the Shortage of Software Developers Sergey Ovcharenko Sergey is the head of International Law Department at Alcor (a consulting firm working with IT companies). article March 12, 2020 Silicon Valley has long been considered the best place to start a technology business. The largest tech giants like Apple, Google, HP, Intel, Adobe, eBay (and many more) open their headquarters here, and their success inspires beginners and creates a halo of success for the Valley itself. The location continues to attract new startups. Even international tech startups hope to get a footprint in Silicon Valley (according to CrunchBase, more than 3,000 startups operate in the Valley today). What makes Silicon Valley a destination of choice for tech startups and more established businesses? Here are some primary reasons: destination location, benefits of networking and specialization, local opportunities, insights, and legal support. And the figures confirm these words – some examples: The average funding amount for a Series C round is $50 million; In 2018, there were 145 “active unicorns” in the U.S. collectively worth $555.9 billion; In 2018 alone, 106 new companies around the world achieved unicorn status with 74 new startups joining the club so far in 2019 (as of August 12, 2019). Altogether, an outsized proportion of unicorns come from the U.S., representing 187 current active unicorns. But is everything so iridescent? Many companies in the information technology industry import highly skilled foreign workers to handle programming and other work due to a lack of talent in the US. Why? Because hiring a necessary talent can be expensive and difficult. In the conditions of a frantic demand for programmers in the Western world, Ukraine looks like an attractive location for talent search. New Tech Hub Ukraine boasts of the largest and fastest-growing number of IT professionals in Europe. It is a country with nearly 200,000 IT specialists. Here, software engineers are well-versed in different fields of technology like e-commerce, artificial intelligence, gaming, healthcare, cloud services etc. They are also characterized by good entrepreneurial skills and a deep understanding of work ethic. Ukrainian software engineers are proactive and demonstrate the desire to learn. In 2019, Ukraine ranked 47th among 125 countries in the Global Innovation Index and featured in Gartner’s top 30 countries for offshore services. According to the 2019 Tech Guide Report, there are nearly 4,000 tech companies in Ukraine and over 45% of all development offices in Ukraine come from the USA. Their areas of expertise include artificial intelligence, games, e-commerce, and big data (that are in high demand nowadays). Outsourcing or Owning a Development Center Among the most popular options for work abroad are outsourcing and offshoring. Let’s analyze the pros and cons of both options. When starting up a product development business, many entrepreneurs encounter a shortage of funds, so to reduce expenses they often rely on software development outsourcing. However, is this approach truly effective for tech product companies? There are two main cases when outsourcing can actually be profitable for product IT companies and become a “magic pill”. The first one is solving a short-term task that does not require constant cooperation. The second is to run a test of the new market. If a startup is unsure of the market for its product, it can outsource in order to avoid the risks. This will cost less than building their own team and R&D office. Thus, an IT company may seek external help without significant risks. This appears especially useful for companies that no longer need to hire the entire team before the launch of their business abroad. Why outsourcing doesn’t work For both of the above-mentioned cases, outsourcing can be a reasonable short-term solution; however, in the long run, IT outsourcing might not be the best solution. Why? First and foremost, an IT company does not own the outsourced engineering team and has no direct influence on it. Since the intermediary has to consider the interests of other clients, qualified developers may be assigned to other projects. This also affects their dedication and approach to work. Outsourced software engineers are less committed, as they get used to working for different projects for a short period of time. Consider the usual situation. You are a startup looking for programmers who not only perform tasks but also feel involved in product development, are responsible and driven. It’s not really difficult: integrating the team into the global life of the company, developing a corporate culture, paying bonuses and stock options. If you are hiring an outsourcing company, then you will need to coordinate every such step with them, and it will not be easy. Another important aspect is that tech companies often encounter the problem of protecting their intellectual property rights. Even though the signing of Non-disclosure agreement is a standard, IT outsourcing cannot guarantee confidentiality because developers work with the same technology throughout different projects. Outsourced software engineers also make use of their previous experience and ready-made templates. Adding active communication between teams on a daily basis to the mix, IP rights seem to be a weak point of outsourcing. The “Way Out” of Problems These potential problems prove that IT outsourcing doesn’t always equate to being effective. Still, there is a way out of it. One of the solutions is to open a development office, which is a huge advantage today. The development office has established itself as a tendency to maintain research and development activities in another country. Many companies, such as Google, Reddit and Grammarly, prefer to have their headquarters in the country of origin, but move their software development activities to another place where they can find a plethora of IT talents. If we talk about Ukraine, offshore software development activities here allow for saving money by accessing reasonable costs and talented software developers at a competitive salary. According to local analytical portals, developers in Ukraine earn from $475 to $5,000 per month, depending on the years of experience. To compare this data with the salaries of developers in the U.S. or the EU, the findings show that IT specialists in Ukraine on average earn 73% less than their American counterparts and nearly two times less than in Western Europe. It should be clearly understood that when we talk about opening your own office with your corporate culture and solely under your brand, your service provider’s IT expertise is unlikely to be particularly important to you. For example, it will not be that important if a service provider has already built similar projects, how many years of programming it has, etc. The main thing that is needed is help in finding the right people who are so lacking in the USA, then setting up other operating processes such as payroll & accounting, office rent negotiations, workspace organization and legal issues. Some of the famous tech companies like Google, Samsung, Reddit Grammarly, Snap, and BigCommerce have their Development offices in Ukraine and have managed to scale up their business. As an example, last year Grammarly raised $90M at a valuation of $1B to consequently become a unicorn. And don’t forget that even 10-20 years ago the expansion of IT companies abroad was an experiment in order to save money, now it is a necessity for survival in the global competition for talents. At the same time, the process includes both the right choice of the country and the business model according to which you will work in this country to get the maximum. The main thing is to weigh the pros and cons and focus on working efficiently.