Ukraine IT services firms target new markets as exports drop
Ukrainian IT services firms are eyeing new geographic markets and exploring digital transformation as the war and a difficult economy shrink international sales.
Russia's invasion of Ukraine, now it its third year, has damped IT services sales in the latter country, but companies there are looking to tap new markets and digital transformation opportunities to regain momentum.
Ukraine IT services exports declined for the first time ever in 2023, according to an IT Ukraine Association report released last month. Following an all-time high of $7.3 billion in 2022, exports last year dropped 8.2% to $6.7 billion.
The report, "Digital Tiger: The power of Ukrainian IT," cited a hesitancy among international customers to sign new contracts and slowing economic growth globally as factors behind the decrease in exports. It was compiled in conjunction with Ukraine's Ministry of Digital Transformation.
Ukraine has been an offshore outsourcing destination for years, with its reputation for high quality and low cost. Indeed, the nation's IT services exports as a percentage of all services exported increased from 5.7% in 2013 to 41% in 2023, the report noted.
"The IT industry is almost entirely export-oriented, so its decline significantly reduces growth opportunities for tech companies," according to the IT Ukraine Association.
Fighting back
IT services companies have adapted to wartime conditions, equipping software development centers with diesel generators and using the Starlink satellite-based internet service to deal with power outages. Such measures have helped companies retain and, in some cases, expand their international client base.
The IT industry is almost entirely export-oriented, so its decline significantly reduces growth opportunities for tech companies.
IT Ukraine Association'Digital Tiger: The Power of Ukrainian IT'
Valery Krasovsky, CEO and co-founder at Sigma Software Group, a custom software and consulting company based in Ukraine, said his company's revenue increased 37% in 2022, citing the continued confidence of existing and potential clients after the invasion by Russia that February.
That growth rate decelerated to 10% in 2023. But some markets saw significant expansion, Krasovsky noted, with 41% revenue growth in Germany and a 19% increase in the U.S. The company has retained all its existing customers and added some new ones, he added.
As for the latter, Sigma Software recently signed a collaboration agreement with Combitech, a technical consulting company that's part of Sweden-based aerospace and defense conglomerate Saab AB. The deal, which focuses on improving digital infrastructure in maritime shipping, will create employment opportunities in Ukraine, Krasovsky said.
But, in general, keeping existing customer contracts appears easier than cultivating new business.
Outsourcing companies, which employ two-thirds of the IT specialists in Ukraine, have experienced "more of a lack of new orders than the loss of existing ones," said Ilya Boshnyakov, a Ukrainian tech media executive and co-author of an e-book on the Ukrainian tech industry.
The government, however, plans to play an ambassadorial role in promoting tech companies and working to overcome fear and uncertainty among international clients, according to the IT Ukraine Association report.
Sigma Software, meanwhile, plans to ramp up its international business this year. Krasovsky said the company is "exploring emerging markets for potential growth," including the Middle East, Africa and Latin America, as well as Japan.
The IT services sector is a key component of Ukraine's services exports.
Digital transformation in Ukraine
Digital transformation could also bolster IT services firms. The invasion prompted the expansion of e-government services delivered to Ukrainians on mobile apps. Sixty-four percent of Ukrainians used government e-services in 2023, according to the IT Ukraine Association report.
"The war in Ukraine has significantly impacted the country's digital transformation," said Max Maslii, president and global CEO at Digicode, a custom software development company founded in Ukraine and now headquartered in Dallas. Digicode maintains a development center in Ukraine.
A key component of Ukraine's transformation initiative is the Diia app, which the Ministry of Digital Transformation launched in 2020 as a platform for accessing public services. The invasion raised its profile, providing Ukrainians with a way to obtain evacuation documents, report property damage and find services for displaced people.
"The Diia platform has been instrumental in driving Ukraine's digitalization efforts," Maslii said.
Krasovsky said Diia helped strengthen the resilience of Ukrainian citizens, but he noted that the nation's digital transformation trend has expanded to defense applications. The government, he said, is collaborating with private sector firms on several defense-related technology initiatives, including cybersecurity, remote operations, data management, communications, emergency response, logistics and simulation for strategic planning.
Ukrainian public services app grows in users, influence
The Diia app has seen a steady climb in users since its pre-invasion launch four years ago. It's now poised to influence how other governments deploy public services applications for their citizens.
The Diia user base hit the 20 million mark in 2023, according to the IT Ukraine Association. Ukrinform, Ukraine's national news agency, had previously reported that the app had 2.5 million users in 2020 and 12 million-plus users in 2021.
Amid the Diia app's rapid adoption, the U.S. Agency for International Development (USAID) in May 2023 said it would help Colombia, Kosovo and Zambia explore ways to deploy Diia-like applications. USAID added Ecuador to the list in December.
International relationships also drive transformation. The U.K.-Ukraine TechBridge, for example, aims to bring together technology ecosystems in the U.K. and Ukraine. The partnership, launched in January, involves Ukraine's ministries of Digital Transformation and Foreign Affairs and the U.K.'s Department for Business and Trade and Foreign, Commonwealth and Development Office.
Krasovsky, a U.K.-Ukraine TechBridge board member, said the partnership will support Ukraine's digitalization and also create opportunities for sharing Ukraine's government e-services experience with the U.K.
In addition, the alliance will help Ukraine IT service companies and SaaS providers generate business in the U.K., he noted.
John Moore is a writer for TechTarget Editorial covering the CIO role, economic trends and the IT services industry.
