What Is an Offshore Development Center?
Offshore development is becoming more and more popular in Western European countries and the United States. Due to the lack of local IT specialists and high software development costs, many Western businesses are opening offshore development centers (ODCs) in Asian and East European countries. In this article, we are going to find out what is an ODC, and which benefits it brings. We will also explain how to open an ODC in Ukraine.
An offshore software development center is a software development office that is based in a country other than where the headquarters is, usually a much cheaper country for running product development. It can be a nearshore destination (e.g., you can build an office in Poland when you’re a German company), or offshore (e.g., you are hiring developers from Ukraine when you’re based in Canada).
So why does an offshore software company deliver the development, QA, and sometimes UX / UI design services to the headquarters company at a price lower than that of an in-house team?
The reason is the economics and the lower cost of living in an offshore country than, say, in the USA. An ODC team may include not only the developers and QAs but also project managers, designers, copywriters, etc. Companies hire ODC teams according to their needs and goals.
Offshore development centers typically function as an extension to the in-house team. An ODC also handles all of the associated tasks such as accounting, taxing, HR/recruiters management, employee healthcare, office space rent, and so on.
The real estate, for purchase or rental, is also much more low-cost in the offshore destination.
How Does an ODC Work?
An ODC workflow depends on the selected cooperation model. The most common cooperation models for offshore software development in Ukraine are as follows:
- Fixed-price project outsourcing. Under this model, an ODC manages the entire project without the involvement of the in-house staff. The ODC and its client agree on a certain payment amount and time frame within which the ODC should deliver the work according to the client’s requirements. A fixed price model is not flexible and is suitable for more or less predictable projects. Even if the work on the project takes longer than expected, the software development center gets no extra payments. However, they can predict those extra payments beforehand and add them to the agreed fixed price. As a result, if the project is completed within the specified deadline, the client still pays more than they would pay in case of other available offshore software outsourcing models.
- Hourly project outsourcing. This model also involves outsourcing the entire project to an ODC, but with different payment options: the client pays for the amount of time that the offshore developers spent while working on the project. This model is more flexible than the fixed price model because the client can change the project requirements and goals in the course of work. However, it is impossible to accurately predict the actual number of hours that are needed to complete the project.
- Dedicated team outsourcing. A dedicated team is a team of offshore software developers that ODC forms to work on a client’s project. The client is not involved in the project staffing process. The ODC assigns the developers to the project from the company’s existing staff (“bench”) and without the client’s participation. Additionally, there is no direct communication between the client and the developers – only a project manager assigned by the offshore software company communicates with the client.
- Outstaffing. Unlike the dedicated team model, outstaffing involves hiring software developers exclusively for the client’s project. As a result, the client gets a completely new team, which is tailored specifically to the project requirements. The client personally interviews and selects the members for their ODC team. Moreover, they can communicate with the developers directly. However, if something goes wrong with the project, the client is responsible for that.
Why Launch an Offshore Development Center in Ukraine in 2021?
An offshore software development center in Ukraine will bring your business the following advantages:
- Cost efficiency. As we have already mentioned, offshore software development costs in Ukraine are much lower than the price charged by in-house developers. Even the salaries that are above average Ukrainian wages are more cost-efficient for companies with the main offices in the United States and Western Europe.
- Access to a big pool of brilliant tech talents. Building an offshore development team in Ukraine is much cheaper than in the United States but it doesn’t mean you get lower quality. Every year around 15,000 IT talents graduate from Ukrainian technology universities. Besides, Ukrainian developers are eager to learn new technologies. They constantly participate in international conferences and have broad minds, which are always open to new knowledge. As a result, ODC teams from Ukraine impress clients with the exceptional quality of work in terms of both tech skills and soft skills.
- Convenient location in the center of Europe. Ukraine’s Eastern European Time zone is quite convenient for work not only with European countries but also with the USA. For example, the time difference between Ukraine and New York is only 7 hours, which allows several hours of working times to overlap. During these hours, the client and the ODC team can meet and discuss all of the “hot” topics.
- Flexibility. Many offshore development centers in Ukraine offer collaboration on the outstaffing basis. Such a model gives the customer more control over the project and the ability to change the project scope and requirements if needed. Additionally, the customer has direct access to the dedicated development team and can communicate with them whenever it is possible.
Offshore Software Development and IT Industry in Ukraine in 2021
- An enormous number of high-quality software developers. Now there are around 116,000 software engineers in Ukraine, and this number is expected to grow more than twice by 2025. The country is the 4th in the world by the number of tech professionals, followed by Russia, India, and the United States. Ukrainian IT industry offers comfortable working places and high salaries as compared with the cost of living. Therefore, many young people are willing to join the thousands of successful IT professionals in the country.
- Favorable tax system. Ukrainian government supports the IT industry in terms of taxation: IT companies in the country are allowed not to pay VAT, and the tax amount is only 5 %. Such favorable conditions encourage the further development of offshore software companies in Ukraine.
- Being home for global startups and brilliant minds. Companies such as Grammarly, Petcube, TemplateMonster, and Depositphotos were founded in Ukraine. An interesting fact: the co-founders of global software products such as PayPal or WhatsApp have Ukrainian roots.
- Being trusted by global tech giants. IT and electronics giants such as Microsoft, Apple, IBM, Samsung, Siemens, Ericsson, Huawei, Skype, and many more have their R & D centers in Ukraine. It proves that the Ukrainian developers are involved in global software development projects and thus are highly skilled, trustworthy, and reliable.
- Big tech events and conferences. IT conferences take place in Ukraine quite often and are very popular with Ukrainian developers because the organizers invite the best international speakers. The most known conferences are Agile Eastern Europe Conference, Dev Challenge, iForum, IT Arena, and PyCon Ukraine. During these events, developers from Ukraine have a great chance to network with their counterparts and exchange their experience. Meetups are also widely popular, and you can find a meetup on any technology, such popular as, for example, iOS, or way less popular such as Haskell.
- Open-mindedness. Though the Ukrainians are still lacking profound project management and strategic thinking skills, their mindset is geared towards western values. They are gradually moving towards the adoption of western mentality, which makes it easier for them to collaborate with clients from Western Europe and the United States.
How to Set Up an Offshore Development Center in Ukraine in 2021
If you decide to establish an offshore software development center in Ukraine from scratch, the process may involve the following steps:
- Hiring a local legal consultant to handle administrative issues.
- Registering your offshore software company as a legal entity.
- Choosing a city and renting an office.
- Getting familiar with the local tax system.
- Hiring the administrative and support staff (office managers, accountants, system administrators, etc.)
- Running a brand-building campaign to establish yourself as a good employer in the new location.
- Hiring developers.
If you decide to collaborate with one of the existing ODC vendors under the outstaffing model, you will need to do the following:
- Choose a vendor for running your offshore software company.
- Get to know the potential vendor as well as carefully explore their track record and finished products that are available on the market.
- Interview the developers for your project.
- Communicate with your new team regarding the organizational structure and/or hierarchy. Assign roles and responsibilities according to their knowledge and skills.
- Take the security measures by deciding on who can access different parts of the project and set up the corresponding permissions.
- Start the actual offshore development process. Select the methodology and break up the workflow into sprints if needed.
- Choose the means of communication, collaboration, and project tracking.
- If applicable, set up the cooperation between the ODC team and the in-house team.
Which City of Ukraine to Choose for Offshore Development Office Setup?
Kyiv is the capital and also the home of the largest tech university in Ukraine. It’s also a place where many Ukrainians relocate to because of the number of jobs and possibilities. If your ODC in another city grows rapidly, at some point you’ll be on the edge of trying to recruit people based in Kyiv to relocate, or you’ll have to hire them remotely or open another ODC. This could be especially relevant if you’re building a bit of a less common solution, e.g. Machine Learning-based product.
Still, Kyiv is a fantastic location served by 2 major international airports, with vivid cultural life, and a lot of cool office spaces.
A Western city that is very close to Poland, and home to many offshore development offices. The city has a strong outsourcing culture, and you can consider it as a good option for building your ODC.
The city is also served by an international airport with direct flights to a dozen of European capitals.
A Southern destination with almost 1-million citizens. Same as Lviv, Odesa is a well-established outsourcing destination, however, the airport serves less direct flights to European cities than Lviv.
Kharkiv has a strong pool of tech talent to compete with Kyiv thanks to a huge technical university. The location, though, is quite remote from Europe, closer to the border with Russia, and the airport is not serving too many destinations. While traveling to Kharkiv might take time, the quality of software developers might leave you very impressed.
Dnipro is located in the center of Ukraine but it’s not as popular as the 4 cities mentioned above. It might be not easy to get there if you want to pay a visit but Dnipro has a strong outstaffing and outsourcing reputation, and you might find good developers there. Plus, the costs might get a little bit lower than in other big cities.
Mykolayiv or Kherson
Two neighboring cities host graduates of a few tech universities. The cost of living in Kherson or Mykolayv is much lower compared to other offshore destinations. This could be good if not the migration of professionals to bigger cities for better career opportunities. However, this doesn’t leave both cities without development talent — a few large outsourcing companies, as well as many small agencies, operate in the area.
Cities are served by Kherson International Airport that is operating flights to Istanbul and was supposed to operate flights from Vienna and Krakow until the global pandemic hit the world. So, as you see, it’s not the easiest place to fly into but might be worth it if you’re looking for some extra low-cost development services.
Ivano-Frankivsk or Uzhgorod
Same as with Mykolaiv or Kherson, but probably a bit better from the logistics point of view. Both cities are close to Lviv, and Uzhgorod is located very close to the Slovakian border. The situation with the talent is slightly better than in Ivano-Frankivsk or Uzhgorod while your costs will still be quite low.
Building an ODC in Ukraine: Potential Issues
When building an offshore software development center in Ukraine, you may run into the following obstacles:
- Corruption and bureaucracy. At the beginning of the 1990s, when the Soviet Union collapsed, Ukraine was going through hard times. Many processes that involved the government institutions took too long, and often it was intentional. People could not get their important documents, permissions, etc. until they gave a bribe. Unfortunately, such corruption still remains in some Ukrainian state institutions, and it may interfere with the process of opening an offshore software outsourcing center. However, the new government is making efforts to fight corruption, and if you encounter it, you know that you can complain, and your complaint will be heard. Since 2014, the National Anti Corruption Bureau (NABU) has processed more than 700 cases. Additionally, according to the new laws, now all civil servants should electronically declare their income, and such transparency prevents them from receiving illegal income. By the way, the Ukrainian government is trying to remain up to date with the newest technologies, as now it is implementing blockchain technology to fight corruption even more efficiently.
- Unstable political situation. In 2014, armed conflicts began in Kyiv, eventually leading to the conflict in Eastern Ukraine. This impacted many offshore development centers that have existed in Ukraine at that time. As for now, the country has almost recovered from this conflict, as you can see by the rapid growth of the IT industry. Now the conflict is happening only in the east, which is far away from the major cities that host the offshore development centers. Many companies will assure you that the conflict is not affecting foreign business in any way.
- Foreign investments may not always be supported. However, now it happens not that often. Since 2014, the new government has established a range of specialized institutions to support the investments from abroad such as Ukraine Invest, Government Commissioner for Investments, and Business Ombudsman Council. This resulted in a boost of investments in Ukrainian IT companies, which reached $630 million within the last 5 years.
Other Ways to Build an ODC Team in Ukraine in 2021
Still, hesitating on whether you want to establish an ODC in Ukraine from scratch or enter into a long-term agreement with one of the existing ODCs? If yes, then you can consider some of the alternative ways:
Building a Team on Freelance Portals
You can collaborate with the developers at freelance portals such as Upwork, and here’s what you have to do:
- Register at a freelance marketplace as an employer.
- Search for the freelancers by looking up their profiles and inviting them to join the team. You can also publish a project description at the platform and have the freelancers make the first move and apply for the job themselves.
- Review the job applications or answers to the invites, schedule the interviews with the applicants, and choose the best candidate.
- Create a job offer and wait until the freelancer accepts the job offer.
- Create the contract and start working with the freelance developer.
You can either hire the developers one by one and form a team from scratch or search for ready-made teams that are registered at the portal as “agencies”. Unlike with the traditional, “physical” offshore software company, freelance software developers work remotely from home and get no benefits such as a paid vacation. This can significantly reduce the costs as you do not need to cover the back-office expenses. However, you cannot be 100% sure about the reliability of the hired developers as well as the quality of the work that they provide. No one can guarantee that they will not stop responding or deliver exceptional work because almost anyone who has access to the Internet can join a freelance portal. Advanced freelance platforms such as Upwork Pro and Toptal offer the rigorous screening of developers. However, their rates may be too high, just like those of the in-house developers in the United States or Western Europe.
Building a Team via a Tech Talent Marketplace
A tech talent marketplace is an innovative way to connect the clients looking for an offshore development team with skilled developers as well as form an ODC team in Ukraine and other leading offshore countries. YouTeam, a Ukraine based startup, launched such a marketplace in 2014 and has reached significant results. At first glance, the YouTeam marketplace may look like a freelance portal, but actually, it is different. YouTeam collaborates with more than 300 web development shops, which share more than 2,000 profiles of their best developers and designers at the marketplace for the clients. These professionals are not freelancers – they are already employed by dev shops on a full-time basis, and the dev shops cover all of the related employment expenses. So the workflow is as follows:
- The customer leaves their project requirements.
- YouTeam handpicks the best dev profiles for the project available for immediate hire, and the customer conducts interviews with shortlisted candidates.
- In case of success, the customer signs the contract with the web dev shop that provides the team.
- The development shop manages all related back-office issues and expenses.
YouTeam offers a whole bunch of advantages as compared to traditional offshore development centers and freelance portals, specifically:
- Strict vetting of the web development shops that join the YouTeam platform. Each dev shop goes through a multi-stage process, at the end of which only the best companies remain. YouTeam representatives can even visit the offices of the web dev shops to see how they organize their working processes. If still some of the developers demonstrate the low quality of work when hired, the responsible webshop is banned from the platform.
- Cost efficiency. With YouTeam, you pay only for the software development services. All of the additional costs, such as recruitment fees, office space rent, vacations, insurance, etc., are covered by the webshop. Besides, the webshop receives your payment only after you accept the delivered work.
- Saved time. Traditional models of hiring an offshore development team in Ukraine, like searching for team members on freelance portals, may take months of your time. On the contrary, on YouTeam you can set up your offshore team within two weeks only. Here are some quick figures: firstly, with a traditional ODC, you will have to wait for two days until the teams are shortlisted, whereas it may take you only 15 minutes with YouTeam. Secondly, you can sign a contract with a webshop via YouTeam within 24 hours while it may take you several weeks to do so with traditional offshore software outsourcing. Finally, you can start working with your ODC team via the YouTeam platform in a couple of weeks, whereas you will have to wait for months in the case of a traditional ODC model.
- Flexibility. It often happens that the scope of the project can significantly change in the course of work. Some traditional ODC models do not allow such changes whereas with YouTeam you can make all of the necessary changes and de-scale the team if needed.
- Professional help with project management. If you do not have in-house project management resources, we at YouTeam can gladly help you by providing the services of a dedicated manager. Overall, building a dedicated development team in Ukraine via a tech talent marketplace is one of the safest and cost-efficient ways of building offshore development teams.
The Bottom Line
Western businesses and startups are now actively moving their R&D centers to other countries, such as Eastern European countries and Ukraine in particular, thus creating the offshore development centers (ODCs). The most common models of collaboration with an ODC are as follows:
- Fixed price project outsourcing: an ODC manages the entire project without the involvement of the in-house staff. Both parties agree on a specific payment amount and time frame within which the work should be done.
- Hourly project outsourcing: the client pays for the amount of time that the ODC team reported while working on the project.
- Dedicated team outsourcing: an ODC forms a team of dedicated offshore developers for the client’s project from its own internal resources. The client does not take part in the project staffing process and there is no direct communication between the client and the developers.
- Outstaffing: the developers are hired externally and exclusively for the client’s project, and the client can directly communicate with the developers.
When opening an ODC in Ukraine, you may encounter certain issues that can remain from the previous corrupt governments. However, since 2014 Ukraine has been actively supporting tech startups and foreign investments as well as taking anti-corruption measures. All of this resulted in the dramatic boost of IT industry in the country.
Alternative ways to set up an ODC team in Ukraine may be to look for potential team members on freelance portals and tech talent marketplaces. YouTeam is an example of a successful tech talent marketplace startup. We have already connected hundreds of skilled software developers from the best web dev shops with clients who are interested in offshore software outsourcing to Ukraine. So if you are thinking about an offshore software development center in Ukraine, a tech talent marketplace may be one of the most favorable and convenient options. Contact us today and let us help you form a dream team.