What Is an Offshore Development Center?
Offshore development is becoming more and more popular in Western European countries and the United States. However, 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. This article discusses ODCs and their benefits. We will also explain how to open an ODC in Ukraine.
Ukraine is a very popular offshore destination for companies searching for skilled and experienced developers. However, due to the ongoing war in 2022, many foreign clients wonder if it is safe and efficient to hire software developers from Ukraine and whether or not they’re stable enough for consistent work. The Ukrainian IT sector had the foresight to create risk management plans before the war started. Hence, most IT companies moved their development teams to Western Ukraine or other countries to decrease disruption. Moreover, the IT sector is among those industries still working and, as such, is helping Ukraine by adding economic stability. Therefore, Ukrainian developers continue to be highly motivated and work hard to meet production expectations.
What Is an Offshore Development Center?
An offshore software development center is a software development office based in a country other than where the company is headquartered. These offices are commonly located in less expensive countries and serve as satellite offices for running product development. It can be a nearshore destination (e.g., an office in Poland when headquartered in Germany) or offshore (e.g., hiring developers from Ukraine when 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 answer is one of simple economics. Subsidiaries located in offshore countries very often have a much lower cost of living. An ODC team may include not only the developers and QAs but also project managers, designers, and copywriters. Companies hire ODC teams to meet their needs and goals.
Offshore development centers typically function as an extension of the in-house team. An ODC also handles all associated tasks such as accounting, taxing, HR/recruiters, management, employee healthcare, and office space leasing.
Purchasing or renting real estate is also very often much less expensive in offshore locations.
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 involving the in-house staff. The ODC and its client agree on a contract price and time frame for completing and delivering the work. As the name implies, fixed price models do not provide flexibility, so they are more suited for predictable projects. This kind of pricing model means that the client pays the same price whether or not the project is completed on time. Of course, there are other offshore software outsourcing models that may better suit a project.
- Hourly project outsourcing. This model also involves outsourcing the entire project to an ODC, but with different payment options—the client pays the offshore developers working on the project by the hour. 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 number of hours needed to complete a project.
- Dedicated team outsourcing. A dedicated development team consists of offshore software developers that an ODC forms to work on a client’s project. The client is not involved in the project-staffing process. The ODC assigns developers to a project from the company’s existing staff—commonly known as the “bench”. Additionally, there is no direct communication between the client and the developers—only the project manager assigned by the offshore software company communicates with the client.
- Staff Augmentation. Unlike the dedicated team model, staff augmentation involves hiring software developers to help the client’s in-house engineers. Using this hiring model, clients hire one or several skilled developers with the required skills and extensive expertise to provide high-quality services. The client personally interviews and selects the members for their ODC team from an agency’s shortlist of candidates. If a problem arises and a developer needs to leave a project, replacing a developer with another with a similar level of expertise is easy.
Why Launch an Offshore Development Center in Ukraine in 2023?
The advantages of opening an offshore software development center in Ukraine include:
- Cost efficiency. Offshore software development costs in Ukraine are much lower than the rates charged by in-house developers. Even above-average Ukrainian salaries are more cost-effective for companies headquartered in the United States and Western Europe.
- Access to a big talent pool. Building an offshore development team in Ukraine is much less expensive than in the United States, but it doesn’t mean you get lower quality. Every year around 16,000 IT talents graduate from Ukrainian technological universities. Furthermore, Ukrainian developers are eager to learn new technologies. They continually participate in international conferences and have broad minds open to accepting new knowledge. As a result, ODC teams from Ukraine impress clients with exceptional quality of work, their tech and soft skills, and their level of experience.
- Conveniently located in Central Europe. Ukraine’s Eastern European Time zone is convenient for working with European or North American clients. For example, the time difference between Ukraine and New York is only 7 hours. That means that a portion of the workday overlaps, allowing the client and the ODC team to meet and discuss any “hot” topics.
- Flexibility. Many offshore development centers in Ukraine offer collaboration through staff augmentation. Such a model gives the customer more control over a project and the ability to change the project scope and requirements if needed. Additionally, the customer has direct access to the developers and can communicate with them.
Offshore Software Development and IT Industry in Ukraine in 2023
According to the Outsourcing Journal, Ukraine is the # 1 outsourcing destination in Eastern Europe. So what makes Ukraine different from other offshore software outsourcing locations? Let’s find out.
- An enormous number of high-quality software developers. Currently, there are around 200,000 software engineers in Ukraine, and experts expect this number to grow by 2025. The country is ranked 4th in the world for tech professional expertise. The Ukrainian IT industry offers comfortable work environments and high salaries compared to the cost of living. Therefore, many young people are willing to join the thousands of the country’s successful IT professionals.
IT field development by cities, DOU, 2021
- Favorable tax system. The Ukrainian government provides tax breaks for the IT industry. For example, IT companies in Ukraine can choose between corporate tax (18%) and distributed profit tax (9%). Such favorable conditions encourage the further development of offshore software companies in Ukraine.
- Being home to global startups and brilliant minds. Companies such as Grammarly, Petcube, TemplateMonster, and Depositphotos were founded in Ukraine. Another interesting fact: the co-founders of global software products such as PayPal or WhatsApp have Ukrainian roots.
- Trusted by global tech giants. IT and electronics giants such as Microsoft, Apple, IBM, Samsung, Siemens, Ericsson, Huawei, Skype, and many more have R&D centers in Ukraine. It proves that Ukrainian developers are involved in global software development projects and thus are highly skilled, trustworthy, and reliable.
- Big tech events and conferences. IT conferences in Ukraine are very popular with Ukrainian developers because the organizers invite the best international speakers. The most known conferences are the Agile Eastern Europe Conference, Dev Challenge, iForum, IT Arena, and PyCon Ukraine. During these events, programmers from Ukraine have a great opportunity to network with colleagues and exchange experiences. Meetups are also widely popular—for anything as well-known as iOS or something as obscure as Haskell.
- Open-mindedness. Though Ukrainians may lack profound project management and strategic thinking skills, their mindset is geared toward western values. They are gradually moving towards the adoption of a western mentality, which makes collaborating with clients from Western Europe and the United States easier.
How to Set Up an Offshore Development Center in Ukraine in 2023
Establishing an offshore software development center in Ukraine from scratch involves the following steps:
- Defining the goals and requirements
- Hiring a local legal consultant to handle administrative issues
- Registering the offshore software development company as a legal entity
- Choosing a location and leasing office space
- Understanding the local tax system
- Hiring administrative and support staff (office managers, accountants, system administrators, etc.)
- Running a brand-building campaign to establish the company as a reputable employer in the new location
- Hiring developers
Collaborating with one of the existing ODC vendors under the staff augmentation model, the following is needed:
- Choose a vendor to manage the offshore software company.
- Get to know the potential vendor and carefully examine their track record and finished products available on the IT market.
- Interview the developers for the project.
- Communicate with the new team regarding the organizational structure and/or hierarchy. Assign roles and responsibilities according to knowledge and skill level.
- Set security measures by authorized personnel to access different parts of the project by setting up permissions.
- Start the 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 cooperation between the ODC and in-house teams.
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Which City of Ukraine to Choose for Offshore Development Office Setup?
Kyiv is the capital and home to the largest tech university in Ukraine. It’s also a place where many Ukrainians relocate because of the number of jobs and possibilities. If an ODC in another city grows rapidly, at some point, companies will be on the verge of recruiting Kyiv-based developers—or they’ll have to hire a remote team or open another ODC. This could be especially relevant if building a less common solution, e.g., a Machine Learning-based product.
Even though there is a war going on, Kyiv is still a relatively stable city for businesses to operate in. A significant number of software development companies have relocated from eastern Ukrainian cities to Kyiv and continue to provide high-quality services.
A Western city very close to Poland and home to many offshore development offices. The city has a strong outsourcing culture, so it is considered a good option for building an ODC.
As for today, Lviv remains the safest city in Ukraine. Many software development companies from war-torn cities have found a place here. These businesses find Lviv to be a stable and secure place to operate in. In addition to this, in Lviv, there is an IT Cluster—the largest tech association in Ukraine, which unites more than 250 IT companies with around 30,000 software engineers.
Odesa is located in the south with a population of nearly one million. Similar to Lviv, Odesa is a well-established outsourcing destination. Due to this, many software development companies open their HQs or branches here.
As this city has a strategic port on the Black Sea, it remains under threat, which may cause some difficulties in doing business. However, due to this very reason, Odesa remains the most protected city among others in Ukraine.
Kharkiv has a strong pool of tech talent that competes with Kyiv, thanks to a huge technical university. In Ukraine, Kharkiv is widely known as a student capital, especially for technical majors, whose graduates have many prospects here. However, it is located in a more remote northeastern region closer to the Russian border—which unfortunately means it is also prone to rocket attacks and power outages.
Although the city’s activities are hampered by constant shelling, local IT clusters continue to operate. In a more peaceful time, Kharkiv would have been one of the cities with the best conditions for opening an ODC, but now we suggest that you look at other options, such as the following city.
Dnipro is centrally-located but not as popular as the four cities mentioned above. Traveling to Dnipro for a visit can be a bit more difficult, but it has a strong outstaffing and outsourcing reputation, so the odds of finding good developers are high. Additionally, overall pricing and cost-of-living expenses are lower than in the bigger cities.
Dnipro, in addition to Kyiv, Odesa, and Lviv, is still one of the cities with a relatively stable situation, even due to the ongoing war. This is due to the city’s strong defenses and its location away from the front lines. Moreover, software development firms in the city are continuing to deliver high-quality products to foreign clients, showing their professionality and ensuring that the development process is well managed.
Mykolayiv or Kherson
Two neighboring central-southern cities graduate students from a few tech universities. The cost of living in Kherson or Mykolaiv is much lower compared to other offshore destinations. This would be a better location if it weren’t for the migration of tech professionals to bigger cities for a larger pool of career opportunities. However, this doesn’t leave both cities without development talent—a few large outsourcing companies, as well as many smaller agencies, operate in the area.
Since these two cities are very close to the front line, the situation in them is not very favorable for doing business. The situation in this region is unstable and unpredictable, making it a risky place to set up an ODC here. It would be better to wait until conditions have become more settled before considering setting up an ODC in this area.
Ivano-Frankivsk or Uzhgorod
Overall, the benefits and drawbacks are similar to those of Mykolaiv or Kherson. However, this area has some logistical advantages because both cities are closer to Lviv, and Uzhgorod is located very close to the Slovakian border.
Since the beginning of the war, many IT specialists from the frontline areas have moved to this region as it is the safest place. This has had an impact on the IT sector in this region, as many more professionals are now working in this region, which means that the overall development of the IT sector in western Ukraine is improving.
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. Ukraine went through hard times after the Soviet Union collapsed in the early 1990s. Many governmental and institutional processes were bureaucratic nightmares—often intentionally. For example, people could not get important documents or permissions without bribing officials. Unfortunately, such corruption still remains in some Ukrainian state institutions and may interfere with the process of opening an offshore software outsourcing center. However, the new government is making efforts to fight corruption. Nowadays, if someone encounters corruption, they can file a complaint, but more importantly, their complaint will be heard. Since 2014, the National Anti Corruption Bureau (NABU) has processed more than 700 cases. Additionally, according to new laws, now all civil servants must electronically declare their income, and such transparency prevents them from receiving illegal income. Furthermore, the Ukrainian government is trying to remain up to date with the newest technologies as it is now implementing blockchain technology to fight corruption more efficiently. Even with the complicated situations because of the ongoing war, the level of corruption is expected to decrease. And the most important step in fighting corruption is the creation of e-government programs. Ukraine’s Diia app has already proven itself as a tool for fighting corruption and simplifying business, and has become a prototype for apps in other countries (for example, Estonia).
- Unstable political situation. In 2014, armed conflicts began in Kyiv, eventually leading to the conflict in Eastern Ukraine. This impacted many offshore development centers at that time. Now, even with the ongoing war, the IT industry continues working without any issues as many IT hubs from the east and center of Ukraine have moved to the western part of the country or nearby countries like Poland, where they continue providing high-quality software development services. Foreign companies should consider this and make sure that their companies have prepared themselves for different unexpected events, have implemented all necessary security measures, and found a safe place to relocate their business.
- Foreign investments may not always be supported. Fortunately, this barrier to entry occurs less often. Since 2014, the new government has established a range of specialized institutions to support investments from abroad, such as Ukraine Invest, Government Commissioner for Investments, and Business Ombudsman Council. This resulted in a boost in investments in Ukrainian IT companies, which reached $630 million over the last five years. But because of the war, it is expected that Ukraine will make very rapid progress in this area, as it will be necessary for the post-war reconstruction of the country.
Other Ways to Build an ODC Team in Ukraine in 2023
Some companies are still hesitant on whether to establish an ODC in Ukraine from scratch or enter into a long-term agreement with one of the existing ODCs. If this is the case, they are alternatives:
Building a Team on Freelance Portals
Here’s a step-by-step guide for collaborating with the developers on freelance portals such as Upwork:
- Register at a freelance marketplace as an employer.
- Search through freelancer profiles and invite them to join the team. Companies can also post a job with a project description on the platform and accept applications.
- Review the job applications or respondent profiles from invites, schedule interviews, and choose the best candidate.
- Create a job offer and wait until the freelancer accepts.
- 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 on the portal as “agencies.” Unlike the traditional, “physical” offshore software company, freelance software developers work remotely without benefits such as a paid vacation. This can significantly reduce 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 or the quality of their work. There’s no guarantee that they will continue responding or deliver exceptional work. Therefore, it’s important to vet potential candidates properly because anyone with access to the internet can join a freelance portal. Advanced freelance platforms such as Upwork Pro and Toptal offer a more rigorous screening of developers. However, their rates may be higher—more in line with in-house developers from the United States or Western Europe.
Building a Team via a Tech Talent Marketplace
A tech talent marketplace is an innovative way to connect clients looking for a software development team with skilled developers or form an ODC team in Ukraine and other leading offshore countries. YouTeam, a Ukrainian-based startup, launched such an IT outsourcing marketplace in 2017 and has experienced significant results. At first glance, the YouTeam marketplace may look like a freelance portal, but actually, it is quite different. YouTeam collaborates with 500+ software development agencies, which share 50,000+ of the best developers and designers in the marketplace. These professionals are not freelancers—they are employed full-time by dev shops. Additionally, the dev shops cover all employment-related expenses. 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 the case of a successful hire, the customer signs a contract with the web dev shop that provides the team.
- The development shop manages all related back-office issues and expenses.
YouTeam offers a 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 screening process, which results in discovering only the best companies. YouTeam representatives even visit the offices of the web dev shops to see how they organize their work processes. If any developers demonstrate low-quality work after being hired, the webshop is banned from the platform. In addition to investigating agencies, YouTeam also conducts pre-interviews for each developer to ensure they match the client’s requirements by evaluating an engineer’s skills and experience.
- Cost efficiency. With YouTeam, employers only pay for software development services with a 10% service fee. All other additional costs, such as recruitment fees, office space rental, vacations, insurance, etc., are covered by the webshop. More importantly, the webshop receives their payment only after the delivered work is accepted.
- Time Savings. Traditional models of hiring a dedicated development team in Ukraine, like searching for team members on freelance portals, may take months. However, on YouTeam, you can set up an offshore team in under two weeks. First of all, with a traditional ODC, employers may have to wait two days for a shortlisted team of candidates, whereas it may only take 15 minutes with YouTeam. Secondly, employers 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, companies can start working with their ODC team via the YouTeam platform in a couple of weeks, whereas they may have to wait for months using 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, companies can make all of the necessary changes and de-scale the team if needed.
- Professional help with project management. If an employer does not have in-house project management resources, we at YouTeam will gladly help 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 most cost-effective ways.
The Bottom Line
Western businesses and startups are now actively moving their R&D centers to other locations, such as Eastern European countries—Ukraine in particular—thus creating offshore development centers (ODCs). The most common models of collaboration with an ODC are:
- Fixed price project outsourcing: an ODC manages the entire project without involving the in-house staff. Both parties agree on payment and the time frame within which the work is to be completed.
- Hourly project outsourcing: the client is billed at an hourly rate ODC team.
- Dedicated team outsourcing: an ODC forms a team of dedicated offshore developers for the client’s project from its 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.
- Staff augmentation: 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 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. These actions resulted in a dramatic boost in the country’s IT industry.
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 build your dream team.