Ukraine crisis puts global IT outsourcing on edge

While first and foremost a humanitarian crisis, the hostilities have Russia’s military invasion of Ukraine has also been a concern for IT outsourcing customers with interests in the region — and those taking advantage of the global IT services market generally.

The conflict has had a significant impact on Ukraine’s IT outsourcing industry, which exports $6.8 billion of IT services annually, approximately 4% of GDP, according to trade group IT Ukraine Association. Ukraine, together with neighboring nations, employs around half of the 1.5 million IT and business services professionals working in nearshore Europe, according to IT services and BPO research firm Everest Group.

“The ongoing Ukraine-Russia crisis has had a massive impact on Ukraine’s IT services industry. Delivery is still taking place from western parts of Ukraine, but it’s very limited,” says Stanton Jones, director and principal analysis at technology research and advisory firm ISG. “As most IT services have pulled out of Russia, the work has since moved to surrounding countries such as Poland and Romania.”

The escalation of Russia’s invasion of Ukraine also “stands to undermine global positioning of the region in the medium term,” says Nitish Mittal, partner at Everest Group.

Here, experts watching the region point to a variety of repercussions already taking place or likely to occur in the short and medium terms, and advise IT leaders on appropriate actions through the remainder of 2022 and beyond.

A key IT outsourcing region in turmoil

The IT services industry in Ukraine and the surrounding region has seen a number of impacts thus far, including operation shutdowns in strategic locations. “Among the three large global services hubs, Kharkiv and Kyiv are already under siege while Lviv is bracing for attack,” says Mittal, adding that hostilities in those cities alone impact 100,000 technology workers.

In addition, there has been significant talent relocation of the hundreds of thousands of IT services professionals in Ukraine. At the same time, there is increasing economic isolation with a growing number of buyers and providers exiting Ukraine, Russia, and Belarus. That has led to redundant talent and infrastructure, says Mittal, as well as legal issues for IT services firms with operations in the region.

The Central and Eastern Europe (CEE) region has, in recent years, established itself as a valuable technology services hub due to its sizable talent pool, moderate costs, and favorable business environment. But there is increasing uncertainty among IT outsourcing customers about the long-term stability of the region for IT services.

“Technology buyers have started to sense and express concerns with potential expansion of war beyond the currently impacted regions — Ukraine, Belarus, and Russia — into the neighboring countries, especially those with NATO membership,” Mittal says. “This is likely to result into apprehension towards sustaining or expanding services within the CEE region.”

What outsourcing customers can do — and expect

The immediate concern of IT outsourcing providers and buyers is ensuring the safety of their employees and partners in the region, and minimizing service delivery disruption. IT services firms have been adept at moving impacted work to other locations in the region or beyond, says Mittal.

IT outsourcing customers can take a number of actions in the near and medium term to manage the impact of the crisis on their operations as well as their partners. “Right now, our advice to IT organizations is to focus on assessing the geopolitical/location risk involved with sourcing decisions,” Jones says. “IT organizations must work closely with existing providers to ensure work can be moved to alternate locations in Eastern Europe. If the conflict stretches out for months or longer, it will push some organizations to find alternative delivery locations, likely landing in India.”

Over the next six months, IT outsourcing customers should focus on supporting their providers’ teams by, for example, easing up on service level agreements. “This is more than a business crisis,” says Mittal. “Empathy is key.” It will also be important to monitor their cybersecurity, particularly data security, as the threat of this conflict extends beyond physical boundaries.

Longer term, IT outsourcing customers should brace for increased prices. “We haven’t witnessed upward pricing pressures owing to this crisis specifically,” Mittal notes, but scarcity of talent particularly for next-generation skills — cloud, cybersecurity, AI, and data — and other inflationary pressures are predicted to push outsourcing costs higher. Rates for time-and-materials and project-based contracts were already up between 4% and 7% in the fourth quarter of 2021, according to ISG, although managed services prices have held steady.

“The conflict in Ukraine is going to put even more pressure on providers to find and retain top talent, especially in high-end areas like software engineering, in which Ukraine excels,” says Jones. If the conflict in the region is long and drawn out, adds Mittal, “prices for delivery from alternate locations — India, Southern-East Asia, Latin America — are expected to have an upward revision in the next four to six months.”

IT services buyers will also want to review their sourcing portfolios and geographic concentration risk and revisit their evaluations of other talent hubs in the area, such as Poland, Romania, and Hungary, Mittal says.

Reexamining sourcing strategies

There are lessons — and actions to take — even for enterprise IT functions not working directly with IT outsourcing providers in Ukraine, Russia, and neighboring countries.

“All organizations should be continually reviewing and hardening their business continuity plans and implementing third-party risk evaluation and monitoring, all while ensuring cybersecurity-related hygiene and awareness is rock solid,” Jones says.

They, too, can prepare for the potential of increased competition for skills in alternative delivery locations across India, Southeast Asia, and Latin America. “Acting quickly will be key,” says Mittal.

The crisis should also incite all IT leaders to reexamine their IT services and sourcing strategy to ensure greater agility and flexibility in responding to global events. “Early preparedness during the last two years helped enterprises rethink their location and service delivery strategy,” Mittal says. “In some ways, the market was already preparing for a crisis like this by being more flexible in their talent sourcing models.”

Being more collaborative and transparent with providers has been key. “We’ve seen buyers and providers are truly partnering — going beyond the contract — to minimize the impact of this crisis,” says Mittal, offering access to mental health and community resources to employees struggling with the dual impact of the pandemic and this humanitarian crisis, being more flexible in order to mitigate risks, and embracing new business continuity approaches as the situation has evolved.

“The IT sector in Ukraine has shown incredibly resiliency as there is still delivery taking place in the Western part of the country,” Jones says. “IT firms have continued to provide extraordinary levels of support and aid to employees and their families.”