Enterprise

Tech thrived on the back of global IT outsourcing. Russia’s invasion has changed the equation.

Europe has been growing its reputation as a top source of IT talent, but the Russia-Ukraine war could stall the region’s tech industry. Still, despite the geopolitical risk, experts and industry practitioners don’t think all is lost for Europe’s tech scene.

Europe at night from space.

As more companies deploy global talent models, geopolitical risks become even more paramount.

Illustration: brichuas/iStock/Getty Images Plus

The global market for IT services has exploded in line with the overall growth of tech, which has become a $4 trillion dollar industry. Finding the talent to meet the growing demand for technical services is more difficult than ever, which has driven companies to hire IT employees across the globe, outsourcing to countries like the Philippines, India and, increasingly in recent years, Ukraine, Poland, Bulgaria and other Eastern European countries.

Everything changed for Eastern Europe’s IT services industry on Feb. 24, when Russia invaded Ukraine and started a war that has claimed the lives of more than 3,000 Ukrainian civilians, according to the United Nations. With no end to the war in sight, Europe’s tech sector is under pressure to maintain its reputation as a hot source of IT talent.

Demand for that talent has not slowed: It’s no secret that companies across the board are having difficulty finding the right people. “There is absolutely a dearth of skills available in certain countries,” said Kerry Hallard, CEO of the U.K.-based Global Sourcing Association. “In the U.K., I think we've got something like 1.2 million open jobs at the moment of which over 100,000 of those are in technology, in software development in particular.”

While the recent history of enterprise tech has centered on automating as much of the work as possible, there’s a limit. “When you think about software, you're primarily talking about talent because we don't make products,” said Sanjay Brahmawar, CEO of Germany’s SoftwareAG.

The talent crisis has made IT outsourcing more essential than ever. “The pool of people that are available in developed countries is not enough to meet all the demand,” said Prasad Vuyyuru, a partner at Infosys, which is based in India. "That is the reason why outsourcing is increasing and it will keep increasing because we don't have enough people in the U.S. or Germany or U.K. to do all the technology work that needs to be done.”

IT outsourcing has been happening for more than 30 years, said Hallard, but the scale has increased dramatically. “Now it's every type of technology, whether it's your cloud infrastructure, whether it is developing your mobile phone app, whether it is ecommerce platforms,” she said. And the industry is growing: “Our stats show that IT outsourcing grew by 20% last year,” she said.

A trillion reasons to diversify

According to Gartner’s estimates, the IT services market as a whole is now more than a trillion dollars in size, said senior research director Brett Sparks.

And although outsourcing has been going on for a long time, the pandemic helped kick-start the “delivery of IT services from remote locations,” said Gartner research Vice President Alan Stanley. And as companies began to spread their nets wider, they began to look to new countries to source their IT services, he said.

“I think one of the things that the pandemic has taught companies is that you can't have everything in one basket,” said Hallard. When India — which is a major outsourcing location for companies based in the U.K. — got hit especially hard during the pandemic, companies had nowhere else to source the work, she said. That led companies to expand their global footprint so that “if one destination is taken out, they know that they've got a fallback,” said Hallard.

At Gartner, Stanley noted that while two years ago its report included 20 major locations for exporting IT services, now that number has doubled to over 40.

Initially, companies focused primarily on countries like India or the Philippines for their outsourcing needs, said Vuyyuru. Now almost every company has a base in India or the Philippines, he said, noting that companies like Accenture and IBM have just as many employees in India as Infosys does. Still, there are limits to how much talent is available in any one country, which has driven companies outside of those traditional regions.

“For example, they've gone to Eastern European countries, because the advantage with Eastern European countries is they also generate a lot of engineers,” he said.

The IT talent landscape has also developed across parts of Asia, the Middle East and Africa, said Brahmawar. While the majority of SoftwareAG’s development talent sits in Bangalore, Chennai and Hyderabad, India, the company also has talent in Malaysia, Bulgaria and North America, amongst others.

In the U.K., outsourcing has shifted from its initial base in India to include Central and Eastern Europe, said Hallard. “There you’re looking at the areas like Bulgaria, Romania, Macedonia, all of these countries are beginning to absolutely grow in terms of the number of people that they've got working in the technology field.” But even Poland, which is becoming a strong software development hub in its own right, is now outsourcing to neighboring countries, she said.

Demand for European talent in particular has increased because of the region’s strength in high-demand IT skills. Europe has a good reputation for the sort of engineering skills needed in sectors like “automotive, alternative energy power sources, rail, and let’s say transport,” Brahmawar said.

“So some of these heavy engineering sectors, the skills that understand both software as well as the domain understanding, that is probably Europe’s trend,'' he said . “And the other thing where I think Europe has good experience now is around data privacy, data protection [and] data management like GDPR.”

Managing risks

But as more companies deploy global talent models that increasingly leverage IT employees from Europe, geopolitical risks like the impact of the Russian invasion of Ukraine become even more paramount. Existing talent shortages already made the jobs of IT leaders difficult, and caused some companies to reconsider their global outsourcing strategies.

Geopolitical risks can also impact the long-term desirability of a region for outsourcing as well. “That's the reason why, for example, East Europe, they have been slow on the uptake, because of some of these geopolitical risks,” said Vuyyuru. Pakistan and India are illustrative examples of that. Although the two countries have similar talent pools, “Pakistan has not done as well as India or Philippines has done just because [of] the political uncertainity, the political as well as the terrorism part of it, the security,” he said.

Political, security and economic risks are why business continuity planning is essential for enterprises still using talent in Europe in the midst of the war. While the risks are higher to use talent in impacted countries, Stanley noted that enterprises “could put in place obligations, backup plans, contracts in order to manage and mitigate the risks that are there.”

But as companies cancel contracts and agreements in Eastern Europe, it will affect outsourcing to the region for the next several years at least.

“It’s a volatile situation, and I don't know if we'll recover quickly. And a lot of those agreements they’re pulling out, those are three-to-five-year agreements, so they won't be back for at least three, five years,” said Sparks. And ultimately, some companies don’t have a choice but to leave the region entirely.

Still, despite these challenges, industry experts like Hallard don’t think outsourcing to Europe will slow down in the long run. Because of the talent shortage, the waiting list to get the right talent without outsourcing could be so long that it would be detrimental to operations, said Hallard.

“I don't believe [the war is] going to have a long-term impact on a company’s appetite to outsource or offshore because, basically, they haven't got a choice,” she said.

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