ISG Evaluates Impact of Ukraine War on IT Services and IT Market

The war in Ukraine is also leaving its mark on the IT market, as the country plays a major role in IT services in Eastern Europe: with more than 50,000 employees before the war and well over 200,000 freelancers working for more than 5,000 clients. In total, there are more than 1,000 IT services and product engineering companies in Ukraine. In addition, the country’s IT economy is very export-oriented: About 50 per cent of the Ukrainian IT industry’s turnover is generated through US companies and another 35 per cent through Western European companies. Most recently, the IT services sector in Ukraine generated annual export revenues of almost 7 billion US dollars. This corresponds to about 4 per cent of the gross domestic product.

High investment in IT training and diversification

Ukraine has, above all, a large number of highly skilled IT workers. The country has recently invested heavily in technological training and qualification, which has made it an attractive destination for outsourcing, especially for software development. In addition, leading IT services companies in Ukraine have spread their workforce across different countries following the annexation of Crimea in 2014. This approach has contributed to strong growth in the Ukrainian tech sector in recent years, as it has significantly reduced the risk for clients abroad.

Consequence of the attack on Ukraine

Some IT specialists have left the country, with most seeking a safe place locally. In some cases, this is affecting the ability to deliver. Deliveries continue to be made from the western parts of Ukraine. According to ISG, the IT sector in Ukraine has proven to be incredibly resilient so far. In addition, IT companies continue to provide an exceptional level of support and assistance to their employees and their families. At the same time, some work has been relocated to Poland, Romania, etc. However, short-term resource shifts out of the country have already become difficult. According to ISG, the relocation of engineering services is largely unproblematic. About 25 per cent of IT companies in Ukraine also provide data management services. However, the relocation of these services proves to be more complex.

More investment in cyber security is a must

Most large companies have multiple development centres spread around the world and therefore do not rely solely on teams and suppliers in Ukraine. Ukraine is also not the only country where companies have to weigh the risk and reward of supplier relationships due to political instability. ISG says that in any case, all companies should constantly review their business continuity plans. They should also expand risk assessment and monitoring by external third parties. Last, but not least, it is imperative that cybersecurity measures and awareness remain firmly in place, which often means additional investment.

Relocation to alternative locations

For clients of Ukrainian IT service providers, the main focus at the moment is on operational considerations and working closely with vendors to ensure that work can be moved quickly to alternative locations in Eastern Europe. If the conflict drags on for months or longer, ISG expects that some companies will also be forced to find alternative delivery locations for the longer term – with India becoming a particular focus. Therefore, the main focus in sourcing decisions is currently on assessing the geopolitical/location-related risk.