Ukraine’s burgeoning software development industry gets another boost
Ukraine`s burgeoning software development industry has gotten another boost from the West, with the creation of a US-Ukrainian joint venture that will facilitate software sales in America and Europe while increasing outsourcing contracts at home.
Kyiv-based Miratech and California-headquartered NetworkD signed the deal on Jan. 17 in the UK, where both firms have a presence.
NetworkD CEO and President Ashley Leonard said that they still haven’t thought of a name for the new joint company, adding that NetworkD will hold the majority 62.5 percent stake.
Leonard said that a full merger and initial public offering (IPO) could pan out down the road.
British born Mark Rayner, who has a share in Miratech’s export business and manages investments into Ukraine through other companies, said that he brokered the partnership between NetworkD and Miratech. Rayner, a shareholder of ICSG Ltd, an international tax planning and investment company, said he hopes to coordinate an IPO for the joint venture on the London Stock Exchange within 18 months.
“First we’ll start with a joint venture and see how it works,” said Leonard, whose company boasts clients like U.S. high-tech giant Honeywell and Europe’s Volvo Motors. In 2005, NetworkD, which is 10 years old, reported an annual turnover of around $26 million.
NetworkD provides companies with software that it either produces itself or buys from producers like Miratech, a company which specializes in developing software for clients in the West.
Bohdan Kupych, General Director of Kvazar-Micro Ukraine, a leading IT company in the region, said such partnerships for development centers is a good method for Western companies to start working with Ukrainian software developers. In addition to offering software development services through a subsidiary, Kvazar-Micro also produces computers and offers system integration services.
“There are several examples of existing projects of this kind,” Kupych said. “We have negotiations with about five companies for similar projects. We established such a joint venture with a Dutch company a year ago.”
Kupych said these partnerships could lead to a buyout by the Western or Ukrainian partner in the future, or a merger of both.
If the partnership works out for Miratech, which already has overseas customers, it will expand its presence on the Western software market and increase its inflow of outsourcing, while NetworkD will gain a foothold in a sound software development outsourcing firm in Eastern Europe, where production costs are a fraction of prices in the West. NetworkD is also eyeing the possibility of finding contracts in Eastern Europe.
NetworkD would have paid a lot in start-up costs had it chosen to establish a software development branch in Ukraine alone.
Miratech reported an annual turnover of around $8 million in 2005 – second in Ukraine behind Softserve. However, Miratech President Mykola Royenko said that his company is number one in terms of servicing foreign customers, adding that 85 percent of its products end up in North America and Europe.
Leonard said that five years ago 90 percent of his business was from North America and only 10 percent was from Europe. Now it’s about 50/50.
The NetworkD CEO said that Ukraine’s inexpensive but qualified programmers weren’t the only reason his company chose Ukraine. He said that the improved business and political climate following the Orange Revolution also played an important role in the decision-making process.
“There is a buzz in the air,” said Leonard.
“We feel much more comfortable working here in Ukraine as compared to a place like India,” added Leonard, a British citizen.
Andriy Cherevko, marketing manager at Softserve, considered one of Ukraine’s largest software producers, said the new joint venture’s success will largely depend on NetworkD’s position abroad; namely, its ability to land software development contracts for Miratech’s developers.
However, he added, this is the first time that he has heard of an international partnership of this scale in Ukraine.
Softserve also places a premium on foreign contracts, but handles them itself through its two offices in the States. When the Post first interviewed Softserve in 2000, the firm employed nearly 100 professionals. Five years later, the company had a workforce of over 500.
“Every year the market is growing, but if you compare it to other countries, the Ukrainian market is still quite small,” Cherevko said.
In order for it to grow, it will need government support, he added. This could include things like tax breaks for developers and increased funding for software development education.
Ukraine still remains small compared with leading IT-outsourcing haven India, which churns out about $10 billion in services through IT outsourcing contracts. But it is edging ahead of its immediate western neighbors like Poland and the Czech Republic, which are now part of the Eurozone. Leonard said NetworkD had considered Central Europe before settling on Ukraine.
Miratech predicts that its labor force will increase by 10 to 15 percent over the next couple of years. The company currently employs about 200 programmers.
Ukraine’s software development market has been growing aggressively in recent years, largely fueled by fat contracts from the West.
“The growth of the Ukrainian IT export industry market in 2004 exceeded expectations, going up 57 percent to $110 million from $70 million in the previous year,” according to a 2005 study prepared by Techinvest, a Kyiv-based IT industry venture capital firm.
Much development will be in outsourcing. Everyone from medical insurance companies to tax services is looking to cut costs by developing their software for less. Ukraine, blessed with qualified but relatively inexpensive programmers, has been getting a larger share of the business in recent years.
By 2015, Ukraine will move from 17th to 6th among countries that take in outsourcing, said Miratech’s Royenko.
