Graham Stack in Kyiv -

Ukraine's IT outsourcing sector has exploded over the last 10 years to top $1bn in 2011, capitalising on the science schooling inherited from the Soviet Union. Looking to the future, the sector has the potential to become a real force for Ukraine's modernisation if it can meet some challenges.

IT outsourcing is one of the perennial growth hope stories for Ukraine, drawing its inspiration from the Soviet tradition of science teaching, and the country's plethora of scientific institutes that used to churn out rocket scientists. Under market conditions, the schools have switched to producing programmers - an estimated 16,000 new IT specialists graduate each year.

So it was symbolic that in 2011, Ukraine's IT services export exceeded the volume of arms exports for the first time ever, clocking up $1bn. The figure marked a tenfold increase over the last 10 years, with the sector booming even through the chaos of the financial crisis - at 30-40% per annum, according to government figures. Outsourcing rankers Sourcingline now put Ukraine as the world's 26th most attractive outsourcing location. With the $1bn exports in 2011 still only a drop in the estimated $250bn world market, it has huge potential.

Shashank Samant, CEO of GlobalLogic, a US-based outsourcing company that employs 1,900 specialists in Ukraine, says the country has the largest pool of engineering resources in Central and Eastern Europe (CEE), with around 25% of the CEE IT offshoring market, and the highest ratio of research and development (R&D) to IT services. "It is thanks to the deep math and science skills in Ukraine that we have built up our strong R&D focus - the country's highly rated universities are a rich source of talent," says Shamant, adding that Globalogic's latest major project in Ukraine was the launch of an R&D centre for US cloud computing pioneers BMC Software in 2011.

Taras Kytsmey, who owns and runs the country's largest homegrown IT company Softserve and is also president of the country's industry association IT Ukraine, agrees. "Today, the IT programming national sector is an extraordinarily powerful innovative cluster in the Ukrainian economy, with staggeringly high growth rates," he says.

Underlining its innovative approach, Softserve is headquartered not in the capital Kyiv, but in the poor but picturesque western Ukrainian city of Lviv, which got a big boost as a host city of the Euro 2012 football championships in June. "Ukraine will never develop properly if it does not harness its high-tech potential," Kytsmey warns.

Helping hands

Thanks to the lobbying efforts of organisations such as Kymtsey's IT Ukraine, the country recently came a step closer to fulfilling this potential: President Viktor Yanukovych signed off on measures to support the sector on July 31, which include cancelling VAT for IT companies and reducing their employees' income tax rate to a symbolic 5%.

This was less than the industry was hoping for, but is the first step in Ukraine's quest to catch up with its northern neighbours. "Russia and Belarus already provide extensive preferences for their IT sectors, not only tax preferences, but also support for training development, and changes to customs and labour legislation," says Vladimir Bek, owner of programmers Sigma Ukraine and head of the IT committee at the European Business Association, a Kyiv lobby group for foreign-owned business. "In Ukraine, the creation of favourable conditions is still only at an initial stage."

Russia and Belarus had a head start in Ukraine when their established IT companies, Luxoft and EPAM Systems, set up there. Together, they employ around one-fifth of the Ukraine's total IT development talent. Ukraine is competitive in terms of costs, with developers earning up to $20-30 at the top end - 10-30% lower than in Belarus and Russia, but still astronomical figures for young people in a country where the average salary is around $300 per month.

Despite the wages on offer, insiders and experts see problems ahead for the goose that is laying these golden IT eggs - Ukraine's Soviet science legacy. The goose, they say, may simply be getting past it. "The level of university training and the supply of fresh talent is the number one problem currently faced by the sector," says Inna Sergiychuk, CEO of Ukrainian Hi-Tech Initiative. "Ukrainian students might graduate with good theoretical knowledge, but they have poor practical skills, and this is forcing large companies to have to set up their own training centres to secure competent staff."

"Hiring is difficult," agrees Eugene Novikov, director at the Ukraine design centre of US company Mindspeed Technologies, which develops semiconductor solutions for communications applications. "While those who enjoyed free and good training in the USSR and right after are all either abroad or in senior positions, the prospect for the flow of new heads is looking pessimistic," says Novikov. "Technical training has gone through a decade or so of deep degradation - the state universities were and still are very poorly funded."

Backing up Novikov's complaints, the respected Shanghai ranking of the world's top 500 universities released August 15 did not include a single Ukrainian institution. "With a bit of government support, one could surely attempt to bring at least one Ukrainian university into this ranking," says Andreas Umland, a German Ukraine expert teaching at Kyiv Mohyla university.

More mundane problems such as the decaying infrastructure dog the sector, says Novikov: "We have power outages even in Kyiv and have to buy expensive uninterruptible power supplies."