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All Change On The Eastern Front?
by Kerry Hallard, CEO, National Outsourcing Association
Thursday, March 06, 2014

Political instability could shake up European near-shoring - but don’t panic!

Vladimir Putin’s distaste for the people of Ukraine wanting to ‘play the field,’ trade-wise and have closer connections to the E.U, has led to a return to extremely sensitive Russian/Ukrainian relations that is currently being played out on the global diplomatic stage. But what will this mean for the outsourcing industry?

It will certainly affect the allure of outsourcing to former Soviet countries - news stories about soldiers and stand-offs, riots and illegitimate presidencies are hard to gloss over in business development meetings and the reputations of those countries with divided populations - some with a longing for the West, some with deep attachment to mother Russia - as solid offshoring destinations will suffer, through no fault of their own. 

New business-wise, that is. In terms of existing contracts, I suggest remaining calm.

Any talk of checking your contract for exit clauses is premature. There have been no reported disruptions of service to supply, transport or telecoms, with most of the key delivery centres hundreds of kilometres away from The Autonomous Republic of Crimea, which Luxoft has been quick to distance itself from in its official statement.

Speaking more informally, Luxoft’s CEO Dmitry Loschinin even went so far as to spin the crisis as potentially good for business: “Remember that our business model benefits from an economic rebound in western economies and weaknesses in economies where we have our staff, such as Russia and Ukraine,” he said. “We expect the labour market to have a greater availability of talent and cost pressure should ease.”

‘Stick around and we’ll give you a discount’, that seems to imply. In effect, organisations with short-term transactional deals in Ukraine could potentially ‘short’ their investments, go elsewhere and come back to lower prices when Ukraine isn’t such a fashionable destination anymore. Of course, for more complex deals the costs of switching would outweigh the expected potential financial benefits, so for many companies, putting their trust in suppliers’ contingency plans will be the best foot forward.

Getting caught up in the media’s rain dance below the grey clouds isn’t the best way to make a sourcing decision - nor is the viewpoint of a trumped up US ‘diplomat.’
Ukraine has always featured in the higher echelons of political risk maps. For the last few years it has swung from ‘medium’ to ‘high’ on Maplecroft’s Global Risk Analytics index, a fact that will not be lost on IT suppliers operating out of Ukraine.

Most of them will have well-laid plans to ensure continuous secure service. Suppliers’ people on the ground are best placed to judge what action needs to be taken, if work needs to be switched to another geography. Trust your suppliers, work with them on joint contingencies; it might be as simple as beefing up security, physical and cyber, or who knows, you might find a Ukrainian software engineer seconded to a hot desk near you.

In the politically unstable situation, with the economy in such a sorry state, we might find a situation where Ukrainian IT talent decides to emigrate west, and make the leap into the EU long before their homeland manages to. These people are highly skilled in a discipline where there is a global shortage. Most nations would jump at the chance to take on these hi-tech ‘refugees’ - software engineer is on almost every nation’s ‘most wanted’ skills list. These people won’t be benefit scroungers, they’ll be high bracket tax payers who UK tech companies could put to immediate good use - the Tech City sector could grow exponentially because of it.

I expect Poland and the Baltics could do well out of the stand-off, particularly the Baltics, with their close cultural synergies with Ukraine, and Belarus, who might be the next country to exercise people power to relax the ties to Russia and be more west-facing. Latvia even has the Euro, so is fully through the door of the West, which is where many Ukrainians want to be. Whether that is possible, who knows?

One thing’s for sure - political stability is the first thing you ask of an offshoring nation. Look at Egypt, once a hot offshore destination, only now able to brush itself down and re-launching itself following the Arab Spring. Ukraine needs to establish credible leadership and clear strategic direction fast, or the customers and workers of its lucrative IT sector might be tempted to look elsewhere.

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