R&D Globalization: A Ukraine Perspective

2009

Zinnov LLC
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Overview
SCOPE
This report is intended to provide an overview of the R&D landscape in Ukraine in the context of Central and East European (CEE) countries* Specifically, the report seeks to provide detailed information on the following aspects Size of IT offshoring market in Ukraine with specifics for the R&D offshoring market Primary drivers for offshoring of R&D to Ukraine Key offshoring locations for R&D within Ukraine Macro and micro challenges that may hinder the progress of Ukraine as a key R&D offshoring destination

Belarus
Czech Republic

Poland Ukraine

Slovakia

Hungary Romania Bulgaria

CONTENTS
The current document is a preview to the complete study and covers the R&D offshoring market numbers for Ukraine along with an overview of the key drivers for offshoring of R&D to the region

Note: *The scope of the study includes countries Poland, Belarus, Czech Republic, Slovakia, Hungary, Romania, Bulgaria and Ukraine only

Agenda

1 2 3 4 5

Market Overview

Lay of the Land

Location Analysis

Key Restraints

Case Study

The IT offshoring market in Central and East European (CEE) countries has rapidly evolved over the last 3 years
CEE IT Offshoring Market, 2006-08
CAGR

18%

Belarus
Czech Republic

Poland Ukraine

Slovakia

Hungary Romania

Bulgaria

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Note: The scope of the study includes countries Poland, Belarus, Czech Republic, Slovakia, Hungary, Romania, Bulgaria and Ukraine only Source: IT Ukraine, Zinnov Analysis

USD Million

Among the CEE countries, Ukraine has emerged as the largest IT offshoring market

IT Offshoring Market Size of CEE Countries, 2008 Ukraine has achieved this status with a significantly large talent pool of about 25,000 IT resources, supportive government policies and lower operating cost structures

Ukraine accounts for more than 20 percent of the total CEE IT offshoring market

USD Million

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Source: IT Ukraine, Primary interviews with stakeholders of service providers and industry associations, Zinnov Analysis

The Ukrainian IT offshoring market is predominantly driven by R&D related activities

IT Offshoring Market Split by Activity Based on Headcount, 2008

The talent pool in Ukraine is highly capable of performing high end R&D work, as a result of the relatively advanced educational system inherited from the erstwhile Soviet Union

Note: * IT/ITES Information Technology / Information Technology Enabled Services Source: IT Ukraine, Russoft, Zinnov Analysis

Agenda

1 2 3 4 5

Market Overview

Lay of the Land

Location Analysis

Key Restraints

Case Study

Post 2000, Ukraine has rapidly evolved into a leading destination for R&D Offshoring among the CEE countries
Evolving R&D Offshoring Landscape in Ukraine Soviet Era
1960s-1980s: Ukraine was an important center for Soviet arms industry and hi-tech research during the 1960s Most of the R&D related activities were state-funded for defense, space and military programs Restrictions in society and especially due to restriction in relations with the West, the software sector in Ukraine was underdeveloped until late the 80s.

Reform Era
1990s - 2000: The country became independent in 1992 after the dissolution of Soviet Union Post the soviet regime Ukraine moved from a planned economy to a market economy, the transition of which resulted in an economic recession In the early 90s the IT sector suffered a backlash in the form of a brain drain. At that time the best qualified specialists and programmers found a job abroad or immigrated to the US, Canada or Western Europe Commercialization and applicability of programming resources was first introduced and developed after 1991

Growth Era
2001-Current: In 2001, the Government revised the legislative laws concerning software products to increase IP protection The Government implemented a visa free entry for citizens of US and Europe to attract experienced talent About 60 70 percent of the service providers began operations post 2000 Post 2004, the government has also introduced various initiatives and laws to promote the IT industry in Ukraine Between 2000 and now the IT industry has grown at an average of 40 percent annually and has resulted in Ukraine being the largest R&D offshore destination in the CEE region

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Source: Ministry of Commerce-Science, Technology and Innovation System in the Ukraine, Zinnov Analysis

Compared to CEE countries, Ukraine has witnessed its R&D offshore market grow at more than double the rate of that of the CEE average in 2004-08
R&D Market Growth, 2004-2008
CAGR

18%

CAGR

40%

Ukrainian R&D offshoring market has seen explosive growth in the past few years with the growth rate being more than double of that of the CEE average, which can be attributed to the highly capable talent pool, low attrition, low costs and increased government support

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Source:IT Ukraine, Russoft, Zinnov Analysis

The key reasons for the rapid growth in R&D outsourcing to Ukraine include presence of highly skilled R&D talent pool, lower cost of operations, supportive government policies and proximity to EU countries
Key Drivers 1
Talent Pool

Description
Ukraine has highly capable resource pool of about 8,000 to 10,000 working in R&D related activities. The number of R&D resources installed in companies in Ukraine are the highest in the CEE region

Impact of the Driver

Cost Arbitrage

Cost of running operations in Ukraine is about 60-70 percent cheaper than in the US

3
Government Support

The government has been actively supporting the IT Industry and specifically R&D activity in Ukraine. Though the support came recently, Ukraine is poised to be a significant R&D outsourcing destination Close proximity to Europe makes Ukraine a preferred destination for near-shoring. In addition, good proficiency in English and European languages facilitates easy transition of projects and co-ordination between client teams
Impact

4
Proximity to Europe

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High

Low

Note: Impact of driver indicates the important factors based on which global firms offshore R&D projects to Ukraine service providers . It is purely a qualitative rating based on Zinnovs observation across key product development firms globally Source: World Bank-Ukraine Economic Update; PWC-Doing business and investing in Ukraine; Zinnov Analysis

1 Talent Pool

Talent Pool Size

In terms of talent pool, Ukraine has a significant population of highly skilled manpower capable of working in R&D related activities
Installed R&D Resource Pool, 2008

Soviet Legacy

Since the Soviet times, Ukraine has had a long standing reputation as a major technology hub with a well developed scientific and educational base

Education System

Ukraines traditions of physical, mathematical and programming schools are very strong. Nearly 60 percent of the universities in Ukraine have graduates who have majored in these fields

Ingenuity

With only 1 percent of the worlds population, the country has 6 percent of the worlds physicists, mathematicians, computer programmers and other highly trained professionals

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Source: IT Ukraine, Zinnov Analysis

2 Cost Arbitrage

The cost of operations is also significantly lower with the costs of R&D resource in Ukraine being 60 to 70 percent less than that in the US
Average Operating Cost/ FTE/ Year - A Comparison
200

Illustrative

150
Average Cost USD 000

Silicon Valley (150 175)

60-70% savings

100

Tel Aviv (115 135)

Lviv is about 20% less expensive than Kiev while other cities are about 25% lesser

50

Moscow (60 75)

Shanghai (45 55)

Bangalore (35 45)

Kiev (37 40)

Lviv (33 38)

Kharkiv, Donetsk Dnepropetrovsk ( 30 35)

0
USA Israel Russia China India Ukraine Ukraine Ukraine

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Source: Primary interviews with stakeholders of service providers; Zinnov analysis

3 Government Support

The government has also been providing active support by driving targeted initiatives to promote investment in the region
International Co-operation
Ukraine has entered into bi-lateral agreements with many countries such as Netherlands, Poland, Singapore, etc. to facilitate innovation & promote FDI

Infrastructure
The government is also taking active measures to improve the infrastructure condition within Ukraine such as focusing on development of Transport Corridor Europe Caucasus Asia corridor, setting up of new technology parks etc.

Executive Bodies
The government has established dedicated agencies such as IT Ukraine, Ukrainian Hi-Tech Initiative etc. to promote innovation and foreign investment in the IT and software industries in the country

Government Support

National Programs
Various programs on a national level such as Invest Ukraine have been introduced to improve the FDI status in the country

Education
Ukraine has worked constantly to improve the educational standard in the country through various programs and initiatives such as Bologna Process and EUREKA

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Source : Primary interviews with various stakeholders in executive bodies and service providers, Zinnov Research

4 Proximity to Europe

Proximity to Western European countries is an added advantage as it has enabled companies to near shore their operations in Ukraine

Near-shoring locations are closer to the client which makes mutual visits easier enabling higher productivity and efficiency The Central and Eastern European countries have close cultural ties with markets of Western Europe. Typical near-shoring location personnel have proficiency in the clients language and better understanding of cultural background of the client. Strong reaction to instances of companies moving jobs offshore (loss of good will) was the reason why European countries preferred near-shoring.

Belarus
Czech Republic

Poland Ukraine

Slovakia

Hungary Romania

Bulgaria

This is a preview. The total slides displayed are limited. For full access contact info@zinnov.com
Source: Primary interviews with stakeholders of service providers and industry associations; Zinnov analysis

Additional Information
The current document is a preview to the complete study and covers the R&D offshoring market numbers for Ukraine along with an overview of the key drivers for offshoring of R&D to the region The full report provides a comprehensive coverage of the R&D landscape in Ukraine with more details on offshoring landscape and key drivers for offshoring along with additional insights on major offshoring locations in Ukraine and challenges that can hinder the progress of the region as a key offshoring destination Full report on Ukraine R&D landscape can be accessed at Zinnov s Global Location & Talent Pool Portal. Sign up today for a free trial account http://zinnov.com/US/demo_signup.php Or, email us at info@zinnov.com

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