Ukraine's information technology sector frequently tends to fly under the radar of international investors. However, the sector has experienced substantial growth for the last three years. Long-term sustainability of this growth will require significant changes in the country's business and policy landscape.
According to Ukraine's state statistics committee, the country's software development market alone grew from about $90m in 2001 to $260m in 2005.
Still, the IT market in Ukraine is not yet saturated and there is plenty of room for further growth. Oleg Bodnor, director for Cisco Systems Ukraine, told OBG that "demand for IT products is bigger than what's on offer." There are several factors for this. For one, many companies are coming under new, ambitious ownership looking to increase their company's profile through the implementation of state-of-the-art IT. Additionally, a growth in foreign investment has raised the standards for everyone in the market.
Banks are the most IT-hungry sector, though an increasingly competitive mobile telecommunications industry has left providers searching for the next competitive IT advantage. As many companies are preparing to be sold or to attract foreign investment, upgrading their IT systems is seen as a fast way to add to their value.
However, some companies implement IT systems for purely cosmetic reasons, without training their staff how to use them. The marketing director of a local IT firm told OBG that this is not surprising, as "it will always be true that some are more oriented towards foreign investment and some are more serious about increasing the skills of their staff."
While Ukraine has many qualified software developers and researchers, the market remains quite fragmented for software development, with no critical mass of companies involved in software research and design. It is also widely acknowledged that the number of qualified IT people is not keeping pace with developments, as changes in the country's education system cannot keep up with technology. "There is a big gap in IT specialist capability, and the government does not often know how to teach modern technology in schools," said Bodnor.
Indeed, one of the issues is the extent to which the government is willing to support IT development. In the past, government spending has been relatively weak and sporadic. There is also a sense that the government does not always see the value of such spending.
One foreign energy distribution company submitted its business proposal to Ukraine's national commission for energy regulation. IT included a plan to invest in SAP, the industry standard for business software. The commission turned down the proposal, citing the purchase as "unnecessary spending."
Some companies may also balk at IT acquisitions because of the transparency it creates. Ukraine's business sector is still unaccustomed to significant disclosure and although this attitude is changing, it is a slow shift. While pressure could come from international capital markets, as companies seek to do bond issues abroad, the pace of opening up remains slow.
In the wake of the Orange Revolution, the country benefited from World Bank loans to finance its changeover in IT infrastructure. Legislation has been passed setting long-term targets of creating technoparks and silicon-valley type establishments. Meanwhile, some of its neighbours, such as Russia and Belarus, are doing the same thing, making it difficult to say where Ukraine will find its competitive niche.
Some industry insiders say that although the government has not shown much appetite in the past for IT improvement, the fact that it is openly discussed and spoken about is a significant step forward.
Bodnar said the long term will require "more stability and certainty". Much of the future direction depends on the uncertain stance of Prime Minister Viktor Yanukovich's government towards improving IT infrastructure.
Some in the industry have cited the prime minister's discussion of the matter at the World Economic Forum in January as evidence he understands the problems the Ukrainian IT market faces. "Up-to-date infrastructure and technologies, I am sure, will create conditions for the efficient advancement of the Ukrainian economy and its strategic development. Modernisation of Ukraine's economy is impossible without its integration into the world economic system," said Yanukovich. It remains unclear how this sentiment will evolve into policy.