Offshoring and business process outsourcing (BPO) practices are gaining popularity in the IT business realm due to talent shortages and rising costs that hinder company growth. The BPO market is set to hit a whopping $0.37 trillion in revenue by 2024, showing that these approaches really work. Tech giants like Google, Apple, Microsoft, Amazon, Netflix, and Oracle have hopped on the bandwagon, setting up R&D centers in budget-friendly countries like Ukraine.
I’m Segiy Ovcharenko, CBDO at Alcor, with deep expertise in offshore development models. Alcor helps product tech companies from the US build their own R&D centers from 0 to 100 employees within a year in Eastern Europe and Latin America.
If you also want to build an IT R&D center in Ukraine, this guide will tell you everything about launching from scratch and managing a software R&D company to help you realize the new opportunity for skyrocketing growth overseas.
What is a Software R&D Center?
A software R&D center is a development office of a tech company often located in an offshoring or nearshoring country. While many people think these centers are just for big corporations, they’re actually quite common among startups, SMEs, and other mid-sized IT companies.
These R&D centers are all about pushing the envelope and coming up with innovative solutions for the IT company’s product. This might mean adding new features to existing software to enhance its capabilities. But to make magic happen, you need a top team of IT experts.
Typically, offshore R&D teams range from 10 to 50 IT specialists, but they can expand to include hundreds of developers, as seen with companies like Boeing, Samsung, WIX, ThredUP, and Snap, which have set up their R&D centers in Eastern Europe, particularly in Ukraine. Depending on your IT business’s focus, whether it’s game development, AI, e-commerce, fin-tech, blockchain, health tech, etc., you’ll choose the technology stack needed and determine the team composition. Key roles in R&D teams include a team lead or regional manager, software engineers, QA specialists, back-end and front-end developers, a UI/UX designer, and sometimes technical writers.
To support the maintenance of the office, you’ll also need an office manager or IT infrastructure specialist. The customer and the supplier de facto are the same company. That’s why software R&D centers report directly to their head office. Development teams operate independently, with no intermediaries, enabling full control over product development by the parent company.
R&D Center vs Outsourcing
Outsourcing research and development is still drastically different from traditional IT outsourcing. It’s a new model for tech business advancement, so more companies are considering this option due to various benefits. Let’s compare R&D with IT outsourcing to get a clearer understanding.
1. Recruitment
It’s undeniable that IT outsourcing offers the convenience of quickly assembling a tech team without the hassle of recruitment. However, a common drawback is that outsourcing vendors may rotate their developers among various projects, leading to the challenge of working with different engineers. This can potentially impact project consistency and product quality.
On the other hand, establishing an R&D division in Ukraine allows you to directly hire your own software developers. This means you have the freedom to choose the best-matched professionals for your business, ensuring productive workflow, better results, and control over your development process.
2. Commitment
The issue of dedication is a crucial aspect to consider when comparing outsourced developers to having your own R&D team. Outsourced programmers often approach tasks with an employee mindset, focusing solely on completing assigned tasks without fully understanding the bigger picture or having a deep investment in the product. As a result, they may treat your project as just another job.
In contrast, having your own Ukrainian R&D team means you’re working with IT specialists who are genuinely interested in your product. They are more likely to be personally invested in its success and willing to go the extra mile to achieve the best results. This level of dedication can significantly impact the quality and outcomes of your projects.
3. IP rights
While outsourcing companies often sign IP rights agreements with their clients, the risk of sensitive data leaking out remains alarmingly high. Incidents involving code data, personal information, and credential breaches are on the rise among outsourcing providers. In fact, research by the Cyentia Institute reveals that a staggering 98% of companies have vendor relationships with at least one third-party that has experienced a breach in the last two years. What’s more, about 82% of these breaches involve data stored in the cloud.
However, data breaches aren’t the only concern. Your sensitive data could also be misused by the outsourcing vendor for their own purposes, or accidentally shared by developers working in a shared open space. With your own team of developers, you can keep all development details in-house, minimizing the risk of data exposure. Plus, you’ll have full control over data security measures, rather than relying on a third-party vendor. It’s like keeping your valuables locked up in your own safe rather than trusting someone else to guard them.
4. Independence
Trying to instill your company culture in outsourced developers can feel like pushing a boulder uphill. Since they remain official employees of the vendor, they may not fully align with your corporate values and practices. As a result, this engagement model is more suitable for smaller tasks that don’t require long-term offshore relationships.
However, if you’re an executive of a tech product company looking to expand your software capabilities or develop a new product, establishing your own software R&D center in Ukraine presents a viable solution. With your own dedicated team, you have the freedom to build and cultivate your corporate culture independently. You can implement your vision, policies, and regulations, fostering a cohesive and aligned team culture. Moreover, installing your own hardware and software or equipping your employees with the necessary stuff to make the offshore office look like your original workplace is possible.
5. Costs
Tech companies fancy the idea of small up-front investments in offshoring. On the one hand, IT outsourcing enables product software companies to save money and have the work done promptly. On the other hand, outsourcing vendors are interested in increasing the costs of their services. In contrast, if you hire developers from Ukraine as a part of your R&D center, you’ll be able to avoid hidden fees. Pay as you go, regulate the number of services, and build your development center within one month!
Reasons to Open an R&D Center in Ukraine
As can be seen, the R&D model is quite beneficial for tech businesses. However, the most outstanding advantage is the opportunity to accelerate the company’s growth. With the following factors, it is easier to make cosmic progress.
Access to the Pool of Talents
For the IT industry, the most valuable thing R&D centers can give is access to a vast pool of tech talents. Europe witnesses the rise of new emerging markets with a powerful tech potential of Ukrainian, Polish, Romanian, Slovak developers, and Hungarian developers. IT companies are already getting an advantage from it. For instance, in Ukraine, there are over 100 software R&D centers. Amazon, Samsung, Oracle, People.ai, Sitecore, and Grammarly successfully run their software offices in Ukraine. Other companies like Capgemini, IBM, and Ubisoft are well-established in Poland and Romania.
Cost Reduction
While outsourcing is often seen as a cost-effective solution, it can lead to unexpected budgetary expenses in the long run, primarily due to unclear pricing structures that involve additional costs. On the flip side, offshoring provides greater transparency in terms of expenses, as you have full control over them. This transparency is complemented by lower labor and operational costs.
For instance, compared to the USA, software engineer salaries in Eastern Europe, particularly in Ukraine, can be up to 60% lower. Here’s a comparison of the American and Ukrainian annual salaries:
| Senior Positions | Gross Annual Salary, USD | |
| Ukraine | USA | |
| Full-Stack Developer | 46,000-52,000 | 128,000-150,000 |
| Front-End Engineer | 48,000-57,000 | 118,000-127,000 |
| Back-End Engineer | 48,000-60,000 | 125,000-151,000 |
| AI Developer | 42,000-60,000 | 73,000-93,000 |
| DevOps Engineer | 45,000-60,000 | 145,000-170,000 |
| Mobile Developer | 48,000-58,000 | 98,000-162,000 |
Additionally, building your own R&D office follows a pay-as-you-go principle, allowing you to plan your budget and adjust the number of services as needed. It’s like having a metered water supply — you only pay for what you use, giving you greater control over your expenses.
Opportunities for branding
Research & development centers open great opportunities for entering new markets. If you strive to preserve your brand identity, R&D offshoring may bring effective brand expansion. Starting from corporate branding, IT companies can raise their brand awareness in foreign tech ecosystems. Additionally, it boosts your chances to raise more money from investors as no third parties are engaged in the core business. With your own branded office, it’s also possible to do employer branding and attract even more tech-savvy developers.
Convenient time zone
Among the important benefits of Ukraine is that establishing an R&D center offers foreign tech companies a perfect location. The time difference with the US is around 8 hours, which allows for convenient cooperation between onshore and offshore teams. At the same time, the difference with most European countries is only around 2 hours.
Ukraine for IT Offshoring
Ukraine is one of the Eastern European countries where the volume of the IT market is growing 22% annually, amounting to $2 billion in 2021, according to the IT Ukraine Association. What’s more, the Global Sourcing Association labeled Ukraine as the #1 IT outsourcing destination in 2021.
While the Ukrainian tech industry mainly focuses on IT services, its startup ecosystem is rapidly expanding. With over 1,500 startup companies, Ukraine is among the top 50 countries for startup development and offshore attractivness. This thriving environment is attracting a plethora of software product companies and investors to the region, enticed by the promising opportunities for innovation and advancement.
As of 2023, over 309,000 IT specialists in Ukraine make up a considerable talent pool. According to the Coursera Global Skills Report 2023, Ukrainian developers rank #3 in Europe for technology skills, particularly exceling at Python, SQL, Java, JavaScript, and TypeScript. In addition, they have a good comprehension of English (over 55% of Ukrainian software engineers have at least an Upper-Intermediate level of English), according to the biggest software developer community in Ukraine, DOU. Most tech specialists in Ukraine are young – 21-30 years old. 88% have a higher degree in computer sciences, while only 4% have no higher education. Importantly, nearly 62% of Ukrainian developers take middle or senior positions.
Ukraine hosts many popular tech events in Europe, including meetups, conferences, workshops, etc. Every year about 1,000 events take place for software & QA engineers, top-level managers, venture investors, and non-technical professionals in the IT industry. The largest of them are:
– SaaS nation
– Lviv IT Arena
– iForum
– Year-End Summary Finance & Legal Conference for IT business
– IT Weekend Ukraine
– City Investment Forum
– ITEM
– .NET Fest
IT companies are members of different communities and local clusters. The largest union of software product and service companies is the IT Ukraine Association, which aims to build a dialogue between the local IT companies and the government (to create a comfortable business environment for doing IT business in Ukraine). The IT industry in Ukraine enjoys tax incentives. When properly employed as independent contractors, Ukrainian developers pay just 5% of taxes from their monthly salary (instead of the traditional 30-45% in the EU or USA). Hence, employers save on payroll tax, and software engineers earn more, which is mutually beneficial.
How to Open an R&D Center in Ukraine
When outsourcing research and development, companies may feel confused and frustrated. This process involves studying labor law and finances of the country, as well as the analysis of its market capacities. Software product companies must hire people and then properly employ them, establish an R&D center in Ukraine, provide software & hardware maintenance, utilize security measures, conduct onboarding, etc. First, you need to develop an offshoring strategy and set the goals. Think about the structure of your future team: number of people, roles of engineers, technology stack, and other components. Then, investigate the local labor market and find out its capacities. Travel to the offshoring location to visit several business centers and choose a comfortable office space.
After this, you’ll need to do some redecorations, procurements, workplace setup, installation of the security system, etc. In parallel, start IT recruiting in Ukraine, interviewing the eligible candidates. Once hired, software engineers must sign an employment contract and a non-disclosure agreement. Develop the vision of your R&D operational management to launch all processes. This includes HR payroll, office maintenance, and legal assistance. The last yet most important part is to create an inclusive onboarding experience for your new team.
Trying to tackle all these tasks solo in a new market can feel like climbing Everest. That’s why teaming up with a reliable partner is the way to go. They’ll handle IT recruitment and all operational functions, making R&D management a breeze. With them taking care of the nitty-gritty, you can say goodbye to endless paperwork and boring tasks.
How to Minimize Risks with an R&D in Ukraine
To make everything work like clockwork for your software R&D center in Ukraine, you should include several important details in your offshoring strategy. Working proactively, you’ll ensure smooth offshore software development. The following information answers the question “What risks do companies that outsource research and development have?” and explains how to avoid them.
Employer branding
Indeed, there are many skillful developers in Ukraine, but they may not be ready to work for a foreign company. Since Ukraine is a new market for many American tech brands, even the most popular US-based tech companies can sometimes be ‘no name’ firms in Ukraine. For this reason, never hesitate to spend money on employer branding, as it will facilitate your life abroad. For example, a good employer brand accelerates the recruitment process. As a result, vacancies are filled within the shortest deadlines. The possibility of headhunting also explains the essence of employer branding and why you’ll need it sooner or later.
Take a lesson from Tonic Health’ journey. This US software company ventured to open an R&D center in Ukraine, aiming to hire 5-6 programmers monthly. However, being new to the Ukrainian market posed challenges in attracting developers. Seeking a solution, Tonic Health turned to Alcor. With our help, Tonic launched a thorough employer branding campaign, using social media marketing and PR tactics. The result? No more job offer rejections and a successful team of 15 Ukrainian developers in their R&D center.
Office lease agreement
What business owners often leave unnoticed is office rent. If you can’t come in person to sign a lease agreement, appoint a regional manager to be responsible for that. This person will represent you with a lawyer at the negotiations with the tenant. Another important role in this process is an IT infrastructure manager, who can go and check the chosen office for you, and estimate the security level of your future software R&D center in Ukraine and its comfort, parking lot, noise level, air-conditioning, etc.
Business trips
Tech companies want to adjust their work with R&D centers and usually invite Ukrainian engineers to the USA for business purposes. There the offshore team meets the whole company staff. The employer organizes introductory training and many team-building events for them. Business trips also sustain permanent cooperation and communication between several offices from different locations.
However, sometimes there’s a problem with getting an American visa. For instance, Ukrainian developers can be rejected on a business visa because their direct income from the USA is viewed as employment relations. Therefore, to avoid visa issues, pay special attention to the cash flow and type of employment with your offshore development team. Take care of all legal issues beforehand and abide by the law. This will increase trust in your employees and make them feel secure.
Contact local specialists to get a deeper insight into the payroll system in Ukraine. They will help you find the most appropriate kind of employment and prepare templates of contracts and other documents. Generally, these recommendations will prevent tech companies from making common mistakes when opening an R&D center in Ukraine. However, to stay safe, you should contact a local service provider to start offshoring successfully.
R&D Service Provider in Ukraine
R&D service providers aim to facilitate the management of your offshore development office. While many IT vendors suggest single services, Alcor offers full offshore software development services in Eastern European countries, including Ukraine, Poland, Romania, and even Latin America. This includes tech recruitment, payroll & accounting, full legal support, help with office lease and maintenance.
That’s what we did for People.ai. They aimed to establish an R&D office in Ukraine but initially engaged with multiple vendors simultaneously. This approach ended up slowing down their offshoring process and causing delays in meeting deadlines. Seeking a more efficient solution, they turned to Alcor and found our all-in-one offering. Thanks to our comprehensive solution, People.ai got a branded development center in Kyiv with a team of over 25 coders. Additionally, we ensured full compliance with Ukrainian laws and effectively managed their finances throughout the process.
In contrast to outsourcing or outstaffing models, Alcor doesn’t control the team in your IT R&D center in Ukraine. We don’t have the right to fire or replace software engineers in your team because you remain their employer (thus managing employees independently). Also, the Alcor team doesn’t include any developers, so we don’t retain any rights to your software product. As a turnkey R&D center provider in Ukraine, we don’t have access to your intellectual property either.
What we have is a team of professional recruiters, lawyers, accountants, and account managers who work with tech companies daily. They support the working environment of the R&D team and provide operational management. Alcor strives to help offshore developers concentrate on software development, while everything else is secured by our IT BPO company in Ukraine.
Final Thoughts
As can be seen, if you need to open an R&D center in Ukraine or any other offshoring destination, you should allocate a lot of time and effort. However, it will bring you essential advantages such as access to a big talent pool and full control over your team, processes, and place. Among all other factors, the most challenging is to set up all processes and make them work in synergy with the head office.
FAQ
✅ What’s a software R&D center?
A software Research and Development (R&D) center, frequently situated in offshoring or nearshoring destinations, serves as a strategic hub for conducting research and development activities.
Why to open a software R&D center in Ukraine?
Opening an R&D center in Ukraine is a strategic choice due to the country’s rapidly growing IT market, robust startup ecosystem, and a substantial talent pool of over 309,000 IT specialists. With strong English language skills and a majority holding higher degrees, Ukraine offers a skilled and youthful workforce, making it an attractive destination for software product companies and investors.
How do R&D centers differ from IT outsourcing?
R&D Centers offer direct IT specialist recruitment for team consistency, stronger commitment, and better IP protection. Outsourcing, while suitable for minor tasks, can lead to varying teams, potentially lower commitment, and increased costs without the autonomy and cost control of R&D Centers.
❓How do I open an R&D center in Ukraine?
To establish an R&D center in Ukraine, start with strategic planning and goal setting. Explore the local labor market, select office space, and complete setup tasks. Partnering with a reliable service provider can simplify and expedite the process, reducing administrative hassles and ensuring a smooth R&D center launch.