Economic and political factors affecting global software outsourcing in five supplier countries

Looking into our crystal ball for the coming year, we see global factors that should inform your decisions about how – and where – to leverage global IT software outsourcing. We’ll highlight five countries (other than the U.S.) that have notable circumstances that should be examined from an IT outsourcing potential.

U.S. (on the “buy side”)

Economically, the United States enters strongly into 2018 as a consumer of global software development outsourcing services. The U.S. dollar looks to be strong against the typical foreign currency comparisons. U.S. businesses will enter 2018 with a double-whammy of optimism. The just-approved tax cuts have been generally received as good news to start the new year, and is viewed as an extra boost to the economic forecast for 2018. Gross Domestic Product (GDP) growth estimates are hovering around 2.5 percent with an additional 2 percent expected for 2019. Labor statistics show the country at – or near – full employment.

With a few notable exceptions, namely Russia and China, the typical outsourcing partner countries U.S. businesses rely on are still, at present, in good relationship with the U.S. The current U.S. political climate is decidedly pro-business, and the U.S. economy is unquestionably framed in a global context. Although the Trump administration’s call for “better international deals” may have select, case-by-case basis implications as 2018 progresses, there’s not any indication of policy shifts that would disrupt “business as usual” for global IT outsourcing.

Ironically, the hot topic of immigration may play well into the argument for outsourcing, since the growth of stateside employment through H1B visa candidates may be problematic for the foreseeable future.

Venezuela

In years past, U.S. companies were more bullish on examining outsourcing relationships in Venezuela. But the last few years have tempered historic enthusiasm.

Economically, Venezuela is struggling. GDP is expected to decline 5 percent in 2018 and another 1.2 percent is forecasted for 2019. Even worse, Venezuela is suffering from hyperinflation, which the International Monetary Fund estimates will reach 2,068.5 percent by 2018. As a country which, under the late President Hugo Chavez, shone as a bright economic star due to profitable oil output, Venezuela is now experiencing the downside of deflated crude oil prices. Oil production has fallen precipitously and is on track to fall by at least 250,000 barrels per day in 2017.

Political unrest is high in Venezuela. Fueled by a struggling economy, anti-government protests are a regular occurrence in Venezuela. Yet, while their government is besieged by controversy, the country of Venezuela has close economic ties to the U.S. Venezuela deserves a level of consideration as a potential outsourcing destination. University life in Venezuela has been significantly disrupted by anti-government protests, and general economic woes. Yet, programmers in Venezuela are fluent in English and are technically proficient. And although Venezuela may not be the first place that people would think of in terms of traveling, you can regularly fly to the country without restriction.

Ironically, because of our direct relationships there, we can tell you that U.S. companies are still having positive results by partnering with Venezuelan software outsourcing companies. For example, one such vendor reported just recently that they have many happy clients and have never missed a daily stand up meeting video call.

On the plus side

Venezuela is presently a low-cost leader for outsourcing to Latin America because of economic challenges faced within the country. The quality of their well-educated software engineers is very high, although there are limited professional software development opportunities within the country. Therefore, software outsourcing is an excellent way to earn a living for IT professionals and a good opportunity for clients to have access to tremendous software development talent.

On the down side

Venezuela may not be the best outsourcing destination for your needs if you prefer to work with a company and a country that has an established outsourcing presence. If it’s important that your business outsources to a country that’s economically and politically stable, you should choose to outsource your software development project to a different location.

Ukraine

The territorial disputes with Russia – centered in Crimea and the Donbass region cast a large shadow over Ukraine up through 2016 and even into 2017. Presently, the parties seem to be at a stalemate, tacitly going through the motions of implementing the plans set forth in Minsk II, yet both sides are secretly hoping for international conditions to change in favor of their preferred stance.

Economically, Ukraine faltered a bit in 2017 – presumably due to fracture with the Donbass region, which is held by rebels and resulted in severe import/export complications. Yet – Ukraine is expected to rebound next year. GDP growth forecasts are for 2.9 percent in 2018, and then an additional 3.2 percent in 2019.

IT outsourcing is not a new concept to Ukraine with more than 300 companies providing IT services to companies elsewhere across the globe. Kiev (the nation’s capital) is Ukraine’s major outsourcing service hub. Also of note, the country passed laws to protect intellectual property (IP) rights in 2005, in part to ensure competitiveness in the global economy.

Kiev is a mere two-hour flight from major European cities, such as London, Amsterdam and Paris. The government has introduced visa-free travel for visitors from the European Union, the U.S. and several other countries.

Ukraine is strong in education and science, with almost 1,000 colleges and one of the highest levels of education in Eastern Europe. The National Academy of Sciences supports more than 100 scientific research institutes and eight techno-parks, which focus on the commercialization of high-technology research.

The number of engineers, the quality of their education and the relatively low cost of outsourcing in Ukraine are the main reasons for choosing this country as an outsourcing destination. Many top computer programmers worked on the former Soviet Union’s space and military efforts. Today, Ukrainians are producing complex systems, such as rockets, satellites and space-research equipment, and they like to point out that their country has launched more satellites than NASA.

Ukraine is hungry to catch up with its neighbors and hopes to eventually gain membership in the European Union. Ukrainians have a great affinity for the United States and the European Union, and there’s a large Ukrainian population in the northern U.S. and Canada. The English skills of Ukrainian engineers are adequate, but not as good as in some other outsourcing destinations. In some instances, you may have to cope with a heavy accent, to benefit from the wealth of intelligence and programming experience. It’s often best to rely on written English as a means of communication, which is usually sufficient for most outsourcing projects.

On the plus side

Ukraine offers a pool of technical talent that can cover virtually any software development need – from “mobile to mainframe.” Software applications requiring scientific knowledge are particularly well suited, as are projects for embedded systems or those using languages like C and C++. This talent is available at very favorable rates compared to equivalent options in other European countries.

On the down side

The only reason not to outsource your software development to Ukraine is its ongoing conflict with Russia. However, all companies in Ukraine we’ve contacted report no disruption in their ability to deliver services.

China

It’s inarguable that China is an important figure in the global economy and the international political arena. Although a super-hot economy slowed in 2017, China’s Gross Domestic Product (GDP) is expected to grow around 6.4 percent in 2018 and 6.2 percent in 2019.

U.S. and Chinese relations have been cyclical for decades, ranging from full-on standoffs to positive overtures of good working relations. In the current climate, there are many U.S. business activities in China (including outsourcing relationships in IT and engineering), but a cloud of suspicion hangs due to mutual claims of government cyber hacks and China’s infamous reputation for intellectual property infringement. Cultural and language differences along with new concerns about data security and restricted access to information systems in China via the Internet has dampened interest in outsourcing to China.

Historically, relationships are very important in Chinese business, but this is sometimes misinterpreted as unwarranted and suspicious favorable treatment. Personal introductions through trusted business associates were a requirement in the past and are still very helpful for making progress in the Chinese business world today.

Software development companies that are seeking growth or change may benefit from outsourcing their projects to China for a number of reasons:

• Economic incentives: Like many countries, China has a special economic zone that’s used to entice companies to come to China.
• Synergy: Some countries have assets in China already. As such, it may be natural for some companies to consider outsourcing software services. By leveraging well-developed relationships with existing partners in China, enormous success can be achieved through combined efforts.
• Mobile development: China has a great depth of mobile skills, although there are currently more developers for Android than iOS. In terms of skill sets, ERP-type systems, traditional software coding projects and anything that’s already configured are great projects to outsource to China.

Strained relations and security concerns

In recent months, China has restricted or outlawed free internet access and VPN technology. This has made it problematic to use standard methods of secure information exchange with an offshore partner. Anecdotally, we know of at least one company who stopped using a China-based software development team because of 3 factors:

1. Rate increases
2. High turnover
3. Chinese firewall / VPN limitations – i.e. trouble sharing files, training videos, content with the Chinese development team

Stories involving weak intellectual property (IP) rights and protections in China are legion. China has a reputation for duplicating the efforts of other companies – fostering a copycat culture. While this is a real concern, the situation mainly applies to manufactured, physical goods. Nonetheless the government and China businesses know that it must adopt Western standards for IP rights if it’s to have any chance of competing on a global scale.

On the plus side

If you’re looking for low-cost software development, China is certainly an option. Notwithstanding reports of recent rate increases, the outsourcing rates in China are still generally 10 to 20 percent lower than are the rates for many vendors in India. Since the number one reason companies outsource their software development is to save money, you would think outsourcing to China, with a well-established pool of technical talent would be obvious. However, you may want to make sure your software will be of limited use in the Chinese market. If a U.S. company is contracting a Chinese vendor to create mortgage processing software that’ll be sold in the United States, for example, then the risk of someone being able to make use of such software in China is slim.

On the down side

Cultural differences – and the extreme differences in time zones – compared to the U.S. (typically 12 to 13 hours) can be a deterrent. If you need to collaborate on a regular basis using spoken English, your challenge will be in finding a Chinese vendor with whom it’s easy to work.

Intellectual property (IP) protection is a real concern – “buyer beware.”

The tightening of internet access, regardless of data breach concerns may be problematic. In a global digital economy, the internet is the highway on which businesses transact. We are very concerned that collaborating quickly (and securely) with a Chinese outsourcing problem may be so cumbersome that a relationship could be over before it really begins.

Portugal

In this list of five countries we have spotlighted, Portugal is the “one to watch” for many positive reasons. Subsequent to the enactment of national austerity measures, Portugal’s economic rebound from a crisis in 2011 to 2014 has been described with adjectives like “astonishing” and “momentous.” In December of 2017, Fitch Ratings agency raised Portugal’s bond rating from junk status (BB+) to investment grade (BBB). This was preceded by S&P’s announcement of an upgrade to investment-grade status in September of 2017. When you remember Portugal was on the brink of bankruptcy in recent memory, seemingly modest forecasted growth for GDP of 2.1 percent in 2018 and 1.8 percent in 2019 is really a great story (note: Portugal is a member of the EU).

Portuguese higher education has a solid reputation – based on a more classical university system of education and a technical, vocational-minded polytechnical set of institutes. IT professionals in Portugal demonstrate solid technical skills and capabilities.

Portugal is committed to being a leader, not an also-ran in the European technology community. This was highlighted by the fact that the 2017 International Web Summit was hosted in Lisbon. 

On the plus side

Portugal boasts a solid pool of technical talent with rates that are comparatively low because of the historically weak Portuguese economy. In contrast, Spain has similar rate structures to Portugal, but doesn’t have the established software outsourcing industry Portugal exhibits.

On the down side

Some are skeptical of Portugal’s rosy economic predictions, pointing out that Portugal’s rebound included a hefty bailout from the International Monetary Fund (IMF). Similarly, there are fears by some that Portugal’s political stability is tenuous, and “as goes the government – so goes the economy.”

Brazil

Brazil has been notably in the world spotlight in recent years – having hosted the World Cup in 2014, and the Summer Olympics in 2016. Brazil is the largest and most populous country in South America. Portuguese is the official language, and English proficiency on the whole is low. Brazil is physically closer to the United States than many other outsourcing destinations, and their time zone is two hours ahead of Eastern Standard Time.

On the economic front, Brazil’s GDP figures fell precipitously from mid-2013 to mid-2016. Since 2016 – the GDP has risen – and is forecasted to continue to climb back to pre-2015 figures over the next 2 years. Similarly, unemployment has been on the decline since mid-2016. In 2006, Goldman Sachs published a report projecting four emerging countries will dominate the world economy by 2050: Brazil, Russia, India and China – or BRIC.

Politically, Brazil’s economy seems to have been bolstered by market-friendly policies of Michel Temer in 2016. However, global watchdogs are eagerly awaiting the outcome of a November 2018 election, which could undo recent economic improvements.

Several large outsourcing vendors operate in Brazil, and there’s little doubt that a great deal of programming work is accomplished there for other Brazilian companies. But only a few small and medium-sized outsourcing vendors exist in Brazil focus on providing software development services for the U.S. and other Western countries. Most Brazilian IT outsourcing vendors focus on BPO and providing body-shop software development resources. Although outsourcing costs tend to be higher in Brazil than other outsourcing destinations, American companies are setting up operations and doing business there. Intellectual property rights in Brazil have been under review by the U.S. Trade Representative for several years, and where once IP rights were a concern in that country, their patent, copyright and trademark laws now correspond to those laws of other large outsourcing nations.

On the plus side

Brazil promises to be a good bargain for outsourcing if you can find a qualified vendor. A soft economy in recent years translated into favorable rates for U.S. companies seeking an outsourcing partner in Brazil. Companies that have a business interest in Brazil will likely benefit from outsourcing there. For instance, if you want to introduce software in the Brazilian market, setting up an operation in Brazil would make sense.

On the down side

Rising prices may be a deterrent for many businesses considering Brazil as a software outsourcing destination. As well, those businesses that require application programming will find limited resources. Finding programmers with a mastery of English may also be difficult, even with the predominance of English as the “language of international business.”