. Economic Review – Journal of Economics and Business, Vol. XVII, Issue 2, November 2019 /// DEVELOPMENT OF IT OUTSOURCING IN UKRAINE: A PROSPECT OF THE BRAIN DRAIN REDUCTION* Nataliia Marynenko1 , Halyna Tsikh2, Iryna Kramar3 ABSTRACT economic development of Ukraine as a whole is provided. Ukraine is faced by a devastating problem of economically active population emigration, Keywords: IT outsourcing, brain drain, which has reduced the labor force in the country competitive advantage, development by 5-8% in the last two years and demonstrated a negative impact on the potential Gross JEL: L24, O15, M15, O30 Domestic Product (GDP). Despite this, Ukraine is one of the leading software development centers in Central and Eastern Europe and ranks fourth in the export of information technology (IT) 1. INTRODUCTION products and services in the world nowadays. The IT industry is one of the four priority sectors As estimated by the United Nations (2019) by for Ukraine’s export strategy, it is one of the 2050, the population in Ukraine will decrease most perspective, dynamic and innovative to 36 million (43.9 million – in 2019) and 50 branches of Ukraine’s economy. Professional years later it may be recorded at 28 million. expertise, cost effectiveness and high standard Next to low fertility rates, migration plays a key technical education make this industry role for the situation to happen. Every attractive also in terms of employing Ukraine’s Ukrainian who leaves in search of a better life own intellectual resources within the country. is contributing to the loss of one of country’s The article aims to characterize the state of most valuable resources – human potential affairs, potential and prospects for the (Talmazan, 2019). The representative of the development of the Ukrainian IT outsourcing National Bank of Ukraine (NBU) Nikolaichuk market as well as to analyze and evaluate it (2018) said that for the last two years including comparison with foreign practice. migration has reduced Ukrainian workforce by Research methods used are as follows: desk 5-8% and the impact on potential GDP is quite research, inductive and deductive methods, high. The tendency for young people to leave abstract and logical method, system approach, abroad to study is also strong. Despite this, analysis and synthesis, empirical methods, and Ukraine is one of the leading software statistical analysis. The essence of IT development centers in Central and Eastern outsourcing, its types, aims and main Europe (CEE). Professional expertise, cost advantages of use are revealed in the article. The effectiveness and high standard technical features of IT outsourcing industry trends both education makes this branch attractive in in Ukraine and the world practice are terms of use of its own intellectual resources researched. Competitive advantages of Ukraine within the country in particular (Komsa & in the world IT outsourcing market are Hrebennyk, 2017). identified. Challenges, obstacles, risks as well as potentials and prospects of IT outsourcing The research on the possibilities to lower development are determined and analyzed. Ukraine’s drastic brain-drain by ensuring Recommendations for the brain drain reduction appropriate institutional conditions for IT due to the IT industry progress are offered and professionals is of great importance. its impact on the potential GDP growth and * The paper was presented at the 6th International Scientific Conferences ICEI 2019, held in Tuzla and published in the Proceedings. 1 Ternopil Ivan Puluj National Technical University, Ukraine, E-mail: [email protected] 2 Ternopil Ivan Puluj National Technical University, Ukraine, E-mail: [email protected] 3 Ternopil Ivan Puluj National Technical University, Ukraine, E-mail: [email protected] 41 /// ///. Nataliia Marynenko, Halyna Tsikh, Iryna Kramar . The aim of the article is to characterize the outsourcing in Ukraine. Tropitsyna (2014) state of affairs and potentials for the formation revealed the stages and mechanism of using of Ukraine’s IT market, as well as to analyze outsourcing services to improve enterprise and evaluate the prospects for its develo- efficiency and analyzed the market for out- pment, including comparison with foreign sourcing services in Ukraine. Koshkarieva practice. (2016) studied distinctive features of outsou- rcing as a service and the purpose of its appli- cation. IT outsourcing in Ukraine as an activity 2. PREVIOUS RELATED RESEARCH was studied by Tonyuk (2016), who conside- red its trends and development forecasts. Features of IT outsourcing development are Sadchykova, Khomenko, and Gorobinska studied in the works of foreign and Ukrainian (2018) studied the essence of “outsourcing” as scientists. Significant contribution to the a concept and highlighted the features of development of the concept of outsourcing outsourcing in different types of economic belongs to Heywood (2001) who presented the activity. Dubovskyi (2018) modeled the coun- arguments for and against outsourcing. try’s labor potential in the field of IT outsou- Gottschalk and Solli-Saether (2006) focused rcing. their attention on the issues related to the However, in all those studies the IT-profe- strategy, structure, principles and methods of ssionals emigration issues were not disclosed. effective IT outsourcing management. Bravard This fact makes the proposed analysis to be and Morgan (2006) showed how to make distinguished among the others related to the efficient outsourcing-related decisions. IT outsourcing aspects. St. Amant (2009) covered business process outsourcing (BPO), government IT outsour- 3. RESEARCH METHODOLOGY cing, localization and offshoring, outsourced IT projects, trust in offshore outsourcing, etc. The methods used to achieve the aim of the Hirschheim, Heinzl, and Dibbern (2009) research are desk research, inductive, dedu- attempted to synthesize what is known about ctive, abstract, empirical and logical methods; information systems outsourcing by studying system approach; analysis and synthesis; and its three parts (traditional IT outsourcing, IT morphological and statistical analysis. The da- offshoring, and BPO). Beulen, Ribbers, and ta for GDP, total goods and service exports and Roos (2010) presented both research and pra- Information and Communications Technology ctical examples to explore how relationships (ICT) exports, budget tax revenues are provi- with external provider(s) have to be establi- ded by the State Statistics Service of Ukraine, shed and managed successfully. Willcocks, NBU, PricewaterhouseCoopers (PwC), the Lacity, and Sauer (2017) shared a report for World Bank, International Data Corporation the findings of 405 major research studies on (IDC), European Business Association (EBA), offshoring, and offered the analysis of emer- Eurostat, and the United Nations. Surveys of ging findings and practices for the future. The the Ukrainian IT professionals and a detailed work by Aubert and Rivard (2016) is devoted overview of the country’s IT market are to theoretical principles and modern trends of provided by the largest Ukrainian developer IT outsourcing. community DOU.ua, IT Ukraine Association, Better Regulation Delivery Office (BRDO), N-iX, Features of IT outsourcing in Ukraine were IDAP, ITCua, etc. studied by Ukrainian scholars Osadchuk, Yok- hna (2010), Matvii (2013), Herasymchuk (2013), Meshko, Yefremova (2015), Litoshe- 4. IT OUTSOURCING: NATURE, TYPES, nko (2017), Ilienko, Moroz (2014), who re- ADVANTAGES AND DISADVANTAGES OF USE searched the nature, types, advantages and disadvantages of outsourcing, and analyzed the Outsourcing refers to contracting third party dynamics of the IT outsourcing market in entities to do specific business functions for the Ukraine. Tyshchuk and Pavlova (2013) organization (Patterson, 2019). Informa-tion analyzed the potential and prospects of IT technology outsourcing (IT Outsourci- /// 42 Economic Review – Journal of Economics and Business, Vol. XVII, Issue 2, November 2019 . Development of IT outsourcing Ukraine: a prospect of the brain drain reduction /// ng) involves tech-based functions such as so- The main disadvantages of IT outsourcing ftware and application development, network are identified as follows (Hrebeshkova & administration and web development, datace- Stel-makh, 2011): nter services, and infrastructure technology outsourcing (enterprise resource planning, loss of complete control over the IT infra- customer relationship management, supply structure servicing company; chain management, e-commerce, enterprise dependence on the outsourcer, especially in asset management, etc.). The types of outsour- security matters; cing services can be divided into: (a) onsho- and decrease in labor productivity of own re/home shoring (outsourcing done within the personnel because of loss of motivation borders of a country); (b) nearshore (ou- during changes. tsourcing to a company in a neighboring cou- IT outsourcing is not the only way to tran- ntry); (c) offshore/services overseas (outsou- sform a business, although when properly ma- rcing to a country far away as a rule because it naged, it can act as a catalyst for change. is significantly cheaper) (What Is Outsour- cing?; Different Types of IT Outsourcing). IT outsourcing advantages are (Deloitte, 2018; 5. IT outsourcing in the global dimension Meshko & Yefremova, 2015): capacity optimization and ability to con- The global market size of outsourced services in centrate resources on core activities; 2000-2018 is shown in Figure 1a.