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Ukraine One Year Later: Perspectives On IT Services Perseverance

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The TD Cowen Insight

Ukraine’s IT Services exports activity has persevered despite significant contraction in GDP. But the industry’s future remains fluid, with mixed client sentiment & vendors diversifying to retain/grow business. Geopol + macro weigh on near-term growth to varying degrees. The tech brain drain across the conflict region is notable, with new talent hubs emerging to reshape long-term developer supply.

Our proprietary survey of Ukraine-based DE/IT Services vendors suggests clients have been largely supportive, but there is an element of fatigue to contend with as the war lingers. Ukraine’s IT Services export activity has persevered despite significant contraction in GDP. But the industry’s future remains fluid, with mixed client sentiment & vendors diversifying to retain and grow business. Geopolitics + macro weigh on near-term growth to varying degrees. The tech brain drains across the conflict region is notable, while new talent hubs emerge to reshape long-term developer supply.

Ukraine’s War Reshapes the Global IT Services Industry

The war in Ukraine will have a lasting impact on the global tech services industry in both the geographic orientation of talent and vendors’ go-to-market and operational strategies. The tech talent pool within the conflict region (Ukraine, Russia, Belarus) boasts high-value software development skills traced back to the STEM emphasis during the Soviet era. Our proprietary research and analysis of publicly available data suggest that at least 20% of the IT workforces of these countries have relocated since the beginning of the war, seeding new regions that will benefit as these skills are well aligned to enterprise IT transformation initiatives.

Software Development Shortage Persists

As part of our deep dive analysis into digital engineering focused supply and demand from September 2022, we forecasted the global software developer shortage would expand to ~5.3MM by 2026 vs. ~1.4MM in 2021. Despite a recent demand lull, the market for high-value technical skills remains tight.  The implications from the ongoing tech talent re-shuffle are apt to inform investment initiatives for vendors adjusting to evolving sources of supply. To support accelerated operating footprint diversification, we expect industry M&A to pick up.

TD Cowen’s Survey of Ukraine-Based Digital Engineering and IT Services Vendors

We conducted a proprietary survey of top public & private digital engineering/ IT services providers with material operational exposure to Ukraine. This captured a diverse range of perspectives, many of which have not been expressed in the public domain. We received both identified and anonymous responses that offer deep insights into the evolution of supply-demand dynamics in Ukraine over the past year.  This includes real-time views across existing & new client sentiment, shifts in workforce & talent, and evolving delivery operations.

Insights From IT Service Providers with Exposure to Ukraine

Vendors have largely retained existing client business, but risk aversion was broadly conveyed across larger global enterprise clients. New logo pipelines remain active, reflecting more accommodating vendor contracting and looser supply on more modest levels of in-country hiring. Client receptivity to new programs and delivery footprints continues to evolve with risk mitigation activities.

Ukraine’s resilience remains evident. The country is still an integral part of the longer-term plan for all providers, but the relative mix will trend lower.

Industry Data Analysis Reveals Enterprise Caution

Along with the TD Cowen survey, we analyzed a wide range of government and industry association data on evolving industry growth and talent dynamics across the region. We believe the breadth and depth of information gleaned here addresses a key investment controversy on relative revenue insulation.

The caution exhibited by enterprise clients outsourcing delivery to the conflict region should not be overlooked, particularly among larger enterprise clients with more inherent risk aversion. The potential for a longer-dated stalemate is a key risk factor that is apt to be embedded in valuation multiples for vendors with higher levels of exposure.