Facebook EmaiInACirclel
Future of Work

The Ukraine Crisis: What are the risks for software production?

Frédéric Lasnier
Frédéric Lasnier
Chief Executive Officer, Pentalog

The situation in Ukraine has emerged as almost as an “old-fashioned” geopolitical crisis, like a relic of the Cold War, yet one which is suddenly pushing IT leaders around the world to re-assess their digital production strategies.

The primary countries engaged in the standoff, Russia, Ukraine, and Belarus, represent as many as 700,000 developers (estimated based on industry sources) who could find themselves on the sidelines. Entrepreneurs will certainly find solutions for their software R&D operations (they always do), but the trouble is likely to be significant.

The Ukraine Crisis

For decades, businesses have worried about disruption of energy commodities each time troops are on the march. We now see a new kind of resource threat to the digital economy in the form of access to outsourced labor markets, which were already under stress before this crisis. The situation in Ukraine poses a new level of global risk whether or not the tensions devolve into armed conflict.

We are talking about three major players in global software R&D. Russia has dragged Belarus into the crosshairs by positioning troops there and carrying out joint maneuvers on the Ukrainian border. A Russian invasion from multiple fronts (including via Belarus) risks alienating a cumulative population of nearly 200 million from the global economy, under several possible scenarios:

  • Mobilization and mass exodus of young Ukrainians
  • An embargo on Russia and its software production
  • An embargo on Belarus and its software production
  • An embargo on conquered Ukraine and its software production

Each of these responses can be seen as presumptive outcomes from a Russian invasion, never mind the corresponding economic and human suffering such action will trigger. But narrowly speaking, in addition to the loss of labor, two other critical effects can be anticipated.

First, in a trend that has become “the norm” with these hybrid conflicts (physical and digital) we should expect to see an intensification of hacker activity towards NATO countries. Security is already becoming the major subject of digital industries; this conflict will accelerate the trend.

Second, in the United States, where myriad Russian developers work for many big companies, we would expect to see a huge stir about work authorizations for Russian natives. Americans are likely to adopt such measures quickly, as we saw recently with workers of Chinese origin.

In total, therefore, the effects of an invasion by Russia could remove in the range of 1 million developers from the workforce, many of whom are among the most important to global software R&D. How such a sudden rupture could be absorbed by the 25 million or so developers in the world remains to be seen.

How should tech leaders respond?

Again, we think back to the Cold War and look at the NATO shield. All Western European nations stand behind it, even a few neutrals. The question for us, as it seems to be for the Russian planners of the current Ukraine adventure, is how far east that line is drawn.

From the point of view of specialization in R&D Software, many countries can fill the gap: in Europe, you have France, Germany, Sweden, and several others in the West. We also have Romania, Poland, Hungary, Bulgaria, and the Baltic countries, the latter representing a degree of specialization, cost, and level roughly comparable to those of Russia or Ukraine.

For American clients, Asia remains a bellwether for outsourcing with Latin American and South American countries rapidly becoming a key resource for top-level talent. Pentalog, for example, has a fast-growing office in Mexico and will soon add a second location in the country.

Over the past few weeks, Pentalog has begun receiving requests from frantic CTOs in the United States, France, or the United Kingdom, either to relocate Ukrainian developers, or to replace Russian or Belarusian developers. For many, even the possibility of disrupted production is too difficult to handle.

Covid, Ukraine and China: A Future of De-Risking

The situation in Ukraine risks a very serious escalation to an underlying labor market shortage, in addition to the human catastrophe which would certainly follow such a move.

From a timing standpoint, the crisis comes after the COVID-19 disruptions which have greatly intensified the underlying global talent shortage. Finally, we see in Ukraine a kind of hint for future geo-strategic tech risks, tensions in the South China Sea coming quickly to mind.

In the face of this triple threat, business leaders have a responsibility to de-risk. Just as we now see all to clearly with computer chips, high-tech industries must diversify their labor sources to mitigate against the potential for critical supply chain disruptions.

At Pentalog, thanks to our global delivery platform, we integrate options for resource diversification in all our offers. For example, to a client who asks us for a team of 10 people in Romania, we also offer two people in Vietnam or Mexico, integrated into the team to add resilience.

With all eyes on the situation in Ukraine, the IT sector is waking up to a painful reality at the heart of the business model. Companies must, going forward, allocate teams with political risks in mind. Working alone is dangerous and inefficient but failing to consider the international situation when choosing outsourcing partners is also not an option.

This Wednesday, February 2, my strategic advisor, Admiral Loïc Finaz, former head of the French War School, will join me to discuss global IT risks, from Ukraine to Taiwan. We will be moderated by David Golub, from New York, at 8 AM EST in English.

Leave a Reply

Your email address will not be published. Required fields are marked *