Risks and Legal Aspects of IT Outsourcing To Ukraine: What Businesses Should Know   

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Posted on September 15, 2020

The software outsourcing industry in Ukraine has been growing at a stable rate since the early 2000s. So far, Ukrainian software development firms have competitive rates, and the quality of projects coded in Ukraine is good for the money paid. A growing IT nation produces high quality and innovative software for Europeans, Americans, Israeli, and others. Ukraine has skilled and educated people who get the jobs done. They work with all modern technologies on software for projects not yet released to the markets and support existing applications and provide reengineering services.

Outsourcing to Ukraine has significant benefits, but many questions arose during the decision process: Is it safe to outsource to Ukraine? What risks of software outsourcing to Ukraine must investors evaluate? What are the political and economic threads for outsourcing? Do Ukrainian IT agencies pay enough attention to legal regulations, data protection, and privacy? Let’s find out in our article.

Key Risks of Software Outsourcing to Ukraine

Political Risks

Ukraine just lived through years of mass protests, government change, and Russian invasion. The good news is that the period of political uncertainty ended. The government supports the course for Euro-integration, economic reforms, and peace in Eastern Ukraine.

Many reforms to support the Ukrainian business, IT sector, and foreign investors were adopted in recent years. The clear pro-EU government policy raises the chances of further law harmonization, making entrepreneurship more accessible, and removing capital flow barriers.

The government does not interfere in the work of the IT industry, but on the contrary, stimulates its development. In this political environment, the IT industry is likely to become the driving force of Ukrainian economics.

The Military Situation in Eastern Ukraine

The Russian aggression towards Ukraine resulted in businesses getting concerned – primarily with their workers’ safety. The military conflict affects 7% of the country on the east side, but the remaining 93% is very open to business.

The hostilities continue far from the Ukrainian IT hubs and in no way affect the industry since most of the IT companies are located in the center and west of the country – in Lviv, Kyiv, Odesa, Kharkiv.

The frontlines are the same as in the last years, with no side either gaining or losing territory. The whole Eastern part of Ukraine is now unavailable for foreign businesses before, and it is indeed a significant loss. However, Ukraine’s overall situation is very calm, and there’s no need to worry, and the companies work in a normal working mode.

VoxUkraine presented an interesting position: “The occupied territories are good news for investors because the risk of invasion has already materialized. Russia’s recent moves signal its willingness to keep the frozen conflict in Eastern Ukraine as a point of pressure. To put it simply, if we take annexed Crimea and frozen conflict in parts of Donetsk and Luhansk regions as given, little changes in terms of Ukraine’s attractiveness as the destination for IT outsourcing.”

Economic Risks

Ukraine’s current economic outlook is far better than many appreciate. Its Association Agreement with the European Union contains hundreds of rules for the opening of various markets. Ukraine has legislated much already, but in many cases, formal rules have yet to translate into the kind of full implementation that would make European competitors want to enter Ukraine on a broader scale.

Over the past decade, Ukraine’s IT sector exports have grown by 540 percent. This puts it in third place among Ukrainian exports. As IT services have recently become one of Ukraine’s largest export commodities, the Ukrainian government is making every effort to protect both parties and reassure everyone that quality and reliability mean many to us.

Ukrainian IT engineers earn far above the average level in Ukraine. That is why the industry attracts many new workers. IT sectors thrive in an environment where universities, government, corporations, service providers, and venture capital all interact. Ukraine is more and more competitive globally.

The integration of Ukraine with the EU, which includes the coordination of the EU digital union, will contribute to Ukraine’s further inclusion in the global information technology market.

The IT industry is one of the few in Ukraine, which can show stable growth with an increase in tax payments to the budgets during the crisis. According to the State Statistics Service’s official data, in 2019, Ukrainian companies exported IT services abroad for a total of $ 2.43 billion. At the same time, 2020 poses for the industry not only the problems of Covid-19 but also tax innovations of legislators.

In March 2020, the Verkhovna Rada of Ukraine adopted several laws designed to mitigate the economic crisis’s negative impact. In particular, for the most popular among IT professionals – the third group of taxpayers, the single tax limit has been increased from 5 to 7 million UAH.

Corona Crysis Impact on IT Outsourcing

The exports of computer services last year increased by 30.2%. However, we have already found ourselves in different business realities, and such rapid growth, unfortunately, will not be observed soon. But we can highlight several trends that the IT industry deals with in the “quarantine” times:

1. Remote work is a common thing for a Ukrainian IT specialist

It is worth noting that IT specialists are already accustomed to this type of work. This is especially true of outsourcing teams, and there are 80% of them. We want to emphasize that the high quality of services and works is maintained when working in the remote work mode, and the difference is completely invisible for clients.

2. IT companies devote a lot of resources to fight COVID-19

The IT business has actively joined in countering the spread of COVID-19 from the very start of the quarantine announcement in Ukraine. Companies create funds, purchase medical and protective equipment, create online platforms for doctors’ interaction and assistance. IT clusters are also active in the regions.

Risks and Legal Aspects of Software Outsourcing to Ukraine: What Businesses Should Know

Ukrainian IT Legislation and Laws For Foreign Customers

For sure, each potential client is interested in the legal aspects of cooperation. Ukraine is a civil-law country. According to Ukraine’s laws, foreign investors may carry out a range of foreign investments in the IT sector: 

  1. Create new jointly owned or wholly foreign-owned enterprises.
  2. Enter into production or cooperation arrangements.
  3. Hire a company/freelancer. 

Taxation Regulations for an IT Sphere

The most common business models used by domestic or foreign IT entrepreneurs in Ukraine are a Limited Liability Company (LLC) or a Joint-Stock Company (JSC). International companies often register wholly-owned subsidiaries as LLCs. For the most part, this is due to the rights and flexible business models available since the introduction of new legislation regarding LLC’s. 

There are two central taxation systems for private entrepreneurs: General tax rules and a simplified tax regime.

Concerning payroll taxes, employees’ salaries are subject to the following charges: income tax – 18%, military levy – 1.5%, and single social payment – 22%. 

A significant number of IT specialists in Ukraine work with companies under the private entrepreneurship model. The form of business is simple to register and maintain, and besides, it can offer good tax savings through a simplified tax regime for such a structure.

The Ukrainian taxation system is very beneficial for IT companies, as it means that they conclude contracts with the company. Most of the taxes levied on the Ukrainian IT sector come from people registered as private entrepreneurs. 

According to the law, the developers are responsible for the entire product creation process. 

The private entrepreneur provides services to the LLC as an independent contractor (freelancer). Thus, the LLC will not be obliged to pay taxes for employment, making it a desirable prospect for many IT businesses. 

This situation is very favorable for the customer. It also means preserving information, transferring product rights, employee loyalty, and lower software development rates.

Cooperation Models with Outsourcing Agency in Ukraine

The client outsourcing to Ukraine usually has a choice of 2 of the most popular options: a fixed price model or a time and material based collaboration with a dedicated team or milestone pricing options.

1. Fixed price model

This model assumes a fixed payment for the project. As such, it works best for companies, prioritizing cost planning over flexibility. The FP approach’s key features are a fixed budget, deadline, scope, higher rates, and potential quality tradeoffs.

As a client, you might be better off considering a pricing model like this if your outsourcing project has exact requirements that will certainly not change over time. A specific time frame must reach a particular milestone.

2. Time and materials

The time and material model is suitable for large projects with unclear or constantly changing requirements. Then payment is made for the achieved result and for the actual time spent. The project time estimate made with this pricing model is more realistic, and therefore the customer benefits more from this approach.

Besides, the customer bears significant responsibility for the implementation of the project. He is responsible for adding or removing specific features during a project. The overall process is more transparent and flexible with the types of T&M pricing strategies.

IT specialists are then better motivated to deliver modern products within a reasonable time frame.

It is clear that the time and materials pricing model seems to be more profitable in many ways; minimizing risks for large and complex long-term projects merely is inevitable.

Legal Aspects: Contracts with Ukrainian Developers

When you select a software house to work with, you want to know the game rules. They have gone through hundreds of previous projects, so they are most likely the ones with excellent expertise for your project.

You are about to face the first challenge: signing a contract. Let’s take a look at the essential documents for software development outsourcing. We will define the key terms that can often be confusing or misleading.  It will help you arrange a business relationship that is safe for both parties.

  1. NDA/NCA Clauses 
  2. Master Service Agreement (MSA) 
  3. Statement of Work (SOW)
  4. Other upon request.

 

Non-Disclosure Agreement (NDA) or Non-compete Agreements (NCA)

A Non-Disclosure Agreement is an agreement between two parties who agree to protect confidential information disclosed in the course of business. Pay attention to the main provisions, which should include the definition of confidential information, exceptions to the concept of “confidential information,” obligations, and conditions of the contract. For example, in the world of programming, general business ideas, codes, databases, documentation, development tools and methods, information processing methods, etc. can be considered confidential information.

At the same time, NDA in the IT business has long been perceived not so much as a legal instrument, but as an element of business etiquette that regulates some rules of communication at different stages of cooperation. IT companies conclude NDAs with clients at the pre-project stage, for the duration of the project.

10 key clauses to have in non-disclosure agreements:

  • Definition of confidential information.
  • The parties.
  • The terms and duration.
  • The permitted use of the information.
  • The legal obligation to disclose.
  • The return of the information.
  • The jurisdiction.
  • The remedies.
  • Responsibility for legal fees.

 

Non-compete agreements might be signed per client request. The purpose of NCA is to protect the legitimate interests of the business. It includes intellectual property, client information, business plans, or trade secrets to avoid erosion of the sensitive information.

The contract limits the developer to work with any similar business for a certain amount of time after the agreement’s termination. That applies first to work, which concerns a specialized area. 

Statement of Work (SOW)

The Statement of Work (SoW) consists of a narrative description of the supplied software services. SOW is one of the first documents you will sign to provide a complete picture of a project before you start planning and implementing it.

SOW captures and defines all aspects of your project. It is an extremely detailed document as it will lay the foundation for the project plan.

It’s also a way to share what a project entails with those working on it, whether they are collaborating on a project or working on a contract. This includes suppliers and contractors applying for a project.

It is also useful for the project manager as it provides the structure on which the project plan is built. The terms of reference will also help to avoid conflicts in the project. SOW helps keep everyone involved in a project on the same page and minimizes confusion with detail and clarity.

What’s included in the SOW for software development projects?

  • Project description.
  • The purpose of the project.
  • Requirements (functional and non-functional requirements and constraints).
  • Proposed solution (approaches to project estimation and implementation, design, and support).
  • Scope of works and description.
  • Milestones or phases.
  • Deliverables.
  • Task list and estimates.
  • Deadlines and schedule.
  • Requirements.
  • Contract mode and payment model.

Master Service Agreement (MSA)

IT vendors like DevCom seek long term, ongoing relationships with clients. Some of our clients have worked with us for over 16 years already. However, that relationship is typically structured across multiple projects/scopes of work.  As we approach a new project opportunity with a client, neither party wants to review or change generic terms and conditions.

Master Service Agreement (MSA) defines a contract between IT-vendor and a client. It serves as the foundation for the relationship that can then reference for future project-based agreements you draw up to keep the project agreements as focused and streamlined.

MSA guides the IT outsourcing company and its client, forms the basis of their relationship. It is a generic set of legal provisions and basic business protections necessary or recommended in outsourcing transactions. Put merely, MSA must state every vital aspect of software outsourcing to convey business expectations and provide financial guarantees to both parties. It should also be a clear and understandable guide at every step of the SDLC. 

For that reason, the MSA document is typically structured into the following sections:

  • MSA’s general terms.
  • Goals and objectives for the project.
  • Scope of services.
  • Conditions for how the work will be performed.
  • Fees, expenses, and payment and acceptance of services.
  • IP rights and ownership.
  • Terms and clauses for termination.
  • Company and client warranties and compatibility.
  • Indemnity.
  • Confidentiality terms.
  • Restrictions on disclosure and use.
  • Non-solicitation of employees.
  • Liability and warranties.
  • Steps for how legal disputes will be handled.
  • Other conditions.

 

Conclusion

Currently, IT companies in Ukraine operate under the general legislative field of Ukraine. Thus, the Ukrainian government actively supports the industry through reforms and laws on taxation, data protection, employment, and export of services. The legal and economic spheres are now actively adapting to the needs of international business, so the signing of a contract and the transfer of funds is no longer a reason for consideration. 

The legal aspects of IT outsourcing to Ukraine are somewhat typical to contracting engineering jobs. Therefore, to get started with Ukrainian IT companies, you need to sign a pack of usual agreements: Service Agreement, Statement of Work, NDA.

Summarizing all those mentioned above, it is undoubtedly clear that outsourcing to Ukraine is safe. The only thing to consider – are people. The most challenging task is to choose a reliable company, people who inspire trust, skillful developers. Sometimes it happens that right after the first introductory call, it becomes clear whether there is a people match or not. A kind of a kindred spirit in business. Because trust means a lot, and such cooperation can last for many years.

With all of the mentioned factors in mind, it might be the best shot to contract DevCom – a Ukrainian development company with a perfect reputation on the global market. Since 2000, Devcom provides a full range of enterprise software solutions, from custom development, professional IT consulting services, Cloud hosting, and DevOps to software support.

If you think there’s some way we can help, contact us now.


Written by: Liza Hazevytch, Marketing Manager at DevCom.

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