IT Outsourcing Destinations Overview: Estonia, Latvia, Lithuania

IT Outsourcing Destinations Overview: Estonia, Latvia, Lithuania
N-iX
1970-01-01T03:12:44+00:00

Today’s technological landscape is constantly changing and companies face the need to accelerate their pace of development to keep up with the industry leaders. Most tech companies struggle to find qualified talents with diverse technical expertise in-house. That is why nearshoring to Eastern and No...

IT Outsourcing Destinations Overview: Estonia, Latvia, Lithuania
By Yustyna Velykholova June 21, 2017

Today’s technological landscape is constantly changing and companies face the need to accelerate their pace of development to keep up with the industry leaders. Most tech companies struggle to find qualified talents with diverse technical expertise in-house. That is why nearshoring to Eastern and Northern Europe becomes a stronger trend. Cultural alignment, business and market understanding, agility, and diverse technological expertise are fostering interest towards these outsourcing destinations. Baltic countries are recognized as some of the most economically stable IT outsourcing destinations in Europe. They boast high levels of digital solution adoption and effective legislation that ensures data security and smooth business operations. However, along with the benefits that Baltic countries can offer, there are also some major risks and challenges. Let’s find out more about the IT market development and business environment of Estonia, Latvia and Lithuania to help you find a reliable IT partner.

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Estonia

IT market Overview

According to OSKA, the ICT sector in Estonia employs around 22,970 specialists with approximately 1,150 people graduating with degrees in computer science every year. The Estonian ICT sector constitutes 5.5% of the country’s GDP and it increased by 1.6% compared to 2015 due to the value added in software development services. Additionally, in a visionary plan Digital Strategy 2020 for Estonia by the government, IT is expected to become the leading sector of the economy and will make up for 20% of the country’s total export. Two major cities contribute the most to the development of the Estonian IT industry – Tallinn taking the lead (67.5%) and Tartu as a runner-up (12.5%).

Estonia is known as the birthplace of Skype, TransferWise, Pipedrive, Cloutex, Click & Grow, Grabcad, Erply, Fortumo, Lingvist, etc. Moreover, the country is home to a wide array of foreign companies that opened their R&D centers there. They include such global companies as Microsoft, SAP, Acronis, Parallels, and more.

In addition, the Department of Critical Information Infrastructure Protection (CIIP) in Estonia evaluates the security of information systems and carries out regular risk assessments. According to Statistics Estonia, 17% of all enterprises have a formally defined ICT security policy and around 42% of them are engaged in the IT sector.

Business environment

Estonia is a frontrunner in the Baltic region in terms of applying modern IT solutions including a wide range of state e-services, e-banking, nationwide ID-card, digital signature legally equal to a handwritten signature. The country was included in the list of Global Information Technology Report 2016 and was ranked 22nd according to the level of business adoption and usage of digital technologies. Estonia is not only implementing e-government solutions but is also conscious about its cyber security. The country hosts the cyber security center of NATO and the IT-agency of the European Union. What’s more, the governmental agency Enterprise Estonia is aiming to increase the productivity of Estonian companies up to 80%. It promotes Estonian entrepreneurship and regional policy and offers consultation, training, cooperation opportunities and financial support to entrepreneurs, research institutions, public and nonprofit sectors.

Estonia is regarded as one of the most politically stable countries in CEE region being a member of the Eurozone, WTO, NATO, and OECD. According to the World Bank’s Ease of doing business 2017 ranking, Estonia occupies 12th place and outpaces its Baltic competitors. The country also launched Estonian Entrepreneurship Growth Strategy 2020, which is the most important strategy related to the development of country’s economy for the next seven years. It focuses on increasing productivity, stimulating entrepreneurship and encouraging innovation within the country.

Risks and challenges

Estonia has one of the best performing labor markets in the European Union but its declining working age population is a real challenge. The Estonian labor market is characterized by its flexibility and low unemployment rates. However, aging poses risks for businesses’ profitability, competitiveness and the country’s long-term economic growth. Moreover, scarcity of resources remains the most critical issue for the successful development of the IT industry within the country. For instance, Kyiv, the the biggest IT hub and the capital of Ukraine, employs twice as much IT experts as the whole Estonia itself.

In addition, according to the European Commission Country Report Estonia 2017, Estonia’s industry remains dominated by traditional sectors with low R&D intensity. Low investments in the technological development of the country’s IT sector and weak commercialisation of research achievements remain the main challenges for Estonia’s productivity growth.

Lithuania

IT Market Overview

Around 27,900 specialists are employed in the ICT industry in Lithuania, with additional 1,700 future experts graduating every year according to Invest LithuaniaSuch global companies as Google, AIG, Nasdaq, Uber, IBM, Wix, HP, Virtustream, Exadel, and Unity have already opened their R&D and IT development centers in the country.

On the whole, IT companies in Lithuania have received more than $100 million in investment over the past year, which stimulated the growth and development of the IT sector. In addition, in 2016, 3 Lithuanian companies were included in the Deloitte Technology Fast 50, a report bringing together the fastest growing tech companies in Europe. For instance, Lithuanian IT company Ruptela UAB experienced a whopping 1,211% growth in revenue over the past five years. Another Lithuanian company Data House UAB marked a 861% increase while nSoft UAB reported a 337% gain.

A lot of regular tech events take place in Lithuania such as Innovations conference, Global Game Jam in Lithuania, Software Development Conference, Silicon Valley Comes to Baltics event, International Open Data Hackathon, etc. Some of them attracted thousands of participants and over 100 international speakers.

Business environment

In line with its Programme on the Information Society Development for the period of 2014–2020, the Lithuanian government is planning to develop the high-speed broadband communication infrastructure. Lithuania has also launched a program aimed to increase the availability of e-services and enhance their quality by adopting digital technologies. No wonder why the country occupies the 32nd place and is the first among Baltic countries in terms of innovation adoption according to Bloomberg Innovation Index 2017. In addition, Lithuanian IT education has received a 50% increase in government funding for IT studies in 2016, which stimulated 43% growth among students choosing IT as their first choice study field.  

Risks and challenges

A large number of skilled professionals are leaving the country to be employed abroad. Skills shortage in Lithuania continues to be high and becomes a major bottleneck for Lithuania’s growth. Despite Lithuanian enterprises have been steadily embracing the opportunities offered by various digital technologies, the progress has been slower than in previous years.

The Digital Agenda Strategy recognises that addressing this issue remains crucial to support digital transformation in banking and other industries. It sets out some important steps to reinforce the investment in human capital. By implementing this, the country is expected to boost the quality of teaching, improve the employability of the low-skilled and promote adult and work-based learning. The strategy sets an objective to attract more young people to choose IT and related science studies and professions in order to ensure the acquisition of digital skills when learning.

Latvia

IT Industry Overview

More than 28,000 specialists are employed in 5,000+ companies in the Latvian ICT sector. Also around 5,900 computer science students graduate every year from Latvian universities thus stimulating growth in the sector. The information and communication technologies (ICT) sector has become the third largest exporter in Latvia, following timber and food products sectors. The evolution of the Latvian IT market led to the birth of such large IT service providers in the country as Tieto, Evolution, Accenture Latvia, and Lattelecom Technology. Moreover, international companies like IBM, PwC, Accenture, KPMG, Siemens, ABB have already opened their regional centers in Latvia.

Business environment

Latvia’s business environment growth and economic stability are driven by increasing shares of fast broadband subscriptions, implementation of a number of governmental measures as well as by improved delivery of public services. According to A.T. Kearney 2016 Global Services Location Index, the country is ranked 18th, which is 5 positions higher than previous year’s result, in terms of financial attractiveness, skills and availability, and state of business environment. Also, the country improved its position in  World Bank’s Ease of doing business 2017 ranking and now occupies the 21st place. Latvia was also featured as one of top 50 countries in the World Economic Forum Global Competitiveness Index 2016–2017 ranking according to indicators like infrastructure development, technological readiness, business sophistication, innovation, etc. The Latvian government is planning to reduce administrative burdens, expand e-government services and work on attracting investment to local companies to create new jobs and increase business competitiveness.

Risks and challenges

Even though more and more Latvians are going online and are using eGovernment services, still half of the population has a low level of digital skills adoption. Furthermore, Deloitte estimates that almost a half of Latvian companies spent less than 1% of their income on R&D in 2016 while only 26% of the European companies spend as little. This negative tendency confirms that R&D investments in the Latvian business sector are not only lower than the EU average but are also well behind other European benchmarks. Additionally, even though the number of IT specialists in Latvia is bigger than in Estonia or Lithuania, it still remains lower than in most European countries.

Wrap-up

All in all, the launch of e-programs, ease of doing business, high cyber security and low corruption rates foster IT industry development in the Baltic countries. Nevertheless, the pace of software development market growth and digital technologies adoption in Lithuania, Estonia and Latvia are still moderate. The shortage of skilled IT specialists becomes a major bottleneck for this region thus finding and scaling a team quickly is a real challenge. That is why many companies consider Eastern European IT outsourcing destinations like Ukraine to establish long-term cooperation. This country is a win-win option in terms of availability of IT professionals and strong technological expertise.

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