Modern companies need to accelerate their pace of development to keep up with the industry leaders and stay on top of their game. Yet, many companies struggle to find and acquire top talent with diverse technical expertise. For this reason, nearshoring to Eastern and Northern Europe has become a stronger trend. Cultural alignment, business and market understanding, agility, and diverse technological expertise foster interest in these outsourcing destinations.
In this article, let’s review the three promising IT outsourcing destinations: Estonia, Latvia, and Lithuania. You’ll find a general overview of the IT outsourcing industry in the Baltic states, followed by a detailed outlook of each country.
IT outsourcing in Baltic states
Baltic states are considered one of Europe's most economically stable IT outsourcing destinations. Estonia, Latvia, and Lithuania boast high levels of digital solution adoption and effective legislation that ensures data security and smooth business operations. The companies in the region are known for nearshore and offshore development services.
The region is also recognized thanks to its numerous product companies, startups, and vendors specializing in outsourcing global business services. That translates into the fact that the total number of specialists focusing on outsourcing services is relatively low.
However, along with the benefits Baltic countries can offer, there are also some significant risks and challenges. Let's find out more about Estonia, Latvia, and Lithuania's IT market development and business environment to help you find a reliable IT outsourcing partner.
IT outsourcing in Estonia
According to the State of European Tech, the ICT sector in Estonia employs around 53,000 ICT specialists. In a visionary plan Digital Strategy 2020 for Estonia by the government, IT was expected to become the leading sector of the economy and make up nearly 20% of the country's total exports. 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%).
A little over 1,000 people graduate with degrees in computer science every year [1, 5]. In addition, Estonia expects to train an additional 7,000 ICT specialists between now and 2027 .
In this country, the Estonian IT industry is well-developed due to numerous startups and a favorable business climate for establishing Estonia outsourcing hubs. The country is known as the birthplace of Skype, TransferWise, Pipedrive, Cloutex, Click & Grow, Grabcad, Erply, Fortumo, and Lingvist, among the few. Moreover, the country is home to a wide array of foreign companies that opened their R&D centers there. They include global companies like Microsoft, SAP, Acronis, and Parallels.
Software development companies in Estonia
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% are engaged in the IT sector.
Clutch lists over 140 software development companies in Estonia, most of which employ less than 50 specialists. Most Estonia outsourcing companies specialize in financial, information technology, business services, e-commerce, healthcare, and retail industries.
If you are looking for a software development company in Estonia, there are plenty of vendors to choose from.
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, and a digital signature legally equal to a handwritten signature. The country ranked 22nd in the 2022 World Competitiveness Rating by IMD . Estonia is not only implementing e-government solutions but is also conscious of its cybersecurity. The country hosts the cybersecurity center of NATO and the IT agency of the European Union. What's more, the governmental agency Enterprise Estonia aims to increase Estonian companies' productivity by 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 one of the most politically stable countries in the CEE region, being a member of the Eurozone, WTO, NATO, and OECD. A few years prior, the country also launched the Estonian Entrepreneurship Growth Strategy 2020, which is the most important strategy related to the development of the country's economy for the next seven years. It focuses on increasing productivity, stimulating entrepreneurship, and encouraging innovation within the state.
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. These factors favor the proper growth of software development companies in Estonia. However, aging poses risks for businesses' profitability, competitiveness, and the country's long-term economic growth. Moreover, the scarcity of resources remains the most critical issue for the successful development of the Estonian IT industry.
IT outsourcing in Latvia
More than 50,000 IT specialists work in software development companies in the Latvian ICT sector. Also, around 700 computer science students graduate annually from Latvian universities , thus stimulating industry growth. The IT outsourcing Latvia sector has become the third-largest exporter in the country, following the timber and food products sectors.
The evolution of the IT outsourcing Latvia sector has 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, and ABB have already established their regional centers in Latvia. What’s more, Latvian software companies with less talent also capitalize on their expertise, offering custom outsourcing services.
Software development companies in Latvia
Latvia has the lowest number of IT outsourcing or software development providers. Clutch lists slightly more than 40 Latvian software companies, with the majority being small firms with less than 50 employees. As for the domain expertise of these companies, the leaders are the business, e-commerce, financial, and manufacturing industries.
With fewer resources and a smaller tech talent pool, IT outsourcing in Latvia is still an attractive destination in Northern Europe. But what makes Latvian software companies and global enterprises so attractive?
Business environment in Latvia
Latvia's business environment growth and economic stability are driven by increasing shares of fast broadband subscriptions, the implementation of several governmental measures, and improved delivery of public services. According to Global Services Location Index in 2021, The country is ranked 21st in terms of financial attractiveness, skills and availability, and state of the business environment. Also, the country has the 41st position in the 2022 Global Innovation Index according to indicators like infrastructure development, technological readiness, business sophistication, and innovation . The Latvian government is planning to reduce administrative burdens, expand e-government services and work on attracting investment to Latvian software companies to create new jobs and increase business competitiveness.
Risks and challenges
Even though more and more Latvians are going online and using e-government services, half of the population still has a low level of digital skills adoption. Furthermore, Deloitte estimates that almost half of Latvian companies spent less than 1% of their income on R&D, while only 26% of European companies spent that little. This negative tendency confirms that R&D investments in the Latvian business sector are lower than the EU average and well behind other European benchmarks. Additionally, the number of ICT specialists in the IT outsourcing Latvia sector is slightly lower than in Estonia and Lithuania and even less than in other European outsourcing destinations.
IT outsourcing in Lithuania
Around 50,000 specialists are employed in the ICT industry in Lithuania , with additional 750+ future experts graduating every year . Such 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 this country. The decision to outsource Lithuanian
On the whole, IT companies in Lithuania have received substantial investment over the past years, which stimulated the growth and development of the IT sector. In addition, the newest Deloitte Technology Fast 50 Rating, a report bringing together the fastest-growing tech companies in Europe, lists a Lithuanian company. According to the recent rating, UAB inlusion Netforms has shown a tremendous 696% revenue growth from 2018 to 2021 .
Dozens of regular tech events, such as the Innovations conference, Global Game Jam in Lithuania, Software Development Conference, Silicon Valley Comes to Baltics event, and International Open Data Hackathon, take place in Lithuania. Some of them attracted thousands of participants and over 100 international speakers.
Software development companies in Lithuania
IT outsourcing in Lithuania is an excellent market for getting the most out of your software development. Apart from a decent tech talent pool, the country has some reputable IT outsourcing vendors. According to Clutch, there are over 90 outsourcing and software development companies in Lithuania.
Software companies in Lithuania have versatile domain expertise. Among the most popular industries that choose Lithuania for IT outsourcing are financial and business services, information technology, e-commerce, healthcare, and consumer goods.
The Lithuanian government plans to develop a high-speed broadband communication infrastructure in line with its Programme on the Information Society Development for 2014–2020. Lithuania has also launched a program to increase the availability of e-services and enhance their quality by adopting digital technologies. No wonder the country occupies 29th place according to the World Competitiveness Rating and 39th ranking in the 2022 Global Innovation Index [11, 12]. Moreover, Lithuanian IT education witnessed a significant increase in government funding for IT studies, stimulating rapid growth among students choosing IT as their first field of study and proceeding with employment in software companies in Lithuania.
Risks and challenges
It’s still worth mentioning that dozens of skilled professionals leave the country to be employed abroad. The skills shortage in Lithuanian outsourcing software companies continues to be high and becomes a primary bottleneck for Lithuania's growth. Although software development companies in Lithuania have been steadily embracing the opportunities offered by various digital technologies, their progress has been slower than in previous years.
The Digital Agenda Strategy recognizes that addressing this issue remains crucial to support digital transformation in banking and other industries. It sets out some necessary steps to reinforce 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 majors and professions to ensure the acquisition of digital skills when learning.
Overall, the launch of e-programs, ease of doing business, high cybersecurity, 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 significant bottleneck for this region. Thus, finding and scaling a team is a real challenge. Instead, many companies consider Eastern European IT outsourcing destinations to establish long-term cooperation. Such destinations can become a win-win option regarding the availability of IT professionals and technological expertise.
Sources cited in this article:
- State of European Tech 2021
- IT Services and Equipment Estonia by Export.gov
- IT sector - e-Estonia
- The 2021 A.T. Kearney Global Services Location Index
- Tertiary education graduates: main subject areas
- Global software marketplace insights: Eastern Europe by SourceSeek
- World Bank’s Ease of Doing Business Index
- Trading Economics
- 2021 Business services sector in Latvia by ABSL
- EMEA’s Business Services Landscape by ABSL
- Global Innovation Index 2022
- World Competitiveness Ranking by IMD
- Deloitte Technology Fast 50 Rating