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 significant 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.
Software development in Estonia
According to the State of European Tech, the ICT sector in Estonia employs around 20,700 specialists with approximately 700+ people graduating with degrees in computer science every year [1, 5]. The Estonian ICT services exports reached $4.17B in 2018 and currently employs 5,9% of the country's workforce. 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 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%).
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.
Software 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% of them are engaged in the IT sector.
Clutch lists over 70 software companies in Estonia and most of them employ less than 250 people. The majority of companies work in financial and automotive industries, as well as healthcare and travel.
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 ranked 9th in the 2018 EU Digital Economy and Society Index for its business adoption and usage of digital technologies. 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 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 one of the most politically stable countries in the CEE region being a member of the Eurozone, WTO, NATO, and OECD. According to the World Bank's Ease of doing business 2019 ranking, Estonia occupies 16th 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 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. 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 IT industry within the state. For instance, Kyiv, the biggest IT hub and the capital of Ukraine, employs twice as much IT experts as the whole Estonia itself.
Also, 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.
IT outsourcing in Lithuania
Around 27,400 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 the country.
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, several 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 seven years. Another Lithuanian company, Data House UAB, marked an 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.
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 its quality by adopting digital technologies. No wonder, the country occupies the 36th place and is the first among Baltic countries in terms of innovation adoption according to 2019 Bloomberg Innovation Index. Besides, Lithuanian IT education witnessed a significant increase in government funding for IT studies, which stimulated rapid growth among students choosing IT as their first choice field of study.
Risks and challenges
The large number of skilled professionals are leaving the country to be employed abroad. The skills shortage in Lithuania continues to be high and becomes a primary bottleneck for Lithuania's growth. Although Lithuanian enterprises have been steadily embracing the opportunities offered by various digital technologies, their 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 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 science studies and professions to ensure the acquisition of digital skills when learning.
IT outsourcing in Latvia
More than 28,000 IT specialists work in software development companies in the Latvian ICT sector. Also, around 700 computer science students graduate every year from Latvian universities , thus stimulating growth in the industry. 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 in Latvia
Latvia's business environment growth and economic stability are driven by increasing shares of fast broadband subscriptions, implementation of several governmental measures as well as by improved delivery of public services. According to Global Services Location Index , the country is ranked 21st in terms of financial attractiveness, skills and availability, and state of the business environment. Also, the country improved its position in the World Bank's Ease of doing business 2017 ranking and now occupies the 21st place. Latvia was also featured as one of the 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 half of Latvian companies spent less than 1% of their income on R&D, while only 26% of the European companies spend that 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 remains lower than in most European countries.
All in all, 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 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.
Sources cited in this article:
- State of European Tech 2018
- IT Services and Equipment Estonia by Export.gov
- IT sector - e-Estonia
- The 2019 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