Due to the unpredictable external economic conditions in Israel and globally, companies are now seeking to adjust their strategic planning. In the past, IT companies could operate more stable, but the current situation requires them to adopt new business methods related to strategic planning.
Failing to implement these necessary changes to their strategic planning can make it difficult for companies to tackle the problems arising from economic and political instability.
Current Business Situation in Israel: Strengths and Weaknesses
Given the current economic and political landscape, it's worth examining the strengths and weaknesses of conducting business in Israel.
On the one hand, Israel has a highly skilled and innovative workforce with a robust entrepreneurial spirit. The country boasts a vibrant startup culture and is home to many successful tech companies, making it an attractive destination for investors and entrepreneurs.
However, there are also some challenges to doing business in Israel. The country is geographically small, with a limited domestic market, so companies often need to look beyond their borders to achieve substantial growth.
Additionally, the region's geopolitical tensions can create instability, affecting business operations and investor confidence. Furthermore, some bureaucratic hurdles and a complex regulatory environment can make it challenging for businesses to operate efficiently.
Israel's business environment is generally strong. The rule of law is well established, the judiciary is independent, and perceived corruption levels are modest by regional standards. The Heritage Foundation's 'Index of Economic Freedom' survey ranks Israel 26th out of 184 countries.
Worth adding that Israel is classified in MSCI indices as a developed market economy with high incomes and robust long-term economic growth. Annual per capita income is more than $40,000, and real GDP expanded by an average yearly +4% over the past 15 years. Israel has a robust scientific environment with a flourishing high-tech industry and the world's highest ratio of R&D expenditure to GDP (nearly 5%). Israel has managed the challenge posed by the global Covid-19 pandemic comparatively well.
With a solid nominal GDP expansion, the ratio of public debt to GDP is expected to decrease to approximately 66% by the conclusion of 2023. Due to its strong macroeconomic fundamentals, Israel benefits from favorable access to global financial markets. Hence, funding the fiscal deficits poses no significant challenge.
Israel's current account balance has been in surplus since 2003 and should remain so in the next few years. After widening to an annual average of +5% of GDP in 2020-2021, it is forecast to narrow moderately to around +4% in 2022-2023.
A Wave of Layoffs and Political Risks
Many companies, both large corporations and small startups, face new challenges. The changes took place throughout 2022 and continue into 2023. The labor market in the IT sector has changed significantly over the past few months, and now there are a lot of developers in the market due to cutbacks.
Most Israeli tech firms are laying off junior and middle employees, HR, and marketers, and beneficiaries of the companies are asking to cut costs and optimize the budget.
Political risks have been added to economic problems, more recently, against the background of the aggravation of relations between Israel and Lebanon and the Gaza Strip, which began in early April 2023, political instability in the region has increased, as well as fears of a local conflict turning into a larger one.
New challenges are forcing Israeli high-tech companies to optimize their budgets, including the cost of maintaining employees.
Principles that Can Help Leaders Manage a Company Effectively in Conditions of Instability
Effective management seeks to qualitatively and quantitatively increase the company's potential to take a more competitive position in the market.
IT companies are faced with the question of what strategy to choose in an unstable time and what actions will be most effective. The most popular and effective events are usually associated with the following ones:
Let's talk about some of the staff management cost optimizations below:
Initially, it is recommended to examine the cost-related parameter. This involves considering cost reduction and optimizing the budget, which may encompass:
Staff cuts;
Transfer of part of the staff to a part-time work format;
Cost reduction for various additional activities not directly related to product development;
Revision of the advertising budget;
Review of office space rental.
Layoffs are a highly contentious issue for companies as they can significantly demotivate the remaining employees, particularly in IT firms.
Another approach related to staff cost optimization is the reduction of wages, working hours, and various bonuses in the company (like additional health insurance, payment for sports activity, etc.). Because people primarily want to keep their jobs during a crisis, they generally understand the reason for reducing social benefits and accept new temporary anti-crisis changes.
Outstaffing and Outsourcing
One of the most stable and old ways to optimize the budget for Israeli digital companies and startups is outstaffing engineering departments and outsourcing project development to Central and Eastern Europe countries, which can significantly reduce the cost of maintaining employees.
The impact is felt directly in optimizing the engineering team's salary budget (up to 35%) and the cost of HR support (office, workplace and equipment, personal insurance, solution of legal and tax issues, teambuilding, etc.).
New Market Development
A fantastic opportunity for Israeli digital firms to boost revenue and attract fresh clientele is to explore new markets with a welcoming business environment. Another crucial aspect is to recruit professionals from countries with low taxation, comparably low wages, proficiently skilled staff, and excellent command of the English language.
The most promising market for Israeli companies to tap into is Central and Eastern Europe. This region boasts a favorable business climate and several distinct advantages we'll explore further.
Over the past two decades, Eastern Europe has become one of the largest regions for the supply of software development services, with Ukraine, Poland and Romania, accounting for 5% of the global IT outsourcing market. More than a million programmers live in the region. About a third (30.8%) live in Poland, another 15.4% in Ukraine, and 10.7% in Romania.
In general, companies that decide to come to Eastern Europe often find first-class engineers focused on innovation. According to Statista, revenue in the IT outsourcing segment in Eastern Europe will reach $2.7 billion by the end of 2022, and will also show a CAGR of 17.17%. By 2027, according to forecasts, the volume of this market will reach 5.94 billion dollars.
In our last article, we reviewed the average salaries of software developers in the largest cities of countries that are leaders in exporting IT services via outsourcing and outstaffing and also compared them with the salaries of software developers from Israel.
The most significant advantage of the Central and Eastern European market is its large size and the availability of affordable qualified specialists who successfully cooperate with Israeli IT companies.
The IT market in Poland is the largest in Ukraine, with over 400,000 specialists. As of the beginning of 2023, there are 290 thousand IT specialists in Ukraine.
In other locations, the number of specialists is less - in Romania, there are about 120 thousand, and in Bulgaria, up to 80 thousand IT experts. However, these markets continue to grow - in Bulgaria alone, by 2024, the market is expected to increase to 112 thousand specialists.
As of 2023, about 35,000 IT specialists work in Croatia. Export of IT products and services at the peak of the COVID-19 pandemic, becoming 4% of the country's GDP.
Romania is among the top 20 countries in the world with the best programmers from Hacker Rank. Ukraine, for example, is ahead of Romania in this ranking (Ukraine is 11th, Romania is 20th), but both of these states are in the TOP 20.
In general, Bulgaria's IT industry has a strong growth potential. According to the conclusions of the AIBEST Annual Industry Report, 77 thousand of IT specialists have been working in full-time positions in the country over the last year. Experts predict that by 2024 their number will increase to 112 thousand engineers. In addition, more than 6,500 technical graduates enter the local talent market each year. About 90% of the most qualified Bulgarian IT specialists live and work in Sofia.
In our review, we examined the concepts of staffing and outsourcing and their advantages and disadvantages. There you can also learn in detail the methods of budget optimization for Israeli IT companies.
Outstaffing and Outsourcing Models for IT Companies
By briefly examining the benefits of outsourcing and outstaffing, we can identify several key components:
Reduce Costs
Compared to those in developing countries, pay for experienced developers is significantly higher in the West, and companies can recruit competent developers with less money by outsourcing their work.
Fill Talent Gaps
Outstaffing is a quick route to landing such developers without upskilling their internal team or going through a lengthy recruitment process. Also, finding particular IT expertise can take time and effort in some countries.
Improve Business Focus
Outstaffing allows firms to concentrate on their core competencies rather than micromanaging developers. Meanwhile, outsourcing enables startup owners to focus on marketing, sales, and investor pitches rather than building code.
Free Up Internal Resources
With outsourcing, the offshore vendor will allocate a budget for workspaces, software licenses, and ongoing upskilling and the administrative tasks that come with it.
Increase Capacity
Companies using software developers outstaffing can effectively replenish their teams with offshore developers. As a result, businesses can scale efficiently without being constrained by strict financial commitments or physical resources.
Final Thoughts
The strategies we reviewed in this review allow companies to survive in an unstable external environment and take advantage of new opportunities. These strategies include improving the financial condition, reducing the costs of optimizing the team of specialists, using outstaffing and outsourcing models, and cooperation with the markets of Central and Eastern Europe. In addition to a perfect quality/ cost balance offered by East-Central European IT outsourcing service companies, the pro bono benefit of cooperation with this region is a cultural fit. Central and Eastern European countries learned to maintain good relations with both by bridging east and west.
Both outstaffing and outsourcing are the best ways to optimize development team costs for Israeli Fintech companies. Such optimization is essential for investors and creditors in 2023, making doing more tasks for less money possible.
If you want to compare the prices for outstaffing specialists with your existing costs, please request, and our managers will provide you with information. Thanks to outstaffing provided by Global Teams, our clients save 20 to 35% on developing their digital projects.
Today, Global Teams has expanded to include over 50 Experienced Software Developers and other professionals in Ukraine, Serbia, Hungary, Poland, Moldova, Romania, and other countries in East-Central Europe. We have more than seven years of experience in mobile application development.
The goal is to connect business owners with the professionalism and expertise they need to staff their teams at the best possible price. Our experts understand your needs well.