The Software Engineering Boom in Eastern and Central Europe

A week ago, while attending the opening of SAP Labs Bulgaria’s brand-new building for more than 1,500 software engineers in Sofia, I pondered what the recipe for success is in Bulgaria and Central and Eastern Europe (CEE), given that these countries have developed extremely viable software industries. According to Statista, the IT industry in these countries has seen tremendous growth, even during the pandemic years. The projections for 2023 are that Poland’s IT and IT services industries will reach US?$7.5 billion, followed by Czechia (US?$4.75 billion), Ukraine (US?$3.13 billion), Hungary (US?$1.5 billion), Romania (US?$1.0 billion), Slovakia (US?$0.8 billion), and Bulgaria (US?$0.4 billion) (Statista).

Of course, one could just look at the usual criteria of the availability of talent and (digital) skills, financial attractiveness, and business environment to create a road map to success. This would generate a list of global leaders in the IT industry that is not too dissimilar from the one published by the Kearney Global Service Location Index (GSLI), which uses these criteria to establish the most attractive IT offshoring locations in the world. Unsurprisingly, India and China have been at the top of this list for many years, given their massive talent pools and immense cost advantages. India and China also top the Emerging Europe Future of IT Report 2023 ranking for global best locations for software development offshoring, but third is Poland, with Romania (8th), Bulgaria (11th), Czechia (12th), and Ukraine (15th) occupying spots in the top 15 as well. Furthermore, for technical and help desk IT services, the same report ranks Poland as #1, surpassing even the tech support giants India and the Philippines.

The growth of the talent pool

The question is why we see these strong growth numbers for software engineering services and exports. How was the talent base of more than 1 million IT engineers created? While this number sounds massive, it is much smaller than the estimated number of IT engineers in China (7 million), India (5.8 million), and the United States (4.4 million). Also, these numbers may be irrelevant to multinational companies (MNCs) seeking global talent. For example, the vast majority of Chinese software engineers work for domestic companies and not offshoring for MNCs, and in India, with its thousands of colleges graduating hundreds of thousands of IT engineers every year, employability has become an issue. According to the National Association of Software and Service Companies (NASSCOM) report, NITI Aayog Studies, the Economic Times, and Indian academics, only 50% of these engineers find employment upon graduation, and the reality may be even fewer. So, while scale always matters for MNCs, it’s not just a numbers game when it comes to the relevance of a software sector for foreign firms. The right skill level, often referred to as “employability,” as well as the availability of talent for MNCs also play significant roles.

In the CEE countries, becoming a computer engineer or programmer was simpler than becoming a specialized mechanical engineer, which required fully equipped universities and shop floors in the industry. In addition, because people normally search for better lives and many occupations were simply not providing a good living standard, there were times during the past three decades when every second student dreamed of being a programmer. Thus, beginning very early on (the late 1990s), many young people began choosing to specialize in programming.

On top of this, some Eastern European countries—Bulgaria, for example—were very early adopters of personal computers, especially with the introduction of own brands and the production of Pravetz computers. The Pravetz was an early version of a PC that was somewhat similar to the Apple II but more affordable and manufactured in Bulgaria, making them easy to get, which also drove quite a bit of interest in computing here.

All these factors helped to grow this capable talent pool in Eastern Europe.

The quality of the education system

This led me to the topic of education system quality. Obviously, formal education does not start with university-level degrees in computer engineering; it starts in primary school. Often, we hear statistics about which nations or cultures are specifically good or not so good in certain subjects or which put a special emphasis on math or science at the school level. I wondered if any such assumptions were biased, so I tried to find some data. Looking at the 2018 Organization for Economic Co-operation and Development (OECD) study called the Programme for International Student Assessment (PISA), which the OECD claims to be the world’s most comprehensive and reliable indicator of students’ capabilities, most Eastern European countries were categorized to be on Levels 2 and 3 out of four levels. Level 4, the most accomplished level, featured only participants from different cities in greater China. The exception was Poland, which ranked in the top 10 globally in terms of mathematics skills among students. While PISA does not offer concrete conclusions, interest in STEM subjects at the university level may help to explain the phenomenon. According to the OECD numbers of STEM graduates, in 2021, the countries graduating between 0.9 and 1.2 engineers per 1,000 people in the general population included Poland (50,000 graduates), Czechia (10,000 graduates), and Hungary (9,000 graduates). These figures are actually lower than in some of the large Western countries, where the number of STEM graduates ranges from 1.5 in the United States and 1.8 in Germany to 2.0 in South Korea.

The number of STEM graduates in CEE countries is solid, but not outstanding, so what is the quality of university education? The ranking of Eastern European universities in comparison to global universities is not a simple matter. Depending on who is establishing these rankings, there is a certain bias for local universities. In the Global University Ranking published by US News, the top positions are all occupied by the United States, and a third of the top 150 universities globally are in the United States. The next-best country is the UK, with 17 listings in the top 150. Similarly, and unsurprisingly, the ranking from the Times (UK) put Oxford in the top spot and 20 UK universities in the top 150. The picture is not much different in the QS World Ranking of Universities. Among all the rankings I reviewed that also ranked European and Asian universities high on the list, no university from Eastern Europe occupied any of the top 150 spots, with the exception of the State University in Moscow.

Excellence in mathematics

The picture looks a bit different if we are judging excellence in mathematics subjects. Here, a good measure would be success in the International Mathematical Olympiad, an annual competition of high school students up to the age of 20 attended by more than 100 countries. Hungary, Romania, and Bulgaria are ranked first, second, and fourth, respectively, for total overall number of medals won, while China and the United States have won the greatest number of gold medals. The ultimate accolade in mathematics is the Fields Medal. As this is awarded only once per year, usually to only one recipient, there have only been 69 winners. Therefore, it is statistically very difficult to draw conclusions about mathematical prowess on a country-by-country level based on Fields Medal wins. Nevertheless, 10 Fields Medal laureates hailed from Eastern European countries (including Russia). The number is three times the global average but a little below the United States, which has seen 15 Fields Medal winners.

The focus on skills and individual excellence

If a pattern could be deduced from these observations, it might be that institutional support systems (funded university research, R&D clusters, and government spending) in CEE are still comparatively weak, but the focus on skills and individual excellence has made up for this weakness. Intrinsic motivation and drive in these countries are very high, and the successes of many MNCs engaging in software engineering seem to underscore several basic conditions that make software engineering in CEE interesting for companies that have their headquarters elsewhere. Specifically, these are close proximity to Western Europe, membership in the EU, highly skilled talent, and a strong work ethic, which together constitute the secret sauce. Of course, companies are not acting altruistically; they also look at the bottom line—their profit and loss statements.

The success of international firms nearshoring or offshoring high-quality work to CEE also has a distinctly positive impact on local economies. High skill level well-paid jobs generate tax income for local governments. The growth of MNCs also contributes to the growth of the GDP, mitigating the challenge of a slow brain drain, which is top talents moving to Western Europe and North America in search of higher paying opportunities and a better quality of life.

Is there a magic bullet?

Looking at all the data and reflecting on my own experiences visiting many CEE countries over the last 20 years, it is clear to me that no single attribute can explain the success of software engineering firms and setups in Eastern Europe. During my first visit to our newly created lab in Bulgaria, I met a group of young Java developers who were still students at Sofia University. They only spoke in tech geek and couldn’t wait to help push our technology to the next level. This was eye-opening, as back then, the first signals of an emerging software industry were just appearing. I learned many important lessons during that time. First, location is important but does not create talent. Just as not all people living in Stuttgart or Munich are good at automotive engineering, not all people in Sofia or Bratislava were born excellent software engineers. Second, education is very important, but a cluster of excellent universities does not automatically place a country at the top of the global innovation index. Third, there are obvious advantages that large economies like the United States, China, Japan, and Germany have when it comes to funding their education systems, including higher-level education and cutting-edge research at universities. The top-ten list of international patent countries from the Patent Cooperation Treaty (PCT) is very close to being the same as the top ten global economic powerhouses. Nevertheless, this does not automatically make them the most vibrant software and innovation hubs—smaller countries stand a very good chance of becoming highly successful players in selected technologies if they develop a focus and comprehensive strategy. Israel is a well-known example of this phenomenon, having earned the brand “start-up nation” over the years. Finally, there is no country in the world that is on all possible dimensions the ultimate place to be a software engineer. If such a place were to exist, it would be short-lived, as it would eventually fall victim to its own success. Rising costs, changing living conditions, shortages of talent, and other issues would eventually lead to its demise.

Conclusion

I firmly believe it is the mixture of culture, access to education, dedication, and the focus of stakeholders and students that creates the right talent across regions and countries. Of course, there are additional factors, such as the availability of job opportunities or options to move residence and workplace across the EU without restrictions, that attract more talent to certain sectors, such as IT. Every MNC that entrusts teams in CEE with creating software and innovating will grow those teams based only on past success. Therefore, team culture; a drive for results; and the speed, reliability, and creativity of teams matter a lot more than one single outstanding feature, whether it be low cost or a singularly unique skill. The art of connecting people, leading global teams toward high-level performance, and harmonizing processes is what successful MNCs bring to the table as they embed product teams in the global organization. As for SAP, with its current hubs in CEE (Hungary, Poland, Czechia, and Slovakia) and Southeastern Europe (Bulgaria and Romania), the initial teams, some of which were set up 20 or more years ago, continue to make up the nucleus of a wonderful growth story in the region. The diversity of Eastern Europe in terms of cultures, languages, and histories adds to the beauty of engaging in software engineering in the region. Furthermore, the CEE countries are still catching up with the rest of Europe, and there is frequently still a special energy and can-do attitude in conversations with engineers. Thus, while it’s always exciting to find a unique mathematical genius somewhere, they alone will not make an investment attractive or even successful in the long run. Rather, the unique combination of many ingredients that make the CEE region special is what will produce not only great talent, but also great products—today and in the future.

(Disclaimer: The ideas, views, and opinions expressed in my LinkedIn posts, artciles, and profiles represent my own views and not those of any of my current or previous employers or organizations with which I am associated. Additionally, any and all comments on my posts from respondents/commenters to my postings belong to, and only to, the responder posting the comment.)