Five scenarios for transforming IT from outsourcing to product

The transformation from outsourcing to product is one of the most relevant strategic directions for many Ukrainian technology companies seeking to strengthen their position in the global market. This transition not only promises a significant increase in margins and capitalization through the creation of proprietary intellectual property, but also reduces dependence on external orders and allows for risk diversification. In an environment of high competition and constant change, creating one's own product becomes not just an option, but a necessity for sustainable development and attracting highly qualified specialists who are looking for opportunities for innovation and growth. This article analyzes key scenarios that Ukrainian service companies can consider for successfully executing such a transformation.

Why Ukrainian companies choose the transformation from outsourcing to product

The transition from a service model to a product model is driven by a number of strategic advantages. First, proprietary intellectual property (IP) allows a company to increase its capitalization and ensure significantly higher margins compared to outsourcing, where profit is often limited by hourly labor rates. Product companies have the potential for exponential growth because their product can be scaled to thousands or millions of users without a proportional increase in costs.

Second, creating your own product reduces dependence on large clients and diversifies the risks associated with losing contracts or changing market conditions in the service segment. This provides the company with greater stability and control over its own development. Instead of competing for every new project, a product company focuses on developing its ecosystem and retaining customers.

Third, proprietary product solutions are a powerful magnet for attracting and retaining highly qualified IT professionals. Many developers, engineers, and designers strive to work on innovative projects, see the direct impact of their work on the final product, and participate in creating something unique. This allows companies to form stronger and more motivated teams that are ready to invest their experience in long-term development.

Finally, such a transformation has a significant impact on the Ukrainian IT industry as a whole. It promotes R&D development, the creation of new high-value-added jobs, and the strengthening of the country's technological ecosystem. According to industry experts, the share of product companies in the Ukrainian IT sector continued to grow in 2023, which indicates a shift in priorities and development strategies.

Scenario 1: incubation of an internal startup as a path to a product

One of the least risky paths to a product model is the incubation of an internal startup. This approach involves allocating a small, focused team to develop a minimum viable product (MVP) using the company's internal resources, expertise, and funding. The advantage is that the core outsourcing business continues to generate revenue, financing product experiments.

A typical case: a Ukrainian service company specializing in development for the logistics industry noticed recurring needs among its clients regarding automation of warehouse operations. Instead of another custom solution, they allocated a team of three developers and one business analyst to create a SaaS tool for optimizing delivery routes. This product was initially tested on internal projects and then offered to several existing clients as a pilot project.

The impact of this scenario lies in minimizing risks for the core business. The company can test market hypotheses, gather feedback, and iterate the product without significant external investment or risk to its reputation. Furthermore, full control over intellectual property remains within the company, which is critical for a long-term strategy. This allows the company to respond flexibly to market changes without diverting significant resources from current contracts.

According to Serhiy Balashuk, CEO of Softline:

Scenario 2: acquisition of a ready-made product or startup (acqui-hire) for accelerated transformation

For companies looking to enter the product market faster, an acquisition (acqui-hire) strategy is an attractive option. It allows for shortening development time from scratch, obtaining ready-made technology, an existing client base, and, no less importantly, an experienced team with niche expertise. Instead of building, the company buys an already functioning business or technology.

For example, a large Ukrainian IT company that provided development services for the financial sector decided to enter the FinTech product market. Instead of creating its own solution, it acquired a small startup that already had a payment system MVP and a team of experts in blockchain. This allowed the company not only to obtain the technology but also to integrate into its processes a team that already understood the specifics of product development and the market.

The impact of this scenario is twofold: on one hand, it provides quick access to the market and technology, which significantly accelerates transformation. On the other hand, such a strategy is associated with high initial acquisition costs and significant integration risks. Combining different corporate cultures, technology stacks, and business processes can be a complex task that requires careful planning and change management. Success largely depends on the effectiveness of the integration and the retention of key talent from the acquired company.

Scenario 3: gradual transformation from outsourcing to product through deep specialization

This scenario involves organic growth and a gradual transition to a product model, leveraging accumulated industry expertise and reputation. A company that has specialized for years in providing outsourcing services in a specific niche begins to identify recurring problems and needs of its clients, in order to then scale them into its own product solution. This allows the company to minimize risks by relying on existing knowledge and market understanding.

A striking example is a company that has been developing custom CRM systems for insurance companies for over ten years. During this time, it has accumulated a deep understanding of the specifics of the insurance business, its regulatory requirements, and typical pain points. Based on this knowledge, the company decided to create its own SaaS platform for customer relationship management, specifically adapted to the needs of the insurance sector. This solution was based on typical functional requirements that were repeated in most of their previous projects, allowing them to quickly bring a proven concept to market.

The advantages of this approach are obvious: organic growth, use of existing competencies and reputation, and lower initial investments in market research. However, the pace of transformation is usually slower, and the company needs a clear strategy for exiting a purely service model. It is also important to understand that service and product businesses require different approaches to sales, marketing, and support, so the company must be prepared for internal changes and investments in these areas.

Scenario 4: partnerships and joint ventures as a product development strategy

Creating a product through partnerships or joint ventures (JVs) allows for sharing risks, combining resources and expertise, and gaining access to new markets. This scenario is particularly attractive for companies that have strong technical competencies but are limited in finance, marketing capabilities, or knowledge of a specific market.

Ukrainian deep tech startups often use this strategy, attracting foreign partners for joint development and entry into global markets. For example, a company developing artificial intelligence solutions for the agricultural sector can join forces with a large agricultural holding or an international distributor of agricultural technologies. The agricultural holding provides access to data, test sites, and a client base, while the Ukrainian company provides technological expertise. This allows for the creation of an industry-specific SaaS solution that has significant market potential.

The key advantage of this approach is the distribution of investment risks and access to additional resources, including finance, expertise, and sales channels. However, joint ventures are also associated with complexities. Managing shared intellectual property, aligning strategic goals, and resolving potential conflicts of interest require clear agreements, transparency, and effective corporate governance. The success of a JV largely depends on mutual trust and the partners' shared vision.

Scenario 5: turning an internal tool into a commercial product

Many IT companies develop effective internal tools and platforms to optimize their own processes. These solutions, created to meet internal needs, often have significant commercial potential. The scenario involves monetizing such tools by adapting them and bringing them to the external market as a commercial product, usually in a SaaS format.

Consider an example: an IT company that developed its own project management system or an internal HR system for automating hiring and onboarding decided to bring it to market after successful internal testing. This solution had already been tested in real-world conditions, which proves its effectiveness and functionality. After refining the user interface, adding features for external clients, and creating an appropriate marketing strategy, the tool became a successful SaaS product that generates revenue.

The main advantage of this scenario is low initial R&D costs, as the product already exists and its effectiveness has been verified by internal use. This allows the company to quickly enter the market with a ready-made solution. However, it is important to understand that an internal tool and a commercial product have different requirements. Significant investments in marketing, sales, external customer support, and adapting the product to a wider audience are necessary. In addition, the company will have to change its mindset from "using for ourselves" to "selling to others," which requires new competencies and resources.

According to Serhiy Balashuk, CEO of Softline: "Turning internal developments into commercial products is a testament to a company's maturity and its ability to generate innovation not only for itself but also for the market. This allows not only for recouping investments in internal R&D but also for creating a new revenue stream, which is critical for the stable growth of IT companies in Ukraine."

What is hindering IT transformation in Ukraine and how to overcome these challenges?

Despite the obvious advantages, the transformation from outsourcing to product in Ukraine faces a number of significant challenges. One of the key ones is the lack of sufficient funding. Product development requires significant investments in R&D, marketing, and sales, which cannot always be covered by current outsourcing revenues, especially in the early stages. The Ukrainian venture capital market, although developing, is still less mature compared to global innovation hubs.

Another challenge is the lack of product expertise in the team. Outsourcing companies are traditionally focused on executing clients' technical tasks, and they often lack specialists with experience in product management, product marketing, strategic planning, and understanding market needs. This leads to the development of products that do not find their market or do not meet user expectations. Also, a significant brake is the fear of losing current outsourcing contracts that provide stable income, and cultural resistance to change within the company, where teams are accustomed to a certain model of work.

To overcome these challenges, companies need to:

• Build internal competencies: Invest in training and developing specialists in the field of product management (Product Owner, Product Manager), user experience design (UX/UI), and product marketing.
• Engage external consultants: In the early stages, collaboration with experienced product consultants or mentors can significantly accelerate the process and help avoid typical mistakes.
• Gradual change of corporate culture: The company's culture must evolve from client-oriented (in the context of outsourcing) to product-oriented, where the focus shifts to the product user and their needs. This requires openness to experimentation and readiness for failure.
• Use the Lean Startup methodology: Focusing on rapid iterations, creating an MVP, constantly gathering feedback from the market, and flexibly adapting the product allows for minimizing risks and optimizing costs.

Successful transformation requires not only technical mastery but also strategic vision, readiness for investment, and a deep understanding of the market. Ukrainian IT companies have unique potential for the transition from a service model to a product one, using their engineering strength and adaptability, which will allow them to take leading positions on the global stage and strengthen the country's economy.