Ukraine and the supply chain

When Russia invaded Ukraine, most of the stories on the economic impact of the war focused on energy and wheat. Gas prices, which were already high, have continued to spike, and while harvest time is months off, Ukraine, like Russia, is a major producer of wheat, especially to the Middle East.

There was less discussion about impacts to the supply chain. That is starting to change. This past week, the Wall Street Journal reported on European auto plants forced to shutdown for a lack of parts that are manufactured in Ukraine, with the expectation that some of that production will shift to the U.S., which isn’t dependent on Eastern Europe for auto parts.

Based on a call I had last week with Eric Simonson, a partner with the Everest Group, there may also be an impact on engineering projects and ongoing technology services. The Everest Group is a boutique Dallas-based research and consulting firm. As of last week, Everest and Simonson were predicting that up to 100,000 technology jobs could be disrupted as a result of the Ukraine conflict – Remember that this is an incredibly fluid situation, so that number could’ve risen in the week since our conversation given the number of Ukrainians forced to flee the country.

Some, but not all, of those jobs are associated with outsourced engineering projects and technology services in the supply chain. Based on my conversation with Simonson, you might think of Ukraine as a kind of India of Eastern Europe, providing an alternative source of talent to Western European countries, but also providing a high level of technical skills that aren’t easily replaced.

Simonson said engineering services tend to range from simple things like technical documentation, which could include maintaining drawings and standards, to more complex projects like component and system design. “Imagine I’m a large distributor that wants to build a customer-facing app,” he said. “Or, I’m designing an audio visual system for a new car model, and I want someone to design the interface between voice input and the screen. Those are the kinds of projects that might get outsourced to a firm in Ukraine.”

On the technology side, he adds that tech companies in Ukraine work on what he called “complex business services.” Examples might range from questions around the technology required to run customer support, such as how much should be self-service, and what is required to make that happen; how much is voice versus chat; and how many languages does the platform need to support. A company probably has an internal team for some of that work, but then outsource some of it or even ask the tech company to innovate and create a solution. He added that Ukraine is capable of providing a relatively high level of services: “If you think of automotive manufacturing, it’s providing chips versus tires,” he said. “Ukraine is chips.”

So, what’s happening in Ukraine – recognizing that it’s a very fluid situation. Simonson broke it down into two camps, or companies with direct exposure to Ukraine and those with indirect exposure. His take was based on conversations with 15 different very well-known global brands.

“For people with direct exposure to Ukraine, their energy is going into how to support those employees: Can they help them move, for instance,” he said. “We talked to some larger companies that were bussing people around to safer areas.” He added that it’s a humanitarian response today. “They’re trying to mitigate the damage and tackle what they can tackle. They’re not solving for the future,” he said.

On the other side are companies with indirect exposure, such as multinationals with notable operations in Russia and exposure to Belarus. “These companies have employees whose mortgage rates have doubled and are suffering under sanctions,” he said. “They’re asking how much do we support them? Can we educate them to what is going on? Will our business be nationalized by Russia? The organizations with people in Poland are unsettled by all of this. They are opening their homes to refugees, and they’re asking what membership in NATO will really mean for their countries. They’re wondering if they’re next. It’s unsettling and distracting to them.”

To his point about the potential for the nationalization of businesses, the New York Times reported this morning that Russia is considering this strategic move.

I asked him if companies were beginning to re-think their Eastern European strategies, similar to how companies began to rethink their China relationships since the implementation of tariffs in 2016. Not yet, Simonson said. “Recall that there was a reason that people went to Ukraine, which is that they couldn’t find the services they needed elsewhere,” he said, adding that there are some big brands that have invested heavily in the country and have some dependency – they tend to outsource projects and services that were more difficult to source initially, and they tend to be highly-skilled employees.”

The longer answer is that unless there is enough change in Russia to change a company’s view of their risk, a pivot down the road is likely.

What’s his advice to clients?

First, get clear on where your talent is located and what are your options for moving them. Focus on your critical initiatives and how you care for your talent to preserve capacity.

Second, it’s time to get smart and investigate alternative countries for talent or service providers that can help you make a shift faster if need be.

Third, carefully review your initiatives and ask what you can do to simplify, remove or eliminate them because getting things done is going to get harder.

And, finally, understand your funding and budgeting. “If you need support for employees or to move things for stability, what funds are available to make that happen,” he said.

“I’m a little surprised that things are still getting done,” Simonson said. “But it doesn’t feel like that will continue for long.”