Modern companies need to accelerate their pace of development to keep up with the industry leaders and stay on top of their game. Yet, many enterprises struggle to find and acquire top talent with diverse technical expertise. For this reason, nearshoring to CEE and Northern Europe has become a stronger trend. Cultural alignment, business and market understanding, agility, and diverse technological expertise foster interest in these outsourcing destinations.
In this article, let's review the three promising IT outsourcing destinations for team extension: Latvia, Estonia, and Lithuania. You'll find a general overview of the IT outsourcing industry in the Baltic states, followed by a detailed outlook of each country.
IT outsourcing in Baltic states
Baltic states are considered one of Europe's most economically stable IT outsourcing destinations. Estonia, Latvia, and Lithuania boast high levels of digitalization and effective legislation that ensures data security and smooth business operations. The companies in the region are known for high-quality nearshore and offshore development services.
The region is also recognized thanks to its numerous product companies, startups, and vendors specializing in outsourcing global business services.
However, along with the benefits Baltic countries can offer, there are also some significant risks and challenges. Let's learn more about Latvia, Estonia, and Lithuania's IT market development and business environment to help you find a reliable IT outsourcing partner.
Read more: Top IT outsourcing destinations of Eastern Europe: Market Report
IT outsourcing in Latvia
Out of 1.9M people populating the country, more than 35,000 IT specialists work in software development companies in the Latvian ICT sector. Also, around 700 computer science students graduate from Latvian universities annually, thus stimulating industry growth. IT outsourcing in Latvia contributes a lot to the country's economy—the sector has become the third-largest exporter in the country, following the timber and food products sectors.
The evolution of IT outsourcing in Latvia has 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, and ABB have already established their regional centers in Latvia. In addition, Latvian software companies with less talent also capitalize on their expertise, offering custom outsourcing services.
Software development companies in Latvia
Latvia has the lowest number of IT outsourcing or software development providers. Clutch lists slightly more than 40 Latvian software companies, with the majority being small firms with less than 50 employees. As for the domain expertise of these companies, the leaders are the business services, ecommerce, finance, and healthcare industries.
With fewer resources and a smaller tech talent pool, IT outsourcing in Latvia is still one of the top destinations in Northern Europe. But what makes Latvian software companies and global enterprises so attractive?
Business environment in Latvia
Latvia's business environment growth and economic stability are driven by increasing shares of fast broadband subscriptions, the implementation of several governmental measures, and improved delivery of public services. According to the Global Services Location Index in 2023, the country is ranked 20th in terms of financial attractiveness, skills and availability, and state of the business environment. Also, the country has the 41st position in the 2022 Global Innovation Index according to indicators like infrastructure development, technological readiness, business sophistication, and innovation [10]. The Latvian government is planning to reduce administrative burdens, expand e-government services, and work on attracting investment to Latvian software companies to create new jobs and increase business competitiveness.
Risks and challenges
Let's explore some of the reasons why IT outsourcing in Latvia may present challenges for businesses. Even though more and more Latvians are going online and using e-government services, around 30% of the population still has a low level of digital skills adoption, according to Digital Skills & Jobs Platform. In addition, R&D investments in the Latvian business sector are lower than the EU average and well behind other European benchmarks.
Keep reading: How to partner with the best developers in Eastern Europe?
IT outsourcing in Estonia
Estonia is the smallest of all three countries in terms of population—it is home to 1.3M people only. According to the State of European Tech, the ICT sector in Estonia employs more than 34,400 ICT specialists. In addition, a little over 900 people graduate with degrees in computer science every year [1]. As stated by the Estonian Investment Agency, as of 2024, the ICT industry comprises 5% of the country's GDP. 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%).
The Estonian IT industry is well-developed due to numerous startups and a favorable business climate for establishing Estonia outsourcing hubs. The country is known as the birthplace of Skype, TransferWise, Pipedrive, Cloutex, Click & Grow, Grabcad, Erply, Fortumo, and Lingvist, among the few. Moreover, the country is home to many foreign companies that opened their R&D centers there. They include global companies like Microsoft, SAP, Acronis, and Parallels.
Software development 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 the Estonian Investment Agency, Estonia is ranked first in the EU in the Global Cybersecurity Index, meaning local enterprises have strong, formally defined ICT security policies.
Clutch lists around 160 software development companies in Estonia, most of which employ less than 50 specialists. Most Estonian outsourcing companies specialize in finance, information technology, healthcare, business services, ecommerce, education, and retail industries. If you have decided on IT outsourcing in Estonia, there are plenty of vendors to choose from.
Business environment
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 cards, and a digital signature legally equal to a handwritten signature. The country ranked 22nd in the 2022 World Competitiveness Rating by IMD [11]. 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 aims to increase Estonian companies' productivity by 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.
Another reason to go for IT outsourcing in Estonia is that the country is one of the most politically stable states in the CEE region, being a member of the Eurozone, WTO, NATO, and OECD. A few years prior, the country also launched the Estonian Entrepreneurship Growth Strategy, which is the most important strategy related to the development of the country's economy for the next five 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. These factors favor the proper growth of software development companies in Estonia. 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 Estonian IT industry.
Related: Going far and near to find software developers? Explore Eastern Europe
IT outsourcing in Lithuania
With its robust ICT sector and a growing pool of skilled professionals, IT outsourcing in Lithuania is an attractive choice for many businesses. Housing 2.8M people, Lithuania is the most populated country out of three locations, therefore, it is the leader according to the number of ICT professionals. Around 55,000 specialists are employed in the ICT industry in Lithuania [1], with 1,100 future experts graduating every year. Such global companies as Google, AIG, Nasdaq, Uber, IBM, Wix, HP, Virtustream, and Unity have already opened their R&D and IT development centers in this 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.
Dozens of regular tech events, such as the Innovations conference, Global Game Jam in Lithuania, Software Development Conference, Silicon Valley Comes to Baltics event, and International Open Data Hackathon, take place in Lithuania. Some of them attracted thousands of participants and over 100 international speakers.
Software development companies in Lithuania
IT outsourcing in Lithuania is an excellent market for getting the most out of your software development. Apart from a decent tech talent pool, the country has some reputable IT outsourcing vendors. According to Clutch, there are over 120 outsourcing and software development companies in Lithuania.
Software companies in the country have versatile domain expertise. Among the most popular industries that choose IT outsourcing in Lithuania are information technology, finance, healthcare, business services, ecommerce, as well as supply chain and logistics.
Business environment
The Lithuanian government plans to develop a high-speed broadband communication infrastructure in line with its Programme on the Information Society Development. Lithuania has also launched a program to increase the availability of e-services and enhance their quality by adopting digital technologies. No wonder the country occupies 39th place according to the Global Innovation Index [11]. Moreover, Lithuanian IT education witnessed a significant increase in government funding for IT studies, stimulating rapid growth among students choosing IT as their first field of study and proceeding with employment in software companies in Lithuania.
Risks and challenges
It's still worth mentioning that dozens of skilled professionals leave the country to be employed abroad. The skills shortage in Lithuanian outsourcing software companies continues to be high and becomes a primary bottleneck for Lithuania's growth. Although software development companies in Lithuania have been steadily embracing the opportunities offered by various digital technologies, their progress has been slower than in previous years.
The Digital Agenda Strategy recognizes 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 majors and professions to ensure the acquisition of digital skills when learning.
Wrap-up
Overall, 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 technology adoption in Lithuania, Estonia, and Latvia are still moderate. The shortage of skilled IT specialists becomes a significant bottleneck for this region. Thus, finding and scaling a team is a real challenge. Instead, many companies consider CEE IT outsourcing destinations to establish long-term cooperation. Such destinations can become a win-win option regarding the availability of IT professionals and technological expertise.
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Sources cited in this article
- Emerging Europe by Future of IT
- IT Services and Equipment Estonia by Export.gov
- IT sector e-Estonia
- The 2023 Kearney Global Services Location Index
- Global software marketplace insights: Eastern Europe by SourceSeek
- World Bank’s Ease of Doing Business Index
- Trading Economics
- Business services sector in Latvia by ABSL
- EMEA’s Business Services Landscape by ABSL
- Global Innovation Index 2022
- World Competitiveness Ranking by IMD
