In Startup Nation, Old Israeli Firms Struggle to Find Tech Workers

The COVID pandemic has accelerated a process that was already underway, exacerbating Israel’s already chronic shortage of engineers and developers

Omri Zerachovitz
Omri Zerachovitz
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Strauss' home water dispensers assembly line, in 2005.
Strauss' home water dispensers assembly line, in 2005.Credit: Ofer Vaknin
Omri Zerachovitz
Omri Zerachovitz

Strauss Group’s home water dispensers are found in 700,000 homes in Israel and abroad. That makes the Israeli company, best known for its dairy and other food products, very much a denizen of the old economy of manufacturing. But the line between companies like Strauss and high-tech has been fading in recent years.

In the case of water dispensers, Strauss has developed an app to operate them. Another technology it has developed enables the device to learn a family’s consumption habits and adjust itself accordingly. So, if they usually have their first cup of coffee at 7 A.M., the machine will start to boil water a few minutes beforehand.

It’s not cutting-edge technology and not an app that will be used by the millions, but Strauss still needs tech professionals to develop it, and that’s a challenge: It needs to hire the same kind of people that high-tech companies are hiring and there is a chronic shortage of them.

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“Salaries for these kinds of workers are rising, but because we’re in the food industry, we can’t raise our prices at the same pace,” said Tsafrir Ezra, chief information officer at Strauss Water. But he is quick to add that it isn’t a lost cause: “There are a lot of people who started with us and then moved to high-tech, but others have gone the opposite direction.”

Strauss Water is just one example of an old-line Israeli business undergoing a process of digital transformation, which if anything has accelerated over the past year due to the coronavirus pandemic. Faced with lockdowns and other restrictions on face-to-face contact, businesses had to come up with remote alternatives to continue working, selling and supporting their products and services.

The pandemic – in Israel at least – seems to be over, but digitization is continuing because companies have learned that they can make money from collecting data to generate insights, streamline operations, reach new customers and more. Meanwhile, more activities are moving to cloud computing.

The result is that Israeli companies which are not normally associated with high-tech need more and more data scientists, quality assurance experts, cybersecurity professionals and the like. There aren’t nearly enough of them: According to the Israel Innovation Authority, there are about 13,000 unfilled jobs in the local high-tech industry, not counting non-tech employers such as Strauss.

And the situation is only getting worse. Israeli startups raised a record $5.4 billion in the first quarter of 2021, arming them with unprecedented amounts of money to hire and pay salaries. More competition for tech talent comes from the hundreds of multinational research and development centers based in Israel.

Playing field tilted

The supply-demand mismatch has pushed salaries higher and increased employee turnover, creating serious headaches for non-tech companies. But the COVID-19 year had the secondary effect of creating an uneven playing field, said Yossi Lubaton, chairman of the advertising agency Publicis Israel.

“[Tech] companies like Fiverr, eToro, Wix and Playtika had an amazing year, but for companies whose main market is Israel it was a hard year. They are struggling to retain and to hire employees because in certain job categories, pay has risen 50% in recent years,” Lubaton said.

Publicis Israel is a group that comprises Glickman Shamir Samsonov, Leo Burnett Tel Aviv and Zenith Media as well as Mint, a software house specializing in advertising-tech that has developed products for the convenience-store chain Yellow and the drugstore chain Super-Pharm.

“We are focused on hiring and training young workers, but we know they will stay with us for a limited time,” said Lubaton. “People almost never stay with us for four or five years, sometimes it’s not even worth training them. We have raised salaries, but our ability to do so is limited. I think a lot of companies will move off-shoring to countries where there’s a bigger supply of workers. I don’t see any other way of fixing the problem without increasing the supply in Israel.”

Another employer, who asked not to be named, told TheMarker that when he recently tried to hire software developers to create a new application, there were candidates who asked for a monthly salary of 40,000 shekels ($12,200), double what he was offering. In the end, he had no choice but to increase the pay and was able to hire two employees. The hiring challenges aren’t only over money, he said. He also has to convince candidates that the work itself will be challenging and interesting.

The Government Information and Communications Technology Authority, which oversees governmental digitization projects and employs some 200 people in core professions such as development managers, network experts, cybersecurity managers and information-system managers, faces even more daunting obstacles because pay for civil servants is capped by law.

“Pay is below the market average and the gap has been growing. If once what we paid was in the 30th percentile, today we pay in the 10th and maybe even less. The gaps can grow to more than 10,000 shekels a month,” said Moriya Zisovitch, the authority’s planning and strategy division manager.

To fill the gap, the authority has contracted about 4,000 workers through the Government Procurement Administration in a system that is similar to outsourcing. They work as programmers, analysts and system architects and get paid salaries more close to the market average.

Right now, the government has launched its Nimbus Center for Cloud Services, for which Zisovitch has high hopes it will be able to attract quality staff.

“We’re telling people that they can have an influence on the future of society, on services provided for the citizen and his daily life,” she said, but added: “But with all due respect to the impact that comes with the jobs, the pay gaps in the core positions are huge. We’re working with the Civil Service Commission, the Government Procurement Administration and the wages commissioner to bridge them.”

Meantime, however, job openings get few applicants and many drop out during the hiring process, said Zisovitch. Another problem is that the authority’s offices are in Jerusalem, not in the tech center of Tel Aviv.

Another way non-tech businesses and the government get around the labor shortages is by hiring outside contractors, for example, to manage their cybersecurity functions.

These contractors include companies like Ness Technologies, One Software Technologies and Matrix. But since they are deemed service providers, the Central Bureau of Statistics and private sector researchers such as Startup Nation Central have never surveyed them properly. As a result, it is difficult to know exactly how serious the tech-worker shortage is in old-line companies. The Manufacturers Association trade group estimates it is about 2,000.

Bank Hapoalim is one example of a non-tech company that has increased its tech hiring by about 300 to 1,500, even if it doesn’t appear in the figures.

Retraining in-house

“We’re competing heavily in the financial technology segment, not necessarily against Bank Leumi or Israel Discount Bank but against Google, Apple and Amazon,” said Revital Bergstein, the head of people and culture strategy at Hapoalim’s IT Division. “One way we manage this is to retrain people we have in other jobs. There’s a certain value of training employees who already know the product.”

Ziv Mandel, who is in charge of development services and offshore operations at Matrix, said he has a lot of customers who have outsourced projects because they can’t hire staff to do them in-house. The labor shortfall is all over – not just in the hottest areas of high-tech.

“Because Israel is very high-tech, the situation is worse. But in Hungary, for example, there is no competition from the high-tech industry and graduates go to work for banks. Here in Israel, the banks need ‘alumni’ from 8200 [the Israel Defense Forces elite intelligence unit], but they face impossible competition from startups and other tech companies,” he said.

Although the high-tech sector’s labor woes get the most attention since it is Israel’s growth industry. “But it’s clear that a shortage also exists in old-line industries and for the economy that’s no less acute a problem: From the perspective of an ordinary citizen who gets services from companies and organizations in Israel, it’s important that the level of computerization and digital transformation improves,” said Mandel.

One reason the Innovation Authority hasn’t devoted more resources to the problem is that by law its purview is limited to research and development. True that developing news app and other tools to improve productivity can be classified as R&D, but the authority prefers to keep to a narrow definition.

However, as part of a new government’s drive to retrain workers who lost their jobs due to the COVID-19 pandemic, the authority has expanded its scope on the assumption that those getting appropriate training may also work in high-tech later.

“We’re expecting much more demand for tech workers than we’ve known until now, both in high-tech itself and in other business sectors. If not now, certainly in a year we’ll be experiencing a shortfall,” said Anya Eldan, the Innovation Authority vice president who’s responsible for the program. “That’s because the digital transformation has gathered momentum over the past year in industry, logistics, banking, insurance and, of course, retail.”

Eldan noted that the authority was supporting retraining for jobs not directly in R&D but supporting it, for example, data scientists, network experts and digital advertising managers. “These are professions needed everywhere,” she said.

This could be a way for old-line companies to source tech workers without having to compete head to head with tech companies. The latter generally prefer not to hire people without any professional experience, such as graduates from boot camp programs that train people for jobs in a few months.

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