Israeli high-tech companies have been employing more and more people overseas, where salaries are lower and employees are more pliable, and that has come at a cost of 20,000 local jobs, a survey by the human resources company Ethosia has found.
The survey, based on responses from 138 Israeli companies, showed a steep rise in the employment of workers at facilities operated overseas by Israeli firms. The number of workers employed in Eastern Europe and India alone reported by the companies surveyed jumped to 2,240 in February, an increase of 25% over the previous survey, conducted in January 2017. That compared with just a 6% increase in domestic payroll during the period.
The companies surveyed include some of Israel’s biggest and best-known, like 888, Wix, MyHeritage and Gett as well as early-stage startups. All told, the 20,000 jobs created overseas paid combined salaries of $920 million, according to Ethosia.
One reason for growing overseas employment is that pay is considerably lower in the countries that are the most popular places to outsource jobs and that has become an increasingly important factor as the shekel strengthens against the dollar.
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“The source of financing for Israeli startups is in dollars, their revenues are in dollar and they report to their investors in dollars,” said Jason Schwartz, chief financial officer for SimilarWeb, which makes digital-marketing tools. “So long as the dollar in a range of 3.4 to 3.55 shekels, it raises the costs of employing workers in Israel and makes it equal to Silicon Valley. With costs like that it’s hard to justify to our investors hiring Israelis.”
Another reason that Ethosia points to for the growing use of overseas staff is that Israeli developers need to be pamped more than in low-cost countries. The firm found that 12% of the companies surveyed were “fed up” with their Israeli developers.
“In Ukraine you don’t have to worry about Cibus or 10bis [two Israeli office catering services], or about a company car or a MacBook. The engineers don’t complain that their ‘developer happiness’ is declining,” said Eyal Solomon, Ethosia’s CEO. “Some startups report they have trouble coping with all the demands Israeli developers make of them.”
The top countries for Israeli tech companies employing people overseas were Ukraine, which was used by 28% of the companies surveyed. Next in line were Poland (19%), Bulgaria and Belorussia (14% each), India (12%), Romania (7%) and Macedonia (2%). The rest were spread between countries like Kazakhstan, the Czech Republic and Slovakia.
The preferred choice of Israeli companies is not to hire directly overseas but to employ people through a subcontractor or on a freelance basis. Ethosia estimated that was the option used in 70% of the overseas hires, or 14,000 people.
A few companies, most notably the website-tool maker Wix, employ directly. It has two research and development centers in Lithuania and Ukraine. AppsFlyer recently bought a Ukrainian company and has taken in the staff as hires. In one case, Intel Israel, a foreign subsidiary of the U.S. semiconductor giant, has an R&D center of its own abroad, in Poland.
However, the difference between subcontractor and employing directly are not huge, said Yuval Tal, the CEO and founder of Payoneer, an online money-transfer company. He prefer direct employment where possible but said that it was not always an option.
“In many cases the use of an outside company in these places is technical, in order to comply with the country’s employment laws,” Tal said. “The workers come to Payoneer offices, their CVs say they work at Payoneer and in workplace events they celebrate with Payoneer. They don’t go off to another employer in the afternoon.”
Eran Cohen, president of the outsourcing firm Ciklum Israel, said the foreign jobs didn’t come at a cost to Israelis because Israel suffers a labor shortage. “The army and the universities can’t supply all the market demand. The number of software people in the market hasn’t changed in the last 30 years even as the industry grew by a factor of 10, so what can we do?”
Even low-cost countries aren’t a lasting solution, he added. “In four or five years it will be hard to find people in Ukraine, Bulgaria, Romania, Poland and Belarus, too,” Coehns aid. “The talent pool there is exhausted and we’re looking for new places.”