The New Russian Revolution

Software development firms see a niche in complex overseas projects

In the city of Novosibirsk in Siberias Ural Mountains, rent hovers at just $30 per month. Cell phone service is so cheap that some Muscovites get their plans there, then pay roaming charges to use their service at home.

So it should be no surprise that software development company Plesk, which pays $400 to $1,500 per month to Russian code writers, is a popular employer making a big impact on this city. After all, those are the types of salaries that buy Land Rovers.

The largest employer in Novosibirsk, the Russian-owned but Northern Virginia-based Plesk is a poster child of sorts for the latest thrust in the globalization of the information technology (IT) industry: Russians attacking offshore software development full force.

India is still by far the reigning offshore software development superpower, having sold $6 billion worth of such services in 2000. But a growing number of nations with good technical schools and a propensity toward entrepreneurialism have laid their eyes on that cash. Russia, with some 100 companies like Plesk, joins countries such as Australia, China, the Czech Republic, Ireland, Israel and the Philippines in this expanding field.

And the field is expected to continue growing, thanks to a combination of the economic slowdown that is pushing more U.S. companies to look overseas for cheaper software development and the continuing domestic shortage of skilled code writers. Offshore contractors often are paid just one-third of what a worker in America or another industrially developed country would make.

Fueling the growth is the expectation that ultimately a set of companies will emerge in developed countries that will outsource software production to a handful of locations abroad, in the same fashion that U.S. retailers contract out the production of clothes to locations in Asia and Latin America.

Think Kmart for Web site development, software applications construction, database integration, tech support and eventually systems integration. After all, if modems can be made in Taiwan and clothes in China, why not software in Siberia?

Software development is making serious inroads into the Russian-American business scene. Representatives from the office of Mikhail Gorbachev have asked Plesk CEO Dmitri Simonenko to join a group of Russian executives who will brief the ex-president on their business. On this side of the Atlantic, Plesk was recently offered a seat on the IT board of a prestigious lobbying group, the U.S.-Russia Business Council, currently dominated by Compaq Computer and IBM.

Additionally, Russian National Economy and Trade Minister German Gref recently announced his team is putting together a development program for the industry.

But as software development becomes a hot topic on the Kremlin circuit, some of the issues that other nations face in trying to penetrate the U.S. market begin to crop up. How do Russian outsourcers get a foot in the door? How do they develop a relationship of trust with Western partners? And, more important, how would internationally non-savvy U.S. companies use this eager international work force to their advantage?

Finding answers to these questions would help midsize corporations in the U.S. and abroad enjoy savings previously available only to giants like Intel and Motorola in the pre-Internet world. For nations like Russia, participation in an industry like this could help leverage resources other than oil and gas.

A rash of conferences on both sides of the Atlantic this spring sought to qualify these issues.

Impatient Russians

"Damn inconvenient" — thats how Evgeniy Peskin described his flight from Moscow to San Francisco, where a conference organized by the Department of Commerces Business Information Services for Newly Independent States for the first time positioned Russia as a competitor to India in the field of offshore software development. The trials of an 18-hour commute didnt deter the lanky Muscovite from spending just four hours in the U.S. — on his first visit to the Bay area.

"Im just way too busy to take out more time," he says, pouring himself another cup of coffee.

Peskin is vice president in charge of day-to-day operations at IBS Group, one of Moscows largest software development contractors, with a roster of Western customers ranging from Boeing to IBM. He is adamant about Russias potential in this new field, citing customer enthusiasm for IBS services. Indeed, insiders believe IBS made as much as $10 million on offshore software development in 2000, a number that Peskin declined to break out of his companys $120 million 2000 revenue.

The company hopes to boost its business by opening an office on Microsofts turf in Seattle. Still, Peskin did little to conceal his impatience with potential American customers who, in his opinion, are trailing their European counterparts in tapping the services of Russian firms like IBS. Trailing, he says, partially because of unfounded concerns that working with Russian firms is not as safe as with Indian shops or businesses in other countries with better overall business climates.

"The role of organized crime in Russian software business, problems with the tax environment and other issues have been embellished to fit the stereotype of Russia as a place where everybody is sitting in a pile of snow, drunk on vodka, watching bears roam the streets. Wed like to prove we live in a different era," Peskin says.

As an industry, Russian offshore software development is off to a modest start. In 2000, only 8,000 professional programmers were working in an organized fashion on cross-border projects. Overall revenue for the industry is roughly $60 million to $100 million, a fraction of Indias $6.3 billion, according to the American Chamber of Commerce in Russia. But insiders like Peskin say its time for Russia to make a name for itself in this industry.

"Russia has a chance to get into a niche of offshore software development that is different from the one that India occupies," Peskin says, echoing what most Russian IT industry participants and observers have been saying for the last year or so. Indian firms, they say, are good for simple tasks like encoding, but Russian companies are better positioned to bid for "complex" projects that require the creative use of computer skills.

Creative is the key word here. Entrepreneurs who have worked with Russian programmers — even Western executives at companies like Intel — say Russians tend to get bored quickly with menial tasks like simple encoding. Most of the contractors are well-suited for more challenging projects that often require a broader math background.

Greg Shenkman, founder and CEO of Exigen Group, which is rolling numerous Russian offshore software development companies into one mega-entity, says he often finds his employees straying into far more complex and challenging development problems than the task at hand. His challenge, he says, is to continually motivate his employees. "I am in awe of Russian intellectual capital," he says.

First Western Converts

Russian development is slowly gaining favor on this side of the Atlantic. Bruce Waldack, founder of Web hosting firm DigitalNation, which sold out to Verio for $100 million, is now head of a new venture, Thruport Technologies. He attributes part of his success to a Siberian connection. "We have been using Novosoft, a Russian firm in Novosibirsk, for software development both at DigitalNation and at my new firm, Thruport," Waldack says.

While he has never been to Russia, he describes his relationship with his contractors as very stable. Thats great praise coming from Waldack, who has been known to take extreme punitive measures against employees who arrive at work as little as one minute late.

Other entrepreneurs go as far as setting up firms focused entirely on soliciting business in the West and executing projects in the East. Emmy Gengler, founder and CEO of Fremont, Calif.,start-up Softjourn plans to use her stable of 70 programmers in Kiev, Ukraine, to complete projects for Silicon Valley and European customers.

And then there is the ethnic connection. Executives like Plesks Simonenko, who lives in Virginia but still calls Novosibirsk home; Exigens Shenkman; Niwot, Colo.-based Stephan Pachikov and his company Parascript; and Gene Shablygin and his Jet Info Systems in Dallas draw heavily on their Russian origins to hire teams of programmers and developers back home.

Russians who know the potential of their countrymen view offshore software development as an entry-level business that can evolve quickly into development of more complex and expensive products and services. Plesk develops server automation software in Siberia. Jet Info Systems puts in large financial enterprise systems, acting as a high-end systems integrator. Parascript develops complex consumer software applications.

But these companies are in a minority. The majority of Russian companies are just finding their footing in this new market.

A veteran of offshore software development, Andrew Sviridenko, president of the small Moscow-based Spirit, has been in this game for the past five years and is still very careful about projections. Plesk has yet to make a profit.

"At this point, we are fighting for a mind share with American companies," Sviridenko says.

Third-party observers, like Sarah Carey, a partner at Washington, D.C., law firm Squire Sanders, say that while Russian offshore firms penetration of the U.S. market is unstoppable, Russia — like other nations seeking to tap the American market — is a long way from becoming another India.

"Russian companies are just getting recognition in this space, and they are not a massive number yet," says Carey, who works with Russian firms that seek to establish themselves in the U.S.

Among the obstacles, she says, is a lack of Russian government policies encouraging this new industry, and a lack of contacts among members of the Russian emigrant diaspora, a major factor in developing new business.

Indeed, according to a recent White Paper prepared by the American Chamber of Commerce in Russia, the government doesnt even offer visa-free travel for offshore software development customers, a standard practice in other countries. Incentives like special tax treatment also seem to be a long way off.

Still, if Russia follows other nations down the road of leveraging its labor skills to attract contractual work from Asian, European and North American countries, I-managers in the U.S., Europe and Asia-Pacific are likely to get more choices and more savings when pursuing software developing projects. This has market leader India both worried and amused.

800-Pound Gorilla

The eyes of Indian executives who have made their fortunes in offshore software development moisten when they speak about Irish, Israeli, Philippine, Russian and other competitors.

They have a right to feel sentimental. Ten years ago, the Indian offshore software development industry was making just $100 million per year as well. But today, there is no nation as savvy and as synonymous with high-tech as India. The steps that India undertook to get there — 50 years of focusing university education on engineering and preserving English as the nations lingua franca and teaching it to kids from the age of 3 — have resulted in a mind-boggling penetration of the U.S. high-tech industry, with up to 60 percent of Silicon Valley start-ups employing Indians.

But with other nations catching on to these basics, India is rapidly evolving past its offshore software development, call center and research lab roots toward becoming a country where IT would be the main export item.

"Most of the people in India [today] are peddling bodies as so many dollars per kilogram for work done in the U.S.," says Suresh Rajpal, CEO of Indian software developer Trigyn Technologies and formerly country manager at Hewlett-Packard. "But this business is 5 [years] to 6 years old. Trigyn, on the other hand, has a global software product, for which I got funding of $10 million in this lousy market three months ago — an Indian software product with global valuations."

Rajpal believes his business is blazing the trail for other Indian companies as they make their mark on the global IT industry. He is about 10 years ahead of his time, as are other IT executives, like those in Russia dreaming the same dream.

"I feel the IT world is becoming tiny, like a tennis ball in the palm of my hand," says Plesks Simonenko. "And I feel awfully proud we are selling a Russian-made software product in America and worldwide."