The Russians Are Coming

Russia is no India, but the future does hold opportunities, along with some obstacles, for Russian software outsourcers.

Can Russia do what India has done? The answer is no, but …

Russias largest software outsourcing providers are tiny when compared with their Indian counterparts. None has more than $60 million in annual revenue, while the biggest Indian players boast more than $2 billion annually.

At Russoft Associations Russian Outsourcing & Software Summit here on June 1, Forrester Research analyst Pascal Matzke estimated that total sales of Russian software houses in 2005 were $1 billion.

In contrast, Forrester pegs the size of the Indian software industry at $24 billion and that of China at $2 billion. Russoft is a trade association for software makers based in Russia, Ukraine and Belarus.

Indias vast English-speaking work force also dwarfs that of Russia. But Russian providers bring valuable qualities to the table: high-level thinking, strong English skills among executives and key staff, and a desire to break new ground on leading-edge projects.

Russian programmers regularly are top finishers in the International Collegiate Programming Contest sponsored by the Association for Computing Machinery.

Starting with a solid base of top-shelf customers and solid technical expertise, the Russian software outsourcing industry faces two key challenges: to increase in size quickly to compete with the Indian companies and to keep its costs down, even as Russia enjoys an oil-fueled economic boom that is driving up the cost of living, particularly in and around the big cities of Moscow and St. Petersburg.

One customer of outsourcing company Luxoft said he has noticed the financial pinch. "Moscow is the worlds oil-boom city. Moscow has become a very expensive city, so Luxofts rates have increased," said Daniel Marovitz, chief technology officer for global banking at Deutsche Banks investment banking unit, in London.

In remarks at the Russoft conference, Forresters Matzke pointed to some other obstacles: restrictions on travel, weak business education, corruption among officials, lack of consideration for intellectual property and weak marketing by the software makers themselves.

Size Matters

As the worlds largest companies seek outsourcing partners for their projects, Russian players, because they are too small, simply cant bid on many of them.

Matzke said the multisourcing strategies of many large outsourcing customers are creating more contracts of smaller value and opening doors for smaller vendors, such as the Russian companies.

/zimages/1/28571.gifRussian software makers search for growth. Click here to read more.

As vendors become larger, he said that a few ought to emerge as "national champions" and other smaller companies could follow. The Indian market has already followed this pattern, he said.

In Russia, the race for national champion is a two-horse contest between Luxoft and Epam. Both are turning to acquisitions to stoke their growth.

Moscow-based Luxoft, with 1,600 employees and $45 million in annual sales, in April acquired IT Consulting International, a software maker with headquarters in New York and software development operations in Russia. ITCI focuses on financial services work, while Luxoft counts among its clients IBM, Boeing, Dell and Deutsche Bank.

Epam, meanwhile, with $40 million in annual sales and 1,400 employees, has headquarters in Lawrenceville, N.J., although its development work is done in Russia and other former Eastern Bloc countries.

Epam acquired Fathom, a Budapest, Hungary, software outsourcer two years ago. Karl Robb, executive vice president of global operations for Epam, said in an interview at the companys Moscow offices that Epam is looking seriously at new acquisitions.

Government Help?

As the indian players soared to prominence thanks to a vast English-speaking work force and favorable government policies, Russian software companies have struggled in obscurity, seemingly a low priority for their own government, which looked to oil, coal and steel as engines of national growth.

"In Russia, all decisions come from the top. We have not seen any initiative from the top since perestroika," said Joseph Feiman, an analyst at Gartner, in Stamford, Conn. That could be changing. The tax subcommittee of the Russian parliament, the Duma, recently approved a tax code that would favor software outsourcing providers. In addition, the government is helping to build several major technology parks, including one in Dubna, about 70 miles outside Moscow.

Another challenge the Russian companies face is that big U.S. companies are moving into Russia and competing for technical talent. Intel has more than 1,200 employees in Russia, including 700 in its software solutions group.

Looking ahead, Gartners Feiman said Russia will probably miss the move to BPO (business process outsourcing), where a large English-speaking staff is required to handle such corporate functions as human resources and accounts payable.

Still, in the new Russia, opportunity is there for the taking. But with costs rising and the Indian companies on the march, for Russian software outsourcers, the window of opportunity wont remain open forever.

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