IT opportunities & challenges in Russia

Vladimir Radyuhin

Russia was a late starter on the IT market, but is fast catching up. Last year, it emerged as the third largest outsourcing destinations after India and China

When people in India or elsewhere in the world use a scanner or a digital camera to convert a pile of documents into computer-readable and editable texts they more likely than not use software developed by Russian programmers. FineReader, an Optical Character Recognition technology produced by Russia’s ABBYY company is today shipped with scanning devices made by leading manufacturers such as Xerox, Panasonic and Fujitsu.

Russia was a late starter on the information technology market, but it is fast catching up and may soon pose a serious challenge to global IT leaders, including India. After visiting India’s “Silicon Valley” in Bangalore in December 2004, President Vladimir Putin earmarked $2 billion for IT development and pushed for vast tax breaks to help businessmen in his country create “Russian Bangalores.” Last year the Russian government launched the construction of seven major technology parks in the country: IT firms will be prominently represented there.

Driven by the oil boom

The Russian oil boom is driving the domestic IT sector to grow nearly three times faster than the rest of the economy, at about 25 per cent annually, which is the highest growth rate in the world. Meanwhile, software exports have been growing at the rate of 40 to 50 per cent annually over the last few years. The Russian IT sector expanded in value terms from just over $0.5 billion in 1999 to $18 billion in 2007. Now it is set to grow to $40 billion by 2010.

Last year Russia emerged as the third largest outsourcing destination after India and China. Even though it is still a distant third, exports are growing at a breathtaking pace. They crossed the $1 billion mark in 2005, and are projected to grow to $13 billion by 2010.

What spurs this growth is the high quality of Russian technical specialists. Russia still boasts a world-class system of science education. Almost 50 per cent of Russian students major in technology, science or engineering — which is far more than in India, China, Japan or the U.S. Russian science graduates spend between five and six years at university before entering the workforce. This ensures a more thorough training. Russia has 20 times more scientists per capita than India, and up to 40 per cent more scientists per capita than Germany, France or the United Kingdom, according to Forrester Research. Russians consistently win top prizes at international programming competitions. There is not a single high-tech company in New York that does not have a Russian in a top executive position. In some departments at Microsoft, Russian is the main working language. The Google empire was founded by Russian-born Sergei Brin, who is today the second richest American under 40.

Today Western companies are setting up shop in Russia to tap Russian talent. Global giants such as Microsoft, IBM, Cisco, Dell, Boeing, Motorola, Siemens, and Hewlett Packard have opened software development centres in Russia. Intel and Sun have in Russia their largest programming units outside the U.S.

India’s presence

India is about the only country whose IT companies are conspicuous by their absence on the Russian market. I-Flex Solutions is the sole exception: two years ago it set up a branch in Russia. Some other companies, like Infosys, have established a client base in Russia, but do not have local offices.

Indian IT companies have a rather condescending view of the Russian software industry as being no match to India in terms of volumes and costs. To be sure, India’s vast English-speaking workforce dwarfs that of Russia.

But Russian providers have important advantages over their Indian competitors: they offer high-end software and embedded software product development, which acts as a differentiator from low-price offerings from Indian companies.

“Solid training and high technical skills of our personnel enables Russian companies to develop sophisticated, comprehensive projects, which is a trademark of the Russian IT industry,” says Natalia Khvatova, marketing director Russia & CIS, Luxoft.

Luxoft is Russia’s largest provider of high-end IT outsourcing services and product development to global companies such as Boeing, Deutsche Bank, Dell, IBM, Microsoft, UBS, T-Mobile, Alcatel, and Areva.

Many Russian software companies have overtaken Indian providers as far as costs and workforce turnover are concerned and are fast closing the gap in English language skills.

“India’s popularity as an outsourcing destination has led to a rise in labour costs and attrition rates,” Ms. Khvatova told The Hindu. “Today we can offer offshore products at a lower price than Indian companies. The employee turnover in Luxoft is 6 per cent, compared to 30 per cent in India and 23 per cent in China. This gives us an advantage in outsourcing.”

President of Intel Russia Steve Chase agrees that Russians are the best in tackling complex problems. “The policy we have at Intel is simple,” he said in an interview. “If we can, we commit difficult problems to engineers in the U.S. If the task is very labour-intensive, we assign it to Indian specialists. If the problem cannot be solved, we offer it to Russians.”

Western high-tech and software companies are increasingly picking Russian IT providers for strategic partnerships. Intel’s Mr. Chase says his Russian workers have qualities that are hard to find elsewhere.

Different approach

“A typical software programmer in Russia is not a programmer by education,” he said. “He is more of a scientist — he is a chemist, or a physicist, or a mathematician. They approach problems differently, and we love that, because they are creative.”

Deutsche Bank’s Daniel Marovitz explains the difference between Indian and Russian programmers:

“In India, people want to say ‘yes’ to please and to follow instructions. That can create problems sometimes. In Russia, people aren’t afraid to tell you that you have a silly idea that makes no sense whatsoever. But that’s what you need.”

The former Russian Economic Development Minister, German Gref, is convinced that Russia will overtake India in IT in less than 10 years. “Russian programmers will create absolutely new products that will have no analogues anywhere,” he said.

A study by the global research firm IDC last year revealed that many U.S. and West European corporations even today prefer Russian IT providers to Indian ones. Their choice is influenced by such advantages of Russian firms as the ability to implement complex projects, creativity and problem-solving oriented thinking.

These translate into higher “uptime,” with projects moving faster, and the cost per line of working software declining.

While drawing inspiration from the Indian IT boom, Russian IT firms are not trying to replicate the Indian experience.

“It is useless to compete in market volumes, since Russia is far behind India and China in population terms,” says Data Art director-general Mikhail Zavileisky. “So, Russia should try to boost the income from clients by way of producing complex and expensive products.”

Experts say there is plenty of scope, not only for competition but also for cooperation between Indian and Russian IT companies.

Valentin Makarov, president of Russoft, the Russian equivalent of Nasscom, thinks cooperation between Indian and Russian IT companies could generate a strong synergy effect.

“Russian and Indian companies could be mutually complementary. Russians are strong in high-end solutions, while Indian firms at good at supplying mid-range software that does not require specialised engineering skills,” Mr. Makarov told The Hindu.

“Russia geographically, culturally and historically is close to Europe, and Indian IT companies may find it easier to penetrate the European market in a tie-up with Russian partners. A further reason for cooperation is that both Russia and India are growing IT markets, and Russian products gradually find their way to the Indian market, while Indian banking products are marketed in Russia.”

The current year may offer more opportunities for cooperation. According to an annual forecast for the IT outsourcing industry compiled by Luxoft, a tendency seen in 2007 for vendors to set up shop in other countries in order to tap into talent resources in an increasingly tightened market will gather momentum in 2008.

It is high time Indian IT companies took a closer look at the Russian market.

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