From Russia with Love

By Drew Robb

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While India gets all the attention in offshore outsourcing, Russia has expanded steadily over the last few years and is rapidly becoming a major destination for American offshore software development business.

Analysts predict that the country will capture a 5 percent share of North American and Western European offshore development dollars by 2007.

“The Russian market size for exported IT approached almost $500 million in 2004 and is growing at a rate in excess of 25 percent per year,” said Stan Lepeak, an analyst at Gartner. “Russia represents a viable market for certain types of technically intensive services.”

Custom application development across the full range of application types is the dominant service performed in Russia’s IT service market. In addition, Russia has become a haven for custom R&D and design work, embedded systems development, specialized testing, software package integration and translation services.

These particular skills are highly available due to Russia’s unique strengths, which it lists as follows: an elite university system; a highly skilled and ample workforce; an array of specialized expertise capable of solving large-scale, complex technical problems; a cost of labor advantage compared with the U.S. and Western Europe; geographical proximity to Western Europe and the U.S.; and cultural proximity to the West.

These findings are supported by a recent study, IT Outsourcing Destination: Russia by RUSSOFT, Russia's trade association of software development and IT services companies. This document lists companies such as Boeing, Alcatel, Reuters, London Stock Exchange and Siemens as examples of more than 250 global companies actively utilizing Russian-based offshore software development.

Why are so many companies gravitating to Russia rather than continuing to focus their overseas investments in India? President of RUSSOFT Valentin Makarov sees this as a sign of a major shift in the overall direction being taken by of the offshore outsourcing market as a whole.

Initially it was largely IT grunt work being off-shored (popularized by the blind panic induced by the infamous Y2K bug) Many firms dumped the laborious code checking work onto Indian firms more than happy to take the load. This then led to basic software development tasks. Nowadays, however, more complex Oracle, .Net and Java programming is being off-shored.

“We are moving from the era of cheaper coding towards outsourcing of more complicated solutions related to core business,” said Makarov. “That’s why Russia’s acknowledged strong points such as high educational level and creativity are finding so many new opportunities.”

Development Centers

One of the ways this trend manifests is in terms of Fortune 500 companies opening centers in Russia. Motorola, Intel, Sun, IBM, Boeing, Dell and Nortel are just a few of the companies that have established large development centers in places such as Moscow and St. Petersburg.

Dell, for example, with the help of LUXOFT recently established two centers with more than 1500 staff—over 90% with bachelor degrees and 61% with advanced degrees in technology and science.

“By delegating some projects to the LUXOFT center we free up the time and energy of our IT departments while keeping the rate of IT deliverables at the current or even higher pace,” said J.R. Carter, a senior manager at Dell.

LUXOFT also tackles sophisticated programming and product development tasks for the likes of Boeing, Deutsche Bank and IBM. It operates across a wide range of platforms, from the latest Windows and Linux-based tools all the way to mainframe.

Another company with a large Russian center is Cadence Design Systems of San Jose, Calif., a supplier of electronic design and engineering services. Cadence utilized the services of Russian firm Mirantis, which has U.S. headquarters in Foster City, Calif., to set up its Russian business hub.

“Russia has become a center of electronic design excellence with many major global technology companies having facilities there,” said Ray Bingham, chairman of Cadence. “There are many exceptionally talented electronic designers and engineers in Russia.”

According to RUSSOFT, Russia is ranked number three in the number of scientists and engineers per capita worldwide. That translates into a talent pool of over 4.7 million students (600,000 in Moscow alone), 50% of which are majoring in science, math, and computer sciences.

These students regularly win international programming contests. In the world’s most prestigious competition, the Association of Computing Machinery (ACM) International Collegiate Programming Contest, for example, the country boasts four gold medals, one silver and one bronze out of the last six events.

“Russia is of great interest to American high-tech because of the superiority of its software engineers,” said Deborah Palmieri, president of the Russian American Chamber of Commerce. “They have exceptional theoretical ability, which when coupled with American know-how, provides a dynamic combination.”

As a result, the country has already acquired the trust of the financial services sector. At mentioned above, LUXOFT services Deutsche Bank, while Reksoft handles trading systems for European banks and Vested Development, which services large financial and investment customers.

When asked about the most prominent Russian IT companies, RUSSOFT’s Makarov named LUXOFT, StarSoft Development Labs, VDI, Reksoft, EPAM Systems and Auriga.