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From Russia With Love

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InformationWeek – by Mary Hayes with Greg MacSweeney

Russian tech-services firms build up their arsenals to compete with offshore outsourcing businesses in India

On Oct. 4, 1957, the Soviet Union launched the Sputnik 1 satellite, a feat that startled the world and sent the U.S. government scrambling to match the accomplishment. By the time the United States successfully launched the Explorer 1 satellite, the fact had been established: The Soviets were not only capable of rivaling the United States in technical and engineering expertise but had proved they could exceed it.

A lot has changed since the days of Sputnik, but Russia's continuing commitment to science and technology has resulted in a plentiful supply of smart, highly educated software programmers and engineers. Now some IT-services companies are looking to capitalize on that talent, touting Russia as an alternative for outsourcing software development. What's more, wages in Russia are considerably lower than those in the United States, which can translate into notable savings for budget-constrained IT and software-development departments.

Those are among the reasons that ServiceWare Technologies Inc., a U.S. company that makes call-center software, began outsourcing all its code-development work to Russia two years ago. Software developers are at the forefront of the move to use Russian talent, according to the Aberdeen Group. "There's a lot of respect in Russia for software engineering (Eastern Europe on the whole is also catching up)," says Scott Schwartzman, chief operating officer and CFO at ServiceWare, who's working with IT-services company EPAM Systems LLC. "They have this untapped resource of tremendous talent" yet to be commercialized. By using 30 EPAM programmers, ServiceWare has cut developer costs by more than 60% in the past few years.

Still, Russia has a long way to go before it rivals India, the darling-du-jour of offshore outsourcing. Immature business and project-management skills, not enough promotion of English-language skills, and a telecommunications infrastructure in disrepair are among the challenges that have kept Russia from matching the astounding success of India, which exported nearly $10 billion in software and services last year.

Government support is tepid, too, says Ian Marriott, an analyst with Gartner. In the West, "the heads of enterprise will help lead the thinking of the government. In an ex-Communist country, it tends to be the government who leads the thinking and direction," he says. And although there are some very good entrepreneurs in Russia who are developing businesses to address the North American and European markets, "they're perhaps not getting the same government support we're seeing in India," Marriott says. The friction with the government stems from suspicions that private companies are more intent on lining their own pockets than enhancing the country's economic development.

Yet there are signs of progress. RusSoft, an association that represents software-development companies with a presence in Russia and Belarus, is calling attention to offshore outsourcing in the region and in recent months has worked more closely with the Russian government to advance those efforts. RusSoft's 50 member companies employ some 6,000 developers; the organization says its members' exports totaled about $150 million last year, roughly half of Russia's estimated software-development export industry. In late June, RusSoft cosponsored the Outsourcing Software Summit 2003 conference in St. Petersburg, which drew several hundred attendees and included presentations by both private-sector and government officials.

Many of RusSoft's members are tiny companies, but some have several hundred or more employees and brand-name clients and are headquartered or have offices in the United States. EPAM, for instance, employs nearly 500 programmers in Moscow and Minsk, Belarus, and has done work for Colgate-Palmolive, Compaq, and Ford, as well as for CareFirst, a division of BlueCross BlueShield. EPAM maintains its U.S. headquarters in Princeton, N.J.

CareFirst began working with EPAM in 2000, but it didn't know it was outsourcing maintenance work to Russia because it was working through a third party, says Maynard McAlpin, director of E-commerce at CareFirst. It's now working directly with EPAM on developing a sales-campaign management system; its low costs and high quality were selling points to drive the relationship to the next level, McAlpin says. "EPAM has worked through the business requirements with us, and the business users are very comfortable with us using EPAM," he says.

A San Francisco company with a big presence in Russia, Exigen Inc., is a preferred vendor for Prudential Financial. It signed a five-year contract with Exigen to provide application development and product support from Russia and Latvia for Prudential's financial-services functions. And LuxSoft, a division of Russia's IBS Group, has done work for Boeing, Citibank, Dell Computer, and IBM.

Even well-established services companies are looking to Russia. EDS says it will consider Russia, India, the Philippines, and elsewhere as part of its "best shore" strategy to help customers find offshore outsourcers that best meet their needs. EDS also is partnering with Exigen on IT services for a major bank in Australia.

Alex Poberezhsky, general manager of outsourcing services for Exigen, says customers can expect to slash 40% or more off their development budgets by outsourcing to Russia and neighboring regions. However, salaries can vary widely depending on the region, from $500 to $3,000 a month. Exigen has development centers in St. Petersburg; Moscow; Vilnius, Lithuania; and Riga, Latvia; as well as data and integration centers in the United States. It has about 900 programmers in Eastern Europe and plans to hire another 2,000 within the next year, most of them in Russia.

Exigen aims to make sure that up-and-coming programmers will have rigorous training. At the St. Petersburg outsourcing conference, Exigen and Micro Focus International Ltd., a U.S. developer of Cobol software, said they'd signed a joint commitment to earmark $1 million in resources to develop a standardized curriculum for training programmers in Cobol, Java, and application maintenance in Eastern Europe.

Russia could become a more attractive option as the fight for talent in India grows fiercer. IT-services firms there already are bidding up wages to maintain their competitive edge. Indian companies such as Infosys, Tata Consultancy Services, and Wipro have several thousand developers and many years of experience, but size isn't everything. ServiceWare's Schwartzman says he likes the fact that EPAM doesn't have "9,000 people in Bangalore with a nine-hole golf course," poking fun at some corporate campuses of Indian IT-services companies. In India, there are a "lot of firms vying for development talent. Loyalty isn't necessarily encouraged. Prices are starting to escalate."

Russia also gives an alternative to companies that "don't want to put their eggs in one basket," says EPAM senior VP Bob Gargano. And if tensions over nuclear arms heat up again between India and Pakistan, analysts predict a boon to alternative offshore regions. It appeals to companies with big operations in Western Europe, too, as cheaper talent is just close by. There's a lot of potential for Russia to soon emerge as a key offshore-outsourcing center -if not as a top-tier player, than as a solid second-tier provider. Further down the road, years of experience and support could thrust Russia into the limelight. Just look at how much has changed since Sputnik.