Russia's Value-Driven Outsourcing Strategy Captures Imagination

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Global Outsourcing – by Nilotpal Chakravarti

Russia is gaining recognition with its value-driven outsourcing strategy. Big companies like Dell, Boeing, Microsoft, Deutsche Bank, and IBM are all leveraging Russian expertise and have outsourced some of their operations to Russia.

Recently, when former President Mikhail Gorbachev delivered a sales pitch for Russian software development at Massachusetts, he signaled to the world that Russian society is ready to make a breakthrough, and take its rightful place in the new economic equations, by value-driven outsourcing.

And rightful place it is taking. Big companies like Dell, Boeing, Microsoft, Deutsche Bank, and IBM, are all leveraging Russian expertise and have outsourced some of their operations like software development or maintenance and support. Russia as an outsourcing destination has even been attracting attention of some Korean companies.

Few companies in the world have created bigger ripples in global market in recent years than Samsung Electronics Co. The South Korean company has marched ahead of its Japanese and US competitors to take a big share of the international electronics and mobile phone markets. And one important element of Samsung's astounding success is the Samsung Research Center in Moscow. According to Cha Dae Sung, who is in charge of global technological cooperation, "Russia is our primary destination for technology outsourcing."

And Samsung is not alone. LG Electronics, Daewoo Electronics, and several other smaller companies rely heavily on Russian engineers, who work either from Korean sub-offices in Moscow or in the office towers of Seoul.

Russians believe that they can provide top quality, cut-price programming, but with Russian efficiency and a deep bench of highly educated programmers - some of them rocket scientists and nuclear physicists from the Cold War.

Now, as a strategy, the Russian companies are hoping to tap the growing US appetite for getting work done offshore. Importantly, there is no shortage of Russian programmers. According to a study by the Russian IT Services Professional Association, Russoft, the country has 250,000 software engineers and has more scientists per capita than UK, Germany, India, and France. That's one reason why US companies such as Motorola, Siemens, Sun Microsystems, and Intel, have R&D centers in Russia.

According to Arkadiya Dobkin, a Russian immigrant, who founded EPAM in 1993, the US companies were the target customers from day one. His company now has 1,200 employees, including 50 in the US, with offices in Moscow, Minsk, Belarus, and Budapest, Hungary.

Analysts say that EPAM and Luxoft, two of Russia's top offshoring companies, head a growing industry that boasts about 250 firms. Sales of IT and services for export from Russia have doubled annually in recent years, to about $450 million in 2004, tiny when compared with India's nearly $20 billion industry, but Russia is increasingly attractive to the US companies for a variety of reasons.

Russia's expertise in specific areas such as aerospace, and the desire of some outsourcing companies to reduce the risk of relying on one country is definitely proving to be a boon for the industry. The high creative potential of Russian specialists, due to their established system of education in the fields of mathematics and basic sciences, as well as their solid work experience with complex projects and diverse technologies are a distinct advantage.

Also, Russia's low wages are competitive. A typical programmer with experience earns between $8,000-$14,000, depending on whether the location is high-priced Moscow or the cheaper provinces. That's a little more than the $7,000 to $11,000 an Indian might make, but it is well below the $55,000 or more paid to an American in a similar job.

However, what is noteworthy is that Russia is spending a larger percentage of its GDP on R&D than India. Moreover, IT and Communications Minister, Leonid Reiman has said that Russia would invest some $650 million in the IT sector over the next five years. This is quite an impressive amount and many would find it more than a welcoming message from the government towards the IT sector.

Remarking about the Russian strategy, which has gained wide acceptance in the West, AMR research analyst Lance Travis made an interesting observation. According to Travis, "Russian firms tend to be more pessimistic in their approach to project management." While, Indians always report the best possible scenario and the Russian firms always the worst possible scenario, many believe the Russian approach is more appropriate for high-risk projects.

However, it must be said here that it is unlikely any of the Russian companies will suddenly leapfrog the competition and begin to approach the size and scope of the Indian outsourcing firms. But the companies have some specific strength, and they do offer an alternative to India for relatively small custom application development and maintenance support on projects in Western Europe, and as an alternative to India to minimize geopolitical risk and cultural differences.