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Eastern Europe's Software Solution

BusinessWeek – by Jack Ewing

The dissolution of the Soviet bloc left behind a phalanx of expert software engineers, and EPAM is farming them out to top U.S. clients

Belarus, the former Soviet state ruled by strongman Alexander Lukashenko, doesn't usually top lists of favorite places to do business. Flat, marshy, and landlocked, the nation of 10.3 million between Poland and Russia has had trouble attracting foreign investment, the CIA World Factbook says, in part because of the government's habit of arresting business people it deems "disruptive."

Yet for Lawrenceville (N.J.)-based EPAM Systems, Belarus has been the key to growth of 30% or more a year. The company, founded by Belarus native Arkadiy Dobkin, has tapped a ready supply of well-trained software engineers in that country, as well as Russia, Ukraine, and other places in the region, to become one of the top providers of outsourced software services operating from Central and Eastern Europe.

Blue-chip clients

EPAM's 2,400 employees in cities such as the Belarussian capital of Minsk or the Russian city of St. Petersburg supply tailor-made software for corporate customers including Colgate-Palmolive (CL), Samsung, and the London Stock Exchange. The company also has been involved in software development projects for software makers including Microsoft (MSFT) and Germany's SAP (SAP).

Dobkin, who worked for Colgate-Palmolive and SAP in the U.S. before founding EPAM in 1993, acknowledges that there is some risk doing business in Belarus or Russia, where the company also has operations. According to U.S. authorities, there is a risk of arbitrary interference by government officials in the region, and analysts say that businesses are concerned their trade secrets could be stolen by pervasive spy organizations. But Dobkin says that the risk of doing business in the region is no greater than in Asia. "It's not a problem from my point of view," says Dobkin, a graduate of the Belarussian National Technical University in Minsk. EPAM uses encryption to protect clients' intellectual property and allows access to sensitive information only to employees with a need to know. In some cases, EPAM even sets up separate networks and dedicated Internet connections to protect information.

For all the faults of the Soviet system, it did a good job producing engineers. Belarus has nearly 100% adult literacy, and Minsk was a center of the Soviet Bloc's information technology industry. The region is dotted with technical universities, and students from the region consistently do well in international computer-programming competitions.

Cost and quality

Labor costs are low enough that EPAM can compete with higher-quality Indian providers on price, Dobkin says. But ultimately EPAM's selling point is the quality of its work. "Clients come to us initially because of the cost advantage," Dobkin says. "Our goal is to make sure our client is getting more than just a cost advantage." SAP says it chose EPAM for a project in 2003 based on the quality of the company's earlier work for SAP.

Certainly EPAM has compiled an impressive list of blue-chip clients. For Colgate-Palmolive, EPAM developed a mobile sales-support system that representatives of the consumer products company use globally for such functions as order entry or product updates. For Swiss luxury shoe, luggage, and accessories maker Bally, EPAM built a system used to track and steer the flow of merchandise in warehouses and stores. EPAM also created a system that energy services company Halliburton (HAL) uses to manage foreign currency transactions. "At the core they're extremely good engineers," says Andrew Parker, a vice-president at Forrester Research (FORR) in Amsterdam who specializes in IT services and outsourcing. "They have the kind of solid relationships in the West that only a few others can claim."

EPAM also tests new products or develops components for software, such as Microsoft business applications or programs designed for a specific task. That kind of work also helps EPAM hone its expertise and improve its services to other clients. For example, EPAM was involved with SAP's Netweaver software while it was still being perfected. "Now it's a platform accepted on the market and we have skills to provide services on this platform," says Dobkin.

Confident of future

Dobkin says his goal is to continue growing at 30% to 40% a year, maintaining the company's preeminence among Central and Eastern European suppliers. Geography is in his favor, since Western European companies often prefer to outsource work in the region because of much shorter travel times than to Asia.

At the same time, rising political tensions in Russia are making some customers nervous, Forrester's Parker says. Dobkin, though, says EPAM has been able to convince local government authorities that outsourcing centers should be encouraged. He adds that the most favorable regulations have been introduced in Belarus. Product development, software testing, and application maintenance and support are among the most in-demand services in outsourcing. And in any event, a professional services company is less affected by local government than a company that must import or export materials or build major facilities. "It's not like oil or manufacturing, which very much depends on local conditions," Dobkin says.