EPAM Merger Creates Russian Offshoring Leader

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Computer Business Review

EPAM Systems is to strengthen its position as Russia's largest software outsourcing services vendor by acquiring domestic rival Vested Development Inc for an undisclosed sum in cash and shares.

The merger will create a company with more than 2,200 employees and an annual revenue run rate of over $70m, with a client list including high-profile names such as Reuters, Mars, and Nestle. The company, which will operate under the EPAM name, will have development centers in Hungary, Russia, Belarus, and Ukraine to clients in western Europe and the US.

EPAM chairman and CEO Arkadiy Dobkin told Computer Business Review that the deal would make his company "the strongest alternative to the current mainstream outsourcing destinations" such as India and eastern Europe. Russia has yet to make a major impact as global IT sourcing location, due in part to the fragmented supplier community, with Dobkin claiming there only 10 to 15 companies doing offshore work for western clients.

Research company Meta Group claims that the market for exported Russian IT services was worth around $600m in 2005, whereas Indian industry association Nasscom said that total Indian IT exports (the majority of which are IT services) reached $23.6bn in the year ended March 2006.

EPAM is headquartered in Lawrenceville, New Jersey, but makes the majority of its revenue from providing low-cost development services from its centers in central and eastern Europe to software vendors such as SAP and Hyperion. It made full-year 2005 revenue of $40m, and in January it received its first round of venture capital from investment group Siguler Guff and Company.

Vested Development has 400 employees that provide a range of software services including development, testing, re-engineering, and maintenance. The company's CEO Anatoly Gaverdovsky will head up the combined company's operation in Russia where it will also look to win more business with the growing number of multinational companies operating in the country.

While the pre-merger EPAM made around 90% of its revenue from clients in western Europe and the US, VDI made only half its sales from overseas clients, with the rest coming from domestic contracts.

Dobkin said that staff attrition, rather than pricing pressure, is EPAM's biggest challenge this year. He said: "There is less pricing pressure right now as a lot of companies that are outsourcing to India are experiencing problems with high attrition levels and some also have quality issues." He said EPAM's attrition rate is currently less than 10%.