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Global IT Outsourcing to Increase in 2006

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The Tech Briefing – by Lauren Keyson

Exclusive TTB Interview with Arkadiy Dobkin President and CEO, EPAM Systems

Arkadiy Dobkin says that he would estimate the global IT outsourcing market volume to be about $20 billion to $25 billion. It was started about 15 years ago by Indian companies, which today control about 70% to 80% of the whole market. EPAM Systems saw what they did and decided to duplicate it using different resources as a labor pool. So instead of doing this in India, EPAM is doing it in Eastern Europe. The market opportunity just wasn't too obvious 10 or 15 years ago, because the whole region wasn't considered a friendly one.

Lauren Keyson (The Tech Briefing): Can you give me a brief description of what your company does?

Arkadiy Dobkin (EPAM): Our company specializes in software engineering services outsourcing. Our client base can be split into two main groups. One of them is other software companies, such as SAP (SAP) and Microsoft (MSFT). The second group is large global corporations like Colgate (CL), Reuters or British Telecom.

LK: So Microsoft is one of your clients?

AD: Yes. It is not the biggest client in terms of our revenue, but it is one of our important clients. Another example mentioned above is SAP, the world's third largest software company. About 50% to 60% of our revenue comes from different software companies, which outsource software product development and services to EPAM.

LK: What do you think is the outlook for global IT outsourcing in 2006? Will it continue to increase?

AD: Yes, absolutely. IT outsourcing will grow everywhere but especially in Europe. Five years ago, most outsourcing clients were from the United States, and now all of Europe is heading in the same direction. A lot of European companies have accepted outsourcing during the last several years. Previously, IT outsourcing in Europe was mostly done in the U.K., and now Germany, France and other countries are starting to outsource IT work abroad. Due to European market growth, Eastern European IT outsourcing providers like EPAM will have additional opportunities for more work and for higher growth. This is because European clients most likely would prefer Eastern European ("nearshore" vs. "offshore") providers, owing to the geographic proximity, as well as competitive availability of qualified resources.

LK: Obviously, the benefits of outsourcing to Eastern Europe and to India include the cost savings.

AD: This is the first and most obvious benefit that usually starts the process. But after companies tried this, they found out that there are many more benefits. It is not just about cost. There is an additional operational flexibility and access to unique or, in many cases, even more qualified resources. It is important to note that historically the educational systems in computer science and in engineering fields were (and still are) pretty good in Eastern Europe.

LK: So you do think the U.S. will start outsourcing to Eastern Europe, because we outsource a lot to India right now?

AD: They already do it today. About 70% of our revenue is already coming from the United States. Indian IT outsourcing service providers are very popular and clearly dominate the market, but they do have some particular problems. What is happening in India today is very similar to what happened in Silicon Valley five to seven years ago, when it was difficult to find any qualified engineers. Demand for good resources is very high, and, as a result, the employee turnover is also very high. It also causes a constant increase in cost of operations. So those are the drivers for U.S. companies to consider other alternatives globally and, first of all, in Eastern Europe.

LK: You had an article in Consulting Magazine. They wrote, "the remarkable saga of Arkadiy Dobkin and his quest to build the next great global IT consulting firm." What was the remarkable saga?

AD: It is an "old" story of the person who immigrated to the U.S. and started to build his own business, and succeeded at least for the time being. I think it is a pretty popular image of America, which still kind of exists in many countries - that you are coming here, finding out what you can do and achieving the results.

I came to the U.S. about 14 years ago from Minsk, Belarus, one of the former Soviet Union republics. I started the company several years later, together with my school friend. From the time of the article in Consulting Magazine, we have grown four or five times and become the largest provider of IT outsourcing services with development centers in Central and Eastern Europe. I think that was an important question mark ("would they survive?") in the story, and I'm glad we have been able to address it for now clearly.

LK: What is really interesting about this story is that you are dealing with countries all over the world, and you are right here in Princeton, New Jersey.

AD: Yes, we are an American company specializing in offshore software development. Ukraine, Belarus, Russia, Hungary and England locate our major subsidiaries, while the company’s headquarters is in New Jersey. Ninety-five percent of our clients are from North America and Western Europe.

LK: Are there other countries you are hoping to break into next year?

AD: We do plan visible growth for our existing offices in the U.S., Russia, Belarus, Hungary and Britain. We are also significantly accelerating our operation in Ukraine, and we are opening an office in Germany in January 2006.

LK: Are you thinking of going public?

AD: Though Eastern European IT outsourcing providers are still much smaller than Tier 1 Indian companies, EPAM is already recognized as a leader among the vendors with development centers concentrated in Central and Eastern Europe. That creates a good opportunity for future growth and allows us to consider an IPO process to accelerate such growth.

LK: So you are a success story about how you can help companies in the U.S. grow by outsourcing their software development...

AD: We have some clients that we believe, at some point, survived only because they outsourced to us. In many cases it allowed them to continue to grow. We also have many stories where EPAM built for large global corporations mission-critical business applications that other vendors have real difficulties delivering. So I would say it is important to point out that, in most cases, our clients selected EPAM not because of some potential cost savings, but because the capabilities of our engineering staff, our proven delivery record, the overall quality of our work, and our unique knowledge of how to do the complex software engineering work in a currently required globally distributed fashion.

EPAM President and CEO Arkadiy Dobkin is a recognized pioneer of the Eastern European IT outsourcing services industry. He began his IT career in Russia, where he worked for several emerging software companies. After immigrating to the United States in 1991, he held thought and technical leadership positions as Development Manager at SAP Labs and as Senior Vice President of Development at Firepond Inc. As one of the first IT managers to open up the software talent pool from the former Soviet Union region and Eastern Europe to the global business community, Mr. Dobkin keeps actively promoting capabilities of the region's skill base across the U.S. and Western Europe.