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Offshore Hot Spots: Russia

OutSourcing World

World-beating scientific and engineering manpower make it the best place for highly complex software.

"IT is Russia's next natural resource," declares Leonid Reiman, Russia's Minister of Information Technology and Communications (ICT) at the Russian Economic Forum in London last year. With software exports growing at 40 percent to 50 percent annually, he has reasons to be optimistic. By 2010, the government hopes that Russian programmers will contribute to 7 percent of global software exports, and create a $40 billion market.

"Exceptionally well educated developers who can perform extremely complex jobs, and a great understanding of engineering and financial services domains are core strengths of Russia's outsourcing industry," remarks William Martorelli, Principal Analyst at Forrester. This competence emanates from country's vast talent pool, and a culture of science education.

In 2004, about 45,000 IT engineers graduated, and almost all of them have additional masters degree in Math, Physics, Electrical Engineering, or Computer Science. Local programmers also have substantial experience in the development of complex solutions, since much of Russia's application software has historically been developed in-house by IT departments of large organizations, according to IDC Russia senior analyst Timur Faroukshin.

Michael Akselrod, senior vice president, Research Infrastructure Development at Reuters, cautions buyers who are looking to outsource to Russia: "Don't assume you can get quick benefits [in Russia]... take your time in the beginning and build efficient model which will work for you and for them. Start small. Pick the project which is not critical for you and does not have a hard delivery date. Use it as proof of concept and make sure that you work out all the critical issues before you start to expand this team and give them more critical jobs. Developers [here] are aggressive, innovative and in many cases go beyond their responsibilities." Reuters has an outsourcing relationship with EPAM in Russia.

From a pure cost angle, doing work here is more expensive than in China or India. The average annual salary of a software programmer with 2 to 3 years' experience ranges from $7,000 to $13,000. And Russian companies are already facing the specter of ballooning employee compensation even as outsourcing grows.

Russia's low labor costs and new industry-friendly legislation may help it stay competitive, according to Faroukshin, but there are still other concerns that need to be addressed. The country still faces significant challenges, among them, spotty infrastructure development, limited funds and crime. Corruption and concerns over the government taking a heavy-handed approach to big business are also issues that worry many foreign executives. The Russian government is hoping to reassure investors by cutting red tape and amending the tax code to create simplified regimes favorable to the IT industry. It's also developing a set of laws governing intellectual property, e-commerce and information exchange.