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Ex-Soviet Programmers Take on India in $48 Billion Market

Bloomberg – by Ilya Khrennikov

When Arkadiy Dobkin emigrated to the U.S. two decades ago, his first job was washing dishes. Now he employs 10,000 programmers in his native Belarus and elsewhere in eastern Europe, developing software for clients such as Barclays Plc and Expedia Inc.

Dobkin’s Epam Systems Inc. (EPAM) is among a slew of eastern European companies seeking a piece of the $48 billion global outsourcing market. The companies are building on engineering expertise grounded in the Soviet era to challenge Indian programming giants such as Tata Consultancy Services Ltd. (TCS)

In the Soviet Union, engineers worked on “all these military machines during the Cold War,” Dobkin said while navigating his laptop to pull up data about the company. “It’s not like India, where IT education was mainly an answer to market demand.”

Soviet-era knowhow and teaching methods have been preserved, so graduates of the region’s schools have skills suited for broader problem-solving rather than just narrow programming tasks, said Dmitry Loschinin, CEO of Luxoft Holding Inc. (LXFT), an Epam rival that employs more than 6,000 in the region doing work for customers such as UBS AG, Boeing Co., and Ford Motor Co.

Code Jam

“Indian programmers have traditionally worked on the back-office, system administration and support,” Loschinin said. “We can develop complex solutions.”

His team has worked on derivative trading systems for banks and computer-vision navigation that matches a moving image from a camera mounted in a car to locations on a map. For Deutsche Bank AG, Luxoft created software that helps speed decisions on whether to grant a customer a loan.

Luxoft had “teams of experts ready to grill you with tough questions,” Daniel Marovitz, COO for Technology at Deutsche Bank’s global banking unit, said in a statement. “And that’s what you need on complex projects.”

This year, 16 of 24 finalists of Google Inc. (GOOG)’s annual Code Jam programming competition were from central and eastern Europe. The region also accounted for 8 of 13 winners at this year’s ACM International Collegiate Programming Contest sponsored by International Business Machines Corp.

Though eastern European programmers earn more than those in India, the region’s companies say they can justify the higher price with contracts for more sophisticated work than their Indian rivals can manage. A software engineer makes an average of $17,000 a year in Belarus and about $20,000 in Russia outside the biggest cities, according to Otkritie Capital. That compares with some $10,000 in India and $95,000 in the U.S.

‘Qualitative Advantage’

Programmers from central and eastern Europe are “known for being very creative and capable of solving the most difficult programming problems,” Alexander Vengranovich, an analyst at Otkritie in Moscow, said in a note last month. “This, in our view, gives offshore companies from CEE a qualitative advantage over Indian and Chinese peers.”

Epam boosted sales 30 percent to $434 million last year and Luxoft increased its latest annual revenue 16 percent to $315 million. Ciklum, a competitor with about 2,500 programmers, says its sales will be up by more than 50 percent this year. The global market for IT outsourcing grew 17 percent to $48 billion last year, according to VTB Capital.

The Indian giants won’t give up their dominance of the market easily. Tata Consultancy, Asia’s largest computer-services exporter by market value, boosted full-year sales 29 percent. Its rival Infosys Ltd. (INFO) saw sales jump 20 percent. Tata didn’t respond to requests for comment, and Infosys declined to comment.

Learning English

Epam, with headquarters in Newtown, Pennsylvania, but virtually all programming operations in eastern Europe, has almost tripled in U.S. trading since its initial public offering last year. Luxoft, with executive offices in Zug, Switzerland, is up 50 percent since its June IPO. Ciklum and other rivals such as SoftServe and Infopulse are closely held.

Dobkin moved to the U.S. in 1991 just as multinationals were starting to farm out information-technology work to Indian companies. With a degree in electrical engineering from Belarus, he worked various jobs while learning English before setting up his business in 1993.

“It was just me in New Jersey and my classmate in Minsk,” said Dobkin, 53. “We had neither money nor connections, so we started to differentiate ourselves by the complexity of the things we can do.”

A milestone was a 1995 contract to create a customer-relationship management system for Colgate-Palmolive Co. (CL) The program Dobkin developed gained attention in the industry -- and an introduction to SAP AG (SAP) founder Hasso Plattner. That led to a contract to develop software for SAP.

Sephora, Adidas

When Indian providers got a boost from the so-called year 2000 problem, requiring work to avoid potential computer glitches caused by the millennium change, Epam saw more value in developing systems such as early e-commerce platforms. The company has since won contracts with Four Seasons Hotels and Resorts, cosmetics-retailer Sephora, Coca-Cola Co. and Adidas AG.

The former East Bloc companies gain a further advantage from being in the same time zone with European clients and closer to the U.S., said Valentin Kazan, a vice president at IBA Group, an outsourcer based in Prague with more than 2,500 programmers across eastern Europe.

The companies have “a favorable geographic location,” Kazan said. The “availability of offices and resources and the ability to provide service onshore, in close proximity to the customer” can reduce costs and makes work flow faster.

Original publication is here.