Russian and Ukrainian Skills Valued in Outsourcing
Quickly growing. Unlimited potential. Unpredictable. Each of these words conveys the business environment in Russia today. Global executives eye developments in the world’s largest country and speculate on each aspect of the emerging business scene. A poor telecommunications infrastructure, erratic bureaucracy, lack of experience in Western business and management skills, economic woes, a cumbersome tax system, poorly enforced consumer protection laws and almost no intellectual property laws spell instability – by Western standards. Yet, Western companies are turning to the East, because it has something the West needs.
Some say the Russians are the best in the world when it comes to software. In fact, information technology (IT) and telecommunications were the two areas that managed to grow despite the 1998 financial crisis. In August that year, the ruble was devalued by 183%, inflation rose to 38% and unemployment rose to 11.5%. The software market flourished despite its troubled marketplace. Despite the poor economic progress of Russia, the software development industry is stable. To a certain extent, it is independent of the Russian economy.
The people of the former Soviet Union possess an extremely high level of technical and scientific expertise; industry analysts agree that these people have a broader knowledge of algorithms. The land annually sprouts more than 100,000 graduates with degrees in computer science, engineering, math and physics. Much of that expertise is clustered at Moscow, St. Petersburg, Novosibirsk in Russia and at Kiev in Ukraine. In fact, St. Petersburg State University was the year 2000 European champion in the ACM International Collegiate Programming Contest World Finals.
Dmitry Loschinin, managing director of LUXOFT, believes that the state has an obligation to build an image of Russia as an exporter of intellectual resources and to mitigate the dominance of oil, gas and metals in that image. Although the market for software products and services in Russia is growing rapidly, it is still relatively small. But external markets are significant. Russian software prices can be 10- 20 times lower than those of Western companies, and Ukrainian products are priced even lower. LUXOFT serves leading Russian companies, such as the Central Bank of Russian Federation, Yukos Oil and Gazprom, as well as international clients including IBM, Boeing, BMC Software and ABB Industries. The company is ISO 9001 certified and is working toward CMM Level 4 certification.
Understandably, a Forbes International article says that Russia is “nibbling at the edges of India’s outsourcing revenues.” Analysts indicate that the Russian software market – excluding installation and consulting – was worth about $150-$250 million (US) in early 2000 and is growing at 50 to 60 percent per year. Large companies with major IT projects have a need for customized solutions, and LUXOFT is devoting significant resources to this business arena. Although the cost benefits are comparable between India and Russia, much of the software development work is shifting to Russia because of the nation’s expertise. LUXOFT’s managing director explains that “Russia is a scientifically oriented country. The competitive advantage of Russia is the R&D skills, which the USSR had been preparing for decades.”
“Also, during the last years of the Communist era,” he continues, “the USSR was aggressively trying to develop a new generation of specialists capable of operating complex mainframe systems. Today these systems are still in use by many large companies in the U.S., including Fortune 500 companies. Since it is not economically feasible to switch from mainframe systems to something new, specialists who are familiar with these systems are still needed; and Russia is a source for these specialists.”
In addition to mainframe technologies, LUXOFT’s clients currently demand software development for enterprise information systems, eCommerce, data warehousing and manipulation solutions. Analyst reports state that the average size of these contracts in most of the leading Russian companies is from $100,000 – $250,000 (US).
Although there is a market for eCommerce solutions outside Russia, internal use of shopping on the Internet is still low. There are several very successful online shopping enterprises, but only three percent of the population currently has access to the Internet. Business-to-consumer (B2C) initiatives are further hindered by undeveloped banking laws, poor infrastructure and inadequate credit card mechanisms. The average Internet consumer is 20-30 years of age, has a higher education and an above-average income. IBS Group, LUXOFT’s parent company, believes that B2C has developed slowly because Russian citizens have not yet been fed the consumer culture of America. B2B, on the other hand, attracts Muscovites because they have observed how this strategy and outsourcing allow Western companies to reduce costs. According to Brunswick UBS Warburg, a premier investment house in the Russian market, growth prospects from 1999 to 2003 is 316% for Russian B2C and 245% for B2B. Internet users likely will grow by 62% and Internet advertising by 133%.
The Russian government is outsourcing many software development activities. These include a personal banking system for the Saving Bank of Russian Federation, a unified billing and ordering system for the National Railroad, roads optimization systems for the police authorities, a unified medical system and database for public hospitals and insurance programs, a unified tax reporting system and database, a statistics system and an ecological monitoring and analysis system.
LUXOFT offers eBusiness solutions, software development, application maintenance, application reengineering and data conversion. It’s a subsidiary of IBS (Information Business Systems) Group, established in 1992, which is now the vanguard in Russia’s IT market. IBS, which provides consulting services similar to top-tier U.S. outsourcers (like EDS or Andersen Consulting), was named the best Russian Systems Integrator for three years and the number one consulting company in 1997.
IBS president and CEO, Anatoly Karachinsky, has been acknowleged by the leading Russian marketing research agency (DATOR) as the most influential person in the Russian computer business and was invited by President Putin to attend a summit in 2000 of the nation’s business and financial elite. The Muscovite is active in efforts to increase the use of computers with Internet capabilities in Russia. He also educates fellow business execs about Western strategies of increasing capitalization. Karachinsky has formed Club 2015, which applies business expertise to the government’s problems in improving the business climate in Russia.
LUXOFT uses a comprehensive methodology that includes processes for the entire maintenance life cycle; value-added services to enhance system capabilities; cycle-time production fixes; a Quality Management System of well-defined processes for projects, which also allows flexibility for integration of client standards; and an approach for consistent interaction whether the work is performed onsite or remotely.
Made in Kiev
Ukranian businesses occupy a unique place in the world, as their eastern border touches Russia, and Eastern Europe is their western border neighbor. The nation has suffered drastic economic downturns since it declared independence from Russia a decade ago. Still, market processes are going on, and the nation is marching forward in its strategic goals of economic reform and integration into the EU. Analysts recognize that the future of Ukraine as an independent, democratic nation is of strategic importance to Europe, the U.S. and Russia. Of the 51 million people in Ukraine, more than one-fifth are Russians. Although efforts have been underway officially to change the language and culture to Ukrainian, most of the people are still Russian-style thinkers.
In his historic visit to Kiev in June 2000, President Clinton praised Ukrainians for having “what it takes to succeed in the global information age – strong universities, an educated society and partners willing to stand with you.” He positioned America as Ukraine’s partner. Indeed, American dollars are already being spent in Ukraine – in dealing with an intense IT skills shortage, the U.S. has become the world’s leading consumer of so-called “offshore” software development and application maintenance.
Except for some legalities, there are basically no differences between Ukrainian, Byelorussian and Russian software development teams, according to Andrew Pleshch, outsourcing projects manager at Softline Company in Kiev. They have attended the same schools and have the same technical background and mathematical prowess. Pleshch believes there is a natural affinity between Americans and Europeans that is becoming an important driver for outsourcing projects to Russia, Ukraine and Israel, rather than India. He also believes that “most of the stars from India are now in the U.S.” and that Ukranian/Russian teams are “much more ready to implement time- and money-critical projects quickly and with high-quality resources.”
About 80% of Softline’s customers are local companies seeking to improve both their business and technological levels. But Pleshch describes his company as “ready to ‘eat’ very serious work, especially full-featured B2C and B2B solutions for Western service providers and end users.” The outsourcer is a winner of the year 2000 Ukrainian software contest, recognizing Softline’s development suite Megapolis.
Softline, an ISO 9000/9001 certified independent software vendor and IT projects integrator, provides turnkey solutions for private sector companies and governments. Services include consulting, system reenginering, end-user training, software installation. Besides B2B and B2C solutions like Internet brokerage and marketplaces, the company’s project development expertise is in financial and operational management, billing and workflow systems.
East and West Share Knowledge
Recognized as leaders in the software world, LUXOFT’s director of sales, Andrey Zhulenev, spoke at CeBIT (through BITKOM in Germany) in March on the benefits and steps in setting up a dedicated software development center for a customer’s IT organization. LUXOFT is presenting and is also sponsoring the “Software Development in Russia – Opportunity for U.S. Business” conference (in Boston, April 11-12 and in Seattle on April 13. See www.outsourcing-events.com for more details). Vladimir Fortov, advisor to President Putin will also be a featured speaker. Event participants will learn what many Fortune 500 companies already know about Russian business.
In fact, American companies dominate the IT scene in Russia. Intel, which targets a substantial portion of its research and manufacturing dollars in emerging economies, has a facility in Nizhni Novgorod (once the Soviet Union’s biggest center for the development of defense electronics). IBM, Sun Microsystems, Microsoft, Hewlett Packard, Lucent Technologies, Xerox, Apple, Compaq, Novell, Symantek, Nokia, Ericsson, 3M, Oracle and Siemens all have a major presence. Americans are also shareholders in many Russian IT companies.
Unisys works with Aeroflot on a frequent flyer program. Boeing, General Motors, Ford, Chrysler, Toyota, BMW, Corning, DuPont, are inside Russian borders. McDonald’s has at least 58 restaurants in Russia and its downtown Moscow location is reportedly the busiest in the world. Other food and beverage companies operate in Russia: Coca Cola, Heinz, Kraft, Pepsico, Sara Lee. Financial institutions such as Deutsche Bank, Citicorp, Chase Manhattan, American Express have subsidiaries in the former Soviet Union. The pharmaceutical industry also has spread to the Euro-Asian territory with such giants as Merck, Bristol-Meyer, Squibb, and Pfizer.
BISNIS, part of the U.S. Department of Commerce, reports that in 1997 Russia attracted nearly $10.5 billion in foreign investment. Leading analysts estimate that from 60 to 75 percent of Russia’s former state-owned assets have been privatized.
People everywhere learn by example, and Russian business execs outside the software industry are beginning to understand the useful strategies of outsourcing. It’s the ideal solution for the unpredictable Russian and Ukranian markets because it allows flexibility, minimizes risks, helps to cut operating costs and is an avenue to resources for companies with limited money.
Unlike some countries, where outsourcing is all but prohibited by employment laws promising jobs for life, neither Russian nor Ukrainian law inhibits outsourcing. Both have inherited laws from the former USSR, which tend to be socially oriented, sometimes making it difficult for employers to terminate an individual’s employment without an appropriate reason.
An online publication, The Russia Journal included an article in its February 19, 2001 issue about outsourcing as “new creative options” for companies to meet their needs and achieve flexibility. Siberian Consulting Group provides support to Russian and foreign companies in establishing business relations and organizing joint stock companies. Education about the value of using outsourcing as a business tool is also available on the Web site of Avenir & partners, a Russian outsourcer of business administration, IT and logistics.
Economic trends and evidence of a strong Western presence in the business world of Russia and Ukraine demonstrate that these two nations are not just on the radar screens of Western businesses. Forecasts project both to be eCommerce and eBusiness boom areas, once they get over the current hurdles. Outsourcing clearly has a favorable future influence on both their internal and external markets.
About the Author: Ben Trowbridge is an accomplished Outsourcing Consultant with extensive experience in outsourcing and managed services. As a former EY Partner and CEO of Alsbridge, he built successful practices in Transformational Outsourcing, Managed services provider, strategic sourcing, BPO, Cybersecurity Managed Services, and IT Outsourcing. Throughout his career, Ben has advised a broad range of clients on outsourcing and global business services strategy and transactions. As the current CEO of the Outsourcing Center, he provides invaluable insights and guidance to buyers and managed services executives. Contact him at [email protected].