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Assessing offshore destinations - second stop: Russia

Central and Eastern Europe has established itself as a prime location for offshore and nearshore services, particularly for clients based in the United States and Western Europe. Russia, by far the largest country in this region, has the largest labor force and the biggest pool of educated talent. The country has a strong education base, with universities in Moscow, Novosibirsk, St. Petersburg, and Nizhny Novgorod turning out large numbers of tertiary graduates. The salaries remain much lower than those in Western Europe or the United States (for example a java developer has a monthly salary of RUB 60 000 /USD 2 000 or a 1С programmer gaines about RUB 55 000/USD 1 800), while in terms of culture, Western European and American organizations often perceive Russia as being a closer fit than countries like India, China, or the Philippines.
Russian programmers are excellent at high-end and complex systems design and development. This ability serves them well in applied fields of software engineering: high tech in general, precision electronics, medical devices, aerospace, and automotive, as witnessed by the companies interviewed in a recent IDC study (“Russia as Offshore Software Development Location: Should You Consider This Your Next Move?”). Another advantage in Russia is that the attrition rate (around 9%) is very low, so there is no need to overstaff projects to insure against risk of high attrition. Beyond the traditional technical skills and the low attrition rate, executives expressed satisfaction with the ability of Russian professionals to deal with highly complex projects: to make changes mid-project (important for telecom industry because requirements change so quickly) and to use robust, real-time languages is particularly important when developing embedded applications and operating systems. Russia’s deepening service delivery expertise made the country a research factory for top organizations like Intel, IBM, Motorola, Samsung and Google.
The research “Top 50 Emerging Global Outsourcing Cities” assigned Nizhny Novgorod (fourth-largest Russian city) as an aspirant city for the title of top offshore destination. The city is known for its engineering, R&D and software development capabilities. Many software developers and offshore service providers have their setups in Nizhny. St. Petersburg was also selected as one of the established sourcing locations for engineering services and high-end R&D. In St. Petersburg the number of specialists knowing a foreign language is much higher than in other cities. For instance, the proportion of employees fluent in English exceeds more than twice than in other regions. This difference is even bigger for the German language. With a large pool of talented engineering graduates, robust IT infrastructure and strong quality traditions, St. Petersburg has long been seen as one of the key outsourcing destination in Eastern Europe.

Russia vs. India. Unusual point of view...

Any country attempting to establish a strong offshore IT delivery industry will always be compared to India, which pioneered the wave. India's popularity as a delivery hub, whether for IT and business services or R&D, has led to increasing labor costs and growing attrition rates. The ability to claim greater workforce stability has become a differentiating factor for other countries positioning themselves in the global sourcing market. The Indian software and services industry was quick to establish a strong profile in the market through Nasscom, and has the Indian government behind its efforts to promote the Indian brand. From the start, India used CMMI quality levels to establish its credentials in the market. While quality levels remain important, these are now taken for granted to some degree.

Russia must play catch-up. In 2008, the total Russian export of software development and services was worth $2.65bn, second only to India. Russian companies continued to explore the high-technology development niche, which demands in-depth knowledge in mathematics and related sciences. Although the profiles of Eastern European countries as offshore locations have been raised in the past few years, there is still some way to go before these countries. None of them (including Russia), have established a brand as strong as India's. Nevertheless, it is clear there are good opportunities for the Russian offshore industry, not only because the use of offshore resources is a growing trend, but also because Russia has a competitive edge over its rivals. IDC believes, however, that the Russian software development industry must take a few key steps to take full advantage of these opportunities, such as: establishing the key strengths of the Russian software and services industry. This can be done by highlighting the differentiators, such as Russia's ability to deliver on high-end, complex projects; technical skills; and cultural and time-zone fit. The differentiators mentioned above could be part of the brand value of the Russian software and services industry. Any support the Russian government can give in building the brand will be valuable, as official trade delegations will be able to help spread the word. We have to remember that Russia has lost some of its attractiveness due to the increasingly volatile political environment and rapidly escalating costs, particularly in Moscow and St Petersburg. But there are some hopes for the state support of the industry owing to the fact that on June 18, 2008 Dmitry Medvedev, President of Russia called IT one of the 5 priority areas of modernization of the Russian economy. Also a key success factor for any company in the technology market these days is a strong list of reference customers. So the Russian software and services companies must establish stronger lists of customers they can quote, in order to build a stronger brand among ITO countries.

From Russia with Love

The aim of the trip of Pentalog in Russia (we visited Perm and St. Petersburg) was to make an assessment of the country’s ability to serve clients in several areas of IT engineering. The friends that Pentalog made there, demonstrated their strong commitment to international development and improving their technical and business skills from every point of view. This was an encouraging attitude when thinking of creating a prospective partnership in this country, despite the past legacy which seems to continue to weigh heavily on professional
relationships. One entrepreneur explained how he launched his business at the time you could read signs saying “Business is bad” in the streets. Today the dream of Russian entrepreneurs is to do business with France, Germany...

We noticed the same difficulty with foreign languages, as we also mentioned concerning Morocco, Ukraine and India. It’s true that the use of English is not yet systematic amongst IT engineers. But after thinking about it, overall we didn’t feel any more difficulty in communicating than we did in India, where people spoke English well enough but with a “local” colored accent and with various expressions. On the other hand we met German-speaking people, which is an additional positive point (generally only 10% of employees know German well in respondent companies). The language problem is of course less obvious in Saint Petersburg which is a doorway to the Western world, a very cosmopolitan and modern city of 7 million inhabitants, with 120 universities and engineering schools. It is probably the 2nd largest city in the world for engineering outsourcing, maybe even the 1st when compared to Bangalore in terms of the percentage of the population going to university.
We were really impressed by the people we encountered. Russia almost seems an obvious choice for the future development of our business and the presence of Pentalog. These projects came at the right moment; the France-Russia year was inaugurated in Paris… We will return with great pleasure to these frosty regions, but so welcoming!

Pictures from our trip can be seen here: http://picasaweb.google.com/pentalog.ht/SanktPetersburg_012010#

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