A whitepaper titled “Russia as offshore software development location: should you consider this your next move?” by IDC provides a deep insight into Russian IT industry basing the research on in-depth, executive-level interviews with 20 Western European and US companies that have used Russian software and services companies for delivering on offshore development projects.
The thorough analysis proved that crucial for customers is the ability of Russian vendors to deliver on high-end, technically complex projects, strong technical skills, understanding the business needs of the customer and translating these into the final product. American organizations often perceive Russia as being a closer cultural fit than e.g. India, China, and the Philippines, states the study. This together with time zone fit and acceptable cost makes up the group of softer factors, less important but still influential.
The study also found that for custom application development engagements, customers value the ability of Russian companies to tackle non-standard tasks, which are essential for trouble shooting and product development. These findings are also in line with neoIT’s estimations that Russian vendors create a differentiator from lower-priced offerings from Indian companies by focusing on top-notch software and embedded software product development.
The thorough analysis proved that crucial for customers is the ability of Russian vendors to deliver on high-end, technically complex projects, strong technical skills, understanding the business needs of the customer and translating these into the final product. American organizations often perceive Russia as being a closer cultural fit than e.g. India, China, and the Philippines, states the study. This together with time zone fit and acceptable cost makes up the group of softer factors, less important but still influential.
The study also found that for custom application development engagements, customers value the ability of Russian companies to tackle non-standard tasks, which are essential for trouble shooting and product development. These findings are also in line with neoIT’s estimations that Russian vendors create a differentiator from lower-priced offerings from Indian companies by focusing on top-notch software and embedded software product development.
Selecting a local vendor
However there are a number of issues one needs to keep in mind when engaging with a Russian vendor. Russian IT industry has been growing fast but from a nascent stage. It’s still pretty young and many of the emerging vendors are unknown abroad and yet inexperienced. It doesn’t mean you should shun them: just weigh the pros and cons.
Here some recommendation may be useful. First of all, customers are advised to visit a vendor’s office or delivery center. This step allows establishing personal contact with the possible provider, get acquainted with its workflow, facilities, etc. Second, it’s always good and convenient to learn by others’ experience, so asking for references of the vendor’s clients does sound sensible.
Still Russia lacks promotion on the world market and this used to impede its stepping out from the shadow of India. Nonetheless the situation is changing. RUSSOFT joining the majority of domestic vendors holds annual Forums (this year held in St. Petersburg on June 20-23) which have become the mouthpiece for the whole industry, including many local vendors, not only market leaders (see the chart) but also smaller companies each having something unique to offer.
Company Staff Revenue, $ mln
EPAM Systems 2,700 80
Luxoft 2,220 68
IBA Group 2,000 61
Exigen Services 1,800 55
Reksoft 350 11.4
Top Russian ITO companies, 2006 (Source: “Russia as offshore software development location: should you consider this your next move?”, IDC)
Not only locally is more and more consideration given to Russian high-tech players, but also globally. It’s no wonder that there was so much hype around Russia at this year’s CeBIT which welcomed 77 nations and Russia as “guest star”. With top state authorities opening the event, Russia nearly doubled the number of its representatives vs. last year and made the top 5 list of largest exhibitors.
Consolidating to boost scalability
Together with the whole IT industry growing are local vendors, too. The majority of serious market players report 40-60% annual growth in 2006. This stands for organic growth, however non-organic one derived from acquisitions and mergers is also a factor.
Recently analysts noticed definite consolidation trends within global IT outsourcing industry. With constantly intensifying competition between the vendors it’s getting more and more evident that the bigger the company, the easier it is to win contracts and gain credibility.
On the wave of hot discussions on outsourcing contracts failures clients have become more careful in vendor selection. Although the major reason for unlucky outsourcing engagements is considered to be lack of communication between the parties, certain dependence between the size of the vendor company and the success of the deal exists. Larger vendor aim at expanding their presence as many countries within their target markets as practical in order to make communication with the clients easier. This increases the client’s chances to find a vendor’s office onshore or nearshorе, and gives additional time and cost advantages. Understanding the necessity to increase communication and having better opportunities to do it, clients are likely to choose a 2,500 – 3,000-strong vendor with offices in at least 5-8 global locations vs. a smaller and geographically more limited ones (other things being equal).
Global market trends have reached Russia as well. With dozens of new-born vendors emerging each year, mid-size and large market players seek merger opportunities to gain more weight. 2006 and already 2007 have seen several deals, in particular 1,800-strong Exigen Services merged with StarSoft Development Labs, Bulgaria-based Stone Computers joined IBA Group, EPAM Systems acquired VDI. Particularly the latter merger was a milestone for the industry as it solidified EPAM’s leadership in the vast CEE region, making the combined company the largest in headcount (2800+ at the moment), the most regionally diversified (20+ offices in 7 countries), and broadest service line.
These and most of other smaller deals have similar root causes. Vendors seek rolling out operations in new markets, expanding onsite, onshore, and nearshore presence, access to richer talent pool with unique expertise and specific skills. Interestingly, new target market spot include Russia itself, too.
On the right way
Russia’s domestic demand for IT services is going up fast. In their BRIC’s analysis Goldman and Sachs forecast that by 2050 the Russian economy overtakes that of Germany, France, Italy and the UK, automatically becoming a huge target market for IT services. While the majority of projects today are coming from the US or EU, in the future more and more IT services will be requested by Russian local clients.
Though some analysts predict a downturn in the amount of outsourcing deals and offshoring activities, others stay optimistic. Eastern European countries are poised to take more offshoring business, however, due to their attractive regulatory environments as well as close proximity and cultural ties to Europe, according to a study by the Economist Intelligence Unit (EIU). As far as Russian vendors are concerned, they feel pretty secure against possible business activity slump thanks to their target markets’ stability and, most importantly, to their focus on complex projects which can be developed best of all by the Russians.
Given all these factors, it’s evident that Russia is unlikely to fall out of favor as an ITO destination. The country has already entered the market in a big way and is unlikely to leave the road!
However there are a number of issues one needs to keep in mind when engaging with a Russian vendor. Russian IT industry has been growing fast but from a nascent stage. It’s still pretty young and many of the emerging vendors are unknown abroad and yet inexperienced. It doesn’t mean you should shun them: just weigh the pros and cons.
Here some recommendation may be useful. First of all, customers are advised to visit a vendor’s office or delivery center. This step allows establishing personal contact with the possible provider, get acquainted with its workflow, facilities, etc. Second, it’s always good and convenient to learn by others’ experience, so asking for references of the vendor’s clients does sound sensible.
Still Russia lacks promotion on the world market and this used to impede its stepping out from the shadow of India. Nonetheless the situation is changing. RUSSOFT joining the majority of domestic vendors holds annual Forums (this year held in St. Petersburg on June 20-23) which have become the mouthpiece for the whole industry, including many local vendors, not only market leaders (see the chart) but also smaller companies each having something unique to offer.
Company Staff Revenue, $ mln
EPAM Systems 2,700 80
Luxoft 2,220 68
IBA Group 2,000 61
Exigen Services 1,800 55
Reksoft 350 11.4
Top Russian ITO companies, 2006 (Source: “Russia as offshore software development location: should you consider this your next move?”, IDC)
Not only locally is more and more consideration given to Russian high-tech players, but also globally. It’s no wonder that there was so much hype around Russia at this year’s CeBIT which welcomed 77 nations and Russia as “guest star”. With top state authorities opening the event, Russia nearly doubled the number of its representatives vs. last year and made the top 5 list of largest exhibitors.
Consolidating to boost scalability
Together with the whole IT industry growing are local vendors, too. The majority of serious market players report 40-60% annual growth in 2006. This stands for organic growth, however non-organic one derived from acquisitions and mergers is also a factor.
Recently analysts noticed definite consolidation trends within global IT outsourcing industry. With constantly intensifying competition between the vendors it’s getting more and more evident that the bigger the company, the easier it is to win contracts and gain credibility.
On the wave of hot discussions on outsourcing contracts failures clients have become more careful in vendor selection. Although the major reason for unlucky outsourcing engagements is considered to be lack of communication between the parties, certain dependence between the size of the vendor company and the success of the deal exists. Larger vendor aim at expanding their presence as many countries within their target markets as practical in order to make communication with the clients easier. This increases the client’s chances to find a vendor’s office onshore or nearshorе, and gives additional time and cost advantages. Understanding the necessity to increase communication and having better opportunities to do it, clients are likely to choose a 2,500 – 3,000-strong vendor with offices in at least 5-8 global locations vs. a smaller and geographically more limited ones (other things being equal).
Global market trends have reached Russia as well. With dozens of new-born vendors emerging each year, mid-size and large market players seek merger opportunities to gain more weight. 2006 and already 2007 have seen several deals, in particular 1,800-strong Exigen Services merged with StarSoft Development Labs, Bulgaria-based Stone Computers joined IBA Group, EPAM Systems acquired VDI. Particularly the latter merger was a milestone for the industry as it solidified EPAM’s leadership in the vast CEE region, making the combined company the largest in headcount (2800+ at the moment), the most regionally diversified (20+ offices in 7 countries), and broadest service line.
These and most of other smaller deals have similar root causes. Vendors seek rolling out operations in new markets, expanding onsite, onshore, and nearshore presence, access to richer talent pool with unique expertise and specific skills. Interestingly, new target market spot include Russia itself, too.
On the right way
Russia’s domestic demand for IT services is going up fast. In their BRIC’s analysis Goldman and Sachs forecast that by 2050 the Russian economy overtakes that of Germany, France, Italy and the UK, automatically becoming a huge target market for IT services. While the majority of projects today are coming from the US or EU, in the future more and more IT services will be requested by Russian local clients.
Though some analysts predict a downturn in the amount of outsourcing deals and offshoring activities, others stay optimistic. Eastern European countries are poised to take more offshoring business, however, due to their attractive regulatory environments as well as close proximity and cultural ties to Europe, according to a study by the Economist Intelligence Unit (EIU). As far as Russian vendors are concerned, they feel pretty secure against possible business activity slump thanks to their target markets’ stability and, most importantly, to their focus on complex projects which can be developed best of all by the Russians.
Given all these factors, it’s evident that Russia is unlikely to fall out of favor as an ITO destination. The country has already entered the market in a big way and is unlikely to leave the road!
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