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MSNBC, September 2001

Can Russia's techies mimic India?

By Rebecca Santana, MSNBC contributor

MOSCOW - Barely anyone came to work on a bright autumn day at one of Russia’s biggest software development companies, but that was perfectly fine with management. Business is doing so well, the company moved into new office space and many employees stayed home while the move took place.

“IT USED to be a factory producing some big construction materials, and it is still a factory but producing software,” said Dmitri Loschinin, managing director of Luxoft, which employs 220 people in its production staff. Luxoft is one of a growing number of companies developing software for mainly foreign clients, an industry often referred to as offshore programming. India leads the field in offshore programming, but Russia possesses the fundamentals to compete for market share if the country overcomes certain obstacles.

Although there are no official statistics, insiders estimate that Russia will generate somewhere between $70 million and $100 million in revenues from its “offshore programming” operations this year and employ around 3,500 full-time programmers. Many others, especially university students, will work as freelance programmers.

These numbers are tiny compared to India, which generated $6 billion in revenue in 1999, but Russia’s offshore programming industry is growing at 50 to 60 percent a year, according to a McKinsey Global Institute report.

One of the main reasons Russian companies are attracting business is their low costs, which make it cheaper to outsource business to Russia than simply hiring programmers and moving them to the United States. The main centers are located in Moscow, St. Petersburg, and the Siberian city of Novosibirsk where there is a wealth of educational institutes as well as good communications infrastructure.

Alexander Egorov, CEO of St. Petersburg based Reksoft, one of the oldest offshore programming companies in Russia, says Russian companies charge about $40 for an hour’s work compared to $90 to $120 in Europe and the United States. Russian programmers make $300 to $1,500 a month depending on experience and skills.

The low wages almost make one forget this is a country that put the first person in space and still has an education system emphasizing mathematics and science that made such a feat possible. Last spring, a team from the prestigious St. Petersburg State University beat out teams from Cal Tech, MIT, and Harvard to win the International Collegiate Programming Contest World Finals.

“The traditionally limited computer resources in Russia make Russian programmers more creative in their solutions,” said Dan Dougan from St. Petersburg based Jensen Technologies. To put it more bluntly, Russian programmers can’t afford to buy their own computer so they put it together by hand.

But Russia is lacking many of the incentives that made India such a powerhouse, including special government sponsored schools to teach programming languages, tax incentives and subsidies.

“Don’t even speak about it or I’ll cry!” said Egorov. “That’s why India will sell software near to $6 billion this year and the whole Russia industry will sell near $120 million. That’s the difference.”

Many companies, though wary of too much government involvement, are optimistic that the Russian government may be moving in the right direction. Anatoly Karachinsky, president and CEO of IBS, which spun-off Luxoft, said Russian President Vladimir Putin is supportive of the idea and other government leaders, are falling in line.

“The president plays tennis? Everyone plays tennis. The president started to talk about offshore programming, said it three times, everyone became terribly interested!” said Karachinsky.

But-deservedly or not-the country has an image problem. Russia’s international reputation as a snow-covered Wild West where legal protection for intellectual property rights-as well as just about all other rights-are flimsy and easily violated, rattles many foreign companies. Surprisingly, says Jim Hitch from the St. Petersburg branch of the Baker & MacKenzie law firm, Russia has all of the right laws in place.

“The difference between Russia and the U.S. and other countries is really not what’s written in the laws but how they’re enforced,” says Hitch. He added that foreign companies can minimize their risk when doing business with Russia.

Getting foreign companies to overcome their hesitations of doing business with Russia is one of the main obstacles to offshore programming, says Pavel Cherkashin, president of Moscow-based Actis Systems. “We have to prove a lot that a Russian company in theory can be a good partner,” said Cherkashin. “If we can sell the concept of Russia, it’s 2/3 of our own sale.”

Quality control and proper management are other factors that make Russia a hard sell. Russia trails far behind India in the number of companies certified to assure consistent quality. Only one Russian company has an ISO 9000 certification — one of the globally recognized measures of quality, according to the McKinsey Global Institute report. India, on the other hand, has 109 certified companies.

Another concern is the level of management skill in Russia. While computer programmers are abundant, managers to guide them are not. Only a handful of Russian offshore programming companies employ more than 80 programmers, partly because there aren’t managers with the skills to coordinate that many people.

But none of these problems seem insurmountable. Most of these companies are growing at a very quick pace, which means more jobs and more money for Russia.

“There’s no downside to bringing this offshore development to Russia,” said Matthew Igel, general manager of Kelly Services in Moscow, who recruits IT personnel for offshore programming companies. “It doesn’t pollute the air. There are no health risks. Maybe your eyes will get bad sitting in front of the computer too much, but it’s such a major jobs creation.”

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