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Outsourcing's Russian Front


Alexei Nikolaevsky has had his share of difficulties. In the 1990s, the 41-year-old Muscovite wrote programs for Russian banks -- until the 1998 banking crisis forced major clients out of business. Then he emigrated to the U.S. and worked for two years at a small info-tech company in Texas -- until the dot-com bubble spooked him. Now, along with many Russian IT specialists who moved to Silicon Valley, Nikolaevsky is back home working for one of Russia's fast-growing offshore programmers. "I feel optimistic about the industry," he says. "The business is doing well."

So it is. Russia's software exports were worth an estimated $475 million last year, a 60% rise over 2002 and a ninefold increase over the previous five years. Nikolaevsky leads a team of programmers at Luxoft, Russia's largest software producer, which provides business software for the likes of Boeing (BA), IBM (IBM), and Microsoft (MSFT). And as lower costs drive more Western companies to get their programming done overseas, that list of clients could be just the start. "I don't believe you can do anything to stop outsourcing," says Dmitry Loschinin, chief executive at Luxoft, which expects sales to grow from $15 million last year to $25 million in 2004. "It's like manufacturing moving to Taiwan or China: Nobody is talking about bringing it back." Loschinin predicts that in five years, Russia's software exports will be worth $3 billion to $5 billion.

Russia's outsourcing industry is tiny compared with that of India, which exports $10 billion worth of software annually. And other low-wage countries, notably China and the Philippines, are also trying to break in. Still, Boeing, Dell (DELL), Intel (INTC), and Motorola (MOT) are among the U.S. companies that have set up development centers in Russia, and many more contract out programming work.

It's easy to see why. Programmers in Moscow earn around $12,000 a year -- more than their counterparts in India but about a fifth of the average programmer's salary in the U.S., says Alexis Sukharev, president of software developer Auriga Inc. Sukharev says a U.S. company that gets its programming done in Russia achieves cost savings of 40% to 60%.

SCIENTIFIC EXCELLENCE. But with price competition stiff, Russian developers stress advantages other than cost -- notably the country's abundant technology skills and a tradition of scientific excellence dating back to the Soviet era. "In India, turnover was so high it was difficult to put a team together and stay with it," says Yossi Elaz, vice-president of R&D at Draeger Medical Systems Inc., a Massachusetts medical-equipment supplier that recently began sourcing part of its software development to Auriga. "In Russia, people stay with the company and are committed."

Russia's industry has its problems, though. Most developers consist of 10 to 20 programmers and are too small to achieve any international profile or generate enough cash to expand, says Luxoft's Loschinin. Marketing, he adds, is mostly a matter of informal contacts. While the industry clearly needs to consolidate, managers lack experience in mergers and acquisitions.

Nor is the government doing all it could, many in the industry assert. Local developers point to India, where techno-parks allow small companies to achieve economies of scale and encourage consolidation. The investment climate is nothing to e-mail home about, either. "What is not recognized yet is the need for a favorable regulatory environment," says Sergei Kozlov, Motorola Inc.'s general manager in Russia. Oleg Byakov, an official responsible for IT development at the Communications Ministry, insists that things are changing. "More and more people are aware that offshore programming is a source of faster economic growth," he says. Maybe. But Russian programmers could be disappointed unless such talk is soon translated into action. By Jason Bush in Moscow


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