Global Economics

Bad Image Hurts Russian IT Outsourcing


Despite Russia's growing IT industry, Gartner says companies are wary of the country thanks to a continuing perception it's a difficult place to do business

Russia is bidding for a bigger slice of the lucrative global offshore outsourcing market but is being hindered by the continuing negative international perception of the country.

Russia's IT services industry is currently growing at about 10 per cent per year and was worth $1bn in 2005. But despite Russia being in Gartner's top 10 list of near-shore outsourcing locations, the analyst claims companies are still wary of sending work there.

Ian Marriot, research VP at Gartner, told silicon.com: "One of the biggest challenges is global public perception of Russia as a place to take work to. If you look at what companies are doing, they are saying they are happy to do business in Eastern Europe - but not Russia. That's going to take years to break down."

Dmitry Milovantsev, Russian deputy IT minister, claimed in an interview in Moscow attitudes are changing and the Russian economy is being reborn as "an economy of high technologies", although he admitted the country can't compete with the scale and low cost of India and China.

He said: "That is why we compete at the high-end. India and China will never have people with such experience as our people have. If we position Russia against India and China, Russia loses its competitiveness. We don't want our labour force to cost as low as China."

While the Russian government is paying more attention to IT and investing in a series of 'technoparks', such as one 120km outside of Moscow at Dubna, the country's natural resources - oil and gas - remain the primary investment focus for the government.

One of Russia's strengths, however, is the mathematical, engineering and science graduates turned out by the country's universities, a legacy of the Soviet education system. This means Russia has one of the highest numbers of scientists and engineers per capita, according to the World Bank.

The faculty of computational mathematics and cybernetics at Moscow State University, for example, takes in 500 new students per year - 10 per cent of the entire university's new intake - and turns out 450 graduates annually.

The courses are rigorous with first year undergraduates focusing on mathematical modelling, mathematical physics and quantum computing before specialising in later years. Specialist research areas include cryptography and internet banking security.

The students also take a mandatory two-year English course for four hours per week and do a half-year internship in their fifth year. Boris Berezin, professor and vice-dean of the faculty, said the quality of the graduates means they are in high demand.

He said: "We cannot prepare enough students to meet the demand of companies. This fundamental type of education is quite complex for students because it is a huge workload. But as a result of this they have a very well developed brain-set."

That is evident at one of Russia's biggest IT outsourcing firms, Luxoft, where 70 per cent of the 2,300 workforce have Master's degrees, and six per cent have PhDs. Dmitry Lochsinin, CEO of Luxoft said in an interview in Moscow the company is using this to target the kind of high-end work that companies "don't normally outsource", such as equity trading applications and core enterprise systems.

Current customers include Citibank, Deutsche Bank and UBS. Lochsinin said he is confident Luxoft will see "60 per cent-plus growth again this year".

However, Gartner's Marriott said: "Russia is in the leading pack of countries capable of doing this stuff but it is still cheaper in India and you get a broader range of services. It's also still difficult to do business in Russia and to set up a captive [operation] there."

Provided by silicon.com—Driving Business Through Technology

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