Outsourcing Growth Outstrips Staff Supply

From: The St.Petersburg Times; Tuesday, November 16, 2004
By Sveta Skibinsky
STAFF WRITER

The past few months St. Petersburg's software outsourcing industry has seen tremendous growth, with large multi-national and Russian companies opening branches in the city.

Yet, as the industry began to overcome problems related to a general market immaturity, it was the shortage in the supply of qualified personnel that emerged as the biggest challenge locally.

St. Petersburg's software outsourcing industry is second only to Moscow in size, claiming a 19 percent market share: that's almost $100 million of the country's total $540 million software export sales this year.

"The recent [expansion] trend leads us to believe that St. Petersburg is becoming an increasingly attractive destination for establishing research and development centers (R&DC)," said Valentin Makarov, president of Russoft - an association of Russia's software developing companies.

"The list of multinationals that have established R&DCs here in the last few months is amazing: Intel, Sun Microsystems, Alcatel ... as well as the biggest Russian companies, such as Epam and Luxoft," he said.

Nevertheless, a recent survey of offshore software development conducted by Outsourcing-Russia.com showed that more than 80 percent of Russia's industry players are still independent companies, and less than 14 percent serve as development centers for large multinationals.

CONSOLIDATION

Although the size of St. Petersburg's software companies has been increasing, there has developed a tendency to settle more market consolidation as opposed to out-and-out growth, said the editor of Outsourcing-Russia.com, Alexey Shorin.

Among the promising upcoming deals, Shorin named the acquisition of St. Petersburg-based Star Software by a major industry player, Epam Systems. The deal has not been officially announced, but Epam System's director of business development confirmed that the acquisition was at the signing stage, in an earlier statement to business daily Vedomosti.

Shorin believes that this emergence of big industry players should make it easier for Russian companies to secure bigger and more lucrative contracts from desirable clients, and to compete more with more muster on the global market.

CLIENTS

Despite industry surveys reporting the U.S. as a key market for Russian firms, Star Software CEO Nickolai Puntikov said that, in the first place, Russian companies aim for the European markets. In fact, most the key clients for St. Petersburg software developers are in Europe, and Puntikov's own company relies on 80 percent of its business coming from European clients.

Scandinavia is another area increasingly attractive to the Russian IT sector, with a few St. Petersburg-based developers, such as Arcadia, working closely with companies in Norway.

"In St. Petersburg, American companies have never been the leading clients. Even Luxsoft, that does [software] development for [American] Dell works with Dell's EMA division (Europe, Middle East, Africa)," said Puntikov.

The traditional choice for American companies, with a large outsourcing budget at their disposal, has been India. Considering that in Europe the practice of outsourcing began to develop much more recently, Eastern European countries, including Russia, were seen as more suitable and geographically closer territory, said Puntikov.

"India's strengths are in routine maintenance, while ours is in R&D. We do challenging problem-solving, dynamic XP programming. Plus Russia is close to Europe so it's a natural choice for most European countries," said Puntikov.

QUALITY ASSESSMENT

One major obstacle to securing big contracts up to now, has been the lack of agencies providing quality assessments (QA) in Russia. Over the last year the amount of companies that have adopted their practices to international ISO and SEI CMM standards has sharply risen.

As of now nine St. Petersburg companies have been certified and twenty others are on the way to certification, Makarov said. "Russoft organizes dozens of training sessions and events devoted completely to QA. In my opinion, the certification process is not an obstacle to doing business in Russia anymore," he said.

PERSONNEL

Though welcoming in terms of credibility and expansion, the entrance of large, new companies to the local market has heightened the competition for the industry's main resource: human capital.

"The haunting problem of the domestic software development market is the lack of qualified personnel," said CNews analyst Roman Borovko to Vedomosti. Market consolidation is part of the solution, he said, as smaller companies fill the void.

Maintaining strong human resource capital, however, requires long-term commitment and educational investments.

"Large companies such as Intel started investing into education right away, upon entering the city," said Puntikov. "They established connections with the city's universities, made sure specialists in the fields were being prepared. "But, smaller companies should also participate in the process. For example Star Software is getting ready to launch its own commercial educational center, which will provide continuous education and training to the professionals in the field."

The education is exactly one area where the government could step in to help, said Puntikov, suggesting that by making sure professor salaries were attractive to retain the highly-caliber staff, the country's universities would secure a continued line of quality personnel in the future.