Russia's one big chance to play catch-up

From: The Financial Times; September 04, 2002
By Alan Cane

Is Russia set to challenge or displace India as the world leader in offshore software development?

On the face of it, the subcontinent has an unassailable lead. Last year the Indian offshore software market was valued at more than $6.2bn, the result of 20 years of government support and encouragement for the indigenous industry.

By comparison, the Russian market was worth under $150m. So, the Russians have a long way to go if they are to create, virtually from scratch, a robust and sustainable software industry.

The rewards for success, however, could be considerable and there is a clear window of opportunity. According to Swedish figures, the global demand for IT services will rise to more than $1,000bn by 2008 compared with $327bn in 1997.

Furthermore there is a chronic shortage of programmers in the west — more than 880,000 in the US alone according to one estimate, while Russia is producing graduate programmers at a rate of 100,000 a year.

The practice of outsourcing software development to third parties — often in foreign countries — is becoming increasingly important in Europe and the US as companies seek to cut costs and concentrate management time and effort on core business activities rather information technology.

India was one of the first countries to recognise that it had the assets to allow it to offer a competitive software development service to customers abroad.

First, a large pool of highly educated, skilled computer specialists who are paid a fraction of the remuneration earned by programmers in wealthier countries.

Second, efficient communications. The Indian telephone network has been greatly improved over recent years. Even so, some companies prefer to install their own satellite base stations.

Third, a business and cultural infrastructure which is roughly similar to that of the customer's country. And fourth, a government which is sympathetic to and supportive of the local industry's efforts.

It has to be said, however, that the continuing tension between India and Pakistan and the threat of war worry some potential customers.

So how does Russia match up? St Petersburg, famous for Nevsky Prospekt, the Hermitage Museum and Etienne Falconet's "Bronze Horseman" statue of Peter the Great, is the spearhead. It has four universities — St Petersburg State University, the Technical University, the Electrotechnical University and the Institute of Fine Mechanics and Optics, taking in some 1,400 programming students a year. Are they any good?

Well, for the past two years, students from the State University have won the IBM world computer championship.

There are a small number of IT companies in St Petersburg including Reksoft, Luxoft, Arcadia, Baltros and DataArt, several of them US-owned, employing the output from the universities.

Salaries, by western standards, are low. A programmer who could expect to be paid between $35,000 to $60,000 in the US would receive $5,000 — $7,000 in St Petersburg, according to Richard Leslie, a director in DataArt Technologies' London office.

It means that projects can be carried out approximately 70 per cent cheaper than in the West and below Indian rates.

He points out that the Russian programmers are intensely patriotic: "They are committed to putting St Petersburg on the map and making it an established leader in IT".

In general, the cultural and technical infrastructure in Russia is satisfactory although Russian software specialists are excellent on the theoretical and engineering aspects of a problem, but weaker on commercial matters.

However, the Russian government has a perception that software could be an important element in the overall economy, but has yet to formulate a clear commercial strategy.

St Petersburg and other software centres in Russia have developed on an ad hoc basis without government support. A stable legal environment encompassing intellectual property rights and a national training programme would help.

Companies such as Xerox, Honeywell, Motorola and Boeing have all taken advantage of the best Russian computing brains. The window of opportunity will not remain open, however.

Russia may be able to develop software more cheaply than India at present, but some East European states — Hungary and Poland, for example, have programmers who are just as accomplished.

Further east, China is waiting in the wings. If Russia is to become a force in world software, the next few years are going to be critical.