Index of articles, June 12, 2006,1895,1974935,00.asp

Outsourcing: The Russian Revelation

By Stan Gibson

When Daniel Marovitz sought an offshore partner, he scanned the globe. "We talked about Canada, Ireland and low-cost locations in the United Kingdom. But it really came down to India and Russia," said Marovitz, chief technology officer for global banking at Deutsche Bank's investment banking unit, in London.

Marovitz soon found the approaches of companies in those two countries could not be more different—and that a Russian outsourcing provider would best satisfy Deutsche Bank's needs in maintaining and enhancing its 5,000-user "client-first" CRM (customer relationship management) system for investment bankers.

Want to have applications built in Russia?

As Marovitz learned, the thing to remember is that you're not in India, where you may become accustomed to seeing hundreds of workers assigned to a project that they will dutifully attempt to execute according to instructions, cheerfully saying "yes," even when they have doubts about the methodology or the deadlines.

In Russia, it's the opposite: You won't find big companies with big teams willing to say "yes" to your every whim.

Instead, you're likely to find a small team of experts ready to grill you with tough questions. It may be jarring at first, but for certain projects, it can be just what the doctor ordered.

That cultural difference is one of the larger take-aways from the Russoft Association's Russian Outsourcing & Software Summit, a conference in which outsourcing companies from Russia, Belarus and Ukraine met to promote their services here from May 31 to June 2.

"In Russia, the good news is that you have very creative and strong-willed people. And the bad news is that you have very creative and strong-willed people," said Marovitz.

"In India, people want to say 'yes' to please and to follow instructions. That can create problems sometimes. In Russia, people aren't afraid to tell you that you have a silly idea that makes no sense whatsoever. But that's what you need.

"Sometimes you have to stand up and explain why you want something done a certain way. It's easier to have a relationship where the line between employee and vendor gets blurry because people are active members of the team and not just following orders."

However, apparently not all outsourcing customers are used to hearing "nyet." The Russian software outsourcing industry, with about $1 billion in annual sales, is dwarfed by that of India, which boasts $24 billion in annual revenue, according to Forrester Research.

For comparison, IBM on March 6 said its spending in India would be twice as large as the entire Russian market during 2007. Overall, IBM said it will invest $6 billion in India over the next three years. Indians have a nearly limitless skilled labor force, widely speak English and are expert at understanding Western business culture. Those attributes have propelled Indian providers to a steep growth trajectory and global prominence in the past decade.

Russian providers, while they might be a decade behind the Indian companies in maturity, boast some advantages nonetheless.

For example, in the case of Deutsche Bank, the world did not appear as flat as some might believe. The cost of maintaining a relationship between the bank's London offices and India loomed much higher than one with Russia in terms of travel, time zone differences and management costs.

Knowing that work on the bank's CRM applications would require frequent travel back and forth, Marovitz signed a deal with Russian software outsourcing firm Luxoft to handle maintenance and enhancement of the applications. Beginning with about 24 programmers in December 2002, Luxoft now has about 200 working on the Deutsche Bank applications.

"In India, there is a high infrastructure cost to make things work. Even a small team can cost a lot of money to work with," Marovitz said. "With Russia, it's just 3 and one-half hours from London and a 3-hour time change. It's easy to do a two-day trip. For those reasons, it seemed like a good fit for us."

Marovitz said he was also impressed by Luxoft's size. "Luxoft was already working with Dell and Boeing and also the U.S. Department of Energy. They're much bigger than the other Russian players," he said.

Proximity to Europe also was important to British Telecom Global Services, which signed a deal with software developer Fathom, of Budapest, Hungary, two years ago to upgrade BTGS' Web portal for corporate customers. Fathom was acquired last year by Epam Systems, of Lawrenceville, N.J., an outsourcing company with development offices in Russia, Belarus and Hungary.

"They are 3 to 4 hours away. It's easier to communicate between onshore and offshore people. There wasn't a big cultural divide," said Andy Pennington, portal product manager for BTGS, in London.

The creativity and narrow but intense focus of the Russian providers have led some U.S. companies to recruit them for product development. SirsiDynix, a $100 million company specializing in library management systems, discovered StarSoft Development Labs, a $10 million development house with offices in St. Petersburg, Russia, and Cambridge, Mass. SirsiDynix and StarSoft signed a deal that calls for StarSoft to develop SirsiDynix's next-generation, Web-portal-based library management system.

To carry out the work, the companies adopted a team approach involving 25 StarSoft developers in Russia and 25 at SirsiDynix offices in Salt Lake City and Denver. The new system, called Horizon 8.0, was developed in one year. "It's extremely successful, and we're very happy with it," said Jack Blount, a SirsiDynix board member based in Provo, Utah, and formerly president and CEO of Dynix, which merged in December with rival Sirsi.

Blount is moving on to start a new company, Alphabay, which is developing retail supply chain systems. He said he plans to employ StarSoft. "StarSoft is an innovator in the space that we need—new products. I needed people to be hired fast and working fast, with no attrition. The Russian companies can staff quickly."

StarSoft also got the call from the Denmark offices of Computer Sciences Corp. for a project called Labka II, a software product for Danish hospitals and laboratories. Proving work with Russian outsourcers is subject to the same pitfalls as work with other providers, the Labka II project was plagued by communication problems that caused the project to fall behind.

"There was an us-versus-them mentality. There was bad communication. There was no CSC presence on-site," said CSC Program Manager Alan Guthrie, in Taastrup, Denmark, who took on the assignment of setting things aright.

Guthrie established a global program office and assigned CSC staff to the development team, which swelled to 60 members. "To improve communication, we brought some StarSoft people from St. Petersburg to [Copenhagen, Denmark]. We used Skype. We established a disciplined requirements definition," he said.

Looking back, Guthrie said cultural differences were behind the delay.

"Russian and European cultures are different," he said. "The Russian team will work longer hours without complaining. There is a shorter workday in Denmark. The Russian style is closer to the U.S. style. They want to overachieve. Nothing's guaranteed. They want to debate. They want to understand why. They might be more compatible with an American client."

Guthrie added U.K. and U.S. workers to the CSC team to help bridge the gulf. "When you spend the time to build the right relationship, it's outstanding," he said.

Work on specific projects, often for software products that incorporate critical intellectual property, has led some customers to engage Russian providers in BOT (build, operate, transfer) deals. Storage products vendor Isilon initially set out to establish an offshore captive operation. After trips to Russia, Ukraine and India, Isilon executives decided that working with Mirantis, a Russian service provider, was the best approach.

"We were looking for a SWAT team to develop a very specific clustered storage product," said Mark Schrandt, vice president of engineering at Isilon, in Seattle. "We wanted creativity in the process. We wanted unique intellectual property, with a prenegotiated buyout option."

Once initial development is complete, Isilon will bring the Mirantis team on board to work on the next version of the product in-house. "It's a good idea where intellectual property is involved," Schrandt said.

"Russian companies are willing to do this in order to catch up. In India, you can't find one BOT that has worked. In India, there's too much attrition. We will save millions each year if we keep growing," Schrandt said.

The difficulty an outsider faces in starting up an operation in Russia is another reason to seek out a partner. "It's hard to start off a new operation in Russia with no experience," said Dmitry Loschinin, president and CEO of Luxoft, in Moscow.

Once the operation is up and running, a BOT approach can address the IP protection, Loschinin added.

"One answer to the question of security is to make everyone an employee," Loschinin said. Luxoft entered into a BOT agreement with two customers and is willing to consider the same approach for others, he said.

Luxoft also responds to security concerns by isolating from one another the teams working on various customer projects. In Luxoft's building in Moscow, the team that is working on the Deutsche Bank project—and the IT systems they use—is kept separate from other teams.

Luxoft also is willing to send large teams to work on-site at customer facilities, another approach that can enhance security. In the case of Boeing, for example, Luxoft has 150 people working at Boeing's Seattle facilities.

Concern about retaining IP is akin to customers' concerns about vendor viability. Karl Robb, executive vice president of global operations for Epam, in Budapest, Hungary, said he is no stranger to intense customer scrutiny. "Clients want to see errors and omissions insurance and several years of audited accounts," Robb said.

Robb also said BTGS' work with Epam is small compared with its work with Indian outsourcers HCL and the Progeon unit of Infosys and that comparisons between Indian and Russian providers are inevitable. "BT has several thousand people in India, but we fill a niche in complex product development," he said.

BTGS' Pennington said his company ensures IP protection through "very strict" supplier agreements. He also said the Indian and Russian stereotypes are true, but only to a degree. "Epam will work more with a partnership. They will offer advice. Indian firms will tend not to disagree," he said, adding, "but I've seen guys at Epam who do just what they're told. And Indians do have onshore people who are great at being part of the team."

Using Indian and Russian re-sources in a complementary fashion is key to BTGS' strategy. Pennington said his company's Indian partners test the code that's produced by Epam.

Said Deutsche Bank's Marovitz: "For large firms, like Deutsche Bank, the key is, to use a British expression, 'horses for courses.' It's important to think about what you're trying to get done. If it's maintenance for COBOL or FORTRAN, you're better off trying to get that done in India. In Russia, developers won't be very happy to do that kind of work. In Russia, it would be better if your work were more interesting and you were trying to push the technology envelope so that people can try out new ideas."

Marovitz suggested taking a portfolio approach for business continuity and disaster planning and hedging your bets on wage inflation and attrition. "Different people are better at different things. The Russians are definitely a powerful part of our strategy," he said.

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