In earlier issues of Global Services magazine, we haved reviewed the importance of organizations developing a Service Delivery Model (SDM) to help guide them through their outsourcing and subsequent management efforts. We have also reviewed how to tailor an SDM to the Chinese services market and to the Central and Eastern European markets.

Moving further east from Europe, this article will explore options for organizations to source outsourcing services of the Russian market. While there are several other states from the former Soviet Union that are developing services-export markets, most notably the Ukraine and Belarus, we will focus here on Russia, the largest, most complex and lucrative market. Lessons learned from the Russian services market will also apply to other former Soviet states.

Profiling the Russian Market

The Russian outsourcing services market has its roots in the strong science, technical and engineering capabilities of the government and defense industries of the former Soviet Union. Historically, however, a commercial IT software and services market was virtually non existent. Following the dissolution of the USSR, there were few commercial opportunities for the large pool of skilled technologists in the public sector, and that sector itself struggled under significant budget reductions. The result was that many practitioners left the public sector to form local high-tech start-ups or emigrated to the West. The business environment for start-ups was limited compared to Western countries and even to India, from the perspectives of governmental support, access to capital and home market demand. However, the situation has steadily improved over the past 15 years.

Russia’s internal and export services markets today are focused primarily on IT and related high-tech, engineering and Research and Development (R&D) services. Export services related to commercial packaged software applications are nascent (Russian IT service provider Luxoft being an exception), and those around back-office BPO (e.g., finance and accounting, human resources and procurement) are non-existent. The Russian IT software export market will generate one billion dollars in 2006 (India is in the $25 billion range), and the country’s total IT market is more than $10 billion. Many large high-tech multinationals, including Intel, Motorola and Boeing, have developed significant captive operations in Russia, and Boeing’s Russian R&D facility is its second largest in the world.

Most Russian software development companies use the time and materials pricing model when marketing to U.S. and European customers, selling their man-hours instead of products. While the Indian companies have been using the time and material business model since the Y2K days for software products, many have evolved into a fixed-price model that allows them to capture value from maturing processes and productivity gains.

In contrast to the large multi-nationals with Russian operations, the domestic software service provider market remains generally small and fragmented. A few key players are emerging , but most service providers are unknowns in Western markets (See Figure 1). There are also many Western headquartered firms started by Russian expatriates. Russia — in contrast to India, the Philippines and Central/Eastern Europe — has not been a major target location for new operations by multinational and Indian outsourcing service providers selling services back to the West. There are a variety of reasons for this, including language, capacity, travel constraints and ease of business operations, and none of these reasons will change significantly in the short-term.

LEADING RUSSIAN SOFTWARE SERVICE PROVIDERS

Russian government support for the IT-services industry has been limited overall, and especially compared to that of the U.S., India or even more recently China, though this has begun to change. Earlier this year, the country’s Ministry of Information Technology and Communications announced it will form an agency to support IT exports. The government has also announced plans to develop four regional high-tech zones, and has earmarked $50 million to fund their infrastructure. This is a step in the right direction, but the investment levels are small and other efforts to address restrictive taxation policies as well as create a state funded high-tech investment fund have been slow to move forward.

Russian marketing and sales efforts have lacked sophistication, especially when compared to their Indian competitors, but Russian interests have made progress in the creation of trade associations and related industry advocacy groups. The largest — with 80 member companies — is RUSSOFT Association (www.outsourcing-russia.com), formed in 2004 via the combination of the Fort Ross Consortium with the National Software Development Association. APKIT is the Russian Information and Computer Technologies Industry Association, a trade association that includes Russian and Western IT firms (e.g., Microsoft and HP) and acts as a lobbying body in the Russian government.