Why Russia?
Entering the Russian market directly via the development of a captive operation, a joint venture or through a related direct investment is not advisable for the average Western end-user organization. The immaturity of the market and various associated risks likely outweigh the benefits. Even larger multinational high-tech and services firms need to move cautiously in the Russian market, though many have done so successfully to date, as noted above. There are viable opportunities, however, for Western buyers to access Russian talent through local Western expatriate and Russia-based service providers.
There are, however, several reasons for buyers to consider the Russian market. Some of these are similar to those that would apply when considering and selecting any non-home market location for services. Others are more specific to Russia itself.
Skills. As noted, Russian service firms possess strong engineering, R&D, mathematic and related high-tech skills. Accessing these skills is the most prevalent and practical reason to target this market. The educational system remains good, especially in the sciences with over 100,000 graduates with degrees in computer science, engineering, physics and mathematics every year. In addition, a large number of scientists and academics were laid off in 1992 after the collapse of the Soviet Union. Russia has no recruitment industry to coordinate this massive talent pool into an industry that can be leveraged by Western buyers. Companies such as Intel, Boeing and Microsoft all have captive centers in Russia with hundreds of programmers and various staffing models. For example, Boeing augments its center through outsourcing and staff-augmentation agreements with Russian companies, while Intel’s facility in Nizhni Novgorod employ’s Russian engineers directly. Business-management education, however, is weak when compared with Western markets and India.
Cost. Outside of the major cities such as St. Petersburg and Moscow, Russian hourly service rates are lower than those in India but higher than many areas of China. Russia overall is very competitive in the global market based on the quality/skills delivered for the unit cost. Russian salary levels are relatively lucrative and appealing, which helps to retain local talent.
Proximity and Western expatriate base. Russia does have some geographic-proximity benefits to Western Europe and in some cases Japan and the Far East. Proximity is more a benefit when a Russian provider has established Western operations that can front for the Russian-based technical resources.
Motivation and stability. The Russian services market is not as dynamic as markets like China and India. Turnover rates are low and employee motivation is relatively high. Because of the recruiting problem, IT staff has fewer alternatives to job hop and because of visa difficulties to easily emigrate out of the country. Russia is not, nor will it likely become, a member of the European Union, and it will not experience the wage pressure and employee migration issues facing service providers in Central and Eastern European countries.
There are some other common reasons why buyers often should choose offshore markets other than India that do not as readily apply to the Russian market as to others.
Diversification. Global diversification is often a good reason for buyers of outsourcing services to move beyond their home country or the top two or three offshore locations. Diversification to the Russian services market, however, can potentially increase a buyer’s risk profile. This is likely the case with direct investment, but less so the case when using Russian service providers, especially those with established Western operations or headquarters.
Language and culture. Russian Western-language skills, particularly English, are adequate, though not strong as in other markets, notably India and the Philippines. From a cultural perspective, Russia is not similar to most Western markets.
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| A VIABLE RUSSIAN OUTSOURCING SERVICES MARKET |
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Moderate outsourcing experience and sophistication. The Russian market is not as complex or exotic as some emerging Asian or African markets, but it is not for the novice outsourcing buyer. It is suited for smaller, less-sensitive projects |
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Focused on IT and related technical services, not business-processes related services outside of R&D and select knowledge-process related work (e.g., analytics and design) |
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Need specific, specialized technical skills. As cited above, Russia is strong in technical areas requiring scientific experience and sophistication, but it is not necessarily the best go-to location for large-scale, inexpensive coding skills |
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Appropriate project attributes. Given the size of the Russian export-services market and most of its providers, it is more suited for smaller, contained projects. Projects that require a high degree of collaboration are likely not best suited for Russian providers unless there is a local presence. With a few exceptions, Russian service providers are not versed in commercial packaged-software applications |
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Prior or existing market experience in Russia is not a prerequisite given the recent emergence of the country as a provider of export services. Any parallel investments being made in Russia would greatly contribute to its appeal |
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Buyers must be comfortable with the higher level of legal and IP risk associated with doing business in Russia, and should have experience in dealing with similar markets. |
Market presence. Until the late 1990s, the concept of marketing and sales as a part of the university curriculum and business environment was non existent, causing the Russian market to lack the lure to Western buyers like of those in India or China. Some industries (e.g., energy, minerals, consumer products and telecommunications) are targeting the market, but for the most part it is not common to invest in the Russian services market to gain a springboard into the overall economy.
