Complexity and Risks

There are challenges and many risks in entering the Russian market. All are more prevalent to firms making direct investments, but even buyers of outsourced IT services need to account for these risks.

Geopolitical. While democratic and free market policies and practices have been introduced over the past 15 years in Russia, they have not exactly flourished, and in some areas have even receded in recent years. While in some cases this is not overly relevant to buyers of IT services, they need to remain very aware that their service provider is operating in a very different market than those in the West. Levels of political instability fluctuate, Western-style personal freedoms are often tested, and there are ongoing disputes, with varying degrees of intensity, with the former Soviet block country neighbours.

Market/Economic. While the Russian economy is strong and growing, it is highly dependent on natural resources. This is not a problem today, nor is it likely to be in the near future. But a major drop or collapse in energy prices would hurt the economy, and impact nascent government attempts to strengthen the export-services market.

Infrastructure. Telecommunications and network infrastructure is good in major cities, and the government plans to invest more to improve these services. Given the slower growth of the services market, infrastructure is not being stretched as much as in other markets like India and China. However, in the outlying cities, where the lower-cost labor resides, infrastructure is still below standard, so buyers need to thoroughly assess infrastructure needs and plan contingencies accordingly.

Legal and IP. Russia’s bid to enter the World Trade Organization is putting Intellectual Property (IP) rights on the agenda of Russia’s lawmakers; however the Russian legal systems and overall IP protection practices need improvement. IP concerns and an unpredictable legal system to defend those concerns is one reason why multinationals have preferred to maintain tighter direct control over their own operations. Buyers must account for IP risk for any work in Russia, especially R&D, and also recognize the potentially limited recourse available via the legal system.

Crime and corruption. Crime and corruption is high and, by many measures, growing in Russia. This has not impacted the IT services industry as much as others, but buyers must account for this, both from the perspective of the work being performed as well as when they personally venture into Russia.

Many companies are also concerned about the lack of transparency in business and government and the reliability of law enforcement

Capacity. Russia is a large country with a solid educational system and a significant employment base for high-tech jobs. The market is small, though, relative to India or China. Russia’s population level is also declining, as are expected life-span and immigration. So the ability of Russian services firms to support significant growth beyond current levels will be challenged. It is more difficult for Russian technology workers to get visas to the U.S. and Europe, which limits their mobility.

Business/Industry skills. While Russian IT-services firms have strong technical skills, knowledge and contextual understanding of Western business practices and industry requirements is generally limited. Russia service providers with Western operations are stronger in this respect.

Global Services Delivery and Management Model

Outsourcing buyers need to clearly review their reasons for considering the Russian services market. It is not just another low-cost offshore location or alternative to India. It has both important positive and negative differentiators. Buyers typically require a specific hook or angle to consider the Russian services market, such as the need to access the specialized high-tech skills present in the market, other business interests in Russia, or past personal positive experiences with the providers.

If Russia is the right market to consider, buyers must tailor their global service delivery models to account for its services market realities based on the attributes described above. The key is to make sure Russia is the best source for the services required as compared to other lower-risk countries.

The Russian IT-services market is a relative newcomer to the global stage. While the country as a whole is one of the largest for low-cost IT services, its export market is small.

However, it is showing solid capabilities and potential for growth in specialized high-tech areas, especially software products and embedded software.The market has been the most dynamic and appealing for high-tech multinationals, such as Boeing, Motorola and Texas Instruments, that have made direct investments into the country. Costs are generally competitive globally, below the Indian market, and much better than nearshore locations. Technical skills are very strong, but English-language skills lag India.

The Russian government has shown increased interested in promoting the services market and helping to build out its infrastructure, but much more support is needed. Economically the country is strong, though somewhat one-dimensional, and geopolitically it is somewhat fragile. Russia is a viable source of IT services for many buyers, but offers a more complex proposition than many other locations.