White Paper.

IT Outsourcing: Russian Perspective

IT Outsourcing: Russian Perspective

White Paper

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White Paper. IT Outsourcing: Russian Perspective

TABLE OF CONTENTS 1. What is IT Outsourcing? 3 2. Offshore IT Outsourcing . 3 2.1 Ownership .. 3 2.2 Contracting.. 4 3. Key Reasons for IT Outsourcing .. 4 4. IT Offshore Markets .. 4 5. Russias IT Offshore Market . 4 6. Benefits of Russian IT Offshore 5 7. Challenges of Russian IT Offshore . 8 8. 10 Keys to Offshore Outsourcing Success to Russia .. 9

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White Paper. IT Outsourcing: Russian Perspective 1. What is IT Outsourcing? The procuring of services or products in Informational Technology, e.g. applications development, from an outside vendor or manufacturer in order to cut costs and achieve other benefits of IT Outsourcing in order to make business processes more effective and be more competitive on market. Outsourcing is not something new, as larger companies have always considered using outside resources for performing particular tasks instead of resorting to their own workforce. As a result, many small companies based in a low-cost climate have entered into long term partnerships with western corporations that have realized that going beyond national boundaries to search for costeffective, highly skilled workforce is the way to success. But since in the early days cost was considered the only reason for hiring outside contractors, nowadays theres a turn, as companies become more and more aware of the rest of the advantages outsourcing can bring. Today, most IT managers consider outsourcing to be the most affordable solution for a company interested in becoming more efficient by reducing costs and accessing state-of-the-art technologies without spending additional funds on research and development. 2. Offshore IT Outsourcing Although it currently represents more then $10 billion global IT services market, offshore software outsourcing is playing an increasingly important role in the information technology (IT) strategies of major corporations and attracting the interest of business and technology decision makers across the vertical industry spectrum. Meanwhile, global and regional U.S. and European consulting and systems integration companies are incorporating offshore delivery into their go-to-market strategies, joining established Indian suppliers and emerging software services from other countries in a growing and dynamic market. In short, offshore delivery is becoming part of the global IT services industry mainstream. Offshore software development is characterized by two basic business models linked by a common set of value propositions. The first model based on ownership. The Enterprises set up wholly owned facilities overseas or form joint partnerships with offshore sup-pliers to take advantage of low wage scales and skilled labor and/or to establish a market presence in a particular country. The second model is based on contracting an existing IT consulting and software development firm. Clients contract with offshore suppliers to carry out all or part of a software project. Increasingly, this model is characterized by on-site/offshore delivery where supplier personnel work at a client site performing requirements gathering, architecture, prototyping, and related activities. Coordination with offshore facilities and client interactions is the responsibility of a dedicated project manager. Each of these business models has its own advantages, as well as drawbacks. 2.1 Ownership IBM, Nortel Networks, Cisco Systems and Deutsche Bank and many others have established their facilities in India several years ago. Microsoft, Boeing, Dell, Motorola, Intel among others set up joint ventures and direct ownerships in Russia. Ownership seems to be one of the most attractive and beneficial long-term strategies. However, it takes time, money and a lot of effort to have it work effectively, not to mention all kinds of risks that doing business in low-wage countries involves (for example, establishing a legal presence, taxation, labor law issues, property rights in software, etc.).

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White Paper. IT Outsourcing: Russian Perspective 2.2 Contracting As a business strategy, Contracting is more popular then previous model. Compared to Ownership, it needs far less money, but is not devoid of risks either, though of a different kind. The real problem here is to find the right team of developers. For lack of comprehensive and independent information about the IT Outsourcing market, not many foreign companies get it right the first time and often fall victim to the jack of all trades, master of none syndrome common to some of the IT Outsourcing companies. In a good case it is a company with global presence and can provide services with high level of project management and on-site presence at clients location. 3. Key Reasons for IT Outsourcing Reduce and control Operating Costs - The major benefits of outsourcing are significant cost-savings. Offshore outsourcing is particularly cost beneficial. A typical company can save up to 60-70% on outsourcing to low labor-cost countries. Faster time-to-deployment By integrating onsite and offshore teams, service suppliers are often able to work on a 24/7 basis, spanning time zones and deploy follow-the-sun development to reduce time-to-completion on high-priority projects and testing schedules and deliver rapid cost-effective results. Focus on core activities Outsourcing non-core functions, either locally or offshore, frees internal resources to focus on business-critical initiatives and reduce dependency on thirdparty contractors. Access critical technology skills Offshore outsourcing has opened up a global technology talent pool, providing enterprises with affordable access to critical IT skills. Improved quality Led by Indian suppliers, offshore outsourcers as a group have embraced third-party quality standards and software life cycle processes that, in some cases, are more rigorous than those of their customers. 4. IT Offshore Markets With 2001 export revenues that surpassed $6.2 billion, Indian suppliers dominate the offshore software services industry. Suppliers from Russia (and other former Soviet bloc nations) among with China, Taiwan, Pakistan, Jordan, Egypt, Mexico, and other countries entered the market and adapting business models established by Indian firms that have dominated the services sector in the past decade. The emergence of new offshore centers has been marked by new approaches and skill sets, adding to the services and value propositions that define the offshore sector today.

5. Russias IT Offshore Market For many years Russia wasn't considered as a serious player on the global software development market. Russia is one of several emerging countries that are seeking to challenge Indias dominance as an offshore service provider. Although Russia has a long way to go to match Indias success, it has all the capabilities and resources to compete and win a large share in this market According to Gartner Research, by 2007 Russia will capture at least 5 percent of the market share of offshore services revenue in the North American and Western European Markets. 4 ALTOROS SYSTEMS 5600 West Mariner St., Suite 118, Tampa, FL, 33609 http://www.altoros.com email:info@altoros.com Phone: (813) 731-3010 Fax: (413) 513-2868

White Paper. IT Outsourcing: Russian Perspective 6. Benefits of Russian IT Offshore 6.1 Stable economic growth and a booming IT market. Today, Russia is the most dynamically growing country in the Eastern Europe. It has overcome many of the consequences of the 1998 financial crisis, with real consumer expenditures and disposable incomes rising steadily. In 2000, Gross Domestic Product (GDP) grew by 7.4% and growth in 2001 is estimated at 5%. Despite the global IT industry crisis, the Russian IT sector has grown more than 23% in 2001 generating revenues of over $3,4 billions, and is expected to reach $4,6 billions by 2003, according to the recent research of Brunswick UBS Warburg. Russia has the highest spending level on information technology of all countries in Central and Eastern Europe. It offers a large market with a population of nearly 150 million, and the seventh fastest growing consumer market in the world. Software development and the provision of IT services are the fastest growing sectors of the Russian IT market. According to Brunswick UBS Warburg and Gartner's research, it is estimated that Russian offshore application development market will exceed $1 billion by 2005. 6.2 Government support What is even more important is that the government has started to show an active interest in the development of a strong IT and offshore software development industry. It has launched several initiatives aimed at assisting IT and software development companies. Building a strong national IT sector is a priority for President Putin, his administration and the State Duma. 6.3 Large pool of highly qualified talents For decades the USSR was investing heavily in education and research programs preparing the world's most brilliant scientists, engineers, and mathematicians. The Russian education system is considered among of the best in the world. According to UNESCO the country is among the world's leaders in terms of engineers per 10 000 members of the population, with 55, and science students still make a record 50% of total graduates. The literacy rate in Russia was estimated at 98.7% compared to 65,38% in India (Source: Ministry of Education of Russian Federation 2001, Provisional Population Totals : India . Census of India 2001, Paper 1 of 2001) Average Literacy Rate in Russia vs. India
100 90 80 70

Russia

India

60 50 40 30 20 10 0 Russia India

Figure 1. During the last decade of the USSR's agony a new government program called "Informtizatsia" was launched by Mr. Gorbachev to prepare highly skilled hardware and software engineers capable 5 ALTOROS SYSTEMS 5600 West Mariner St., Suite 118, Tampa, FL, 33609 http://www.altoros.com email:info@altoros.com Phone: (813) 731-3010 Fax: (413) 513-2868

White Paper. IT Outsourcing: Russian Perspective of operating sophisticated computer systems. Software engineering and computer programming was included in education programs in all high schools and universities. The programs have produced millions of highly qualified IT specialists and software engineers. The country currently accounts for 4% of the global programmers workforce, on par with India. Share of students majoring in science and mathematics (Source: UNESCO)

50 45 40 35 30 25 20 15 10 5 0
K S Ja pa n us si C In di a a R hi na U U

Figure 2. The country annually has more than 644,000 graduates; 100,000 with degrees in computer science, software & hardware engineering, and other IT related fields. Much of that expertise is clustered in Moscow and St. Petersburg. In fact, The 2001 World Champions of the World Programming Contest are the students of The St. Petersburg State University twice in a row! According to surveys by Microsoft Research, within the last seven years, 1.3 million people graduated from Russian universities with the skills to work in the IT industry. But only 70,000 actually work in IT companies in Russia, and only 8,000-10,000 are working within the offshore software industry.

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White Paper. IT Outsourcing: Russian Perspective

Russia's Untapped Resources

8.000-10.000 Working in OSD 1.3 MLN Technically Trained Russian University in Past 7 Years 70.000 Working in IT

SOURCE: MICROSOFT RESEARCH Figure 3. Esther Dyson, the world recognized technology luminary stated to the New York Times in 2001 that, Many Russian programmers are not mere programmers; they are mathematicians and scientists who turned to software to make a livingthey excel at (solving) complex, large-scale technical problems. They don't simply want to follow directions; they want to be creative. The idea is that they can be very creative at solving tough problems, so their customers can put those solutions to practical use.

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White Paper. IT Outsourcing: Russian Perspective 7. Challenges of Russian IT Offshore Despite the availability of ample talent, many challenges exist. Project management skills are relatively undeveloped, knowledge of English is often poor (even in many senior management positions), marketing skills are embryonic and Russia currently lacks business credibility in its target markets. Without these skills, many Russian companies will be limited to body shopping. Many Russian companies and project managers are just now preparing to obtain world-class quality and business process certification, while increasing their experience levels. Russia currently lacks business credibility in its target markets. One of the biggest challenges of Russian Developers is the lack of government sponsorship and information. Without government support, many of these resources may try to emigrate to countries that offer more certain or exciting careers. There are concerns about the relative maturity and stability of the infrastructure in Russia, it has not prevented a number of U.S. enterprises (e.g., Motorola, Intel, Sun and Nortel Networks) from establishing a cautious presence in the region by opening overseas development centers. These firms have sought to expand their current operations, take advantage of the local talent and low cost base, and establish a strategic early entry into a potentially abundant market. Growing Internet penetration is helping firms based in more remote areas, e.g., Siberia, by improving their access to market and allowing their participation in the growing number of Web-based auctions for contract workers, where buyers publish specifications and invite bidders from all over the world. However, procuring skills online will not lead to Russian firms winning larger, more-complex deals. To win these higher-margin deals, Russian entrepreneurs will need to be more proactive at sales and marketing, while simultaneously developing the execution capability necessary to handle the deals once they are sold.

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White Paper. IT Outsourcing: Russian Perspective 8. 10 Keys to Offshore Outsourcing Success Our expertise shows that the successful offshore software outsourcing initiatives had 10 characteristics. 1. Start with a test project using measurable goals and objectives. Companies that have established successful offshore outsourcing initiatives typically started with self-contained, relatively brief projects based on stable requirements. Application module projects where internal or contract labor costs or time-to-complete schedules are known provide an excellent means for testing offshore delivery and measuring its results. 2. Ensure internal buy-in and involvement. Without buy-in from, and active participation of, internal constituencies, creating the type of collaborative environment that characterizes successful offshore outsourcing initiatives is impossible. 3. Review and document internal processes. A common problem in outsourcing is that internal organizations often operate under informal processes, making it difficult to collaborate with outside suppliers. Before selecting a third-party supplier, a company must assess its internal processes, and identify and document where functions intersect and what and how information flows throughout the internal software development life cycle. 4. Assign a dedicated project manager. Where applicable, the client should assign a project manager, an individual who serves as the focal point throughout the entire project life cycle i.e., from the planning and request for proposal (RFP) phase to acceptance testing and implementation. In addition, this individual was an experienced manager who worked closely with an on-site supplier counterpart to handle day-to-day operational issues. 5. Pay attention to organizational fit. In addition to establishing supplier selection criteria based on technical competency, financial viability, and price competitiveness, meeting with the individuals who will be working on-site to get a sense of how they will fit into the internal culture is also important. 6. Document everything. In order to achieve close, even informal collaboration, client-vendor relationships should have well-documented roles and responsibilities, precise requirements, and clear project milestones and deliverables. This practice also applied to project tracking and oversight; configuration management activities, such as version control, backup, and recovery; and all other facets of the relationship. 7. Establish a secure infrastructure. Some companies provide offshore teams with remote access to internal development systems. Others require the use of distributed development tools and central repositories. Either way, offshore outsourcing presupposes a secure communications infrastructure and the use of such collaboration tools as e-mail, chat, or intranet-based project Web sites. Choosing how work is distributed and the specific development and network infrastructure should be consistent with client security policies and development processes. 8. Allow ample time and resources for knowledge transfer. Knowledge transfer not only ensures that supplier staff members understand the clients software, but also contributes to the creation of a collaborative work environment, one that carries over even after the offshore team members return to the suppliers ODC. In addition, companies with long-term contracts that specify dedicated resources find that periodically rotating supplier offshore staff through their facilities creates a flexible, yet knowledgeable base from which resources can be quickly drawn as needed. 9. Cultural understanding is a two-way street. It is incumbent on companies that seek to do business in other countries to ensure that their employees are able to adapt to and work effectively in 9 ALTOROS SYSTEMS 5600 West Mariner St., Suite 118, Tampa, FL, 33609 http://www.altoros.com email:info@altoros.com Phone: (813) 731-3010 Fax: (413) 513-2868

White Paper. IT Outsourcing: Russian Perspective other cultures. However, enterprises that seek to take full advantage of the benefits of offshore outsourcing need to be aware of such cultural issues as how, or even if, disagreements are raised and resolved. Some companies with extensive offshore initiatives conduct internal cross-cultural training to raise awareness around such issues. 10. Hold regular status meetings and monitor supplier performance and stakeholder satisfaction. Regular status meetings in which client and supplier team members review schedules and deliverables and resolve open issues are an essential part of offshore outsourcing. They enable clients to stay on top of and maintain control over projects as well as track supplier performance.

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