Russian IT Export: A View on the Annual Progress

The beginning of summer was marked by the annual conference on software outsourcing in Russia held in Moscow. The Russian Outsourcing and Software Summit brought together hundreds of industry players, analysts and prospectives. With this being my 5^th year at the Summit, I see plenty of evidence speaking for the maturation of the Russian IT outsourcing industry, and I would like to share some of my observations on the progress of the industry, commenting on the changes that took place since the last year’s Summit.

First of all, the top Russian players (10-12 companies) are getting to be more mature, thus widening the gap between themselves and the rest of domestic competitors. There is a clear sense of differentiation in the leaders’ strategic positioning. Staying competitive in the long run calls for above-average growth rates, which organic growth can not secure. With this in mind, the M&A mood is now in the air with more Ms than As expected. At the same time, the market stays fragmented with a multitude of providers having 10 to 40 headcount. They look for larger players to team up with, and the most plausible scenario of development for the next two-three years, is that we will be seeing a lesser number of ESPs active in the Russian software outsourcing industry.

Another trend of the past year that is worth mentioning is the occurrence of FDIs into Russia-based IT services companies. We have witnessed the Nordic investment into St.Petersburg-based Reksoft in November, funds coming to Epam Systems in February and acquisition of Nizhny Novgorod’s Telma by a Swedish system integration house. The Nordic Venture Network visit to Russia in April and the creation of a state-managed investment fund with a special focus on IT are all evidence to the rising attractiveness of investing into Hi-Tech Russia.

Another remarkable tendency in the market is the appearance of European system integrators on Russian ground, either through building their own captive centers or by planting development centers at third-party providers’ sites. Although the government support was not as active as the Russian IT community had hoped, there is still plenty of IT favoring legislation being passed. The achievements so far include the development of a number of technoparks around the country, the federal law “On Special Economic Zones in the Russian Federation” and, probably, the most useful and fast-paying industrial support is the VAT exemption for IT services companies. Among the most promising incentives is the to-be law called on substantially decreasing the social tax burden. The law has undergone its second hearing in the State Duma and is expected to pass in September. On the macroeconomic level there is a major shift expected with the Russian rouble turning freely tradеable on July 1^st, thus joining the world of fully-fledged international currencies.

The year gone has left a strong sense of the fact that Russian vendors are leading in Eastern Europe, both in terms of size and capabilities. With the outsourcing market of one billion USD in volume for 2005, Russia is expected to grow at the rate of 30% in the next three years and thus surpass the whole of Eastern European outsourcing produce.

As the Summit’s keynote speaker Pascal Matzke of Forrester Research pointed out, Central Eastern Europe is getting stronger, but advantages will be short-lived due to a number of risk factors such as the lack of national champions, absorption of the local talent by global providers and wage inflation which has already hit the large metropolitan areas.

This gives the Russian players a chance to take over Eastern Europe in the global outsourcing marketplace. The clients that already chose Russia as an outsourcing destination over closer Eastern European regions are the best proof: Deutsche Bank, Fujitsu Siemens Computers, Nokia, Siemens, TietoEnator, T-Mobile and T-Systems.

By Svetlana Vronskaya

Editor, Russian IT Quarterly