Russia Becoming IT Powerhouse

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For many years, India has been the poster child of the offshore software development industry. Many of the Fortune 500 have been quietly beating a path to Indian vendors to reduce software development costs and speed up time to market. As well as their much-publicized work on Y2K and mainframe maintenance, these companies also take on Java and Oracle assignments.

But a serious rival now is emerging, one with the resources and determination to take on India — Russia.

The technology sector in Russia achieved $3 billion in revenue last year, up 19% from the previous year. Offshore software development now is a large slice of that total, growing at an estimated rate of 50% a year.

U.S. giants like Dell, Intel, Siemens and Motorola have huge Russian development centers. And Boeing, GE, Sun Microsystems, IBM, Citibank, the U.S. Department of Energy and many others now are turning to Russia for all manner of complex software tasks.

”Our research shows that Russian development resources have stronger math skills and are often used to develop algorithms and complex formulas,” said analyst Laura Carrillo of Boston-based AMR Research.

Carrillo pinpoints the Russian education system as offering high-tech workers there a competitive advantage. In Indian universities, students learn generic development and mass-produced coding for Java and C++.

”Russia takes a higher-level approach, picking individuals more carefully in a similar manner to MIT,” said Carrillo. ”As a result, Russian programmers and developers are more schooled on advanced math and computing techniques than their Indian counterparts.”

Not surprisingly, Russia is earning a reputation as the place to go for development work that involves sophisticated algorithms and complex coding. Last month, for instance, Dell established a Moscow-based Software Engineering Center. It utilizes the Moscow production facilities and manpower capacity of Luxoft, probably the largest of the new breed of Russian offshore firms.

”Having delegated some projects to the Luxoft center, we intend to free up the time and energy of our IT departments, while keeping the scale of IT deliverables at the current and even higher pace,” said J.R. Carter, a senior manager of EMEA technologies at Dell Computer Corp.

The choice of Moscow had a lot to do with the sheer quantity and quality of science and computing graduates — 50% of Russian graduates major in science — 55 out of every 10,000 people in Russia are engineers, one of the highest ratios in the world — 4% of programmers working in the world today are Russian.

”Russia possesses a unique intellectual capital that should translate into existing investment opportunities in the years to come,” said Alexander Andreev, a financial analyst at Brunswick UBS Warburg.

Due to this wealth of resources, Luxoft was easily able to comply with Dell’s stringent conditions. Dell demanded a scalable-on-request team of software engineers. Every team member was selected by Dell based on experience, domain knowledge and educational background.

”As a result of the educational system and culture, Russian code expertise is married up with a quality that American companies find highly desirable — the ability to innovate and be creative in their approach to solving customer problems,” said Luxoft CEO Dmitry Loschinin. ”I believe that this gives Russia a distinct advantage as we go beyond code writing competence into the realm of resolving the complex IT challenges of the modern enterprise.”

Loschinin cites Boeing Company’s experience. After starting on a few smaller projects some years back, Boeing now trusts Luxoft with many high-level development tasks, such as:

An Internet-based catalog that removed the annual nightmare of updating and reissuing hard copies of all documentation. Tools and technologies used, included J2EE (Servlets, EJB, JSB, JDBC), XML, DHTML, Web Gain Studio, Arbortext Epic and Adobe Distiller;

Development of a PDF utility that manipulates a massive PDF database and makes files easily available in print, CD, Internet or Microfilm formats. This system uses Rational Rose 2000, XML and works across Sun Solaris, Windows NT/2000 and Linux;

Migration and redevelopment of a mainframe drawing and blueprint distribution system. Developed in the 1970s in Fortran running on Unix with more than a million entries and accessed by 23 separate IT systems, Luxoft converted it to Websphere/Oracle/ Java, while preserving existing business logic and retaining full functionality.

”The old drawing/blueprint system was of high quality but out of date,” said Scott Griffin, vice president and CIO of Boeing. ”Luxoft converted our drawing system to a modern Web-based platform, while preserving existing business logic and retaining full functionality. This improved system stability, reliability, and access. It also reduced cycle-time and increased flexibility, allowing for the support of new requirements and thereby lowering maintenance costs.”

While customers, such as Boeing, begin small, most quickly grew into large-scale contracts. This tendency to retain clients and expand their dependence on Russian resources is explained when you take a closer look at the pains some of the top offshore vendors take to validate the quality of their development processes.

With Boeing being a big supporter of the Software Engineering Institute’s (SEI) Capability Maturity Model (CMM), an industry-standard benchmark to assess an organization’s software development process and methodologies, it demanded a partner that could match its own standards. Several divisions of Boeing, in fact, operate at CMM Level 5. Among the elite corps of about 200 companies that have achieved Level 4 or 5 CMM are dozens of offshore software developers. Only one U.S.-based software company made the grade. Luxoft, on the other hand, is Level 4 CMM, the highest rating in Russia. That makes it on a par with the big Indian developers.

Many analysts use SEIs model to advise clients about potential offshore vendors.

”I recommend to clients that they only deal with companies who are CMM Level 3 at least,” said Gartner Group Research Director Rita Terdiman.

Buggy software, of course, isn’t big news in America. What isn’t well known, though, is the extent of the problem. According to the SEI, one third of IT development projects are cancelled before completion. The average budget overrun is 189%. The average schedule overrun for ‘difficult projects’ is 222%. And the delivered product generally only contains 61% of originally specified features.

Only 16% of software projects, in fact, are completed on time and one budget. On the other side of the coin, SEI figures reveal that organizations operating at CMM levels 3-5 operate at or close to budget and time line targets, and achieve an average of 5:1 ROI on development projects.

With so many offshore companies dominating the ranks of the highest CMM levels, it’s no surprise that more than half the Fortune 500 currently use overseas software talent. Forrester Research reports that they save an average of 25% on development costs and that U.S. companies are expected to spend $17.6 billion on offshore outsourcing by 2005.

Russia is planning to take a large slice of that total. As well as having a well-educated talent pool, the Russian offshore industry offers distinct price advantages over India.

”With outsourcing to offshore development firms becoming a mainstream practice, competition is definitely growing from Russia in high-end, as well as low-end work,” said AMR’s Carrillo. ”Further, we are beginning to see offshore firms successfully go up against the big American consulting and integration firms for development and integration jobs.”