IToutsourcingRussiaS TC

Outsourcing of software programming to Russia: 

Outsourcing of software programming to Russia Auckland • Berlin • Beijing • Bratislava • Brussels • Budapest • Chicago • Copenhagen • The Hague • Dublin • Helsinki • Ho Chi Minh City • Istanbul • Johannesburg • London • Lisbon • Los Angeles • Madrid • Milan • Moscow • New Delhi • New York • Oslo • Paris • Prague • Riga • Riyadh • Shanghai • Stockholm • St. Petersburg • Stuttgart • Sydney • Taipei • Tallinn • Tokyo • Toronto • Vienna • Vilnius • Warsaw • Washington • Zurich STC St. Petersburg March 2005

Summary: 

Summary The Russian IT sector in general and the outsourced programming business in particular is currently strongly growing. Most of the programming is done by independent companies even though there are many examples of foreign companies that relocate parts of their IT department to Russia. Around half of the outsourced programming business is located in St. Petersburg and Moscow with Moscow having most of the larger companies One of the reasons for the increasing size of the business is the quality of programming engineers in comparison with other countries as well as a moderate price level of Russian programmers. Buyers of their services are mainly companies within the finance/banking sector, as well as IT companies using Russian programmers as sub-suppliers The Russian government has realized the potential in the sector is therefore trying to stimulate the business through an act from November 2004. The means are among others increased IPR protection as well as the creation of Technoparks, lowered taxes and a decrease of bureaucratic barriers. Apart from this, several branch organizations are actively working with the development of the business Source: Beiten Burkhardt Goerdeler

Export of software from Russia has boomed during the last years…: 

Export of software from Russia has boomed during the last years… * According to Russian Ministry of IT and Communications Source: CNews Analytics, Fort-Ross 57 % growth of Russian export of software during the last four years Russia expected to become the number 3 export nation for offshore software programming in 2010* with USD 3 billion in revenue

…as well as the Russian IT market in general: 

…as well as the Russian IT market in general * IT market is computers (30 %), components (25 %), system integration (20%) , replicated software (20 %) and ordered software(5 %) Source: IDC, RBC, Fort-Ross Currently the Russian IT sector account for 1.4 % of GDP compared with US with 5 % According to Ministry of IT and communications, the IT sector should grow to USD 40 billion until 2010

The largest part of software programming is done by independent companies although large US companies have their own IT centers in Russia: 

The largest part of software programming is done by independent companies although large US companies have their own IT centers in Russia Source: CNews Analytics, Fort-Ross

More than 50 % of the outsourcing is done in Moscow and St. Petersburg: 

More than 50 % of the outsourcing is done in Moscow and St. Petersburg Source: Outsourcing-Russia.com, Fort-Ross Largest part of outsourcing programming done in Moscow and St. Petersburg Around 30 % done in other, smaller cities

The largest programming companies are located in Moscow: 

The largest programming companies are located in Moscow * Estimate Source: Fort-Ross Currently, there are more than 250 Russia-based companies that are active in offshore software development. BACKUP

Average revenue per employee is around USD 25 thousand and price per hour varies strongly between USD 5 and 20 dollars: 

Average revenue per employee is around USD 25 thousand and price per hour varies strongly between USD 5 and 20 dollars * Estimate Source: Fort-Ross Price level for Russian outsourcing companies is USD 5-20 per hour, thus offering a wide price range

Source: Gartner Group : 

Source: Gartner Group L= Low, M=Medium, H=High Russia has very high programming quality thanks to highly educated engineers India H H H H H M M L L Phili- pines H M M M M M L L L Israel H H H M M M M M L Ireland H H H H H H M L L Canada H H H H H H H M L China H H H M M L L L L Russia M H H M M L M H L Rank in peer group 8 4-8 4 5-8 1-6 1-4 1-4 6 5-8 Government Support Infrastructure Educational System Cost Quality Cultural Comp. (US) Integration into the world economy Legal System Labour Pool

The two largest buying sectors of programming are banking/financing companies and IT companies that use Russian programmers as sub-suppliers: 

The two largest buying sectors of programming are banking/financing companies and IT companies that use Russian programmers as sub-suppliers Source: Outsourcing-Russia.com, Fort-Ross Largest buyer countries of programming services Switzerland (25 %) Finland (20 %) UK (16 %) Germany (14 %) Sweden (9%)

The Russian government has taken measures in order to stimulate export of IT services: 

The Russian government has taken measures in order to stimulate export of IT services Source: Russoft, RTR Russia TV, BBC Monitoring, ITAR-Tass, Prime Tass Simplification of export procedures Technoparks Marketing support IT investment funds IPR protection Simplification of export procedures for IT-products (diminishing bureaucratic barriers in tax & customs regulation Special economic zones with substantial tax privileges for IT companies. The zones to become incubators of new technologies, ideas, research-intensive production etc Support to the international marketing of Russian IT companies and to their QA systems certification Creation of a state-owned Investment Fund for the IT sector development Enhancement of IPR Protection in the IT industry

The Russian government stimulates IT production through the creation of technoparks: 

The Russian government stimulates IT production through the creation of technoparks Technoparks (or IT-Parks) is a special economic area for IT companies with: A territorial integration of science, education and production in the form of an association of scientific organizations, design bureaus, education establishments and production companies. Significant tax, rental & other privileges Source: Delovoy Peterburg, RosBusinessConsulting The first Russian technoparks will be fully developed over a period of 2-3 years. Definition Geography Timeline Investment St. Petersburg Moscow region Novosibirsk Nizhny Novgorod Estimated amount of investments into each site is $100-150 mln.

There are four IT associations in Russia that work for a development of the industry: 

There are four IT associations in Russia that work for a development of the industry Development of integrated industry strategies Lobbying the interests of the IT industry in the Russian Government Experience exchange/ Networking Small and medium companies support (business, legal, information etc) Assistance in quality ISO certification, CMM/CMMI assessment and SPICE PR and marketing activities RUSSOFT SIBACADEMSOFT AKCIT ISDEF APKIT Source: Russoft, Silicon Taiga, Sibacademsoft

Buying programming services in Russia requires a careful approach, e.g., by being specific in contract writing: 

Buying programming services in Russia requires a careful approach, e.g., by being specific in contract writing 1. Parties Check the power of the Russian party to represent in the agreements. 2. Be specific Be specific in determining the substantive scope of the agreement. Agree on the exact scope of the services/performances/results including the technical description in written form. Agree on the schedule and notification of performances by the Supplier 3. Confidentiality Precisely define the information to be treated confidentially Specify the conditions under which the disclosure of information is allowed 4. Limitation of liability Agree upon a maximum amount of liability and minimum amount of damages arising from the agreement Alternatively agree on a limitation period for claims. 5. Taxes Check the applicability of Russian VAT (currently, 18%, 0%, n/a) that depends on the structure of the agreement and on the activities of the Customer in the Russian Federation. 6. Applicable law and Competent court Consider the Russian law (copyright, legal provisions on the protection of software and on the export control; customs, currency and tax laws) Make sure possible claims can be enforced in Russia. Not every court judgment is enforceable in Russia. 7. Terms of use/IPR Agree on the terms of use of the software (exclusive right, time period, reproduction, modification, non-disclosure etc). Agree on who owns the IPR to the developed software (statutory rights of use by the author of the software) Source: Beiten Burkhardt Goerdeler BACKUP Checklist for buyers of programming services in Russia