Russia and Eastern Europe

There's a treasure trove of scientific talent -- and lots of government bureaucracy.

Compared with some of the big-league outsourcing players, Russia is a rookie. The country's current revenue from IT outsourcing is $150 million to $200 million annually, a drop in the bucket compared with India's yearly draw of $6 billion. But, though little more than a decade old, Russia's outsourcing industry is learning to play to its strengths and is growing by 50% annually, analysts say.

Those strengths include low-cost and highly trained workers. The annual salary for a programmer runs about $5,000 to $9,000, which is comparable to salaries in India. The World Bank estimates that Russia has the third-highest number of scientists and engineers per capita in

the world.

But Russia's acceptance as an outsourcing destination has been lukewarm. The country is widely perceived as having an unstable economy and an inadequate technology infrastructure. Although in recent years, these issues have been addressed to a large degree, the Russian government itself continues to be an impediment

to investment. "The biggest problem with the Russian government and its influence on the country's business culture is a lack of overall business transparency, a complex bureaucracy and restrictive tax, customs and immigration laws," says Stephen Lane, an analyst at Aberdeen Group Inc.

In addition, the government's financial investment in the IT sector is small compared with India's, which has a 10-year head start, and China's, where an authoritarian government makes investment decisions more easily than a nascent democracy like Russia. "But the government is beginning to recognize this need," says Lane. "They are beginning to recognize that they have a jewel here and need to do something to promote it."

In addition, the U.S. Department of Energy has been putting money into finding productive work for nuclear scientists who might otherwise be tempted to take jobs in North Korea. Also, a large number of Soviet emigres now working in the West have been sending work to colleagues in the old country. And finally, software development requires little more than brainpower, a computer and an Internet connection, all of which Russia has in abundance, particularly in its larger cities.

Vladimir Dubinin, who until recently was a vice president at Automated Trading Desk LLC, a New York-based trading technology company, turned to his homeland in 1999 when he needed to hire programmers to build prediction models. The team at Aljba Center in Moscow developed not only the theoretical estimates, but also the software needed to put them into practice, says Dubinin.

Although Russia may not be the best place to find large teams of experienced developers, it's an excellent location for scientific talent. "If you want to do a research project, you'd be better off with an Eastern European country, especially Russia," he says.

"It does help a lot if you have at least one person who can communicate freely [in English]," Dubinin adds. "Especially when you need to communicate something fast."

But Russia?s bureaucracy continues to be a problem. "You spend many more hours doing accounting in Russia compared with the U.S.," he says. On the plus side, he adds, it's easy to hire additional personnel quickly.

In general, the former Soviet Union has several strikes against it. Companies in the region tend to have short track records, not enough experienced management talent and a shortage of English speakers.

Craig Maccubbin, vice president of technology at LLC, looked past these negatives when he decided to hire a company whose development team was based in Minsk, Belarus, a former Soviet republic., a joint venture of Mandalay Resort Group and Park Place Entertainment, both in Las Vegas, lets online visitors buy airplane tickets, rent cars, book hotel rooms and get tickets to shows. "There was a significant amount of custom, one-off development that needed to be done," he says. Maccubbin looked at several options, including both U.S. and offshore resources, before picking Princeton, N.J.-based EPAM Systems Inc., along with companies in Ireland and the U.K. EPAM built's content management systems, developed custom code to work with a third-party booking engine and maintains and updates the site.

"We've had fewer time-zone issues with Minsk, despite the additional two hours of difference" from Ireland and the U.K., he says. Not only was the Minsk team more willing to adjust its working hours, but communication was easier because of EPAM's project-tracking tools. Maccubbin estimates that hiring EPAM resulted in costs

20% to 30% less than in-house programmers and even greater savings over U.S.-based consultants.

Russia may be the biggest, but other Eastern European countries are poised for growth. Belarus and Ukraine, with large numbers of Russian-speaking programmers, offer a lower-cost alternative to Russia, says Gartner Inc. analyst Ian Marriott. Poland and the Czech Republic are seeing significant market growth because of their scientifically and technically educated workforces, says Marriott. Hungary has a more mature and slow-growing IT market but a greater availability of IT, management and entrepreneurial skills, he says.

Marriott estimates that the region could exceed $1 billion in outsourcing revenue by 2005, if economic problems and the mass emigration of knowledge workers are held at bay. But if companies like EPAM continue to grow, and if demand increases from the European Union, Russia's offshore development sector has a shot at the big leagues.

Trombly is a freelance writer in Belchertown, Mass. Contact her at

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