IT Outsourcing Russian Perspective Usable

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White Paper.IT Outsourcing: Russian Perspective

ALTOROS SYSTEMS 5600 West Mariner St., Suite 118, Tampa, FL, 33609

http://www.altoros.com email:[email protected] Phone: (813) 731-3010 Fax: (413) 513-2868

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IT Outsourcing: Russian PerspectiveWhite Paper


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ALTOROS SYSTEMS 5600 West Mariner St., Suite 118, Tampa, FL, 33609http://www.altoros.com email:[email protected] Phone: (813) 731-3010 Fax: (413) 513-2868

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TABLE OF CONTENTS

1. What is IT Outsourcing? 3

2. Offshore IT Outsourcing . 3

2.1 Ownership .. 32.2 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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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 Out-sourcing 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 re-sources 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 withwestern corporations that have realized that going beyond national boundaries to search for cost-effective, highly skilled workforce is the way to success. But since in the early days cost was con-sidered the only reason for hiring outside contractors, nowadays theres a turn, as companies be-come more and more aware of the rest of the advantages outsourcing can bring. Today, most ITmanagers consider outsourcing to be the most affordable solution for a company interested in be-coming more efficient by reducing costs and accessing state-of-the-art technologies withoutspending additional funds on research and development.

2. Offshore IT Outsourcing

Although it currently represents more then $10 billion global IT services market, offshore softwareoutsourcing is playing an increasingly important role in the information technology (IT) strategiesof major corporations and attracting the interest of business and technology decision makersacross the vertical industry spectrum. Meanwhile, global and regional U.S. and European consult-ing and systems integration companies are incorporating offshore delivery into their go-to-marketstrategies, joining established Indian suppliers and emerging software services from other coun-tries in a growing and dynamic market. In short, offshore delivery is becoming part of the globalIT services industry mainstream.

Offshore software development is characterized by two basic business models linked by a commonset of value propositions. The first model based on ownership. The Enterprises set up whollyowned facilities overseas or form joint partnerships with offshore sup-pliers to take advantage oflow 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 developmentfirm. Clients contract with offshore suppliers to carry out all or part of a software project. Increas-ingly, this model is characterized by on-site/offshore delivery where supplier personnel work at aclient site performing requirements gathering, architecture, prototyping, and related activities.Coordination with offshore facilities and client interactions is the responsibility of a dedicated pro-

ject 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 theirfacilities 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 attractiveand beneficial long-term strategies. However, it takes time, money and a lot of effort to have itwork effectively, not to mention all kinds of risks that doing business in low-wage countries in-volves (for example, establishing a legal presence, taxation, labor law issues, property rights insoftware, etc.).


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2.2 Contracting

As a business strategy, Contracting is more popular then previous model. Compared to Owner-ship, it needs far less money, but is not devoid of risks either, though of a different kind. The realproblem 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 firsttime and often fall victim to the jack of all trades, master of none syndrome common to some ofthe IT Outsourcing companies. In a good case it is a company with global presence and can pro-vide 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 significantcost-savings. Offshore outsourcing is particularly cost beneficial. A typical company cansave 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-sundevelopment to reduce time-to-completion on high-priority projects and testing schedulesand deliver rapid cost-effective results.

Focus on core activities Outsourcing non-core functions, either locally or offshore, freesinternal resources to focus on business-critical initiatives and reduce dependency on third-party contractors.

Access critical technology skills Offshore outsourcing has opened up a global technologytalent pool, providing enterprises with affordable access to critical IT skills.

Improved quality Led by Indian suppliers, offshore outsourcers as a group have em-braced 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 offshoresoftware services industry. Suppliers from Russia (and other former Soviet bloc nations) amongwith China, Taiwan, Pakistan, Jordan, Egypt, Mexico, and other countries entered the market andadapting business models established by Indian firms that have dominated the services sector inthe past decade. The emergence of new offshore centers has been marked by new approaches andskill 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 developmentmarket. Russia is one of several emerging countries that are seeking to challenge Indias domi-nance as an offshore service provider. Although Russia has a long way to go to match Indias suc-cess, it has all the capabilities and resources to compete and win a large share in this marketAccording to Gartner Research, by 2007 Russia will capture at least 5 percent of the market shareof offshore services revenue in the North American and Western European Markets.


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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 anddisposable incomes rising steadily. In 2000, Gross Domestic Product (GDP) grew by 7.4% andgrowth in 2001 is estimated at 5%. Despite the global IT industry crisis, the Russian IT sector hasgrown 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 andEastern Europe. It offers a large market with a population of nearly 150 million, and the seventhfastest growing consumer market in the world. Software development and the provision of IT ser-vices are the fastest growing sectors of the Russian IT market. According to Brunswick UBS War-burg and Gartner's research, it is estimated that Russian offshore application development marketwill 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 thedevelopment of a strong IT and offshore software development industry. It has launched severalinitiatives aimed at assisting IT and software development companies. Building a strong nationalIT 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 theworld'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'sleaders in terms of engineers per 10 000 members of the population, with 55, and sciencestudents still make a record 50% of total graduates. The literacy rate in Russia was estimated at98.7% 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

RussiaIndia

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70

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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


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of operating sophisticated computer systems. Software engineering and computer programmingwas included in education programs in all high schools and universities. The programs haveproduced millions of highly qualified IT specialists and software engineers. The country currentlyaccounts for 4% of the global programmers workforce, on par with India.

Share of students majoring in science and mathematics (Source: UNESCO)

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101520253035404550

UK

Japa

nUS

Russia

China

India

Figure 2.

The country annually has more than 644,000 graduates; 100,000 with degrees in computer sci-ence, software & hardware engineering, and other IT related fields. Much of that expertise is clus-tered in Moscow and St. Petersburg. In fact, The 2001 World Champions of the World Program-ming 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 gradu-ated from Russian universities with the skills to work in the IT industry. But only 70,000 actuallywork in IT companies in Russia, and only 8,000-10,000 are working within the offshore softwareindustry.


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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 2001that, Many Russian programmers are not mere programmers; they are mathematicians and sci-entists who turned to software to make a livingthey excel at (solving) complex, large-scale tech-nical problems. They don't simply want to follow directions; they want to be creative. The idea isthat they can be very creative at solving tough problems, so their customers can put those solu-tions to practical use.


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7. Challenges of Russian IT Offshore

Despite the availability of ample talent, many challenges exist. Project management skills arerelatively undeveloped, knowledge of English is often poor (even in many senior management po-sitions), 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. ManyRussian companies and project managers are just now preparing to obtain world-class quality andbusiness process certification, while increasing their experience levels. Russia currently lacks busi-ness credibility in its target markets.

One of the biggest challenges of Russian Developers is the lack of government sponsorship andinformation. Without government support, many of these resources may try to emigrate to coun-tries that offer more certain or exciting careers.

There are concerns about the relative maturity and stability of the infrastructure in Russia, it hasnot prevented a number of U.S. enterprises (e.g., Motorola, Intel, Sun and Nortel Networks) fromestablishing a cautious presence in the region by opening overseas development centers. Thesefirms 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 Inter-net penetration is helping firms based in more remote areas, e.g., Siberia, by improving their ac-cess to market and allowing their participation in the growing number of Web-based auctions forcontract 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 salesand marketing, while simultaneously developing the execution capability necessary to handle thedeals once they are sold.


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8. 10 Keys to Offshore Outsourcing Success

Our expertise shows that the successful offshore software outsourcing initiatives had 10characteristics.

1. Start with a test project using measurable goals and objectives. Companies that have estab-lished successful offshore outsourcing initiatives typically started with self-contained, relativelybrief projects based on stable requirements. Application module projects where internal or con-tract labor costs or time-to-complete schedules are known provide an excellent means for testingoffshore delivery and measuring its results.

2. Ensure internal buy-in and involvement. Without buy-in from, and active participation of, inter-nal constituencies, creating the type of collaborative environment that characterizes successfuloffshore outsourcing initiatives is impossible.

3. Review and document internal processes. A common problem in outsourcing is that internal or-ganizations often operate under informal processes, making it difficult to collaborate with outsidesuppliers. 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 flowsthroughout the internal software development life cycle.

4.Assign a dedicated project manager. Where applicable, the client should assign a project man-ager, 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 implementa-tion. In addition, this individual was an experienced manager who worked closely with an on-sitesupplier counterpart to handle day-to-day operational issues.

5. Pay attention to organizational fit. In addition to establishing supplier selection criteria based ontechnical competency, financial viability, and price competitiveness, meeting with the individualswho will be working on-site to get a sense of how they will fit into the internal culture is also im-portant.

6. Document everything. In order to achieve close, even informal collaboration, client-vendor rela-tionships should have well-documented roles and responsibilities, precise requirements, and clearproject milestones and deliverables. This practice also applied to project tracking and oversight;configuration management activities, such as version control, backup, and recovery; and all otherfacets of the relationship.

7. Establish a secure infrastructure. Some companies provide offshore teams with remote accessto internal development systems. Others require the use of distributed development tools andcentral repositories. Either way, offshore outsourcing presupposes a secure communicationsinfrastructure and the use of such collaboration tools as e-mail, chat, or intranet-based projectWeb sites. Choosing how work is distributed and the specific development and network infrastruc-ture should be consistent with client security policies and development processes.

8.Allow ample time and resources for knowledge transfer. Knowledge transfer not only ensuresthat supplier staff members understand the clients software, but also contributes to the creationof a collaborative work environment, one that carries over even after the offshore team membersreturn to the suppliers ODC. In addition, companies with long-term contracts that specify dedi-cated resources find that periodically rotating supplier offshore staff through their facilities createsa 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 busi-ness in other countries to ensure that their employees are able to adapt to and work effectively in


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other cultures. However, enterprises that seek to take full advantage of the benefits of offshoreoutsourcing need to be aware of such cultural issues as how, or even if, disagreements are raisedand resolved. Some companies with extensive offshore initiatives conduct internal cross-culturaltraining 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 deliver-ables and resolve open issues are an essential part of offshore outsourcing. They enable clients tostay on top of and maintain control over projects as well as track supplier performance.

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IT Outsourcing Russian Perspective Usable