Eager for outsourcing, Russia battles image problem

Russia's IT services industry is currently growing at about 10 percent per year and was worth $1 billion in 2005. But even though Russia is in Gartner's top 10 list of near-shore outsourcing locations, the research firm said companies are still wary of sending work there.

"One of the biggest challenges is global public perception of Russia as a place to take work to," said Ian Marriott, research vice president at Gartner. "If you look at what companies are doing, they are saying they are happy to do business in Eastern Europe--but not Russia. That's going to take years to break down."

Dmitry Milovantsev, Russian deputy IT minister, said here in an interview with CNET News.com's sister site Silicon.com that attitudes are changing and the Russian economy is being reborn as "an economy of high technologies." However, he acknowledged that the country can't compete with the scale and low cost of India and China.

"That is why we compete at the high end," Milovantsev said. "India and China will never have people with such experience as our people have. If we position Russia against India and China, Russia loses its competitiveness. We don't want our labor force to cost as low as China."

The Russian government has been paying more attention to IT and investing in a series of "technoparks," such as one 120 kilometers outside of Moscow at Dubna. Nevertheless, the country's natural resources--oil and gas--remain the primary investment focus for the government.

University challenge
One of Russia's strengths, however, is the mathematical, engineering and science graduates turned out by the country's universities, a legacy of the Soviet education system. This means Russia has one of the highest numbers of scientists and engineers per capita, according to the World Bank.

The department of computational mathematics and cybernetics at Moscow State University, for example, takes in 500 new students per year--10 percent of the entire university's new intake--and turns out 450 graduates annually.

The courses are rigorous, with first-year undergraduates focusing on mathematical modeling, mathematical physics and quantum computing before specializing in later years. Specialist research areas include cryptography and Internet banking security.

The students also take a mandatory two-year English course for four hours per week and do a half-year internship in their fifth year. Boris Berezin, professor and vice dean of the faculty, said the quality of the graduates means they are in high demand.

"We cannot prepare enough students to meet the demand of companies. This fundamental type of education is quite complex for students because it is a huge workload. But as a result of this they have a very well-developed brain-set," Berezin said.

That is evident at one of Russia's biggest IT outsourcing companies, Luxoft, where 70 percent of the 2,300 employees have a master's degree, and 6 percent have a Ph.D. Dmitry Lochsinin, CEO of Luxoft, said that the company is using this to target the kind of high-end work that businesses "don't normally outsource," such as equity-trading applications and core enterprise systems.

Luxoft's current customers include Citibank, Deutsche Bank and UBS. Lochsinin said he is confident Luxoft will see "60 percent-plus growth again this year."

However, Gartner's Marriott said: "Russia is in the leading pack of countries capable of doing this stuff, but it is still cheaper in India, and you get a broader range of services. It's also still difficult to do business in Russia and to set up a captive (operation) there."

Andy McCue reported for Silicon.com in London.