4 April 2008
GGA on the World IT Outsourcing Market
Note: this is the first of a series of articles and interviews with USRCCNE members on the Russian IT Outsourcing Market. Future instalments will be published as part of the USRCCNE Monthly Newsletter. To subscribe to this newsletter, simply enter your email in the field on the bottom right of our home page!
GGA on the World IT Outsourcing Market
Interview with Richard Golob,
President and Chief Executive Officer, GGA
Interview by Josh Wilson
General Editor, USRCCNE
USRCCNE: How did you first become involved in the Russian IT market?
GGA: As a limited partner at Charles River Ventures, a U.S. venture capital firm, I attended a partners meeting in the early 1990s where the late Michael Detouzos, director of the MIT Computer Science Lab, presented his views on upcoming new trends, and he talked about how people in the developing world would begin undertaking the white-collar work for people in the developed world. At about the same time, I was involved as a board member and investor in a data deconvolution software company, where one of our key employees was a recent Russian émigré to the Boston area. We were starting to use software and scientific resources in St. Petersburg, the birth city of our Russian employee, to assist this early-stage company in developing its software package and underlying algorithms. The skill set of our colleagues in St. Petersburg was superb, and the price was impressively low. I realized that I was participating as a client in the upcoming new trend of offshore outsourcing that Michael Detouzos had been discussing. The Internet bubble had just burst, and I was thinking about embarking on a new entrepreneurial venture. I decided to become a provider of offshore outsourcing using resources in Russia, and specifically in St. Petersburg.
USRCCNE: I once heard a proverb of sorts from someone familiar with the IT outsourcing market. It ran something like: "If you have a big project, go to the Indians. If you have a very urgent project, go to the Chinese. But if you have something very challenging that needs to be done right, you want the Russians." Do you think that Russian outsourcing has been able to maintain this market position? What, if any, challenges face Russia in maintaining this position?
GGA: GGA's competitive advantage has been its focus on using the combination of science, mathematics, and software engineering to solve its clients' problems. We know that we have been successful in maintaining that position, as many of our clients have begun to rely increasingly on our technical and scientific resources. Our clients have been accelerating their willingness to outsource highly sophisticated software engineering projects that demand deep domain expertise and that require innovation and creativity to implement. Given that the United States and Europe fought the Cold War for many decades, the perception in those regions is that Russia has a vast repository of scientific, mathematical, and technical expertise, and we believe that, because such a perception is true, it will continue to drive highly sophisticated software engineering projects to Russia. Over time, as other countries begin to build up their technical and scientific capabilities, Russia will encounter increasing competition in this arena, but once a corporation makes an investment in building a partnership with an outsourcing company in a particular country, such as Russia, to undertake highly sophisticated projects, it does not quickly dissolve that partnership to experiment in another part of the world.
USRCCNE: Russia's position in the world market has never been that it could offer the cheapest services. However, recent demographic trends, as well as the "brain drain" of the 90s, skyrocketing costs for office space, and other factors are driving up the cost of doing business in Russia. Do you think this will have a major effect on the competitiveness of Russian outsourcing?
GGA: Any country that encounters success as an outsourcing destination will undergo price pressures. It is a fact, and most corporations are not chasing the lowest-priced providers and then relocating their offshore resources on a regular basis in response to such price increases. They are seeking reliable partners that offer high-quality services at reasonable rates. GGA benefits from low employee turnover rates and deep domain expertise in the sciences and mathematics, and these factors continue to be strong competitive advantages, even though prices are increasing. Then again, pricing is increasing among major Indian outsourcing companies, and yet their average turnover rates are more than five times greater than GGA's turnover rates.
USRCCNE: The government has made several high-profile moves with the stated intention of supporting and nurturing a high-tech economy. One of the first of these was the opening of several "Special Economic Zones" that featured tax breaks for technoparks to be built in, for example, St. Petersburg and Novosibirsk. Is your company planning to take advantage of these zones? Do you believe that that the zones will be helpful for the IT industry in Russia?
GGA: We do not have current plans to participate in these Special Economic Zones, although we are actively researching the potential benefits and disadvantages. We believe that these zones can benefit certain types of start-up companies, but as employee retention is such a critical element in GGAТs success, we must consider whether the close proximity to other similar companies in such an IT park will have an adverse effect on GGA's low employee turnover rate.
USRCCNE: The Russian government is also considering making at least part of the IT market (leaders in the industry and Internet Service Providers) "a strategic industry" Ц grouping it with weapons manufactures as something essential to the functioning of the state and thus limiting the amount of foreign investment that companies inside Russia can accept. Can you comment on this?*
GGA: GGA is not aware of this effort by the Russian government. We believe that, since Russian outsourcing companies need to operate in a global free-market economy, they should not be subject to restrictions on investment from foreign companies.
USRCCNE: Other recent developments include offering tax breaks for companies purchasing software, etc. Do you think the government is doing enough to support the industry? What more could be done to remove major barriers to the industry?
GGA: Compared to China and India, the Russian government has made minimal efforts to assist the IT industry. Russia has focused on developing its considerable mineral and energy resources, and has overlooked to a certain extent the potential value of its human resource, whereas a country such as India does not have extensive mineral and energy resources and must use its human resource as the engine for the country's development. We are pleased that the Russian government is placing more emphasis on the IT industry, but that emphasis remains relatively small compared to the emphasis on the mineral and energy industries. Yes, the Russian government can invest much more heavily in assisting the IT industry, both by helping it to expand internationally and by offering tax incentives and building IT parks.
USRCCNE: Do you think the industry is doing enough to help itself? In other words, are best practices, corporate governance, IPOs, industry associations, etc. being used effectively by Russian companies?
GGA: GGA must undergo regular audits by its large clients, and as a result, we must follow best practices and sound corporate governance. We conduct regular training programs internally to keep our staff at the leading edge. GGA has participated actively in the U.S.-Russia Chamber of Commerce of New England, and GGA's President, Richard Golob, is a member of the association's board. Through this association, GGA has worked on several efforts to bring information about Russia's IT industry to the New England region. In addition, RUSSOFT has been active in outreach efforts to promote the Russian outsourcing industry, and those efforts need to be consistent and repeated over time in order to be effective. For Russian IT providers to compete successfully in the global marketplace, the industry also needs active support from the government, as the industry in Russia is at a severe disadvantage compared to the industries in China and India, where the government provides active support.
USRCCNE: Most sources seem to indicate the domestic demand for IT services inside Russia is growing Ц so much that one of the largest Indian IT firms recently opened an office in Moscow to move in on this market. First, does the domestic market in Russia differ substantially from the market coming from North America and Western Europe? Second, do you think that the Indians or the Chinese might be able to effectively move in on the Russian market?
GGA: GGA does not focus on the Russian market, but we believe that Russian companies will seek their IT services primarily from Russian IT providers, and if not from Russian IT providers, their preference will be to receive such services from providers in the former Soviet Union, such as Ukraine or Belarus. Culturally, the Russian companies will favor Russian IT providers, although Russia has worked successfully with both India and China on an ongoing basis. In terms of pricing, Russian rates are competitive with the rates of the major Indian outsourcing companies, but Russia has a serious competitive advantage because its employee turnover rates are much lower than those in India.
USRCCNE: Russian IT providers are also starting to develop into global companies Ц opening offices in Eastern Europe and even in Western countries such as the US. What are the advantages Ц and challenges Ц of going global for these companies? I'm also specifically interested in if this seems to help or hurt the language barrier that inevitably arises when companies operate with employees and clients across borders.
GGA: GGA's clients often demand a presence onsite, and therefore GGA is in the process of establishing new offices in different U.S. and European cities in response to current and future client needs. In addition, GGA is exploring the opening of offices in different FSU countries to take advantage of the labor availability there at reduced costs to those in St. Petersburg. Any time that a company expands its number of offices, whether within a country or globally, the company will face infrastructure, operations, and management challenges, and GGA is encountering these challenges as it expands. Almost all of GGA's clients speak English internally, as they are large international companies, and so GGA is selecting employees and contractors who speak English, whether they are located in St. Petersburg or some other city outside Russia.
USRCCNE: What do you think the general growth prospects for the Russian IT market are? Do you think the rapid growth seen in recent years will continue, or will we plateau soon?
GGA: GGA can only comment on the outsourcing industry. From GGA's perspective, the Russian outsourcing industry will continue to grow rapidly, as the Russian IT providers are providing high-quality software engineering and algorithm development services, with low employee turnover and deep domain expertise, and at relatively low rates and relatively close proximity to their clients.
*Note: Internet Service Providers were removed from the final version of the bill - it is expected to pass without mention of the IT industry or the Internet.
GGA Software Services LLC, a 300-person software outsourcing company with its headquarters in Cambridge, Massachusetts, and its development facility in St. Petersburg, Russia, provides scientific software engineering, algorithm development, and data curation services, especially for life science, instrumentation, and other science-related companies.
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