Software development drives recovery of Russian IT market
In 2009, Russia’s IT market slumped by a staggering 40% in one year alone. With stable oil prices and a burgeoning middle class, the IT market has recovered. IDC reckons the market will grow 7% this year to $35 billion and will continue to grow at this rate to $46 billion in 2017.
a growing Russian software expertise
Leading the recovery is consumer spending on hardware, particularly tablets, but IDC also highlights increased investment on IT services, software and hardware by transport, telecoms, utilities, government, education and healthcare sectors. Around $7 billion is spent on IT services and a further $5 billion on software.
The market is sufficiently large for Russia to have developed its own software development expertise rather than being dependent on Silicon Valley exports. Indeed, Russia is now successfully exporting software developed for its home market, not only to neighboring states but with brands like Kaspersky, exports can be global.
Outsourcing industry association RUSSOFT estimates that software exports reached $4 billion in 2012, up from $2.75 billion the year before. This is evenly split between off-the-shelf software (from ISVs) and software development services (from outsourcers). Both sectors are growing rapidly, fuelled by a steady supply of programmers.
Today there are one million people working in IT in Russia, 300,000 of which are employed within IT firms. Software-Russia.com estimates that around 100,000 are programmers working in software development. Splitting this down again, half work in developing customer software for export, and the remaining half develop for the domestic market. While not as large a number as China or India, for instance, the staff churn rates are much lower, typically less than 10% a year.
attracting Western companies for offshore software development
It’s this deep pool of talent that is attracting many Western companies to look to Russia for software development, either outsourcing or offshore insourcing (i.e. setting up their own R&D centers).
One of the key reasons is the salaries. Despite Moscow being the second most expensive city in the world to live in, salaries for skilled IT staff are not excessive. According to recruitment site ITmozg (see the English version on software-russia.com), average salaries for the half a million tech staff in Moscow is $31,000 a year for programmers and $25,000 for sys admins. Compare this to Silicon Valley where the average programmer’s salary in 2012 was $118,000.
Look beyond Moscow and St Petersburg to the regional cities and the average salary for developers drops to $15,000-$17,000.
Because of these relatively low labor costs and high levels of education – particularly in maths and engineering – Russia is growing as a location for offshore software development.
backed-up by a good reputation
Compared to Indian software development, which is viewed as very process-focused, Russian’s software development companies have a reputation for being more likely to think outside of the box and deliver innovation. Daniel Marovitz, Deutsche Bank’s COO of technology for global banking, told Software Russia, “For innovation, testing new ground with new software, Russia is a good place”.
The reputation is being enhanced with global awards. In 2011, the European Outsourcing Association recognized Luxoft as the Outsourcing Company of 2011, and also gave it the IT Outsourcing Project of the Year award. Other outsourcers like
- Exigen Services
- First Line Software
- and Reksoft
also appear in the IOAP’s global list of top 100 outsourcing companies. Epam is the largest Russian outsourcing company with most of its global 9000 IT professionals employed in Russia.
overall good results
Independent software developers (ISVs) are also thriving in Russia: they exported $1.6 billion of software overseas in 2012, up 20% on 2011. Half of this revenue is attributable to Kaspersky, one of the giants of end-user security software. Other Russian security software developers Elcomsoft and Dr Web are thriving too. Outside of security, examples of successful software exporters are Parallels (known for Windows virtualisation on Mac operating systems), Acronic (backup) and Transas (marine industry software), CBOSS (telecoms OSS/BSS).
There is a considerable list of Western companies that have invested in IT development in Russia, either to adapt their existing products to the growing domestic market or as a place to develop new products for overseas markets. These include Alcatel-Lucent, Chrysler, Dell, Deutsche Bank, EMC, Ericsson, Google, HP,IBM, NEC, Microsoft, Nokia, Samsung, Sap, T-Systems and Oracle. Intel is perhaps the largest with over 1000 tech staff in Russia.
what could be improved then?
Perhaps more would join them if their preconceptions were removed. According to an Ernst & Young report, existing and potential investors view Russia very differently, which makes it difficult to attract foreign capital. The Ernst & Young Russia Attractiveness Survey states “Investors not yet established in the country have a limited awareness about the investment opportunities that Russia offers.” For instance established investors rate the telecoms infrastructure twice as highly as those that are not established.
But it’s not just a question of marketing. According to Ernst & Young, “Encouraging reliable and supportive institutions, a facilitative business environment, modern infrastructure and strong innovation capacity is critical for Russia to improve its image among potential foreign investors.”
The Russian economy is currently growing in the 3-4% a year category, which is slightly more than the EU average but way behind the Asian and Latin American hotspots. But what is perceived to be weaknesses – poor transport infrastructure and complex, inconsistent business regulations – are set to change. Russia plans to build high-speed railways and motorways and create more favorable business infrastructure which will hopefully drive annual economic growth to 6-7%.
In part 2 of this post, I will look at the development of Russia’s own software and communications industry: from the leading social media platforms to why Russians spend so much time on line.
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