Russia's major development centers: St. Petersburg

Background

St. Petersburg is the second city in Russia in terms of population, financial and industrial strength and political influence. Many consider St. Petersburg the technological and cultural capital of Russia.

The city has a total population of 5 mln which places it among the largest European cities. Developed infrastructure and geographical proximity to Western Europe give St.-Petersburg a cosmopolitan character, good for business and comfortable as a place to live.

Fact sheet

Approximately 30-35% of all the income from offshore programming in Russia is generated by St.-Petersburg-based providers.

Official estimates show 50 offshore providers, although not all of them work exclusively for Western markets and not all are wholly focused on software development. About 2000 software developers are working in such companies.

One can separate the companies into several main groups. First are pure offshore software development (OSD) companies (~30 active players with 1200 software developers on premise). They can have business in other domains and local clients, but the core business is offshore software development.

Next are companies with offshore software development as a sideline. Originally systems integrators and IT-consulters, these companies, for whom software development is often a secondary service, have recently entered the market in order to diversify their business . Software development may take up to 30% of their business and the structure of their clientele is weighted to local buyers. It is very hard to calculate how many of their employees participate in international projects, but the number definitely doesn't exceed 200.

The third noteworthy group is development centers of international IT-majors, like Motorola or Lucent. The total number of developers in these centers is about 600. Usually such centers obtain development orders from their mother companies and do not have any independent marketing activity.

In addition, there are a number of small unincorporated teams or even individuals. It is very hard to estimate this 'gray' area of the economy. There are various expert estimations, from 500 to 2000 software developers in this category.

The total number of developers in the city currently working for international clients may be put at 3000-3500. If we include the revenue generated by unofficial teams and individuals, the total revenue from offshore programming services may be estimated at the level of $65-70M per year.

Focus

One can denote two major types of providers (and the situation is very common for the whole of Russia).

Providers with a horizontal focus. We define horizontally focused providers as companies that build their services from their skillsets (e.g. programming languages, etc). Such providers have no preferred industry domains and are comparatively low in the value chain. They prefer IT-oriented companies as clients and rarely specialize in development of products of their own. These providers are very close to Indian prototypes, with the same level of profitability. There is still a demand for such vendors due to the general shortage of IT-resources in developed countries and the competitive rates these vendors may offer. International IT-majors often resort to the services of such companies to smooth their peak workloads. A horizontal focus allows a company to grow quickly till the moment when it has obtained enough experience to focus on several key domains, where it can move up in the value chain.

Providers with a vertical focus. Vertically oriented providers have developed an expertise in certain domain(s) so as to bring extra added value to their customers and even to develop their own products or technological platforms. These providers are much higher in the value chain than the first, thus they have higher profitability and revenues per employee. Although this is not a common situation for Russia, there are a number of vertical-type providers, Usually, they are small or midsize companies that have historically specialized in a certain domain or comparatively large vendors that have identified strategically beneficial domains among their fields of expertise and started to promote services in these domains only.

Although the aforementioned division may seem somewhat artificial, certain domains where St.-Petersburg providers specialize can be identified as follows - navigation, billing systems, speech recognition, translation and educational software.

Human resources

St. Petersburg has a large number of universities and institutes that produce IT and IT-related specialists. By IT-related specialists we mean engineers who have at least basic IT-knowledge and can be easily trained to become software developers. The number of engineers in software development who graduate every year is approximately 1500 and the number of IT-related specialists is up to 12000 per year. The last figure shows a potential, not the actual number of newcomers. Despite the continuing brain-drain (estimated at under 5% of graduates) and the fact that not all the graduates start to work in the industry, the potential is still immense. There are several main suppliers of the new IT workforce: The St. Petersburg State University, (particularly its Mathematics & Mechanics Faculty), St. Petersburg State Technical University, St. Petersburg State Institute of Mechanics and Optics, S. Petersburg State Electrotechnical University.

Known markets

Due to geography, Petersburg-based providers are slightly more focused on the nearby Scandinavian markets than providers in other regions of Russia. Other markets where local offshore programming firms are active include the USA, Germany, Switzerland, Belgium, Japan, Czech Republic, Italy, Canada, South Korea, Ireland, France.

Strengths and drawbacks
Strengths. In comparison with other Russian development centers, St. Petersburg has several strong advantages. Firstly, it is a relatively low cost place. This is especially true vis-a-vis Moscow, where the salary of a software developer is at least 50 % higher than in St. Petersburg which results in higher end-prices for offshore development.

Secondly, the domestic IT-industry does not yet impinge on human resources claimed by offshore programming providers. Offshore providers have a preemptive access to human resources and the opportunity to select the best candidates.

The city infrastructure is more or less the same as it is in Moscow, where it is slightly worse, the compensation comes in lower cost structures.

Drawbacks. Although St. Petersburg developers are cheaper than, for example, Moscow developers, development and infrastructure prices are even lower in other regions of the Russian Federation (except Moscow) and particularly CIS. But the combination of price level, performance and industry maturity is very competitive. Among weaknesses is a lack of financial resources, that first of all often prevents local vendors from undertaking an active promotion policy and from moving closer to end-customers by establishing sales/marketing offices abroad. In addition, St. Petersburg companies tend to stay at a rather low level of the value chain or have "horizontal focus", in our terminology.