Russia's major development centers: Moscow

Background

Moscow is the capital of Russia, its largest city and Russia's major financial, industrial and scientific center. With a total population of more than 10 mln people, Moscow is among the three largest European capitals.

Moscow is the most developed and dynamic Russian city, with great opportunities and challenges for business, but with a rather expensive infrastructure and high cost of living.

Fact sheet

Moscow's IT-industry is the most developed in the country, but is rather oriented towards Russian domestic IT-buyers. All the gas and oil giants have headquarters/ representative offices in Moscow and often are the clients of the leading offshore software development (OSD) vendors.

Moscow-based offshore software development companies have strong positions on the market and we estimate that approximately 35% of all the income from OSD is generated in Moscow.

There are about 70 software companies having international clients with 3700 software developers. We have identified four major groups among these companies. (Note that the classification is very relative).

First are pure OSD companies with a primary focus on offshore development and software development as a core business. There are approximately 35 pure OSD companies with 2000 software engineers on premise. Approximately 75 percent of the developers in this group work for an international clientele.

The second group unites system integrators, various IT-holdings and IT-consultancy companies. They offer software development, including offshore, as a secondary service. Although the total number of developers in this group is about 700 (total staff is about 2500), the number of specialists, who work in the frame of international projects is lower.

There is also a small number of product development companies which do not play a significant role on the outsourcing market.

Last are mostly domestic-oriented companies (about 20 companies with 600 developers), that have international clients, but the turnover from their Western clientele usually does not exceed 25% of their portfolio.

There are few stand-alone offshore development centers of international IT-majors in Moscow. Though, there are a number of ODCs functioning on the basis of local software vendors, so the number of developers have already been included in the aforementioned figures. 'Gray' teams are not wide-spread. This is explained by the high demand from local software companies, which, even when serving Russian clients, can afford to pay competitive salaries and carry the tax burden. We estimate the number of people working in such teams today to be 1000-2000 and we predict that this figure will decrease in the future.

The total number of developers in the city involved in offshore programming may exceed 3500-4000. The revenue generated from outsourcing services is about $70-75M per year.

Focus

One can denote two major types of providers (and the situation is very common for all 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 this division is somewhat artificial, certain domains for Moscow vertically focused providers can be identified: billing systems, embedded systems, information security, real-time systems, PDA programming, banking software (especially for local customers), speech recognition and scientific software. Almost every provider states that it develops/ installs ERP, CRM, SCM, MRP, MRPII and various eCommerce systems. This is explained by the fact that Russian clients, due to financial reasons and peculiarities of tax and accounting rules, prefer local providers for such purposes. There is also a number of strong web-development companies, both technology-oriented and creative, but they work for domestic companies mostly.

The aforementioned domains usually do not entail deep specialization in a given industry (like ERP for the FMCG sector) and providers still have wide opportunities for the further specialization and for moving up in the value chain.

Human resources

Moscow universities and institutes occupy a very strong position in the world scientific and educational scene. Attracting the best students from the whole of Russia, Moscow's elite Engineering and Physics Institute, Bauman State Technical University, Moscow State University, Moscow Institute of Physics and Technology have a reputation for turning out top-class specialists. International IT-majors often create educational centers on the base of Moscow institutes to get access to talent as soon as possible. For example, The Moscow Technical University of Communications and Informatics supports training centers from Alcatel, Ericsson and Cisco. The total number of specialists in IT-fields who graduate every year is approximately 5000-5500. In addition, approximately 16000-18000 graduates in various engineering fields which have rather strong background in IT can be engaged as programmers every year.

Known markets

International markets where Moscow providers are active include the USA, Germany, United Kingdom, Switzerland, Norway, France, Japan, Spain, Canada, South Korea, Poland, Netherlands. As mentioned already, Moscow-based providers often have contracts with local governmental organizations, gas and oil giants, leading banks and other Russian blue chip companies.

Strengths and drawbacks

Strengths. Although the main purpose of this article is to provide an overview of the Moscow offshore software development industry, we can hardly avoid mentioning peculiarities of the industry which, from the first view, do not have direct bearing on international IT-contracts.

Moscow possesses the most developed infrastructure in Russia, broad access to human IT-resources and a significant pool of large and reputed OSD providers. Up to 15 of them have total staff in excess of 200. Assuming that such companies often have diversified business (in adjacent domains like IT-consultancy and system integration) or belong to large IT-holdings, potential clients can benefit from their financial stability, economy of scale and advanced expertise. In addition, Moscow-based providers have a competitive advantage in terms of access to capital and contracts for the federal government and other domestic clients.

These contracts allow companies to stay in business even when they temporally have no international clients. In the latter case a Moscow company is able to get domestic contracts (at the same rates) and to retain its key personnel and expertise. This also allows Moscow OSD companies to remain at a comparatively high level in the value chain.

Their financial strength lets local vendors move closer to their customers by establishing foreign (usually US-based) sales/marketing offices and, hence, to promote their services abroad more effectively.

Drawbacks. As has been already said, Moscow's infrastructure is the most developed, but is also the most expensive in Russia. High prices for office premises, which often exceed West European level, and high salaries in a tight labor market increase the costs generally. The infrastructure costs also impact on international businesspeople whose sojourn in Moscow can be very expensive in world tables of travel and entertainment.

Although total demand for software developers is satisfied with the supply of local educational institutions, the industry has to compete with domestic-oriented IT-companies on the labor market. This fact forces OSD companies to open distant branches in other cities of Russia and to resort to the 3rd party outsourcing.