Questions and Answers on Russian software industry from Andrew Sviridenko, the SPIRIT CEO
Jun 24, 2002
1. Do you agree that the predicted breakthrough of Russian software development companies to the Western market did not actually happen?
Yes, in 2001 Russian software development companies did not perform the predicted breakthrough to the Western market. In 2001, Russian software development market was in elation due to favorable growth prospects of offshore programming sector, which resulted in overestimation of market growth rate. However, based on our 10-year software export experience, SPIRIT predicted moderate growth of 15-25% for the period, which proved to be a much more realistic estimate.
Companies with extensive market experience, including SPIRIT, made no statements that Russian companies would be able to infiltrate the Indian sector of the market in 2001, and did not share euphoria prevalent among younger and less experienced companies. I believe that Russia's future lies in product development rather than offshore programming.
2. What stops Russian companies from joining the IT outsourcing leaders?
Russian offshore development companies find it hard to compete with Indian developers, as personnel of a typical Russian company numbers several hundreds while Indian offshore companies often number thousands of developers. The best prospects of Russian software export companies are related to the product-oriented, not order-oriented business model selling finished products instead of man-hours. Currently, several Russian companies successfully exploit the product-oriented model, including SPIRIT, Kaspersky Lab and ABBYY.
3. What needs to be done for Russia to become a world market leader?
Whether "Russia's great offshore future" is real, whether it is possible to reproduce the "Indian miracle" or copy the "Israeli-Scandinavian model" - these are very common questions.
What kind of software products do Russian developers need to succeed on external markets?
In my opinion, four major factors are responsible for success of a product:
4. Please describe successes and failures of Russian IT industry by example of your company.
Since being founded in 1992, SPIRIT's efforts were centered on software export and cooperation with the world's industry leaders. In 1999, the company successfully switched from work-for-hire, or offshore, business model practiced since 1995 with NEC, Toshiba and Nortel Networks, to licensing of finished software products. The product-oriented approach proved to be a basis for successful cooperation with Atmel, Furuno, Japan Radio Company (JRC), Leica, NEC, Nortel Networks, Samsung Electronics, Texas Instruments, Toshiba, and other leaders of international computer and telecommunication markets.
In 2001, SPIRIT formed a strategic alliance with Texas Instruments (TI), the Americam industry leader and a major signal processor manufacturer, and signed the largest licensed software export deal in the history of Russian software export industry.
Texas Instruments holds approx. 50 % of worldwide market of DSP processors. More than 500 million of C54 processors were sold worldwide by TI. Ti signal processors power a range of electronic devices, such as cell phones, wireless phones, pagers, fax machines, modems, audio cards, digital voice recorders, photo and video cameras, PDAs, etc.
Since 2002, supplied TI C54 processors will be complete with SPIRIT software. SPIRIT's integrated telephony software will be embedded into the TI ÿ54CST processor to become its integral component.
SPIRIT's label can be easily seen on the body of TI C54CST processor, which demonstrates high quality of SPIRIT's solution.
It is also necessary to note that this was the first precedent of TI directly embedding the software in the processor. While looking for the developer partner, TI managers had to choose among proposals from over 20 American and European companies. Solution offered by SPIRIT proved to be the most efficient of them all.
Since 2002, TI processors with SPIRIT software will be embedded into phones, point-of-sale terminals, set top boxes, check and credit card authentication systems, power/gas/water meters, security systems, cash dispensers, industrial and medical monitoring systems, pay phones, voice recorders, smart home appliances, industrial measurement systems, digital answering machines, remove data collection systems, etc.
Third-generation cell phones are also based on TI processors that allow simultaneously receiving video, audio and data streams over wireless channels. Annual volume of DSP sales will amount to dozens of millions at the end of 2002.
4. Regarding specialization of your company, which is the more favorable path for Russian IT industry - manufacturing finished products or performing separate orders?
I strongly believe and keep stressing in all of my public speeches that best prospects of Russian software exports are related to the product-based (i.e. Israeli) business model, as opposed to the order-based (i.e. Indian) offshore model. The majority of Russian software development companies utilize the order-based business model when dealing with foreign clients, selling their man-hours instead of product licenses. When this model (also known as "work-for-hire", or "time and materials") is used, all intellectual property rights are transferred to the client. The Indian developers have been exploiting this business model for years. While simple and efficient, scaling this model up is extremely complicated, particularly under Russian specifics. In this case, profit depends directly on the number of programmers employed by the company, and increasing that number is often not feasible due to lack of management. Besides, the order-based model goes badly with the creative spirit of Russian programmers who tend to do what they think is best instead of what the client demands. Moreover, employing the work-for-hire model automatically positions a company in the service sector of the market, which affects capitalization estimations negatively. I am certain that product-oriented export model, the so-called Israeli variant, is significantly more promising for Russian developers though somewhat more complicated to implement. It is not easy for a Russian product to become popular and claimed worldwide. However, the primary advantage of this business model is its scalability, regardless of the number of programmers employed. Hiring 100 developers is certainly insufficient if the company sticks to order-based business model, but the same 100 developers can create a highly competitive product that can become a best seller within a specific market segment. This makes investment conditions during capitalization much more favorable for the company. At the moment, I only know of three Russian software development companies that were successful to some degree in selling their products and solutions worldwide - Kaspersky Lab, ABBYY, and SPIRIT. The examples are few, but success is definitely a possibility.
5. What is the most efficient way to advance to foreign markets - to look for distibutors or open a representative office?
It certainly helps to have a representative office focused on performing tasks for the founding company, but locating personnel that can be efficiently remote-controlled often proves to be a problem. Likewise, a local office requires initial investments but profit it generates fully belongs to you.
The most common problem of Russian companies emerging to the international market is lack of sales & marketing experience, so an experienced partner is a must.
It helps to have multiple partners, especially if the product can be promoted in various market segments. In time, it will become clear which of them are reliable enough to serve as your exclusive distributors. At that point, it may be feasible to offer a representative or joint-venture status to a distributor. Afterwards, full-scale regional representative office can be organized by converting the distributor's stock into founding company's shares.
SPIRIT currently expands its regional representative network. After setting up the Japanese office in 1994, SPIRIT successfully performed its partnership program until 2001. Today SPIRIT's representatives work in 9 countries - Japan, Korea, Taiwan, Germany, Great Britain, France, USA, Canada, and Israeli.
Yes, in 2001 Russian software development companies did not perform the predicted breakthrough to the Western market. In 2001, Russian software development market was in elation due to favorable growth prospects of offshore programming sector, which resulted in overestimation of market growth rate. However, based on our 10-year software export experience, SPIRIT predicted moderate growth of 15-25% for the period, which proved to be a much more realistic estimate.
Companies with extensive market experience, including SPIRIT, made no statements that Russian companies would be able to infiltrate the Indian sector of the market in 2001, and did not share euphoria prevalent among younger and less experienced companies. I believe that Russia's future lies in product development rather than offshore programming.
2. What stops Russian companies from joining the IT outsourcing leaders?
Russian offshore development companies find it hard to compete with Indian developers, as personnel of a typical Russian company numbers several hundreds while Indian offshore companies often number thousands of developers. The best prospects of Russian software export companies are related to the product-oriented, not order-oriented business model selling finished products instead of man-hours. Currently, several Russian companies successfully exploit the product-oriented model, including SPIRIT, Kaspersky Lab and ABBYY.
3. What needs to be done for Russia to become a world market leader?
Whether "Russia's great offshore future" is real, whether it is possible to reproduce the "Indian miracle" or copy the "Israeli-Scandinavian model" - these are very common questions.
What kind of software products do Russian developers need to succeed on external markets?
In my opinion, four major factors are responsible for success of a product:
- Orientation on the global market;
- Strong specialization;
- Choosign a correct product niche, no competition with Microsoft;
- Having a professional market partner, preferably a world leader in the selected produuct niche.
4. Please describe successes and failures of Russian IT industry by example of your company.
Since being founded in 1992, SPIRIT's efforts were centered on software export and cooperation with the world's industry leaders. In 1999, the company successfully switched from work-for-hire, or offshore, business model practiced since 1995 with NEC, Toshiba and Nortel Networks, to licensing of finished software products. The product-oriented approach proved to be a basis for successful cooperation with Atmel, Furuno, Japan Radio Company (JRC), Leica, NEC, Nortel Networks, Samsung Electronics, Texas Instruments, Toshiba, and other leaders of international computer and telecommunication markets.
In 2001, SPIRIT formed a strategic alliance with Texas Instruments (TI), the Americam industry leader and a major signal processor manufacturer, and signed the largest licensed software export deal in the history of Russian software export industry.
Texas Instruments holds approx. 50 % of worldwide market of DSP processors. More than 500 million of C54 processors were sold worldwide by TI. Ti signal processors power a range of electronic devices, such as cell phones, wireless phones, pagers, fax machines, modems, audio cards, digital voice recorders, photo and video cameras, PDAs, etc.
Since 2002, supplied TI C54 processors will be complete with SPIRIT software. SPIRIT's integrated telephony software will be embedded into the TI ÿ54CST processor to become its integral component.
SPIRIT's label can be easily seen on the body of TI C54CST processor, which demonstrates high quality of SPIRIT's solution.
It is also necessary to note that this was the first precedent of TI directly embedding the software in the processor. While looking for the developer partner, TI managers had to choose among proposals from over 20 American and European companies. Solution offered by SPIRIT proved to be the most efficient of them all.
Since 2002, TI processors with SPIRIT software will be embedded into phones, point-of-sale terminals, set top boxes, check and credit card authentication systems, power/gas/water meters, security systems, cash dispensers, industrial and medical monitoring systems, pay phones, voice recorders, smart home appliances, industrial measurement systems, digital answering machines, remove data collection systems, etc.
Third-generation cell phones are also based on TI processors that allow simultaneously receiving video, audio and data streams over wireless channels. Annual volume of DSP sales will amount to dozens of millions at the end of 2002.
4. Regarding specialization of your company, which is the more favorable path for Russian IT industry - manufacturing finished products or performing separate orders?
I strongly believe and keep stressing in all of my public speeches that best prospects of Russian software exports are related to the product-based (i.e. Israeli) business model, as opposed to the order-based (i.e. Indian) offshore model. The majority of Russian software development companies utilize the order-based business model when dealing with foreign clients, selling their man-hours instead of product licenses. When this model (also known as "work-for-hire", or "time and materials") is used, all intellectual property rights are transferred to the client. The Indian developers have been exploiting this business model for years. While simple and efficient, scaling this model up is extremely complicated, particularly under Russian specifics. In this case, profit depends directly on the number of programmers employed by the company, and increasing that number is often not feasible due to lack of management. Besides, the order-based model goes badly with the creative spirit of Russian programmers who tend to do what they think is best instead of what the client demands. Moreover, employing the work-for-hire model automatically positions a company in the service sector of the market, which affects capitalization estimations negatively. I am certain that product-oriented export model, the so-called Israeli variant, is significantly more promising for Russian developers though somewhat more complicated to implement. It is not easy for a Russian product to become popular and claimed worldwide. However, the primary advantage of this business model is its scalability, regardless of the number of programmers employed. Hiring 100 developers is certainly insufficient if the company sticks to order-based business model, but the same 100 developers can create a highly competitive product that can become a best seller within a specific market segment. This makes investment conditions during capitalization much more favorable for the company. At the moment, I only know of three Russian software development companies that were successful to some degree in selling their products and solutions worldwide - Kaspersky Lab, ABBYY, and SPIRIT. The examples are few, but success is definitely a possibility.
5. What is the most efficient way to advance to foreign markets - to look for distibutors or open a representative office?
It certainly helps to have a representative office focused on performing tasks for the founding company, but locating personnel that can be efficiently remote-controlled often proves to be a problem. Likewise, a local office requires initial investments but profit it generates fully belongs to you.
The most common problem of Russian companies emerging to the international market is lack of sales & marketing experience, so an experienced partner is a must.
It helps to have multiple partners, especially if the product can be promoted in various market segments. In time, it will become clear which of them are reliable enough to serve as your exclusive distributors. At that point, it may be feasible to offer a representative or joint-venture status to a distributor. Afterwards, full-scale regional representative office can be organized by converting the distributor's stock into founding company's shares.
SPIRIT currently expands its regional representative network. After setting up the Japanese office in 1994, SPIRIT successfully performed its partnership program until 2001. Today SPIRIT's representatives work in 9 countries - Japan, Korea, Taiwan, Germany, Great Britain, France, USA, Canada, and Israeli.