14 August 2006
Personal Reflections on Russian Offshore Outsourcing
The following article was submitted by Richard Golob, President and CEO of GGA Software Services, LLC. It recounts not only his personal experience in building a software outsourcing company in Russia, but also speculates on the wider social, political, and economic impact that this fascinating new market is creating for the peoples and governments of the world.
The article appears in a new book: Buyer's Guide to the Russian IT Outsourcing Industry, available from World Trade Executive, Inc. It is reproduced with permission from all parties.
Personal Reflections on Russian Offshore Outsourcing
(GGA Software Services, LLC)
Three of my four grandparents emigrated from Minsk to New York City more than 100 years ago. So I guess that I was destined to reconnect with Russia at some point. I just did not know when and how. However, as an adviser to Charles River Ventures in the Boston area, I had the fateful opportunity to attend a Charles River Ventures 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. He spoke convincingly 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 our early-stage company in developing its software package and its 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 a future less tumultuous and more stable. So, I decided to change gears and become a provider of offshore outsourcing using resources in Russia, and specifically in St. Petersburg. I'm not sure whether my decision has resulted in a personal future less tumultuous and more stable yet. However, I am confident about the future of Russian outsourcing, and I think that clients worldwide need to consider Russia seriously as an outsourcing destination.
I appreciate that the world is a big place and that the barriers to offering an offshore outsourcing service from any country are relatively low. However, before I decided to locate our facility in Russia, I had considered a wide range of possible countries, including China, Bangladesh, Nepal, and even India. As both vendors and clients know, offshore outsourcing is a highly competitive field. We are deluged with e-mails and telephone calls from offshore outsourcing companies every day. Although I sometimes engage in conversations with my competitors trying to sell me their services, I usually do so for competitive intelligence gathering. Nevertheless, these e-mails and telephone calls make me realize that, unless an outsourcing company has a competitive advantage, it will have great difficulty securing new clients. After all, although it may be a flat world, it is a very crowded world.
Innovation and Research Outsourcing
I kept remembering Michael Detouzos' words about the growing movement of white-collar work offshore. When I thought about the services needed, I kept imagining an isosceles triangle, with Y2K-type services and business application development at the triangle's base and with increasingly sophisticated application development towards the vertex. I appreciated the huge success of the Indian offshore outsourcing industry in penetrating and taking over the triangle's base. I did not think that my Russian colleagues and I would have the marketing power to generate business at the triangle's base, and so I decided that we would start our business development efforts from the triangle's vertex by offering innovation services, which use science, mathematics, and programming to solve a client's problems.
At that time, many companies that had accepted the use of offshore outsourcing for certain services were still hesitant about sending innovation and research to firms offshore. To me and my Russian colleagues, innovation services represented the only way in which we could gain a foothold in companies, especially those that relied on science and mathematics in developing their products. Although the vertex did not represent a huge business opportunity, it was sufficient for us, and it allowed us to begin our journey. The strategy has appeared to work, as we have begun to generate significant business from life science and other science-oriented companies which have started to accept the benefits of using offshore resources for innovation and research. The work quality remains high, and the prices remain low.
So, our decision to site our facility in St. Petersburg has worked nicely with our corporate strategy, given the concentration of highly competent scientists and mathematicians there. In fact, the skill set of our employees helped us in defining our service focus and in deciding to focus on the triangle's vertex. While our Russian team members could compete in terms of quality with programmers in any country on business applications, we encountered resistance in convincing potential clients to switch from their existing vendors and begin using our services at the triangle's base. However, when we analyzed the skill set of our team in St. Petersburg, we found that almost all of our team members had master's degrees and more than 40 percent had PhD degrees in technical fields. It was an easy transition to focus their efforts on problems that required a combination of science, mathematics, and software engineering. Plus, our team members were happy to be returning to their original areas of study and making a sustainable income from work in those areas.
Although the market for offshore innovation and research is only a fraction of the market for offshore business application development, I feel that our future is bright because we have been successful in entering corporations from the triangle's vertex. I'm confident that, as our clients begin to gain confidence in our capabilities in solving highly sophisticated problems, they may start to provide us with opportunities for work down towards the triangle's base. We may meet our competitors head-on as they try to move up the triangle from the base to the vertex, but we're prepared for that turf battle, given that the Soviet Union was always regarded as a superpower in terms of science and technology. In fact, many of the key members of our company started their careers in Soviet scientific institutions.
Building on Russia's Strengths
In the United States, Russia, as a descendant of the Soviet Union, still maintains an impressive reputation as a repository for high-level mathematicians, scientists, and software engineers. After all, the West fought the Cold War for decades against the technological expertise of these people. Rather than try to create a new area of expertise for Russia, we have embraced a strategy that advances Russia's existing reputation in science and mathematics. Although other countries may have capabilities in science and mathematics, only Russia has achieved such a leadership position in the West. Russian software engineers, primarily from St. Petersburg universities, have helped to maintain this perception by placing among the top winners of the annual IBM-sponsored ACM International Collegiate Programming Contest for the past several years.
I am pleased that the Russian government has increasingly begun to appreciate the potential significance of this national resource of excellence, and has begun to support the development of IT parks and other IT initiatives. After all, one of the major forces behind the rise of the Indian outsourcing giant has been the active support of the Indian government, which understood that, although India might not be rich in natural resources such as oil and gas, it Buyer's Guide to the Russian IT Outsourcing Industry nevertheless has an impressive human resource. The Indian government made a conscious decision to exploit that human resource and help the private sector to develop its outsourcing industry. Russia, with its vast oil, gas, and mineral resources, did not have the same critical need to focus on its human resource as it emerged as an independent country. However, now the Russian government has begun to understand that software development and related activities can provide a sustainable component in the Russian economy, and I look forward to receiving the benefits of this growing partnership with the Russian government.
Social Significance of Interdependence
I know that, since the fall of the Soviet Union, the United States and the European Union have been very active in their efforts to keep former Soviet scientists and mathematicians gainfully employed in peaceful pursuits. They have a variety of grant programs to support the continuing research of these scientists, so that they don't get enticed to work for terrorists and the so-called "Axis of Evil." However, these grant programs are not sustainable without additional funding from the United States and the European Union.
I have long argued that offshore outsourcing in Russia represents perhaps the most effective way for the West to provide gainful employment for former Soviet scientists and mathematicians. Instead of funding research grants, the West might consider investing in Russian offshore outsourcing companies and helping us build our offshore outsourcing businesses so that we can provide ongoing employment to these scientists and mathematicians. It would be a quadruple win: for the offshore outsourcing companies, the Russian scientists and mathematicians, the clients, and the West. At the least, I would hope that corporations in the United States and Europe would realize that, by supporting Russian offshore outsourcing companies, they would not only benefit from the world-class scientific and technical skills of those companies, but would also participate in the ongoing effort to establish a more peaceful world.
While offshore outsourcing represents an excellent business opportunity for entrepreneurs such as me and for the companies that use offshore outsourcing, it also provides yet another way to build bonds between people in parts of the world who previously had been at odds with each other or that had little understanding of each other. In the context of an offshore outsourcing relationship, people at the client company must work collaboratively with people at the offshore company to solve problems together. It is clear that offshore outsourcing will bring the world closer together and will create economic incentives to maintain peace. It's also clear that offshore outsourcing is teaching people from different cultures and from different societies that it's possible to grapple with problems together and generate solutions in a spirit of cooperation and goodwill. This spirit will become increasingly critical for the peaceful coexistence of nations.
In fact, I believe, without any supporting evidence, that offshore outsourcing has been a prime reason for the lack of a war between India and Pakistan. Given that offshore outsourcing has become such a critical element of India's economy, I can envisage a scenario whereby captains of leading companies with outsourcing operations in India made it known to India's leaders that, in the event of a war, their companies would pull out of India immediately, leaving a large and devastating gap in India's economy. This type of leverage can work both ways, but I believe that offshore outsourcing will intensify the interdependence among the different parts of the world in a positive way.
While I urge companies to send their offshore outsourcing business to Russia because it will help to strengthen the bonds between their countries and Russia, I also believe that Russia has something very special to offer its clients. That special mixture of science, mathematics, and software engineering will become increasingly attractive to potential client companies as those companies begin to outsource their innovation and research. It is the natural evolution of the outsourcing trend that Michael Detouzos mentioned in the early 1990s, and offshore outsourcing companies in Russia will be able to offer their clients an unusual advantage. My grandparents from Minsk would never believe that I would be returning to Russian soil and building a business that would help Russia and the world at large.
Reprinted with permission of the Buyer's Guide to the Russian IT Outsourcing Industry, Copyright 2006 by WorldTrade Executive, Inc. (tel: 978-287-0301, www.wtexecutive.com).
Richard Golob is President and Chief Executive Officer of GGA Software Services, LLC.
GGA Software Services, LLC has emerged as a leading Russian provider of scientific software engineering, algorithm development, and data curation services, especially for the life sciences industry. With its headquarters office in Cambridge, Massachusetts, and its development center in St. Petersburg, Russia, GGA has focused on bringing together science, mathematics, and software engineering to solve a client's problems. Since 1994, GGA has developed a client list consisting of global pharmaceutical, scientific publishing, and laboratory instrumentation companies, among others. For further information, see www.ggasoftware.com, or contact Richard Golob, GGA's president and chief executive officer, at firstname.lastname@example.org.