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Saturday, 9 October 2010

Grand Russian IT Promenade - Outsourcing Growth, Russian CeBIT, VC and High Tech Start-ups


Are you interested in knowing who holds the keys to the future of IT? Me too! Consider this. According to the Moscow Times, in 2006 Google held its annual Global Code Jam, which brings programmers from all over the world to compete with the same problem online. And these tasks are not a joke, but rather made for die-hard programmers. What's your guess about the winners? (True, I was a bit biased and thought that Russia would be among the top programmers.) And that's exactly the case, a Russian programmer won the award. In fact, among the 100 finalists were 33 Russians. Other significant "youth powers" included twelve Chinese, seven Americans, six Germans and three Canadians. Surprisingly, not a single Indian made it there...

Given all that brain power, it's no surprise that the results of IT market developments in Russia, most prominently outsourcing, are quite promising. According to Leonid Reiman, Russian Minister of Communications and IT, the growth of the Russian IT market overall grew to USD 13.6 billion in 2006, which represents a 17% growth y-o-y. 23 million PCs (33% growth) and 25.1 million users (15% growth) were recorded in Russia in 2006. Russia awaits a boost from digital TV, total Internetization of the school system and techno-park development, said the Minister. Techno-parks alone should bring production output worth USD 4 billion, while total revenues from IT sector should jump to USD 40 billion by 2010.

The true cash cow of the Russian IT sector has been its IT outsourcing (ITO) sector. RUSSOFT reported that Russian software exports grew by almost 54% and reached USD 1.5 billion in volume in 2006. During the past five years the Russian ITO services market grew 30-40%. Russia is just behind India and China in terms of best off-shoring locations in market volume. RUSSOFT singled out that over 50% of the market volume was generated by Moscow and St. Petersburg companies, with others located mainly in Novosibirsk, Nizhniy Novgorod and Yekaterinburg. NeoIT company estimated that this year the growth of outsourcing industry will reach 40-45%.

Intel Russia President Steve Chase recently was quoted by Reksoft IT Quarterly as saying that the outsourcing market "is going to reach a billion dollars this year. People know you have to be in Russia because it's a very fast growing market." The US IT giant has invested $700 million in Russia in the last 15 years, while other companies like Boeing, Motorola, Google and HP added their R&D centers in Russia.

As the Moscow Times reported, Epam and Luxoft, the leading Russian outsourcing companies, employ about 5,000 people and their total revenues in 2006 reached USD 148 million, a 45% growth y-o-y. When compared to India's 80% of global market share, Russia looks small with its tiny 3%, however the potential is strong, as it's boosted by a growing number of IT graduates, strong education system and better infrastructure level.

All these major developments were conceptualized in the giant Russian presence at CeBIT, the annual IT trade show held in Hanover, Germany. This year Russia was the official CeBIT country partner. The Russian Pavilion showcased some 150 exhibitors including major Russian IT, IT consulting, outsourcing and information security companies. The Pavilion was supported by high ranking government officials, including Vice-Premier Naryshkin and Minister Reiman who proudly escorted German Chancellor Angela Merkel around the booths of participants. Minister Reiman was upbeat, announcing that Russian IT exports totalled USD 1.8 billion in 2006 and in the next three years would grow to USD 10 billion.

Of course, who's without sin? There are a number of issues that inhibit faster development of the IT sector in Russia. Lack of marketing skills and global experience, high level of piracy and insufficient venture capital funding represent major obstacles. Let us look closer what is happening in the latter.

High Tech Investments Set to Grow

In Russia in 2006 some ten investment funds specialized in the high tech industry. Those IT companies that were favored by investment funds were mature and successful IT businesses, says CNews Analytics. Currently the situation has been changing, as more and more funds look seriously into smaller prospective companies.

In May 2006 the Russian Ministry of Economic Development and Trade announced the winners of its tender for management of five state and private venture funds that have been created in Russia. The state plans to co-invest in the funds managed by private companies. According to the tender terms, 25% of the venture fund capital will be federal funds, 25% regional, and 50% private capital. The winners of the tender are large Russian investment companies, including Alliance ROSNO Asset Management, Troika Dialog and Monomakh, reports CNews Analytics. These funds are aimed at increasing investments in innovation, lowering risks of private investors and creating venture capital in Russia.

While interest in high tech companies is growing, many investment funds are somewhat cautious and start considering companies seriously only when a company's turnover hits USD 5-10 million, and capitalization grows. Yet, local investors constitute a major share of those who invest in small and start-up IT companies.








Dr. Andrey Gidaspov has over ten years of experience in business consulting in the IT and telecom (ICT) fields in Russia, CIS and Asia. Andrey has sealed deals for hundreds of American companies with Russian and CIS partners, ranging from start-up businesses to large multi-national corporations throughout Eurasia. His past clients include well-known technology leaders such as Motorola, Harris, Tekelec, Oracle, Corning, Tellabs, Qualcomm, Net2Phone, Nortel, Andrew and many others.

In September 2004 Andrey opened his own consulting business, Gidabyte ([http://www.gidabyte.com]), based in Hong Kong, China. The company provides a wide range of business consulting in the ICT sector for international companies in Eurasia and Asia Pacific. GidaByte's bi-monthly newsletter "GidaScope" has become an instant success ([http://www.gidabyte.com/newsletters]) among various businesses interested in doing business in Russia. Andrey recently authored his first book - "Riding the Russian Technology Boom" - which will soon be available on Amazon. Also available at: http://www.russia.futuretext.com


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