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Arkady Khotin, general director of Arcadia, praised the program Angesleva has led.
"Everything was great and super and it's a shame that this program is finishing," Khotin said Thursday in a telephone interview. "We would have been glad if it was extended. Finns are just great." "They have provided very creative training for our staff and for all the [computer] specialists who wanted to participate in them. "I only wish that governments of other countries, Swedes for instance, would do something similar, or our own companies," Khotin added. "Now we're trying to do something similar ourselves."
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Summary: This report provides an overview of recent trends in Western firms utilizing offshore software development in Russia. Hindered by a lack of domestic programmers, many Western software development firms are considering Russian software companies and engineers via offshore programming. There has specifically been growing interest of U.S. companies looking for programming services in Russia. This report provides a list of some companies involved in offshore programming in Russia.

Market Overview

According to Brunswick Warburg, in 1999, Russia conducted $70 million in offshore programming services with an annual turnover $560-580 million.

According to a report by McKinsey Global Institute, the Russian business of offshore programming is growing at 50-60% per year and is expected to be able to obtain this requisite track record and international certification and become a force in the world offshore programming market, for example, along with India.

U.S. firms are only starting to take advantage of potential cost-saving opportunities in Russia for offshore programming. Russian software specialists are valued in the industry for their strong grounding in mathematics and the natural sciences and their lower cost compared to Western programmers. According to Alexei Sukharev, president of Auriga, a typical Western firm can not only relieve current shortages of domestic software programmers but can also save some 30-40% in costs.

Usually companies which provide offshore programming services have a wide range of specialists including: project managers, technical leaders, system analysts, software engineers, quality assurance engineers, software testers, technical writers, HTML engineers, graphics designers, systems engineers, etc. There are about 100 Russian companies taking outsourcing orders from Western companies, and between 10 to 15 major Western companies have already set up offshore programming centers in Russia.

Russia's major intellectual centers are Moscow, St. Petersburg and Novosibirsk. St. Petersburg is less expensive than Moscow and has a better developed infrastructure than Novosibirsk. In order to meet software development requirements several large software developing companies in St. Petersburg joined efforts and created the "Fort Ross Information Technology Services" consortium, which coordinates the activities of its members and actively promotes its members' services to the world. All of these companies were established in the market during the period 1991-1994, and have 6-7 years experience in outsourcing. In addition, Fort Ross is affiliated with leading St. Petersburg universities, which gives the consortium access to the superb research, technical capabilities and human resources of universities. Among Fort Ross customers are such companies as: Xerox, Harris, IBM, Novell, Smith Corona, Guam Bureau of Social Services, Italtel, Relativity Technology. It is able to work either on site or offshore under hourly or fixed price contracts. Fort Ross provides a whole variety of IT solutions, including: Internet programming, e-commerce, Web design, Web server applications, Web database applications, software/hardware reengineering, CASE systems, telephony based solutions, etc. Additional information on Fort Ross Consortium could be found in the report "Software outsourcing - Fort Ross project" at BISNIS website:www.bisnis.doc.gov

The principal benefits of offshore software development are: (1) Savings on professional charges. The rate of Russian specialists can be 3-4 times lower than in Western markets. Using offshore programming can cost less than hiring staffers or bringing in people with visas to work abroad. (2) Availability of qualified workforce. (3) Rapid accessibility. Companies have required personnel available that allows the possibility to double or triple the workforce for time-sensitive projects without exceeding, for example, an allocated budget.

Western companies are already looking to Russia to solve a shortage of IT personnel. Many IT giants such as IBM (www.ibm.ru/educ), Nortel Networks (www.diona.ru; www.belam.com) Sun Microsystems (www.redcenter.ru) and recently Intel have already outsourced some of their development to Russia.

In late June 2000 Intel opened its own offshore programming center in Nizhny Novgorod to develop and support software forthe next generation of Pentium microprocessor a new series Itanium 64-bit process or. is starting hire about 500 programmers who will be full-fledged staff located Novgorod.

Of course, it is possible to hire independent IT professionals from Russian industrial and scientific centers such as in Novosibirsk or Nizhny Novgorod who are unemployed or paid very poorly in comparison with their colleagues in developed countries. However, even if a Western company finds a Russian specialist matching requirements, it could take many months to bring him/her to its site due to immigration restrictions.

It is necessary to keep tight control over project management from the US in order to keep offshore programming projects on track. There should always be a clear understanding of what is to be done and what is expected.

Sector Prospects

According to McKinsey Global, the future of this sector provides a mixed picture: (1) Productivity in local software development is already high and not suffering from regulatory restrictions; (2) Russian software services are becoming compatible in the international market (price and quality) and are actively used via offshore programming arrangements; (3) Entry into international markets takes time and acquires record track and certification; and (4) Growth of output is held back by stagnation of the economy

Some Company Contacts

Below is a list of companies involved in the offshore software development business in Russia. It is not a comprehensive list and does not serve as an endorsement of this company.

[. . .]

Arcadia, Inc.

Arcadia, Inc. is a young and dynamic offshore software development company located in St. Petersburg. The company was founded by Arcady Khotin in 1993 in response to growing opportunities created by the post-glasnost era of Russian programming. The company has about 40 employees of high qualification. Russia's academic military and practical history in programming have given rise to a programming industry that has remained world class after the end of the Cold War. The company has accumulated experience in recruiting a select group of talented software developers, which allows it to build strong business relationships with a number of Western companies. Customers of Arcadia, Inc. are: Cook Network Consultants (USA), VMS Gainesville (USA), etc.

Arcadia, Inc.

Tel/fax: +7(812) 164-8456;

e-mail: Khotin@arcadia.spb.ru

www.planet-software.com/arcadiainc

[. . .]

This report is provided courtesy of the Business Information Service for the Newly Independent States (BISNIS)

[. . .]

Entrepreneurial opportunities

Many Russians, not least Mssrs Mastrukov and Sviridenko, used this opportunity to be entrepreneurial, rather than become part of a multinational.

Arcadia is a St. Petersburg firm founded six years ago by Mr. Arcady Khotin "to take advantage of the growing opportunities arising from Russia's move to a free market economy," says his partner in the US, Mr. Philip Schwartz of Planet Software, a firm that works with Arcadia.

Mr. Khotin himself spent over 20 years as both a software developer and a project manager. In fact, he was Software Development Manager for one of the first Russian-American joint ventures and was responsible for supervising over 100 programmers. Arcadia was founded, he continues, after Mr. Khotin "recognised that thousands of highly qualified computer scientists, engineers and programmer/analysts would no longer be employed in the government, military or R&D sector after the end of the Cold War."

Sometimes this Cold War-forged skills are used directly in highly-technical projects. Soft Nav Ltd. is a St. Petersburg-based company development of real-time and embedded systems for avionics with emphasis on, for example, Global Positioning Systems. The company's foreign customers, says General Manager Nikolai Mikhailov, are such firms as DASA and Dornier Satellitesysteme in Germany.

More often, however, the applications are really rather different.

Arcadia, for example, has worked on more traditional projects, such as groupware, image compression algorithms and such Internet-based components as front ends to Real Audio, CGI and considerable work in Java (a programming language that came into existence well after the end of the Cold War).

[. . .]

Arcady Khotine starts every morning with an old-style soviet. Over breakfast he, his wife, and his daughter—all partners in Arcadia, Inc.—inull over what another day of offshore software development holds in store.

Mr. Khotine is at the center of one of Russia's fastest-growing industries. Famed for its top-notch engineers, some of the West's biggest software houses now rely on companies like Arcadia and Typhoon Software, also of St. Petersburg, to develop software and Internet tools for them. Not only can these bigger firms outsource the most complicated pieces of their work, but they pay a small fraction of the going rate in the U.S.

"With communication tools like the Internet, Western firms can access talent around the world," says Mr. Khotine. "Here in Russia, we have some of the best, cheapest talent around."

Indeed, analysts estimate that dozens of companies in St. Petersburg and more in Moscow are lining up to otter services. Arcadia came early to the business, and is considered one of tile best.

Mr. Khotine, a veteran in St. Petersburg's old state-run technology machine, scooped up some of the best and brightest engineers to work with him. Years of avid English reading had prepared him to start contacts with bigger Western contractors. What began as a $50 contract sealed via the Internet in 1993 has blossomed into hundreds of thousands of dollars in 1997 revenue, a staff of 40, and six or so major, steady clients.

The young industry faces challenges, though. Enlarging the client base is difficult because customers—reluctant to admit to farming out work—won't make recommendations. Mr. Khotine's solution: recruiting a U.S.-based partner to operate Planet Software, a Gainesville, Florida, enterprise concentrating solely on building up Arcadia s business.

What Western companies like to do, though, is send headhunters to shop for local talent. Mr. Khotine, unable to beat Western salaries, has lost engineers to bigger players. So he plans to try a training-center approach: He'll teach engineers, putting them to work on a Western contract in Russia for several years, and then place them with the client overseas.

"We get some contracts, and Western companies get better trained engineers," explains Mr. Khotine. "We have to turn our disadvantages into benefits."

Arcadia, Inc.. in St Peterburg, Russia is one of the very best Russian software development companies.
I have known Arcady Khotin since the spring of 1994 when he had three employees and have been very impressed to watch Arcadia develop over the past five years to its present size of over 70 employees. My observation of Arcadia has been via the internet and no less than five visits to St.Petersburg where I have spent time at his head quarters and gotten to know some of his employees. A remarkable and dedicated crew. Mr Khotin is an excellent manager who, in partnership with Philip Schwartz of Gainsville Florida, has grown Arcadia to the point where it remains highly effective and productive and has become a very serious player in the off shore programming business. His ability to find and hang onto excellent managerial and technical talent is quite impressive. Having an American citizen as partner and business manager in Florida from the very beginning gives Arcadia a competitive leg up in access, and operational and fiscal stability. Last summer's fiscal upheaval seems to have affected him not at all. He has become a very good friend and since I view him as a person of the highest integrity I have no hesitation in putting my own reputation on the line by endorsing him and his business. Let me make it clear that while I have no financial or other interest in his business he has done some excellent work on my web pages. I have a PhD in Russian history. Therefore I have some understanding about the importance of the the success of his and other businesses for the future prosperity and stability of the Russian nation.

Gordon Cook, Editor and Publisher

Offshore

Another high-tech exporter is Arcadia, which supplies contract software development services. Arcadia was founded six years ago by Mr. Arkady Khotin--a long-time Russian software development and project manager--to take advantage of "the thousands of highly qualified computer scientists, engineers and programmer/analysts who would no longer be employed in the government, military or R&D sector".

Arcadia's services are marketed internationally by Planet Software, Inc., based in Florida. "The combined Planet/Arcadia management team," says Planet's Managing Director Philip Schwartz, "has focused all of its energies on building the most respected offshore software company in Russia ... The Russian labour pool now contains thousands of highly-educated developers who can make a better living writing offshore software than working at a government or university job."

Mr. Schwartz goes on to say that "the city of St. Petersburg is at the center of this technology and is rapidly becoming the 'Silicon Valley' of Russia."

Nevertheless, he says, "Planet Software Inc. is a 100% US business. Its legal, banking and accounting relationships are all in the United States." In the last six months, Arcadia has worked on projects involving various leading-edge software technologies, including groupware, compression algorithms for medical imaging, Java, e-commerce, audio and video for Windows and the Internet and industry applications.

PARIS (11/04/98) - Talk about having high-quality problems! While much of the global IT industry struggles to deal with a shortage of qualified programmers -- as the planet inches ever nearer to the year 2000 and even sooner to the introduction of the euro in 11 European countries -- a Russian software house faces an employee pool of more qualified programmers in St. Petersburg than it can hire.

"Students graduate and they need a place to work," explained Arcady Khotin, general manager of Arcadia, Inc. "I can't assimilate them all. There is more talent than I can hire."

Khotin, with some 20 years of programming and software development experience, founded what he calls an "offshore" software development company in 1993. Today, Arcadia does a lot of work for "software houses who have more jobs on hand that they can handle," writing programs for a host of applications from bar-code readers to low-level NT drivers. "We also do a lot of cross-platform stuff, Windows to Mac and so forth," Khotin said.

But there are more top-notch programmers in St. Petersburg than Khotin has business, and so he's decided to set up a training, exchange and placement program in conjunction with his existing business. The idea is to bring in additional software contracts, make better use of St. Petersburg talent, train and place Russian programmers for work abroad, and give programmers who want to stay in Russia a crack at some international training.

New business generated by Arcadia's training program should mitigate the effects of the country's current financial woes, which have struck all sectors of the Russian computer industry.

Khotin said, "This crisis hit us hard and the sales [of 1C:Arcadia Internet Store] practically stopped." Arcadia Internet Store is an electronic commerce application jointly developed by Arcadia and Moscow-based 1C, a company run by Boris Nuraliev, who is well-known in the Russian programmer community. Other IT providers have reported a 60 to 70 percent drop in Russian business -- making his foreign-focused project all the more sensible. And initially, Arcadia will gear the training and placement program on its strongest markets outside of Russia: the U.S. and Scandinavia.

"Instead of what some agencies do we are going to use the fact that we are a well-established software house and we have recruiting ongoing for our company," Khotin said. He made a distinction between what he is trying to do and a practice he calls body shopping -- where employment agencies shuffle programmers to where ever they have a need and with no concern for the programmer.

Khotin said that he "decided to build a new business" in conjunction with one of the local universities, where Khotin has already encouraged professors to train students in practical computer skills that help them to make an easy transition to the working world.

As a result, local-university graduates are often ideal hires because they've already got some business sense -- and plenty of Java skills. "We call it a student patch" Khotin said. In his newest scheme, Khotin will continue to dip into the pool of top graduates to recruit employees who may be assigned to work on a project, perhaps traveling to work on-site. After the project period is over, Arcadia will act as a placement agency, helping whoever among the employees is interested in moving abroad.

"We will find a customer who needs a steady supply of staff, we will sign an agreement that we will take the company's project for six to twelve months," Khotin explained. "At the same time we are preparing to move those students to the customer's company within a year." At the end of the period, the customer will have the option -- and assistance from Arcadia -- to hire and relocate the programmers they want.

"We will have steady flow of projects and customers will have a steady stream of employees," Khotin explained.

For those Arcadia employees who decide to stay in Russia, the work abroad will provide them with valuable experience that they'll bring back to St. Petersburg, Khotin said. "We can't send the cream of the crop overseas all the time," he said. "And not all of Russian programmers want to go abroad. Out of our 60 employees, we have five or 10 who would like to go."

In the U.S., Arcadia's international arm Planet Software, Inc. manages Arcadia's U.S. contracts from Florida. Programmers hired through Planet specialize in Microsoft Corp.'s Windows 95 and Windows NT, Apple Computer Inc.'s MacOS, and Internet-related programming. As a U.S. business, Planet Software's legal, banking and accounting relationships are all U.S.-based, and the company sets up FTP site-access for each project. Customers are invited to communicate about their project via e-mail, fax, phone or Internet phone.

In 1993, Arcadia's first U.S. customer contract brought in US$150. While the firm is still privately held, its revenues have increased significantly over the past half-decade while the staff has grown. But Khotin hopes Arcadia will grow even more.

"This is a very capitalistic approach," Khotin said. "I already have one of my Scandinavian customers being staffed, with the first students going over soon."

For Planet Software, an offshore software developer with offices in St. Petersburg, Russia, Comdex provides a place to look for U.S. licensees for some of its software, where it can negotiate new contracts for software development.
It's also a good place to get new technology ideas. "This is the place where I can ask questions that I have no one to ask back home," said Arcady Khotin, Planet Software's general manager.
The career expo held with Comdex has also been important for Planet Software. "This way I don't have to travel around to visit 20 staffing companies," said Philip Schwartz, vice president of Planet Software.