The huge populations of India and China combined with their strong education systems are winning those countries many outsourcing contracts. By providing large workforces with good technical skills but with lower wages, it is an easy sell driving IT projects offshore on the basis of cost, although many outsourcers also offer a greater range of skills than banks can provide.
However, when scale is not the priority for a project, offshoring to India or China can also have disadvantages, say some bankers. Several financial services organisations are seeking smaller, highly qualified teams that can carry out complex technology projects at low cost. For complex projects, they also require person-to-person contact for a more hands-on approach. This has given the countries of eastern Europe an opportunity to put their well-educated populations to work for Western banks.
Technological clusters
In Russia, the government is keen to make the most of the strengths that its educational curriculum has in technology. Due to the vast scale of the country and its relatively recent economic crisis this will not be easy, so the government is undertaking a programme to allow it to exploit its knowledge reserves. Deputy IT minister Dmitri Milovantsev says the country is developing technology parks in an ambitious scheme built around centres of scientific learning, such as the Moscow area, St Petersburg and Tatarstan.
“They are developing wherever there are strong schools of science – these are very important in resolving infrastructure problems that many technology companies face,” he explains. To drive investment into the industry is a significant challenge, he admits. “The economy has never been as dependent on natural resources as it is now and that has moved people away from IT. When the economic changes occurred, the technology industry suffered first. Those involved in IT research and development in the defence, nuclear and aerospace technology industries found their skills were less in demand.
“If we are moving to a high-level technological economy, we have to build an infrastructure to support that and during that time human resources have to be occupied,” he says. “So they became involved in areas such as finance and construction and it doesn’t take long to become deskilled. We wanted to retain those people in the country so that they can return to the technology field when it is reborn, and we are now seeing that happen.”
There is also a return of Russian émigrés who have brought non-traditional Russian skills from the business world in the West, solving a key challenge. “We also have much human capital working with Western companies and learning the business mindset. When Russians left in the 1990s, they were often successful in creating technological start-ups – for example one of the Google founders [Sergey Brin] is a Russian – and now that those entrepreneurs see they can get stronger remuneration here, they are keener to return,” states Mr Milovantsev.
“The wages here aren’t as low as those of India or China and we do not want them to be.”
Computer science legacy
Russian outsourcer Luxoft has targeted the market for smaller, high complexity projects and achieved some success across its centres in Russia and Ukraine, particularly with European investment banking operations. “The Soviet education system has left a strong legacy of technically able computer scientists,” says Michael Friedland, executive vice-president at Luxsoft. “Our system is very rigorous – it takes people through all of the basic scientific knowledge that is behind programming, giving them a more fundamental understanding and making them good problem solvers.”
He continues: “This gives our programmers a much stronger base. Rather than having learnt individual packages and limiting themselves to that, they can build systems from the base up and adapt to different situations.”
At Moscow State University, Professor Boris Berezin explains the depths of the knowledge that students must have to graduate. “First and second-year students cannot focus on any one area of IT but must study across the board. They receive fundamental mathematical education, programming knowledge and control algorithms, and they learn programming languages as tools to understand the fundamentals. In the third, fourth and fifth years, they can focus on each of those areas with specific courses.”
Where the education system is suffering, however, is in the resourcing of courses – something the government is now rectifying with improved investment at the university. The courses have some famous graduates in the financial services community – Prof Berezin cites Sberbank’s head of IT, for example. But, although many banks have approached students, so far they have not shown the same interest in supporting the faculty that IT companies have. For example, Sun Microsystems, Cisco and HP have long-term relationships with the university.
And the courses clearly work – the head of equities IT at one top tier European investment bank concurs with this assessment of Russian adaptability: “You often find that people trained in India or China have very specific skills, but little room for manoeuvre. You often don’t have the best people working on each job as they are in such huge demand. That makes it perfect for factory production but when you have a particularly challenging project, it can be limiting.
“Also, the huge demand for good staff driven by the major outsourcing companies creates much staff turnover. That, in turn, disrupts projects because the most skilled staff are often the ones to move.”
He continues: “Russian staff all have a strong understanding of the underlying science behind IT and this gives them an advantage when we are looking to solve tough challenges. We aren’t looking for large-scale teams at this point, we want quality and so we are looking to Russian teams to resolve that.”
Deutsche Bank is working with Luxoft for similar reasons, says the bank’s CIO Dan Markowitz. “People stand up for themselves in Russia. They don’t take orders too well – which can be a mixed blessing – but when the requirement is to be innovative and frankly you’re not 100% sure of the approach because this isn’t a well-trodden path, then if you come up with a concept that is flawed, the guys in Russia will come back and say ‘stupid idea’.”
As the outsourcing model has matured, Mr Markowitz notes that the approach must reflect greater demands. “To use a British expression, it’s horses for courses,” he says.
Night shifts
Several factors also made eastern Europe more practical for the customer relationship management (CRM) project that Deutsche Bank was running. “Time zones are an issue,” says Mr Markowitz. “If you have a team of 30 people [in Asia], you can run them in rotation through the night so that when our executives need to talk to someone, they will be available without too much overnight work landing on the same people. But with a team of six to eight people, everyone ends up doing night work and that drives attrition.”
The Russia project started off small. “We were heavily micromanaging in the initial stages in areas such as hiring and training,” says Mr Markowitz. But the work has grown to the extent that there is now a team of 225 and it delivered the new system last year.
“The relationship was not without bumps,” he notes, “but the project came in on budget with some really innovative work and we’re now talking to other banks [that want to] purchase the CRM system from us.”
At outsourcing provider EDS, head of retail banking Jonathan Charley says that typically the two issues driving nearshoring from western Europe to Commonwealth of Independent States and eastern European countries are that the time difference is smaller than with Asia and there is the ability to keep data in similarly regulated countries, particularly when the countries are in the EU.
“Each country has different strengths – for example, Romania, having historically been on trade routes, has strong language skills as well as a strong educational system. We’ve been using Hungary for several years, again for the strong language skills and low costs,” he says.
Mr Charley warns that banks looking to outsource should ensure they are basing their location decisions on fact and not on fiction. “There was a [UK Channel 4 TV] programme in which [the makers] tried to get access to customer information from several companies in India and the only place from which they received it was a mobile phone shop in London.”
Russia is likely to continue facing strong competition from its neighbours and countries further afield. Mr Charley says that for outsourcing providers any one country will not be enough. “We decide where to work based on infrastructure, cost and language. But also important is availability. You don’t want to have all of your eggs in one basket. When there are floods in Mumbai, you need to keep a project running elsewhere. So for a bank looking to outsource, it is vital to have a range of options from your supplier.”
Dmitri Milovantsev: Russia is developing technology parks built around centres of scientific learning
