ADMIN Ltd. - The Moscow Times, 2003

St. Pete Stakes Claim as Software Capital

"There is a constant rivalry between Moscow and St. Petersburg that only St. Petersburg people participate in," quipped Nikolai Puntikov, the loquacious chief of St. Petersburg software development company Star Software. Except when it comes to designing software, that is.

St. Petersburg boasts a surprisingly large share of Russia's software development industry -- about the same as Moscow, by some accounts -- and St. Petersburg-based companies are positioning themselves as big-time players as the sector prepares to grow rapidly in the next few years, according to experts on hand last month at the industry's main annual event, the Software Outsourcing Summit. Offshore software development alone brought Russia some $200 million last year and will grow by roughly 25 percent annually over the next several years, according to Ernst & Young.

"Why is St. Petersburg is ahead of other cities?" Puntikov asked during the three-day conference in a St. Petersburg suburb. One reason is that companies in the northern capital started earlier. "Age means experience," he said.

Puntikov started his company in 1991, the same year St. Petersburg-based Reksoft was founded. Another big player on the St. Petersburg market, Digital Design, appeared the next year and Arcadia followed in 1993. The head start over big Moscow developers like VDI, Aplana and Luxoft gave St. Petersburg companies a chance to corner some niche markets.

For Star Software, some of those markets have been conveniently close to home, in neighboring Scandinavian countries. Star has marketing personnel on the ground in Denmark and Sweden and works as a subcontractor for outsourcing giant CSC of Denmark.

Digital Design has developed expertise in specialized fields like data warehousing and decision support systems, Internet/intranet and e-commerce solutions and electronic document management and workflow.

Reksoft has focused on developing software not only for European and North American clients, but has also won contracts with big Russian companies like Gazprom, Alfa Bank, Sberbank and Mobile TeleSystems.

St. Petersburg-based IT consultant Michael Novikov said it is important for software producers to diversify their client base by working with Russian companies: "Originally, St. Petersburg companies dealt primarily with foreign markets. But after 2000 -- with the onset of the IT crisis -- revenues from abroad slowed down significantly. So companies started to look around in the local market. That's really significant."

Novikov said it is a particularly healthy sign that software developers are picking up Russian small and medium-sized businesses that need new software solutions to support company growth.

Another key to success for St. Petersburg companies, Novikov said, is the quality of university training for programmers and links between companies and the top five university programs.

"St. Petersburg companies start working with students from the very beginning of their university years. They want to be sure that their future employees have specific knowledge in specific fields," Novikov said.

All these factors that have boosted St. Petersburg companies to the top so far will become even more vital as the industry grows significantly over the next few years. Alexander Yegorov, the 33-year-old CEO of Reksoft, called 1991-2000 a "period of organic growth" for the Russian sector and said major expansion and restructuring of the market are likely on the near horizon.

Despite the high-tech slump in the West, outsourcing continues to grow rapidly, said Ian Marriott, research director at Gartner Research, at the opening of the conference. He estimated that offshore outsourcing in Western Europe is growing by 40 percent annually and predicted that the share of the market dominated by India, the world's offshore outsourcing leader, will continue to decline. That leaves a window of opportunity for Russian companies.

Part of St. Petersburg companies' strategy to ensure they take advantage of the growing opportunity is a consortium called Fort-Ross, which organizes trips to European and U.S. cities and lobbies for government support of the industry. But government support is slow in coming, Fort-Ross executive director Vera Semyonova said.

"The Russian government says that high technology and information technology are top priorities for the economy. But we need more than words. A lot of practical steps are needed to develop the sector," she said.

Mark Sanor of Ernst & Young said the sector's growth could be accelerated with consolidation by mergers and acquisitions that would make Russian companies larger and more versatile to more effectively compete with the likes of Indian outfits.

"The largest Russian outsourcing companies are still small by global standards, and they should consider a major change with consolidation," he said.

Yegorov of Reksoft agreed that mergers and acquisitions are still to come for companies in St. Petersburg as well as the rest of the nation. "Basically, we're just getting started," he said.