Domestic Brains Heading Offshore
№4 2004 October/December


The United
States has traditionally been known as a ’melting pot’ of
nationalities, personnel, ideas and technologies alike. However, it
seems that the melting process is not progressing as smoothly as
before. Although brains continue to drain and the workforce
continues to migrate to the world’s richest country, a flow in the
opposite direction cannot be ignored any longer. The fact is, the
U.S. is losing jobs, and in some industries job losses are growing
at a frighteningly high rate. The biggest losses seem to be
characteristic of hi-tech and software development, and this opens
up new opportunities for other countries, including




information revolution has determined that the office is no longer
the only workplace, since modern communication technologies have
introduced telecommuting. In practice, this means that an employee
is always at hand and is available on a 24/7 basis in any country
or continent. Moreover, this technology is giving birth to the
so-called offshore, or ordered, programming. In this case, products
are developed, on order from customers, in those countries which
have the most favorable combination of factors, such as cost,
quality and the period required for implementation.


The model
behind offshore outsourcing for the electronic industry was first
tested chiefly in Taiwan in the 1980-90s. Contracts with Taiwan
manufacturers enabled U.S. and European companies to have their
assembly work done by the Taiwanese, who possess a qualified, but
low-paid workforce. This permitted the company to concentrate on
the development of new products, production series and


Over time,
an ever-increasing number of international electronic giants were
transferring their production to Taiwan and other Southeast Asian
countries. Within a relatively short period of time these countries
turned into major world centers of the electronic industry. The
fast growing demand for standard electronic components for
computers and communication systems helped the Southeast Asian
’Tigers’ at the turn of the millennium to increase investments in
their production. An essential part of these investments was made
available in the form of easy credits, grants, tax remissions and
direct investment. In the past century, the General Agreement on
Tariffs and Trade (GATT) and the World Trade Organization (WTO) saw
nothing reprehensible about such support (today, Russia would
hardly be able to implement such protectionist support without
peremptory complaints from the West). As a result of such financial
policies and assistance from the world leaders, Taiwan, which has
always been a conundrum for China, became an industrialized
country; later it was followed by South Korea, Indonesia, the
Philippines, Malaysia and some other countries, whose economies are
based on the electronic industry.


Until very
recently, India was believed to be a major smithy of technological
personnel, a recognized leader and the main provider of outsourcing
services. From April 2003 to March 2004, software exports by
companies based in the technoparks of Bangalore and New Delhi grew
by 30 percent to reach $12.5 billion. According to India’s National
Association of Software and Service Companies, 70 percent of the
above products were sold to the U.S. Today, India is joined by
Vietnam, China, Mexico, as well as Poland, Romania, Ukraine, and
other countries of Eastern Europe. In India, the cost of
programmers’ services is growing by 15 percent annually, while the
’newcomers’ have to be content with more modest payment for their
services. This is occurring at a time when there exists an
ever-growing demand for programming services around the world.
Specialists predict that in the next five years the software market
is likely to hit $50 billion.




Due to the
development of offshore programming, the U.S. lost 160,000 jobs
over the past three years. This trend cannot be ignored any longer,
and is even becoming a debate issue in the upcoming presidential
elections. U.S. President George W. Bush is declaring that during
the last year he created 1.2 million jobs. However, the fact that
jobs in the hi-tech domain are being lured away can neither be
understood, nor forgiven. (There is evidence that at least three
major companies in New England and Virginia have recently suspended
negotiations with Russian partners exclusively due to the upcoming


While it
is true that major companies gain much from hiring specialists in
countries with a low-cost workforce, this practice may have
negative effects for their home economy by spurring unemployment.
Recently, California prepared a draft bill concerning the use of
outsourcing for public orders which imposes a ban on employing
non-U.S. residents for government contracts. Should the bill be
adopted, any contract in which the state is the customer has to be
implemented within the state’s borders. This delimitation covers
both the contractors and the subcontractors alike. A number of U.S.
states have already adopted such laws aimed at guaranteeing jobs
for their residents. However, Forrester Research predicts that by
2015, 3.4 million jobs in the software development domain will have
moved to countries with a less costly workforce.


There is a
threat that U.S. superiority is likely to be lost in the scientific
and hi-tech domains, suggests a report by the National Science
Foundation. Warren Washington, chairman of the Foundation’s
scientific council, also maintains that lack of competition in the
scientific and hi-tech labor markets was very advantageous for the
U.S., whereas attractive and competitive offers are now coming from
around the world. According to the report, Ph.D. immigrants
currently account for 38 percent of the scientific and engineering


Is the
devil really as black as he is painted? In reality, foreign
programmers are no threat to their U.S. counterparts. There are
certain areas in the U.S. where “cheap” solutions are either
inapplicable or fail to meet customer

Take, for
example, software development for crucial segments of the U.S.
national infrastructure, including technologies that are connected
to national security, military and surveillance domains, the
operation of government agencies, energy management, air traffic
control, and a number of other applications. (Remarkably, the U.S.
president’s advisor for critical infrastructural segments is John
Chambers of Cisco Systems, a telecommunications and software
giant.) It is doubtful that outsiders will receive that part of the
U.S. software development “pie.”


A similar
situation exists in most industrialized countries. The key jobs in
the U.S. IT industry continue to be inside the U.S.

Scheifer, who heads a program for MetaGroup, believes that the
scale of the U.S. controversy over outsourcing and its importance
is overestimated. She maintains that most of the outsourced
projects were – to all intents and purposes – performed by foreign
specialists working in the U.S. on the basis of the so-called H-1B
working visas.


The IT
areas which are not open for outsourcing require many IT
infrastructural specialists, including those developing database
management systems and Internet infrastructures. Also in high
demand are those specialists capable of interacting with ERP system
clients in such areas as resource planning and industry management.
It should be no surprise that the salaries of specialists in high
demand continue to grow. For example, last year software analysts
averaged $131,000; today, they earn approximately $172,500.
Business application managers have also enjoyed a salary rise from
$91,000 to $116,500. Such specialists usually occupy senior offices
and receive especially high bonuses. Experience is being sold as
before, Scheifer says.




presence of American hi-tech corporations on the Russian market is
a history that is now many decades long. However, the U.S. began
viewing Russian software developers as a potential market for
outsourcing only after it was hit by the crash of the dot.com


the Russian software market is developing largely due to its
growing domestic demand. In 2003, software exports exceeded the
half a billion dollar mark with total sales of $6 billion. Software
developers, including those working for customized applications,
have been finding support at the highest possible level. Russian
President Vladimir Putin has recently stated that IT exports are an
efficient instrument against brain drain and deserve state


customers are unanimous about Russia’s opportunities within this
market. A Forrester Research study, published in March 2003,
predicts an annual growth of Russian IT exports by 50 to 69
percent. Analysts of the A.T. Kearney consulting company are less
optimistic. They are of the opinion that Russia will most likely
rank 21st (after Vietnam) amongst those countries advantageous for
offshore programming. This rating, they maintain, is attributed to
the fact that Russia inadequately participates in the international
distribution of labor; it has underdeveloped information and
telecommunication infrastructure, an unfavorable business climate
and cool attitude toward foreign investors.


There are
several factors that make potential customers refrain from doing
business in Russia, such as their impression that Russia is an
unfriendly competitor, language difficulties and the huge amount of
bureaucratic hurdles, not to mention the relatively high salary of
Russian programmers. There is also a persistent myth – propped up
by Hollywood – that Russian programmers are all hackers.


however, the situation is improving in all three of these
directions. Businesspeople and software developers in both the U.S.
and Russia are being drawn together by their political
predilections and entrepreneurial logic. There are also more
pragmatic reasons for cooperating with Russia, for example, its
partnership in the fight against international terrorism and money
laundering, as well as its ability for ensuring network security.
Many responsible manufacturers are transferring their orders from
Third World countries to more understandable partners. To further
bolster the trend, an everincreasing number of Russian programmers
are learning foreign languages, while many young managers are
receiving MBA and MBI diplomas in the U.S. and Europe.


it seems that Russian software producers are already prepared for
the export of not only customized products, but computer packages
oriented toward end-users. (This is more profitable from the
viewpoint of taxation; it requires a full cycle of employment
ranging from the development of architectural software solutions to
marketing, sales and product support.) It is time to find the
niches where high-quality Russian products are capable of providing
worthy uses.


The high
proficiency level of Russia’s R&D teams – due to traditionally
high-quality education in the field of applied mathematics and
programming – was confirmed by the results of the 28th ACM
International Collegiate Programming Contest held in Prague this
year. It was attended by teams from 73 universities from 31
countries, including 8 teams from Russia. First place went to a
team from St. Petersburg State University for IT, Mechanics and
Optics who emerged victorious ahead of very strong teams from the
U.S., Sweden, Belarus, China, Taiwan and Poland. Russia’s Perm
State University (fourth place) and Izhevsk State University
(eighth) also ranked amongst the top ten best teams.


In 2004,
the Asian CASEL competition for the best cryptography standard was
won by the JOKE (Just Only Kryptography Extensions) procedure,
proposed by one of Russia’s research institutes. In a very
competitive environment, Russian specialists left behind their
counterparts from France, Holland, the U.S., Japan and several
other countries. As a result, it should be no surprise that
developmental projects by Russian cryptographers are carefully
monitored by representatives of the Asian markets.


competitions have taken place in the U.S. (a contest sponsored by
the NIST) and Europe. Russia sent teams to both contests;
specifically, the LAN Crypto company presented its NUSH procedure.
Generally, cryptography is a very promising domain for Russian
programmers because this sensitive area of software is connected
with data protection, which is in big demand in many business


outsourcing companies have demonstrated a stable growth of
opportunities for software applications intended for microchip
design. Many U.S. vendors, including IBM, Microsoft, Oracle and
Sun, have already used their services. This year, Intel is about to
double its already numerous Russian personnel by leasing people
from the Elbrus company, which enjoys a long history of good
relations with their Western partners, as well as from UniPro of
Novosibirsk, which specializes in applications for mobile
telecommunications. Intel research units can be found in Moscow,
Nizhni Novgorod and Sarov, and the main products of Russia’s Intel
facilities are connected with procedures and software. Steve Chase,
president of Russia’s Intel office, emphasizes that Intel has no
intention of competing in Russia with the traditional software
manufacturers. Intel only needs software to complete its own
technologies which are connected with the production of data
processing and data transfer hardware of its own.


successes scored by Russian software developers are encouraged by
the situation on the respective markets of the CIS. Russian IT
companies possess a more tangible potential in comparison with
companies from other countries of the Commonwealth, most of which
are suffering from a lack of clientele and weak economic relations.
Deficiencies in the economic development of the former Soviet
republics are bringing additional gains to Russia’s software
developers and service providers working in the field of new
technologies. The situation is opening up access to new markets and
a low-cost workforce. For instance, in Moldova, an average
programmer earns less than $5/hr, which is substantially less than
a similar specialist in Russia, who earns about $15–20/hr. Local
programmers and technical specialists do not require special
training or upgrades since they all are graduates of Russia’s
higher schools. Moreover, the Russian language continues to be the
most widespread language on the territory of the former Soviet
Union. There, Russian outsourcing companies – located closer to new
markets, and similar in terms of culture – may well be rendering
priceless services which lead to additional price gains.




Today, the
demand for software developers is so high that a friendly
co-existence among various national business communities is quite
possible. Each computer has in its memory storage anywhere from
150,000 to several million lines of program coding. Understandably,
each line was created through the effort of computer programmers.
Much of such coding exists as a repetitively licensed product,
however, new technologies and applications require constant
debugging and streamlining, user support, upgrades and development.
In general, the modern economy becomes increasingly

to Harris Interactive, 80 percent of American adults with Internet
access continuously use the Internet for a variety of news; 26
percent of them have become less dependent on other mass media
sources (television and newspapers have suffered the greatest). An
average respondent spends 30 minutes to 2 hours reading on-line
news. Traditional mass media sources have also become massive users
of the new software products.


In 2003,
according to Forrester Research and the U.S. National Retail Trade
Association, Internet outlets in the U.S. increased their sales by
51 percent. Software companies render services and develop
electronic trading desks, alongside e-trade and e-banking. In the
aggregate, U.S. e-sales amounted to $114 billion – far in excess of
$96 billion predicted by the analysts. On average, the Internet
shop margin amounted to 21 percent. Until now, e-sales in the U.S.
amounted to only 5.4 percent of the total sales of goods and
services. However, in the field of technical sales, the Internet is
well ahead – with 43 percent of household appliances sold over web
sites. According to AP forecasts, this year on-line sales in the
U.S. are likely to reach $144 billion.

In Russia,
Internet services are developing faster than the growth rates for
the IT market.



conclusions of Internet Database Connector and Forrester Research
are confirmed by the Gartner Technology Demand Index (TDI). This
monthly economic indicator is calculated by a poll of various IT
companies’ CEOs. In February, for the first time ever since its
introduction in March 2003, the TDI exceeded the level of 100. In
June 2004, the TDI for the U.S. hit a level of 105, thus showing
that U.S. companies believe in economic stability; 5 percent of the
polled CEOs spent more on advanced technologies than was planned in
their budgets. 


A decade
or so ago it was only possible to speak of microelectronic devices,
but the present capabilities of personal computers and notebooks
meet the requirements of virtually all users. Currently, software
products and network content are in the limelight, and
telecommunication networks have immense opportunities for
development. Operators have only begun to evaluate the potential of
new wire and wireless broadband technologies and the possibility to
offer new data services to remote information users.


In this
environment, the most efficient strategy for Russia’s IT companies
is to study the best practice from around the world so as to adapt
themselves to the local economic climate. In Russia, the hi-tech
domain must be viewed as one of the main supports of the economy
and as an important mechanism for achieving high economic growth.
It also requires efficient investment policies. This strategy will
help Russia become a world leader in electronic technologies, thus
creating a new, advanced economy that is based on knowledge and
data transfer.