January 25, 2006
3 Reasons Russian Outsourcing Will Flop
1. The economic incentives aren't big enough.
Is Russian labor cheap...yeah of course it is. Russian labor is a full 50% cheaper than Indian labor and 25% cheaper than Chinese labor. But the labor is unskilled and the infrastructure for most of Russia is so underdeveloped that by the time the product makes it to market the costs are 2 to 3 times as much for a Russian based outsourcer. The hope is always that a properly designed outsourcing program can compensate for these inefficiencies and ultimately make bank, but truth be told we have yet to see that work.
2. The Indian Labor Pool won't dry up for another 25 years.
Now that it has become evident that the Russian labor market cannot compete with its Indian and Chinese counterparts in current market conditions, making a bet on Russia is in some sense making a bet that demand will rise in tier 1 outsourcing destinations to such a degree that outsourcing to Russia will become the most profitable alternative. But with over a third of the world's population between them, and with effective unemployment at near 2/3 of their respective populations, it will be decades before the labor market for low-skill outsourcers will reach levels sufficient to consider tier 2 outsourcing destinations.
3. Russia = Russian...Not English.
Russia is currently making heavy infrastructural investments in targeted outsourcing sectors, particularly IT work. This area has been dominated by China, because it has a strong infrastructure and the growth potential is enourmous. This market has been shared with India because an educated populace, and English, are able to overcome substandard electricity and other infrastructural deficiencies. India and China are rolling revenue back in to their countries at a faster rate than Russia and they start from a much higher point. India was able to edge its way in on the back of English language skills. Russia doesn't have that advantage.
My Summary
Unfortunately for Russia, this latest focus on tech outsourcing looks like a certain flop. Like the Latin American countries trying to adopt ISI after the Asian Tigers did in the 90's, it appears that the window of opportunity is gone and Russia is joining the tech outsourcing party too late and with too little.
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