Russia outsourcing deal points to lessons learned

ST. PETERSBURG, RUSSIA – When the Norwegian branch of European IT services company TietoEnator decided in late 2001 to outsource a major project to a Russian company, it had no idea it had a nightmare in the making.

The job seemed simple enough: Update a human resources and payroll system supporting several thousand end users and written with Borland’s Delphi 3, using Delphi 6 and Microsoft’s SQL Server.

But a slew of mistakes on both sides — mostly in communications — meant that instead of being ready in six months, the software didn’t reach end users until earlier this month, a year behind schedule. The story of what happened highlights a number of key issues facing users and vendors as Russia tries to break into the global outsourcing market.

“We were looking to cut down on labor costs and after discussing where we should do outsourcing, chose Russia,” TietoEnator Norway Director Odd Ruud said at an Eastern European outsourcing conference in St. Petersburg last week. “It was a failure, but we learned something from it.”

Ruud said TietoEnator chose a Russian company because other Scandinavian companies were too expensive and executives believed India was too far. They eventually opted for Arcadia, a small company based in St. Petersburg employing about 100 developers.

Arcadia Chief Executive Officer (CEO) Arcady Khotin said his company was so excited about the prospect of getting a contract from a big Western client that his staff underestimated the cost of the project and overestimated their ability to complete it.

“This was the first project of this kind in our history. We wanted it so badly,” he said.

Khotin, who refused to be more specific about the nature of the project or to provide contract figures, said Arcadia also took on the job despite having little domain knowledge of HR and payroll systems.

“Our project manager said he could do this in his sleep. But it didn’t turn out that way,” Khotin said.

Within weeks of taking on the project, problems were already emerging. The software that Arcadia was given to work on had a number of bugs and all the software documentation was in Norwegian.

It wasn’t until the project was almost due that Khotin realized his team had not found a way to implement a significant number of important features in the program.

After a hurried meeting and some frank talk, TietoEnator agreed to give Arcadia more time to complete the project. A year later the project was done, at a tremendous cost to Arcadia. The company was given more time to finish the project but not more money, and Khotin says the extra year of work they put into it cost them in lost business.

“We overestimated what we could do, but in the end it was good for our people. And despite the fact that we goofed on this project, we’re doing new projects now and the relationship (with TietoEnator) is a good one,” Khotin said.

The project was such a disaster that it became the subject of a case study at the computer science department of the University of Oslo. The study will not be published until the fall, but Veger Imsland, its author, highlighted some of its key points in a presentation at the conference.

Imsland said the first problems emerged in the initiation of the project: Arcadia’s inadequate domain knowledge was ignored, TietoEnator failed to transfer the required knowledge to Arcadia and both sides underestimated the resources required for the project.

The problems continued once the contract was given, Imsland said. Neither company paid enough attention to the project once it was started, nor did they check up on the weekly status reports declaring everything was going smoothly.

Imsland said the lack of communications between the two companies was the key problem. Not one face-to-face meeting was held in the first six months of the project and misunderstandings were frequent because employees weren’t communicating in their native languages. And project managers on both sides faced information overload because they were responsible for all communications between the companies.

Cultural issues also came into play, Imsland said.

“In Russia they tend to use high-context conversation, where it’s more important to read between the lines, which is not the case in Scandinavia,” he said.

These kinds of issues were at the center of conversations on the sidelines of the outsourcing conference. Many here said that while Russia has a wealth of talent, it has yet to build up enough specialized knowledge and global awareness of its abilities.

John Stepper, the global head of equities trading technology for Deutsche Bank, said the lack of non-technical knowledge and experienced managers is hurting Russian companies.

“What’s crucial for us is that people with a company know something about our business and that we have trust and respect for their management.” he said.

The skills of Russian developers are not in question, Stepper said, as Deutsche Bank has used a Russian programming team to devise its global trading platform.

In fact, the IT offshore outsourcing market in general is far from saturated and Russia is poised to become a major market player if it can overcome Western prejudices, speakers at the conference here said.