Belarusian Tech Companies Lead a Global Technological Advance in Outsourcing and Product Development

This year, Belarus was shortlisted as a top outsourcing destination of 2016, by the UK-based Global Sourcing Association (GSA). The country was also included in the Top 30 Locations for Offshore Services by Gartner. These two successes prove that Belarus has a great potential to becoming a leading IT outsourcing destination — according to Uniter’s IT Industry in Belarus 2016 report, more than 90 per cent of Belarusian companies out of almost existing 1,000 firms, developed customised software, in 2015. 

A top outsourcing destination

“From an outsourcing perspective, Belarus’ primary service proposition is in internet technology outsourcing (ITO), with computer and IT services being the third largest sector in the country. Considerable investment appears to have gone into the advancement of the country’s information and communications technology (ICT) capability, a task identified as a priority by the government who are determined to achieve international recognition for Belarus as a regional leader in ICT,” says Kerry Hallard, CEO of the Global Sourcing Association, in an editorial for Emerging Europe.

According to Uniter, the most common outsourcing solutions are application programmes, with 88.7 per cent of companies engaged in their development. This is followed by application development and deployment software (47.2 per cent) and system software (23.6 per cent). More than a half of the companies engaged in own software development offer application software. About one quarter of the total number of companies offer system software products.

“Historically, Belarusian companies have specialised in outsourcing and it is only now they are transforming into product (B2C) companies. These companies need much more time, resources and, of course, expertise. These product IT-companies were the result of the gains in knowledge and skills, that they developed from the outsourcing business model, which IT-specialists used in the development of their own product companies,” says Evgeny Radionik, head of External Affairs at Uniter and the author of the IT Industry in Belarus 2016 report.

Dmitry Khanevich, CEO at Omertex, believes that the outsourcing market will grow, but also that historical tendencies still play an important role in the country.

“When Belarus was still part of the USSR, it was a production centre with a large number of factories and facilities, so the process of change takes time. In a country where the public sector economy is more than 70 per cent any changes may take years. Many companies, which have never worked with vendors before keep their staff in-house. This model is still very strong, but the outsourcing market is growing and can offer more services and more qualified specialists now. Young companies are using it more and more,” adds Mr Khanevich.

Dr Valery Tsepkalo, Director of High Tech Park, agrees that most firms are service or outsourcing companies. “It is easier to run a company like that even from the business model perspective. The risk is lower but so is the margin. In a B2C product company it’s different — the risk is higher as one in ten companies succeed, but the margins are also higher,” he adds in an interview for Emerging Europe.

Combining own products and services

Research proves that more than 60 per cent of Belarusian IT firms combine service‐ and product‐oriented business models. In practice, even the largest leading companies use more than 50 per cent of custom software development. Some eight per cent of companies are exclusively engaged in the development of their own software.

Ruslan Makarski, CFO at Aristek Systems, says that the goal of any company is to make a profit. “That is why companies are looking for any opportunity to increase their profit. The local labour market means one can find professionals who can work in the service’s market and also in the product’s market,” he adds.

“Most IT companies in Belarus started with services, as this business model is less risky and involves lower setup costs. Eventually, after accumulating experience and becoming more mature, many of them, including IBA Group have developed a hybrid business model, which combines services, solutions and products in their portfolios,” says Sergei Levteev, CEO at IBA Group.

Oksana Mogulenko, CEO at SolbegSoft, says that the mixed model provides companies with greater financial sustainability through diversified sources of income and greater flexibility of talent management. There are several factors to consider: “The first factor is that the own product generates recurring income for the company. It also brings proprietary rights which may become a product themselves, and the product brands create extra value for the business owners. Other business opportunities may show up for the product owners,” Ms Mogulenko adds.

Dmitry Karpovich, CEO at Oxagile, says his firm is an outsourcing service company but he can easily understand why Belarus, with its human capital asset, offers so many product companies. “In companies with their own intellectual products and know-how, it’s much easier for an employee to become important, even irreplaceable. It’s simpler to make yourself heard when you produce something unique. Besides, there’s rarely a ‘rate cap’ on some specific products, unlike with services where you have to adjust yourself to the market situation,” Mr Karpovich adds.

Uniter’s Mr Radionik believes that outsourcing provides companies with a regular cash flow while their IT-products are the company’s investment in the future. “Companies deliberately take this risk in order to gain future super-profits, from the product companies,” he adds. 

Aiming at product development

Nickolay Tsarik, CEO of Jazz Pixels, is certain that even the most effective and powerful service company can be blown apart by the operating gaps that are a common phenomena in this kind of business. “That is why the service model is often supplemented by product development, in order to use the latter profit to cover these operating gaps. Moreover this type of mixed model lets companies continue to try new technologies, approaches and working methods,” he adds.

“Today many Belarusian-made products hold leading positions in the market. Let’s just think of the popular game, World of Tanks, or the messaging service Viber. That’s why many companies strive to create something special and unique and they do succeed quite often, because local IT industry representatives, today, have the impressive experience and competency necessary to create high-quality solutions,” says Iya Nekrasova, CEO at InToSoft.

“Having your own product development can also be a good marketing tool, if the products is a success and becomes popular all over the world. It’s a good way to balance the staff load. Those, who are free from a client’s project, can work on the company’s product,” says  Omertex’s Mr Khanevich.

“Recently, venture funds have been actively developing in the country; business angels see the potential of local IT companies and they are ready to offer their resources and expert commentary to help Belarusian Start Ups grow and to reach global tech markets. Moreover, many companies are ready to invest in their own products because it’s a very sustainable model with a future perspective,” says InToSoft’s Ms Nekresova.

Local IT firms have proved they are able to develop their own products that can conquer the world.

“Belarusian start-up MSQRD was bought by Facebook. Japanese company, Rakuten, acquired Viber along with its development office in Minsk, for $1 billion. Maps.me — the best cartographical service was bought by Mail.ru group. The Belarusian game development company, Wargaming, is one of the leaders in the industry in Eastern Europe. I would expect new companies in the transportation sector, health care software and FinTech to become popular across the globe. Within the next five-ten years there will be Belarusian Start-Ups in these fields which will draw the attention of the Fortune 500,” says Uniter’s Mr Radionik.

“The software development industry in Belarus will continue its current trend of developing proprietary products and selling them independently globally. More companies are expected to go public and to announce the launch of an IPO on international stock exchanges. Another important expected move is that the companies’ HRs will actively involve talent from other countries, where the costs services remain lower than in Belarus,” says SolbegSoft’s Ms. Mogulenko. 

Following global trends

Jazz Pixels’ Tsarik says that the final goal of IT is automatisation in order to cut costs and to advance the production processes, switching from expensive manual labour to cheap robotised labour.

“Growth will be focused on human-free manufacturing, e-services, document management and payments development, as well as the robotisation of dangerous and high-risk production processes and the advance of artificial intelligence. As long as there are companies and productions with costs that can be automised, the IT sector has a good chance to deliver its solutions. In terms of a global market, the IT sector has enough capacity to grow for the next 30 years even if no super technology is invented that will allow the construction of goods free of human production,” Mr Tsarik adds.

“We foresee further development in CAMSS (Cloud, Analytics, Mobile, Social, and Security), cognitive computing, the Internet of Things (IoT), and Big Data technologies. The Digital Age will change the way organisations operate as well as how customers consume. Robotics and FinTech will contribute to further digitalisation,” says Sergei Levteev, CEO at IBA Group.

“Today global technological breakthroughs are emerging not once in ten years, but once or twice every two years! It’s practically impossible to predict which novelties will appear in the next decade. However, today we see challenging beginnings in the sphere of Internet of Things and we suppose that they will result in a true breakthrough. By the way, InToSoft and its Dutch partners are currently working on creation of LoRa networks,” says InToSoft’s Ms Nekresova.

How will the Belarusian sector grow in such circumstances? Igor Bessarab, CEO at R-Style Lab, has a concrete answer:  “The industry will continue its growth, topping $2 billion in revenues within two years.”