A big issue that everybody
is looking at, right now, is India and particularly
outsourcing. However, more and more people are speaking
of the Russian potential. How would you assess the
situation in Russia?
First of all, this is a very difficult question.
Especially in the Russian government, there is
a perception that we have a huge potential and
that we can surpass India very soon because we
have a lot of engineers and highly educated people:
therefore, we will obviously defeat India in the
next decade.
I am not so optimistic because India started
to work in software development some ten or twelve
years ago and, of course, they were lucky to have
the Y2K problems a couple of years ago. They used
the Y2K problem completely in order to increase
their position in the international market. We,
of course, have just started and do not have such
a situation.
Talking about potential, you are right. Russian
education, especially Russian technical education,
is still very good. It is good not only because
we are training a lot of programmers, but because
we are training a good brain. Russian higher education
courses last five or six years, to get a Master's
or any other degree. Usually, for two or three
years of that time you are studying mathematics,
physics and chemistry: very abstract courses,
especially the mathematics ones.
You solve a lot of problems and tasks during
the educational process: it's not just lectures.
It is a very good way to develop your brain and
your analytical skills, which is quite important
for a modern engineer because a modern engineer
is not just a software developer, he is a problem
solver. Today, you very rarely find a full, detailed
specification for software development. Sometimes
a customer says: "Look! I've got an idea.
I know I can sell this idea in the States but
I do not know how it should be implemented or
what it should include: help me please!"
So this is a problem, a real engineering problem,
and Russian engineers are very good at these kinds
of problems. If a problem has a scientific component
and a research component, if the real problem
is not defined, then we are very good at solving
it. We are trying to base our company on solving
such problems. It is not just about simple software
development projects. We position ourselves as
software engineers, not software developers. And
there is a difference. A developer is a guy who
is working to a ready made specification, an engineer
is a problem solver.
Comparing this market to India, I do not think
we will achieve their rates and figures. This
year they have seen about $6 billion in total
revenues. For the Russian industry, even the reported
$300 million is too optimistic. I think the real
figure is maybe $150 million because I know all
the companies that work in the market. I know
the founders and the managers so I can work out
the size of the market. It is not a big market.
It is fairly small. I do not think that we will
reach the level of India in the near future but
I guess we have our own niche where we can work
and achieve good results in that particular niche.
Could you explain the most important moments of
Vested Development's own development?
We started work in 1993 as software engineers.
In 1996, we started to work in the US market and,
in 1998, we were founded as an American entity.
The reason was to simplify our communications
with American customers, as sometimes I even had
to explain to them where Russia was, how to operate
with Russian businesses, how to pay us and in
what currency!
For an average American company, it was very
difficult to understand how to come to the international
marketplace. They all operated locally and just
knew too little about anything outside their borders.
So we decided to open this American entity: we
are a Russian company, but we are an American
entity: an American company founded by Russians.
It is very easy to operate internationally as
an American entity.
You have a very particular development mode which
distinguishes you from other companies. Could you
explain the connection between Moscow and America?
Yes, it is very easy. We have Vested Development
as an American entity. We have our headquarters
in Burlington, Massachusetts. Then we have an official
representation office here in Moscow and all our
Russian developers are employees of this company.
That's it.
It is very important for our development to have
an absolutely transparent company according to
western standards. We have, for example, been
audited three years running by an American auditing
company which increases our trustworthiness with
investors and partners. We are trying to work
with large corporations; we think they would like
to see due diligence because they would like to
be sure that we are a financially stable corporation.
We understand that it is very important for them.
We are and behave in the market as a stable, western
corporation. It does not matter how much it costs
us. We have audits. We are working under American
laws and American GAAP accounting principles so
that everything is clear and transparent for investors,
customers and shareholders.
Corporate governance in Russia still only emerging.
A lot of founders and shareholders are still the
top management of the company. If the shareholder
is a manager, there is no way to report yourself.
No way, and no reason to implement corporate governance.
We are still in a very immature phase. It is practically
impossible to impose such things. The shareholders
should trust the managers to run their businesses
and universal corporate governance rules, adapted,
of course, to the Russian context, should be implemented
in companies as in Europe and the USA.
In any case, we are already a transparent company
and I think that is a big achievement on our part.
Right now we are thinking about other strategies
because we understand the value of strategy for
our company. A lot of Russian companies just do
not know such a word.
In a recent interview, you said that software outsourcing
can give a company a real economy and it will continue
to grow despite market trends. What did you mean
by this?
We are talking about outsourcing generally, not
only offshore software outsourcing. It is the biggest
trend in the global economy and right now we see
different companies that are trying to focus on
their core business; self definition, sales and
marketing. That is right for any type of company.
These are three key functions of any company and
any company would like to concentrate their efforts
and their attention on three such issues.
Other staff can be outsourced. Why? Because if you
try to build a system to manage other functions
you will spend a lot on training people, hiring
people, arranging processes and controlling the
quality. Sometimes you understand that it is not
a primary goal, it is no more than a supporting
function. Why not entrust it to other people who
are professional in that activity?
Microsoft is the best example of outsourcing. They
are, right now, hardware vendors: they supply table
PCs and home equipment. They are not producing these
things; they are defining the products, marketing
them and selling them. Flextronix in Hungary and
Mexico produce the X-box for them. They do not need
huge, fixed assets in order to build a factory to
produce these X-boxes. If you have to spend 200
million dollars, you will have to take this money
from your operating capital, invest it in plants
and then produce X-boxes. Then, in a couple of years,
you will have to replace this scheme completely.
It is an absolutely smart move by Microsoft. They
have entered the hardware market in just a couple
of years without any investment.
Another example is Dell. They are producing computers
on demand but they do not have anything in stock.
They place orders with outsourcers to produce parts
for their computers and they force outsourcers to
keep parts in stock so that their operating capital
is absolutely free and their stock reserves are
zero. Where are Dell's shares ? Where are the shares
of Intel who, in order to produce their microprocessors,
build new plants? The Intel plant will cost 1 billion
dollars. Intel does not have another choice, they
cannot outsource, they can outsource only to God
because nobody can produce microprocessors for Intel.
In this specific market, they have their niche but
the trend is very obvious: everybody tries to outsource
in order to free up operating capital, in order
to increase share returns, in order to move permanent
costs (if you have a plant, you need to pay salaries,
for example) to variable cost (if you need X-boxes,
you place an order. If you do not, you pay nothing).
Everybody right now is thinking about outsourcing.
Software, as compared to hardware, is about five
to seven years behind.
It is a new trend in software. Do you think this
is similar to IBM computers? To buying web services
from different parts and assembling them? We have
the same trend in software right now, but software
is behind and people who are trying to produce software
in-house incur much more expense. It is like they
are building plants for software production. Software
development is a plant. You hire people, you train
them, you are coaching them, and then in only a
couple of years they start producing quality software
and software solutions. It is practically impossible
to hire someone and say:
"Develop software with the following qualities!''
It cannot work. It is a kind of a plant. In order
to build such plant you need to invest, you have
to wait because it is a natural process when you
work with people. You cannot force them to be productive,
to know. It is not like machinery installation.
You install machinery and it will work, but people
are people. You have to train them: to build a good
software organization requires about four or five
years.
If you start, if you try to build something new,
you have to invest a lot of money and time. What
Soviet-American start-ups are doing is hiring
developers. It is a big mistake, because they
have hired developers, but they cannot produce
anything. They have to wait three or four years
in order to make them productive and they have
to invest in them. Any software developing company,
any huge organization, has its own software developers;
they are investing more in their own software
plants. Other people try to use outsourcing companies
who are already trained in software development.
Which companies are you talking about? Many companies
when they decide to develop their IT systems are,
unfortunately, talking about cost reduction to make
their systems more efficient. How can your company
help them to do this?
First of all, our rates are very attractive if you
compare them, for example, to a standard American
company. American developer salaries are about 70
000 dollars per year plus bonuses plus management
costs which leads to 110-120 000 dollars per year.
Here we charge our customer about 40-50 000 dollars
which is about a 50% cost reduction for the same
quality of software development; even better I think.
So, cost reduction is our number one advantage.
The second important thing is that clients bear
fewer risks because we have ready-to-use, already
measured software production for them. Because our
software developer was trained on numerous projects
before being assigned to this customer, he is experienced
enough and we know his productivity and his ability
to work for the customer. The customers usually
hire developers from the street and they know nothing
except what is written on his CV. In our case, at
the same time as reducing costs, we offer developers
with good productivity and quality. It is another
risk mitigating factor for our company.
These two factors are extremely important for
our customers - cost reduction and the high quality
of the product. A smart customer usually considers
other factors as well, like our ability to finish
in time and budget, like our experience and productivity,
our ability to work as a team, not as a single
developer.
You have already managed to acquire 3.5 million
dollars in venture capital on the American market.
Could you explain your successes?
I think that, after the Internet bubble, attracting
venture capital is already a success. The good use
of it is another success. We are attractive for
investors, we have attracted about half a million
dollars in pure investment and 1.5 million dollars
as loans.
The first reason for attracting a small amount of
foreign capital was to gain experience in western
corporate governance standards because I am the
founder and, at the same time, the manager of the
company. I would like to have foreigners on the
board - guys who will help me understand how to
work in the States, how to behave there and how
to manage a company in accordance with western standards.
That was the first reason, not just the money.
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The second investment
was to provide financial stability and enough cash
to be able to attract large customers because we
started to work primarily with independent software
vendors in the States; we have a lot of experience
in that field. We are very thankful to them but,
in order to develop further, we should work with
large corporations.
A big influence on any IT company is its staff:
15 people working in the Boston office and 200 people
in Moscow. Could you tell us a little bit about
the training and human resources policy, how you
work together with Universities?
OK. First of all, it is very difficult to work with
multinational companies and the Americans, for me,
are still a kind of an enigma. I think they feel
the same about me. It is another mentality, another
culture. So I cannot understand how to manage them.
That is true and, for me, it is a very interesting
experience, but sometimes very challenging. Another
problem is that, in the States, it is very difficult
to find a good person. It is just difficult and
I do not know why. Here, for me, it is much more
difficult to find a person who can work in many
positions. Talking about the reference side of our
business, we spend a lot of our time finding our
people because my value is zero in comparison to
the value of the employees. It is they who are working,
even now - I am sitting here talking to you and
they are working. And they have four or five deliveries
daily. They are sitting and working at their desks.
I am not managing every step they take, it is impossible
to control every step that 200 people take and,
anyway, you can force people to do anything apart
from think. It is just impossible.
The thing is to train them, to motivate them and
then they should work without any management. That
is important.
I cannot say that we are spending a lot of time
looking at universities. Sometimes I think that
our universities live in another universe. Look!
Earth is very interesting. You can find old thinking,
modern thinking. There are different ways of thinking
and, right now, universities are out of the business
environment.
Governments fund them and they have a number of
ways of finding money, but they do not earn money
as a business enterprise. So their thinking is so
very different from mine and I cannot reach an agreement
with them because I think in a different way. We
have different business goals and terms. For example:
when I ask them to train a hundred developers for
me, they say of course we will. Pay us money and
in four years you will get a hundred developers.
I say I need them tomorrow, I understand how difficult
it is to train people but I need them in a few months.
They say three months is not our course, it will
take three or four years. But I need them in three
months to be able to satisfy my customers. That
is just an example of different ways of thinking.
So I spent a couple of months discussing different
opportunities with them and then I just gave up
and said: "OK, guys, you live on one planet
and me - on another. We'll just set up our internal
training centre." We can train people now
and it is another quality that differentiates us
from many of our competitors.
Our business is very simple, if you want to earn
more money you should have more people. That is
just as straight as it is.
That is applicable to any business but also, if
you want to earn more money and acquire new clients,
expansion and diversification are very important.
Are you diversifying your services and your product
range?
OK. I will first finish with the training centre.
We established our training centre and our proprietary
methodology of training. We do not give lectures.
If someone has finished university and spent 15
years in school, he can read. We can assume that
he can read. So, no way are we going to give him
lectures, he can read them by himself. Then we have
our probation tests. And then we try to teach people,
to train them for real life. We know that our senior
developer can solve a particular problem in 24 hours.
We give the student 36 hours and then we track his
quality. In a couple of months, the survivors can
join our company. So it is a kind of wild life and
wild style of training. It is very important because
we do not just get people who know, this way we
can make sure that they are able to do something,
that they have abilities, not only knowledge, and
that they are adapted to our corporate standards.
So we run a lot of programs at the same time.
Really, this training centre is very important for
people and our company. So we receive from our training
centre a lot of good professionals who can start
working on projects and who are professionals in
our style.
Right now, this training centre works on the open
market not only for us, but also for other companies
on the market. Just by externalising this centre,
we try to increase its quality and productivity
because it is difficult to rely only on our consumption;
it should operate in the open market.
I like the word "diversification"
because in the business sense you can say that if
you diversify you will achieve success. There are
more fields in which to apply your efforts and you
gain more, but diversification has one major problem:
losing focus. As the saying goes, if you try to
hunt two rabbits, you won't get either. If you try
to achieve two goals, it is difficult to do either
of them well. We are working in offshore software
development, we are providing our customers with
certain services. Let us now work on the products.
They just do not understand that development of
the product is the easiest part of the whole business.
Marketing the product is not that easy and consumes
a hundred times more money than the product development
because we have engineering thinking. Everybody
understands how to construct, develop, build but
no one knows how to sell. It is a kind of enigma
for a Russian company. I prefer to stay with one
model and to diversify the services without completely
changing the profile from a service-based company
to a product-based company: to add a couple of gas
stations to the offshore software development company.
I do not favour such a development model.
For example, if we are working in one vertical market
such as health care, we are trying to explore opportunities
in the insurance business, especially in health
insurance. If we are working in just software engineering,
we are trying to master IT consulting businesses
just to offer our customers additional services
and to build a full package of services, instead
of offering just software development. So, diversification
is a good word but I am very cautious about it.
Your background is military engineering and then
you made a step into commercial business. Why?
It is a very interesting story. First of all, in
the 70's and 80's, everybody who studied in technical
universities was connected somehow with MIC because
all technical education was connected with military
plants and military applications. I studied at the
Moscow State Technical University, for example,
(the one named after Bauman) and I specialized in
applied mathematics. It was very specific, to do
with projectile calculations, ballistic missiles:
any flying object… and you must know what was
meant by flying objects in those days - airplanes,
shells and ICBMs.
I had a chance in 1990 to get three months' education
in an international exchange program in Toronto.
It was a very interesting program because it was
created by three Americans who were fans of space
co-operation between Russia and the US. It was very
innovative for the two countries: they created this
program and invited about 150 people, from 35 countries,
for each summer session. It was an absolutely unbelievable
experience for me. I was an engineer and I discovered
two new words for myself - business and management.
We had lectures in this university, my American
friends invited me. They told me: "Look,
Anatoly! Let's start a business in Russia."
I told them I was an engineer. I can calculate,
construct, whatever but I am not a businessman.
Manager meant nothing for me. I could manage some
parts of construction, but not people. Right now,
I manage lots of specialists and it is a great experience.
I understood only one thing during those three months.
I was not any worse as an engineer than the other
people there, but why was I so poor? The Russian
government - Soviet then ? gave us 30 bucks for
three months, like pocket money. And you know that
a rouble then was not a convertible currency. You
could not just buy dollars freely. Of course, we
had full pensions, but it was not so good from a
personal point of view to sit next to a Saudi Arabian
who said he had 1000 Canadian dollars he wanted
me to change. So I got a lot of impressions, I started
speaking English and the main thing I realized was
that I was not worse than anyone else. So what was
the problem?
After my graduation, I spent a couple of years in
military institutes and worked on a couple of projects,
but it was not good for me and I did not feel so
good working at MIC. No incentive, no salaries,
no motivation and no future. Then I left the military
institute and military service and started a company
with my friends and, when I started the company,
I did not know what I should do. Just ideas - let's
do something! That is why VDI was started. The initial
name of the company was Vest, which is Russian for
"message". So, the company was
started, we had our first partner who ordered us
to build a software development system and then
we started a kind of trading business with high
tech products in 1993. We earned enough money with
the trading business, we invested again in software
development and started allowing our engineering
soul to develop. I cannot just move boxes and get
money for that, I wanted to build something and
get money for this service and product. So it was
very interesting: in 1994, we started software development
again and, in 1995, we showed our products to some
western companies and got licenses for that. This
way we tried to penetrate into western markets,
by luck. The story is very simple.
If we were to meet again in 10 years' time, where
would you like to see the company?
First of all, I would not like to find myself in
the company because it would be too brave to say
that I will stay in the company for ever: it is
a business and I understand that. Personally, I
would like to stay in the same area, in the same
business, because I like to invent, I like to create
things and I like to work with Russian people to
create things; to create world class products or
services. That is what I like to do.
I cannot predict what VDI will achieve in ten years'
time because it depends on economic conditions,
trends, everything. For example, two or three years
ago, during the NASDAQ boom, everything was clear:
IPO, I would trade on NASDAQ and my shares will
be very valuable: I will be a millionaire. That
is one picture, but you know the current state of
NASDAQ and IPOs. You have to understand that life
is a complex thing. You cannot predict anything
and sometimes your imagination and your ideas about
the future just do not work. I would like VDI to
remain a stable, growing company. I would like to
achieve a balance between the number of employees
and the quality of services. I would not like to
be a 5000-10,000 employees' company. It would hurt
the quality. Sometimes, I think I would like to
be a boutique company and provide a set of services
of superior quality and not grow because I understand
that growth is very painful. Sometimes, I think
I would like to grow significantly. I would like
to find a good balance between size and quality,
money and doing business because, when you are a
growing company and you are trying to be a big corporation,
you lose time, due diligence, a sense of your customers,
your sense of projects and you try to become not
a manager but a corporate officer. It is right now.
I do not know what will happen. I am changing myself.
I do not know what I will want in a couple of years.
I am sorry for such an indefinite answer, but time
will show. I will not say that I am going to be
the largest corporation in Russia and beat India
in many parts. That is just marketing.
What is your final message to the readers of Red
Herring?
Come to Russia! Russia is part of the world and
it is not an enigma. Coming to Russia would open
up a huge market for any company.
We are working on very interesting projects with
our customers. Sometimes we are inventing products
and selling them. These are their trademarks and
they earn a lot of money from them. I love to see
how Russian brains and creativity can be sold internationally,
not only in the US. And that is the biggest satisfaction:
how we can achieve real goals and how we can compete
internationally and how we can deliver world class
services in practice. I am fighting and I will fight
for that.
We are not only a forest country, we have rich treasures
and our biggest value is our people. We should open
such assets for the whole world. That is my message.
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