Russia & Moscow
Providing their potencial

 Mr. Anatoly Gaverdovsky
Interview with

 Anatoly Gaverdosky

Vice President Research and Development
Vested Development Inc.

Moscow, October 25th 2002
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.

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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