Financial Crisis and IT Outsourcing – What’s Next?
November 26, 2008
Dialogue Magazine, the flagship publication of the Society for Worldwide Interbank Financial Telecommunication (SWIFT), publishes an opinion piece by Alexei Miller, Executive Vice President at DataArt, on the future of IT outsourcing after the financial crisis.
“All indicators are that Wall Street troubles will trickle down to the wider economy, affecting IT services spending changes not only at investment banks and services, but in other industries,” writes Miller. “To be sure, the old selling point of outsourcing – cost-cutting – is as potent as ever. However, compared to the IT economic downturn of 2002, a few things are different this time around… First, the market for offshore labor is much more saturated… Secondly, there has been a sizeable wave of complaint about offshore services delivered from the dominant locations…Thirdly, the industry at large has been too slow to innovate and lead, and too attached to the moniker of ‘cheap labor’.”
“All these factors lead us to believe that the market for ‘commodity’ IT outsourcing services is likely to flatten… These difficult times will present an opening for those vendors who have not just preached innovation, but practiced it, those who have spent their time understanding clients’ business processes and strive to improve them… We recommend that clients look for smaller, specialized vendors who will be willing to provide good terms, but will not look desperate. In this new world, clients will find themselves working with several specialized vendors at the same time and will need to hone a new skill – managing and bringing together reams distributed not just across continents, but across competing firms.”
Alexei Miller, DataArt's Executive Vice President, talks to Steve Hamm, a senior technology writer with BusinessWeek, about the impact of financial crisis on IT outsourcing providers.
"The global financial meltdown is shaking up the IT off-shoring industry, and it’s not just India where uncertainty about the future reigns. I got on the phone with Alexei Miller, an EVP at DataArt, the New York-based but Russia-centered boutique outsourcing firm. Miller, who was in St. Petersburg, was cautiously optimistic. Still, DataArt has put all of its expansion plans on hold.
A lot of the company’s clients are in the financial services industry, though none of its biggest banking clients, such as BNP Paribas, have been hit hard. (A couple of hedge funds that DataArt did some work for actually went out of business late last year, but it had minimal impact on the firm.) Miller predicts a couple of quarters of chaos, then a recovery. “A lot of people (on Wall Street) will get burned but it won’t kill the business,” he told me. “After this madness is over we hope to ramp up after about six months.”
In the meantime, DataArt is playing it safe. It raised about $6 million from private equity investors over the summer--as a financial reserve to cushion it in the event of a slowdown. Revenues grew so fast in the first half that it's on a pace to hit $18 million this year, up 50%, even though revenues have been flat for the past three months and could slow in the next couple of months.
The company, with 450 employees, has programming offices in Russia and Ukraine, and was planning on establishing an office in Belarus. Those plans are on hold now. Also, it had started marketing in France and Sweden, but will pull back now. Its main markets are the US and England.
DataArt learned some important lessons from the crash of 2001/02. Back then, most of its clients were dot-coms, and it lost 95% of its business in two months. Now it's much more diversified, with clients in financial services, health care, media, and travel.
For determined companies, difficulty only makes them stronger."
Alexei Miller, Executive Vice President at DataArt, and Suhail Nabulsi, a Managing Director at Accretive Technologies, contribute a byline article to Dealing With Technology, the Incisive Media publication dedicated to the trading technology for the sell-side. The article, “Capacity Management: Voices from the Trenches”, discusses benefits of predictive technology and system re-engineering vs. refactoring.
“In recent years, as data volumes explode and latency requirements tightening ever further, most firms find themselves constantly upgrading mission critical systems. Too often, it takes shape of a massive revamp of systems from scratch, often with a complete re-write of software code and purchasing a new set of hardware. Multi-year development and testing efforts result in a system with only a few years of active life, only to be replaced by a new system, a new multi-year effort and multi-million dollar investment,” writes Miller. “Opportunities provided by a gradual improvement and optimization of an active system—a process commonly called re-factoring—are often overlooked. Specifically, processes requiring real-time analytics such as correlation analysis, and massive data processing often benefit materially from applying smarter mathematical algorithms to select areas of existing code base, rather than re-writing the whole package on a fancier platform.”
IT Europa, a leading provider of strategic business intelligence, news and analysis on the European IT marketplace, features DataArt’s new initiative, DataArt Labs, aimed at engaging top students from two leading Kharkiv Universities in the company’s projects. The article quotes Mikhail Zavileysky, DataArt COO as saying, “Our key goal is to introduce innovative technologies and to implement the latest IT market trends in university programs, so that we can reap the benefits of the best IT talent working for DataArt.”
More action in Russia. DataArt, the Russian outsourcing company with its headquarters in New York City, is raising $6 million from private equity folks to fund expansion. Rather than opening new development centers, its expanding into new verticals, including media and publishing, telecommunications services, and online travel. DataArt got its start by providing high-end custom programming for the financial services industry in the US. It has programming centers in St. Petersburg, Voronezh, Kherson, and Kharkov. I love writing those Eastern European city names.
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IT Europa, a leading provider of strategic business intelligence, news and analysis on the European IT marketplace, features DataArt’s new initiative, DataArt Labs, aimed at engaging top students from two leading Kharkiv Universities in the company’s projects. The article quotes Mikhail Zavileysky, DataArt COO as saying, “Our key goal is to introduce innovative technologies and to implement the latest IT market trends in university programs, so that we can reap the benefits of the best IT talent working for DataArt.”
