CARY, N.C. – Spying a good value for brainpower at low wages, a software recycler is driving down production costs by hiring Russian programming experts who once replicated U.S. computer technology for the KGB.
Relativity Technologies leases the labor to customize the North Carolina company's main product — software that cuts the time and cost of translating computer languages into updated, Web-enabled versions that remember the features of the old system.
The privately held 160-employee company is small fry compared to corporate giants like Citibank and Nortel Networks who are saving big money by hiring programmers in faraway places where intellectual talent is high and wages are low.
But Relativity CEO Vivek Wadhwa boasts his company is profitable despite the tech industry doldrums thanks to the savings that come from outsourcing much of their programming work to a Russian partner, LANIT-TERCOM.
While a programmer in the United States would make $40,000 to $80,000 a year, Wadhwa pays 90 experienced programmers with the advanced mathematics skills he needs for about $24,000 each a year. The $2.2 million Relativity will spend on research and development this year is far less than a company of comparable size, Wadhwa said.
"If I didn't find this Russian company, (Relativity) wouldn't exist," said Wadhwa, whose business was named one of Fortune magazine's 25 "cool" emerging companies this year.
"It is because we are outsourcing that we can cut costs enough to be profitable. We have not had to cut our R&D or customer support," he said. "Other technology companies are having to cut developers, quality assurance people, and customer support staff, and this directly impacts their ability to innovate, support customers, and survive."
From GE to The Gap, nearly all the Fortune 500 companies use offshore development services or have their own offices set up overseas, said Tom Lovely, who heads Offshore Software Consulting, a Manchester, N.H., company that pairs projects with foreign programmers.
Midsize companies, and even a few smaller ones like Relativity, are joining in. Companies with 1,000 to 5,000 workers will account for 10 percent of U.S. demand for overseas software workers in 2005, up from 1 percent this year, Forrester Research estimates.
U.S. companies of all sizes will spend about $7 billion this year on overseas outsourcing, according to Adventis, an information industry consulting group.
A Forrester survey released in early September found that, of 45 IT executives at companies with more than $1 billion in revenues, 20 used offshore providers. Two-thirds intended to do so by 2003, and more than double their spending for services abroad.
Forrester's Christine Overby said she checked back with about a third of the interviewees after the Sept. 11 terrorist attacks, and all but one said they were going to continue with their plans.
"There are lots of reasons, but in the current economic environment, cost is it," said Stephen Lane, an IT services analyst for Aberdeen Group.
Companies are deciding that "if it's not core to my business, if it's something I can save money on, if I can find someone to do it better, cheaper and faster, then that's the classic outsourcing argument and that is one sector of the IT industry that does well in down times," he said.
In the six months up to Sept. 30, software exports from India, the dominant player in outsourced labor, grew by a third. At least 185 of the Fortune 500 companies outsourced software work to Indian firms, according to India's National Association of Software & Service Companies, a trade association.
Indian software firms make up from 60 percent to 80 percent of the outsourcing business worldwide. NASSCOM estimates that annual exports will, by March, grow by about 20 percent to $8.5 billion — a ten-fold increase in six years.
Indian companies started moving into the market in the early 1990s and have prospered thanks to the pervasiveness of English-speaking workers, government spending for high-speed Internet lines and other communications technology, and the global diaspora of tech-savvy Indian entrepreneurs, said Lane and Rita Terdiman, an offshore programming expert at Gartner Group, a technology research company.
India will remain dominant for several years, until the demand outstrips the subcontinent's supply of software professionals, analysts said.
Companies in Ireland, Israel, the Philippines and Pakistan also are significant players. Low-cost software labor, charging as little as $10 an hour, is being offered on the Internet from much of Eastern Europe, to Egypt, Bali and Nepal.
Relativity built its foreign connection through chief technology officer Len Erlikh, whose family fled the Soviet Union in 1978. Erlikh knew University of St. Petersburg professor Andrey Terekhov by reputation and tracked him down just after the Soviet Union collapsed in 1991, leaving Terekhov and his students unable supplement their low academic salaries.
Terekhov, who had designed equipment that could translate U.S. Defense Department software, had trained talented Russian computerphiles with the mathematics and puzzle-solving tasks the Kremlin needed to take apart and replicate Western technology.
"We had very bad computers but we had to be equivalent to the Americans, so we had to get much more efficient software," Terekhov, chairman of the school's software engineering department and head of the software firm LANIT-TERCOM, said from St. Petersburg.
Relativity's key software product runs through the millions of lines of code in an outdated software program to help recognize what can be recycled and what needs renovating to adapt it to new technologies and online business. This is especially important for companies that want to update programs they have instead of scrapping them and starting over.
Online stock brokerage Charles Schwab Corp. used Relativity's RescueWare to speed up by about 50 percent the calculations it makes to figure the average costs assessed each of its 7.7 million customer accounts, said John Bilotta, a Schwab vice president.