Outsourcing as a Business Instrument in Russia

Challenges include differing attitudes toward hierarchy, formalization, uncertainty avoidance, and task versus relationship focus. Establishing agreed ways of working, cultural training, and relationship building mechanisms helps bridge these gaps. A degree of onshore presence also facilitates mutual understanding.Key measures that Russian companies can undertake to address these economic and market factors impeding outsourcing include:1. Indexation clauses, operational flexibility provisions, localization and multi-sourcing to mitigate macroeconomic uncertainty2. Supplier development programs, global partnerships, and industry associations to improve the vendor market3. Legal compliance assessments, data localization, and adjusting models to address regulations4. Education initiatives, retention programs, and compensation to tackle talent shortages5. Cultural training, relationship structures, onsite integration, and agreed ways of working to reduce inter-cultural challengesIn summary, while outsourcing holds substantial potential, analysis of Russia's unique outsourcing challenges arising from its evolving economy is needed to formulate effective strategies. As the market matures, and companies gain experience in areas like advanced contract structures, vendor development, and talent management, outsourcing outcomes in Russia are poised to improve.2.4 The Development of Outsourcing in Russia in 2024 Under Sanctions PolicyIn order for the company to be able to make the right decision regarding the transfer of business processes to outsourcing and form a final idea of the effectiveness of this tool, we will give a description of the most common methods of analyzing the effectiveness of outsourcing processes. It is worth noting that the approaches given in the table to the assessment of outsourcing are considered by the consumer of outsourcing services.Most of the methods as a comparison base for assessing the effect of outsourcing are based on the level of the current state of the company before the implementation of the project of transferring functions to an external contractor. Thus, the decision is made on the basis of the following comparison: if the effect has been achieved in full, then it is compared with the costs, and the option that requires less implementation costs is considered more effective. Outsourcing is an integral part of the company's work, as well as a way to minimize costs. Outsourcing optimizes the work of the organization, and allows you not to waste resources and money on what they rarely need.Russia’s outsourcing market was already undergoing expansion prior to 2022, growing at a compound annual rate exceeding 15%. Key drivers included cost optimization needs and digitization. While locally provided IT services led adoption, Russian companies increasingly used outsourcing across functions like logistics, finance, customer support and real estate/facilities management (RAO, 2021). The market remained fragmented, relying heavily on small and mid-sized providers. Yet multinational corporations (MNCs) like IBM, Accenture and McKinsey operated centers delivering outsourcing services locally (GBR, 2019).Sanctions radically altered Russia's economic landscape, creating barriers for outsourcing:1. Mass exodus of MNC providers due to mandatory divestments and operational restrictions, severely limiting outsourcing capabilities in areas like IT, consulting, and business process outsourcing.2. Reduced investment capacity of Russian companies impeding development of indigenous outsourcing firms.3. Talent shortages resulting from emigration of skilled professionals, especially in IT, finance and management.4. Technology access constraints due to import controls on critical hardware, software and industrial technologies, restricting outsourcer capabilities.5. Macroeconomic volatility increasing the risks of fixed-price, long-term outsourcing contracts.Despite constraints, Russian enterprises recognize outsourcing will remain imperative in 2024 as a means of accessing specialized capabilities, enabling localization and supporting import substitution efforts. Outsourcing strategies are adapting to the new realities:1. Vertical integration - Companies increasingly utilize quasi-captive outsourcing to related subsidiaries, allowing tighter control under uncertainty.2. Domestic joint ventures - Conglomerates leverage outsourcing partnerships between group entities to share capabilities. Domestic JVs also enable creating localized alternatives to foreign technologies.3. Build-operate-transfer (BOT) models - Companies attract strategic investors to build outsourced capabilities locally in exchange for guaranteed contracts, with future transfer to Russian owners.4. State-backed vendor development programs - Government and industry initiatives provide preferential funding, training and infrastructure access to promising indigenous outsourcing providers, especially in IT.5. Relaxed offshoring restrictions - Regulators will likely moderately ease constraints on offshore outsourcing to bridge capability gaps, provided adequate data security mechanisms are in place.6. Decentralizing smaller contracts – Large deals will give way to smaller, fragmented outsourcing contracts across multiple vendors to mitigate counterparty risks.In addition to such structural adaptations, outsourcing relationships in Russia need increased flexibility regarding contract lengths, pricing models, change control and exit provisions to handle uncertainty.In 2024, outsourcing will remain a strategic capability for Russian companies across sectors like technology, finance, telecoms, retail and manufacturing. The capabilities gap left by foreign MNC exits provides an opportunity for indigenous services firms to expand offerings and gain scale. Outsourcing will also facilitate import substitution by allowing transfer of product and process technologies to local partners. However, nearshoring will gain prominence to tap Belarus and Central Asia for cost-effective skilled talent. While outsourcing complexity is increasing, it remains an essential mechanism for structural adaptation and resilience in the face of external restrictions.In conclusion, outsourcing is set to play a crucial role in Russia's economic evolution despite sanctions pressures. Companies will utilize outsourcing to access specialized capabilities not available internally, enable localization drives, and add flexibility to operating models. However, firms need to adapt outsourcing risk management and relationship structures to handle increased uncertainty. If supported appropriately by government programs and industry ecosystems, outsourcing can provide Russian enterprises with a mechanism for maintaining competitiveness and agility amidst challenging geopolitical and economic conditions.ConclusionThis study explored the diverse applications, forms, benefits, and risks of outsourcing as a business instrument in the Russian context. Outsourcing's role as a mechanism for cost optimization, flexibility, capability enhancement, and focus on core competencies was established. However, the research also highlighted the need for in-depth analysis of contextual factors when adopting outsourcing strategies.A key conclusion is that outsourcing outcomes depend on alignment with the economic, political, and cultural environment. The analysis of the Russian business ecosystem uncovered specific barriers and risks related to macroeconomic uncertainty, underdeveloped supplier markets, talent shortages, restrictive regulations, and intercultural gaps that complicate outsourcing. These limitations necessitate adaptations in outsourcing approaches, vendor selection, contract structures, and relationship management relative to Western models.Nevertheless, the rapid growth of outsourcing across sectors indicates Russian companies are finding ways to selectively utilize outsourcing to drive performance improvements despite indigenous challenges. This was evidenced by the proliferation of more complex information technology, knowledge process, facilities management, and business process outsourcing deals with both domestic and global vendors. The research indicates that Russian firms are learning to better structure win-win relationships, enhance external capability development, and integrate outsourcing governance – evolving outsourcing maturity.Outsourcing contracts have varying durations, from short-term flexible arrangements to long-term partnerships requiring significant vendor investments. Short-term outsourcing ranges from one-time projects to agreements less than 3 years. It provides flexibility when needs are uncertain or changing. Startups and smaller companies extensively use staff augmentation, contracting specific talent short-term for agility. For example a UK fintech company contracted data engineers from a global consulting firm for a 1-year agile project.In contrast, long-term outsourcing spans 3 to 10+ years. Long durations allow amortizing vendor setup costs and cultivating relationships. Large IT infrastructure and business process outsourcing deals often have 5-10 year terms to justify provider investments. For instance, an insurance company signed a 7-year infrastructure services renewal with an IT services firm. While reducing flexibility, long-term outsourcing supports major transformations.Location considerations include geographic proximity, costs, timezone alignment, and language/cultural compatibility. Onshore outsourcing uses vendors located in the same country, providing proximity and cultural alignment but potentially forfeiting cost advantages. Companies concerned with data security and customer interactions often stick onshore. For example, a UK retailer uses UK call center partners for customer service outsourcing.In contrast, offshore outsourcing leverages low-cost talent pools abroad, commonly in Asia and Eastern Europe. However, significant coordination efforts are required. IT application development and business process outsourcing have heavily moved offshore. A cloud computing company uses an Indian partner for IT services outsourcing. As an intermediate option, nearshore outsourcing utilizes nearby low-cost countries, balancing cost and coordination needs. For instance, an automotive company outsourced IT application development for a brand to its own captive center located in a neighboring European country. Nearshore outsourcing fits collaborative processes.Outsourcing has become an increasingly prevalent business practice among Russian companies in recent years. The most common forms of outsourcing adopted by Russian firms include:1. IT OutsourcingMany Russian companies outsource IT services, such as software development, IT infrastructure management, and tech support, to external providers. For example, Sberbank, Russia's largest bank, uses Tier 1 partners like IBM for managed IT services. Other major banks like VTB and AlfaBank also leverage IT outsourcing.2. Business Process OutsourcingRussian companies often outsource repetitive back-office processes like accounting, payroll, recruitment and customer support to cut costs and improve efficiency. Yandex, Russia's leading technology company, partners with Kelly Services for call center outsourcing.3. Manufacturing OutsourcingRussian manufacturing firms frequently outsource production to contract manufacturers, especially in electronics, automotive and machinery industries. For instance, automaker AvtoVAZ outsources up to 30% of its parts production to suppliers.4. Logistics and Distribution OutsourcingRussian retailers and consumer goods companies outsource logistics and distribution functions to 3PLs. X5 Retail Group, Russia's largest food retailer, uses partners like DPD and Pony Express for transportation and warehouse outsourcing.5. Facilities Management OutsourcingRussian corporations outsource non-core facilities management services, such as cleaning, security and property maintenance, to specialist providers. Gazprom recently awarded a mega facilities management outsourcing contract to Millhouse LLC.Russia’s increased macroeconomic volatility and geopolitical risks create an uncertain environment for long-term outsourcing agreements. Periodic currency devaluations, sanctions, fluctuations in energy prices, and high inflation lead to unpredictability in business conditions. For example, the ruble lost over 30% of value in 2022, substantially raising costs for companies outsourcing foreign services. This complicates cost forecasting and establishing stable contracts. Firms must factor in macroeconomic uncertainty through pricing mechanisms indexing costs and ensuring operational continuity despite external shocks.However, fully realizing outsourcing’s potential will require concerted efforts by enterprises, government, and industry associations to grow the ecosystem. Recommended initiatives include formal supplier development programs, educational partnerships to expand talent pipelines, incentives for outsourcing innovations, and cheaper financing for indigenous capability building. A balanced regulatory approach that provides impetus for local capability development while enabling access to global resources will also be constructive.This research contributes a systematic qualitative and quantitative analysis of the outsourcing phenomenon in Russia across dimensions spanning theories, forms, benefits, risks, and situational contingencies. It provides a foundation to guide further scholarship on optimizing outsourcing for the needs of Russian organizations striving for global competitiveness. As the economy progresses and management experience deepens, Russian companies are positioned to turn outsourcing into a source of value creation and sustainable advantage rather than solely cost reduction.SoursesLazareva, N. V., & Egorova, A. (2020). Autsorsingkakprogressivnoeyavleniemirovoiekonomiki. In Strategiirazvitiyapredprinimatel'stva v sovremennykhusloviyakh (pp. 280-283). (in Russian).Loginova, T. V. (2019). Autsorsingiproblemy ego primeneniyanapredpriyatiyakhmalogobiznesa. Ekonomika: vchera, segodnya, zavtra, 9(9-1), 398-403. (in Russian). https://doi.org/10.34670/AR.2019.90.9.040Zvereva, V. A. (2017). Sovremennyeformypredprinimatel'skoideyatel'nosti: autsorsing v Rossii. In Perspektivyrazvitiyapredprinimatel'stva v Rossii (pp. 148-155). (in Russian)Booth T. Here, there and everywhere [Electronic resource] / Booth Tamzin.–Mode of access: http://www.economist.com/news/special-report/21569572-afterdecades-sending-work-across-world-companies-are-rethinking-their-offshoring (26/07/2023)How outsourcing can help make a business successful –Mode of access: https://www.outsourceaccelerator.com/articles/what-is-outsourcing-and-how-does-it-help-your-business/ (26/07/2023)Outsourcing to Russia .–Mode of access: https://www.outsourcingchoices.com/outsourcing-to-russia/ (26/07/2023)Outsourcing as a tool to build and strengthen the competitive advantages of firms –Mode of access: https://sovman.ru/article/1001/ (26/07/2023)Preliminary results of the popularity rating of outsourcing in foreign companies in Russia –Mode of access: https://ubpo.ru/en/press/news/preliminary-results-of-the-popularity-rating-of-outsourcing-in-foreign-companies-in-russia/ (26/07/2023)Tikhonova, A.S., & Ermashkevich, N.S. (2020) Methods of assessing the effectiveness of outsourcing as a tool for organization and optimization of labour costs in companies. Kreativnayaekonomika, 14(7), 1369-1388 (26/07/2023)What happens with business process outsourcing in Russia: Six BPO market trends .–Mode of access: https://investforesight.com/what-happens-with-business-process-outsourcing-in-russia-six-bpo-market-trends/ (26/07/2023)