Luxoft, an IT provider based in Moscow, specializes in sophisticated application development work for companies such as The Boeing Co., Deutsche Bank AG and IBM. A relatively new company, Luxoft has painstakingly built out its operations since its founding in 2000, tapping Russia’s elite universities for top science talent and judiciously opening centers in Central and Eastern Europe.

But when Luxoft went looking for a spot in Asia for back-office help, the Russian outsourcer bypassed India and ventured to Vietnam, this week opening an office in Ho Chi Minh City.

“It is one of the best-kept secrets of Southeast Asia,” said Peter Vaihansky, vice president of marketing at Luxoft, ticking off the advantages of the former Saigon. The total cost of labor beats India and China by 10% to 15%, he said. Unlike India, where salaries continue to rise and turnover is pegged as high as 30% by some studies, the Vietnamese market is not overheated, Vaihansky said. Attrition there hovers below 10%. That’s an important consideration for an offshore provider still building its brand image.

“We cannot be a quality provider unless we can build stable teams that do not rotate half of their staffs every year. That is a very, very critical issue for us,” Vaihansky said.

Vietnam may not yet be a hotbed for IT offshoring, but it isn’t exactly a secret, either. A report published by Stamford, Conn.-based Gartner Inc. in December listing the top 30 countries for offshore services included Vietnam in its Asia Pacific group of 10 countries. Indeed, Vietnam earned an “excellent” for cost from Gartner, beating out China, India, Pakistan, the Philippines and Sri Lanka, which were judged “very good.”

But Gartner analyst Helen Huntley also noted that Vietnam came up short in other areas, ranking only “fair” on language skills and political and economic environment. Cost and risk correlate tightly, she noted. Still, the appetite for global outsourcing is driving more countries to market themselves as IT service destinations. The big news coming out of the Gartner report was not the fact that 30 countries met the firm’s criteria as offshore destinations, but that an additional 13 countries just barely missed making the list.

Global sourcing intense

Analyst Dana Stiffler, who specializes in service providers at AMR Research Inc. in Boston, agrees that the interest in global sourcing is intense. During the past three years, India, and to some extent, China, has been the target of most of that interest, she said. “Vietnam is kind of the latest, greatest destination,” Stiffler said.

As the Indian market has overheated, high demand, rising rates and high attrition have caused both providers and their clients to seek out new markets, Stiffler said.

“Over the past year to 18 months, we’ve had clients re-evaluating their sourcing strategy — not to pull out of India, but to diversify their approach, by country and by the three major commercial time zones,” Stiffler said.

Hence, the upswing in interest among U.S. companies in Latin American countries like Brazil, Mexico, Chile and Uruguay for near-shore opportunities. U.S. companies are also looking for low-cost locations within the U.S. In Europe there is “huge interest” in moving IT and business services to Eastern Europe, Stiffler said.

In Asia/Pacific, certainly China has been the focus of investment for both IT services and business process outsourcing, but usually for the Asian operations of global companies because English-language skills are still in short supply. Malaysia and the Philippines attract U.S. companies.

“We have seen just recently that Vietnam has been a target of interest for companies to invest in,” she said.

Good cultural fit with Russia For Luxoft, the appeal of Vietnam went beyond cost, Vaihansky said. Literacy levels are high in Vietnam. There are more than 70 colleges and universities in Ho Chi Minh City, he said, “and they teach good math there.” The Vietnamese educational system “has borrowed” heavily from the former Soviet Union. Many older IT professionals were trained in Russia and speak Russian, as well as French.

“The outsourcing industry is different in Asia than in Russia. The educational DNA in Vietnam is much more in research and development and the science side of computer engineering,” Vaihansky said, drawing a distinction between the Russian emphasis on high-level math and algorithmic training, and the technical IT skills found in abundance in India.

“I’m not bashing India,” he added, but Vietnam “is a good cultural fit for us, both in terms of establishing relationships with the authorities and jumping through the bureaucratic hoops to open our center.”

“The educational DNA in Vietnam is much more in research and development and the science side of computer engineering.”

Peter Vaihansky

vice president of marketing, Luxoft

The population’s written English tends to be much better than its spoken English, and Luxoft is prepared to invest heavily in English speaking training, Vaihansky said. Of course, the country is tiny by India and China measures, making it difficult for a large IT provider like Infosys Technologies Ltd. or a Wipro Ltd., for example, to ramp up quickly. There aren’t enough people. But Luxoft, whose workforce totals 2,800 people, is not looking to hire thousands of people, Vaihansky said.

Ralph Rodriguez, an analyst at Boston-based Aberdeen Group Inc. with two decades of experience in IT management, can attest to the draw of the bustling Ho Chi Minh City. In 2006, he opened a software development office there while he was CTO of the enterprise software division at Brooks Automation Inc.

Among the city’s assets, Rodriguez said, is a young population (at least 60% is under 35 years old); a central location in Asia (“You can get anywhere that matters in five-and-a-half hours.”); and a decent technical infrastructure. “It’s as good as what I saw in India,” said Rodriguez, who also opened a development center for Brooks in Chennai.

For a company like Luxoft, cost has to be a big enticement, he said. “In India, a guy with seven years’ experience, educated at an elite university, you can expect to pay $30,000 in U.S. dollars in salary. For that same guy in Vietnam — good education, some work experience with an American company — that rate plummets to $800 to $1,000 per month,” Rodriguez said.

“And you don’t have the churn. They haven’t been taught to jump ship at the expense of others,” Rodriguez said.