ERP market in Russia

1 Doing Business in Russia: ERP market overviewPrepared by VM ConsultRussian FederationMay 2011 www.consultvm.com VM Consult – “Your first step onto a new market”www.consultvm.com

2Executive SummaryThis report will present a general overview of the Russian ERP market for a target audience of foreignmanagers and executives considering a move onto the Russian market. After providing a briefintroduction we move on to general describing of Russian ERP market and ITCT industry and with thehelp of statistical data and our own experience we analyse the current state of these sectors, identifytrends and try to provide a forecast for the future. Next we look at potential driving factors for bus inessrelations between Russia and the EU and explain our choice. Following this we draw on our ownprofessional experience as well as reports, testimonies and other data in order to identify and informabout the challenges of doing business in Russia for a foreign entrepreneur. In the conclusion we drawall of our points together and try to provide some points for further reflection. VM Consult – “Your first step onto a new market”www.consultvm.com

3Table of ContentsAbout Us............................................................................................................................................ 31. Introduction ............................................................................................................................... 42. ICT market in Russia .................................................................................................................... 43. ERP market in Russia ................................................................................................................... 64. Critical success factors for entering Russian market ...................................................................... 85. General Challenges of Doing Business in Russia............................................................................. 96. Conclusions .............................................................................................................................. 11CONTACTS ....................................................................................................................................... 12About UsVM Consult is an international business consulting firm that specialises in Russian market entryconsulting. We create value for our clients through attaining a considerable increase in theprobability of the success of their venture onto Russian market.We offer a full spectrum of services for foreign small- and medium-sized enterprises wishing tobreak into the challenging Russian market - from preliminary market research to building oflocal partner networks, from analysis of the economic expediency of working in Russia tosupport with product localisation.Our core advantages are:- Result based pricing (we are confident in achieving positive results and are able to base part ofour price on achieved results)- Holistic approach (working with our client we suggest not a set of activities, but a complexapproach aligned with the clients goals)- Industry experience (we can involve not just marketing professionals in projects, but alsospecialists with specific industry experience)VM Consult does not promise any secret tools or magic formulas that will provide you withenormous results overnight, but working with us will help you to significantly increase thecertainty of your foreign market projects. VM Consult – “Your first step onto a new market”www.consultvm.com

4 1. IntroductionWith a population of 142 million people and a place within the top 10 economies of theworld, Russia is, without a doubt, an emerging economic powerhouse. Following onfrom the tumultuous early years of the transition to capitalism, since late 1999 and theadvent of high oil prices and the arrival of President Putin, the economic situation inRussia has stabilised and in many cases even flourished.But Russian ICT market and is still much less developed in comparison with WesternEurope. And there are still impressive opportunities for IT overhaul in bothinfrastructure and application space, especially in the field of corporate softwareapplications.For example more and more Russian companies realize their business need inautomation of their business processes by implementation of ERP solutions and expertsforecasts the stable growth of Russian ERP market on next years . Although all major ERPplayer are already presented on Russian market. But there still a lot of opportunities forniche ERP solutions. 2. ICT market in RussiaThe Russian ICT market represents 2% of the world ICT market and is still less developedin comparison with Western Europe.The combined revenues of the Russian ICT sector grew by 2.1% to RUB 1.8 trillion($58.9bn) in 2010 in comparison to 2009, comprising 4% of GDP, according to theMinister of Communications, Igor Shchegolev. The share of telecommunications servicesin the sector’s turnover was 74.2 % against 72 % for the previous year, amounting toRUB 1.3 trillion ($43.9bn).The Ministry of Communications estimates that the IT market will exceed the GDPgrowth rate in Russia in 2011-2013 – a 14.6 % increase is forecast in 2011, 15.8 % in2012 and 18.1 % in 2013. It is estimated that the turnover of the IT market in 2013 willreach RUB 887bn ($29bn). The Ministry estimates that total revenues in communicationservices will reach RUB 1.7 trillion ($55.6bn) in 2013, a 33 % increase in comparison to2009. VM Consult – “Your first step onto a new market”www.consultvm.com

5The most promising sectors are manufacturing, utilities and the public sector. Thanks tothe strong Russian educational system (around 2/3 of the population are educated todegree level) there is a large highly-skilled and, in comparison with Western Europe,cost-effective labour pool. The 2.6 billion USD “e-Russia” programme as well as the“Skolkovo” technology park project demonstrate the support and focus on the industryemanating from the highest echelons of government and industry.More than a half of Russian IT market is formed by hardware products. But the mostpotential growth is shown by software products, and besides 70% of software productsin Russia are imported.Situation on Russian IT market was described in SWOT analysis made by Roland Berger. VM Consult – “Your first step onto a new market”www.consultvm.com

6Except untapped markets in many Russian regions, there are a lot of opportunities inrunning IT business in Russia. Pierre Audoin Consultants has pointed out the maintrends in Russian IT market that can be used: Packaged application demand continues to capitalize over custom development and legacy systems. ERP still drives the application consulting market. The crisis raises more interest in Outsourcing, although reluctance remains high.The most prospective sectors for IT are: Manufacturing: clients on the Resources market strongly dependent on the global demand and pricing: Oil & Gas, Metallurgy, Chemicals Utilities: still one of the most bullish sectors, with impressive opportunities for IT overhaul in both infrastructure and application space. Optima remains the dominant player, while positions of the rest of the pack may change with the opportunities Public: the budget allocation for the Electronic Russia computerization program should not be affected by the crisis. Nevertheless, there is a poor entrepreneurship and low capacity to absorb the allocated funds by the governmentVast majority of big IT players are already on Russian market and competition is quitehard, that’s why only high quality solutions with clear defined target customers andproven ROI will get a good chance for successful market penetration. 3. ERP market in RussiaAt the crisis 2009 ERP market reduced on 18 % (while the total software market inRussia felled on 35 – 40 %) and fall down to $492 mln. On 2010 ERP market partlyrecovered, but is expected to reach the volumes of 2008 just at 2012. IDC forecasts thaton the next 5 years Russian ERP market will show stable and moderate growth.Growth of the local ERP market was driven by factors such as consolidation, increasinglyaggressive competition, cost cutting, optimization of internal processes and, finally, by VM Consult – “Your first step onto a new market”www.consultvm.com

7streamlining and centralizing the reporting process. However, many Russianorganizations have already made significant cuts in their IT budgets, which is forcinglocal software vendors and integrators to re-think strategies for their ERP business.Many planned ERP projects have been frozen with local companies spending strictly thebare minimum on required IT, such as maintenance around core ERP modules.On the application side, the most frequently implemented ERP modules on the localmarket are financial, logistics and control modules although CRM and BI solutions arealso becoming popular. As for ERP services, this market is currently evolving better thanthe ERP applications market, since many companies, despite drastic cuts in IT spending,continue to allocate budget to maintain the functionality of the core modules ofpreviously implemented ERP solutions. The main goals of implementation of thecorporate IT solutions in Russia are automation of bookkeeping, finance and humanresource management.Core players on Russian ERP market are SAP, 1C, Microsoft and Oracle. SAP became themarket leader in 2006 and expanded its market share from 39.7 % to 53 % withinseveral years. On the contrary, Oracle, being on the second place, strongly reduced itsmarket share. Russian 1C, which in 2006 controlled 12% of the market, is on the secondposition and shows the stable growth. IDC forecasts that 1C will reach the market shareof 20 % on next years. Russian ERP market breakdown 12% SAP 8% 1C 8% Oracle 53% Microsoft 19% Others VM Consult – “Your first step onto a new market”www.consultvm.com

8According to IDC, the leading Russian industry for ERP implementation is continuousproduction, on the second place is retail, than goes discreet manufacture and energysector.The major part of market is concentrated in Moscow and St. Petersburg, but there isincreasing demand on ERP solutions in other regions, for example in Ural region. 4. Critical success factors for entering Russian marketThe most critical factors for successful market penetration of foreign ERP vendor are:  Right local partner  Proper software localization  Strong marketing background  Proper priceRight local partner. Strong partner will help foreign vendor to understand the needs oflocal customers, to cover the costs of market penetration and to deal with “famous”Russian bureaucracy. That’s why it’s vitally important to find reliable partner. Rightpartner should have experience in target industry, have necessary geographicalcoverage and should be ready to invest time and resources in development of newproduct on Russian market.Proper software localization. Due to language and legal differences Russian penetrationwill require strong localization efforts for translation of screens, adaptation for Cyrillicletters, building interfaces with local accounting systems, development of Russianlanguage documentation etc.Strong marketing background. All major ERP players are already presented onRussian market and it will be hard to get any new client for unknown solutionwithout proper marketing efforts.Proper price. Great part of low price segment is occupied by Russian ERP system 1C,high segment is fixed by SAP and Oracle. The most prospective price range for Russianmarket penetration seems to be between Microsoft AX and Russian 1C. VM Consult – “Your first step onto a new market”www.consultvm.com

9 5. General Challenges of Doing Business in RussiaBureaucracy - Corruption, the rule of law, questions as to the independence of thejudiciary, red tape and customs formalities are just some of the problems which can belocated under the broad umbrella of bureaucracy. The enduring problems withbureaucracy increase the transaction costs of any potential venture on the Russianmarket and must be taken into account when planning.Language and culture – Language remains an obvious stumbling block for many wouldbe entrepreneurs both from small and large companies. Competency in Russian as aforeign language remains relatively low in Europe and despite improvements in theEnglish language competency of many Russians it is still to be expected that many firmswill not communicate effectively in English. There are also some differences incorporate culture and etiquette which should be anticipated and researchedthoroughly.The “risk” factor – This commonly heard cliché refers to the idea that Russia is aninherently risky place to invest. Political stability has been achieved but it is young andwidely criticised and the Russian government is known for making u -turns in policy andsometimes attacking the very foreign assistance it once encouraged, as in the case of BPand TNK in the late 90s/early 2000s. High-profile cases such as the Yukos affair highlightthe sometimes capricious nature of the authorities and while progress has been made inthe spheres of property rights and the rule of law, for example, a potential investormust carefully weigh the benefits and risks associated with any move onto the Russianmarket.Difficulty in raising capital – Businesses continue to complain of strict credit terms and alack of available credit from Russian banks. Interest rates remain high in comparisonwith Western counterparts and terms remain mostly short which makes locating capitalfor large, complex and time-consuming ventures difficult. The situation has improvedsomewhat with the entry onto the Russian market of leading European and Westernbanks such as Barclays, HSBC, Raiffeisen and others but this still lack of capital stillhampers small- and medium-sized enterprises especially. Tax evasion as a means toincrease cash-flow still takes place among some Russian businesses.Finding the right partner – In numerous surveys of representatives of business, (whenthe question is included) difficulty in finding partners is nearly always listed as a key VM Consult – “Your first step onto a new market”www.consultvm.com

10concern for foreign companies. The difficulty is not one which besets only small- andmedium-sized enterprises but, in fact, has proved a decisive factor even for giants suchas Walmart which recently closed (temporarily at least) its Russian office which hadbeen engaged in trying to find a partner for the retail behemoth for years. 1 Visaregulations for foreign workers have become stricter over the last years which makesfinding local partners a more pressing need yet language problems, cultural differencesand a lack of equivalency to Western/European standards all make the search for aneffective partner a difficult affair.Source: WEF Global Competitiveness Report Russia, 2010-11Poor infrastructure in Russia – The Russian rail network is around 85,000km long,making it the second longest in the world and it is this network which handles the bulkof freight transports within the country. 2 Major investment is occurring in Russian ports,especially in the Northern Sea route as this is a prerequisite necessary to supportRussia’s expanding role as an energy superpower and net exporter of resources, yetthey remain inefficient. The situation with the ports is compounded by the fact thatmost rivers in the centre of the country run from North to South/South to North ratherthan from East to West/West to East as may benefit the transport industry. Road1 http://www.npr.org/2010/12/14/132046158/Wal -Mart-Abandons-Efforts-To-Enter-Russian-Market2 Handbuch Logistik Russland | Doborjginidze / Abelmann 2005 (http://www.logit-club.de/fileadmin/upload/Handbuch_Russland.pdf) VM Consult – “Your first step onto a new market”www.consultvm.com

11density is very low at 40m per km² and the majority of roads are of low quality withasphalt used in many cases as an inferior alternative to the more expensive concrete. Asa result average speeds achieved on the country’s roads remain low and the frequencyof accidents remains high. Moreover, there is an acute lack of roads throughout thecountry with many more remote areas being served by nothing more than dirt roads.There is also a lack of competition and know-how within the Russian logistics sectorwhich can exacerbate the problems with infrastructure. All in all, across rail, roads, seaports and airports there is a lack of efficiency and a dearth of modern facilities andpractices. 6. ConclusionsRussia is no longer Churchill’s “riddle, wrapped in a mystery, inside an enigma” but themarket is certainly challenging. A lot of the spectacular growth that has occurred hashad more to do with catching up than with real dynamic processes within the countrybut this does not detract from the fact that a huge and tantalizing market awaits thebold entrepreneur.Russian ERP market opens favorable opportunities for niche ERP solutions, but to getsuccess foreign vendor have to find right local partner, organize proper softwarelocalization, build strong marketing background and offer its product on competitiveprice. This report was compiled by Viacheslav Makovich on behalf of VM Consult in May 2011. The author can be contacted with questions/comments at makovich.v@consultvm.com VM Consult – “Your first step onto a new market”www.consultvm.com

12CONTACTSFor more information on any of the issues dealt with by the report please contact:VM Consult LtdRussian Federation, 190103 St. Petersburg, 10-a Tsiolkovskogo streetTel.: +7-911-932-7890e-mail: info@consultvm.comhttp://www.consultvm.com VM Consult – “Your first step onto a new market”www.consultvm.com

ERP market in Russia

by Viacheslav Makovich on Feb 20, 2012

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ERP market in Russia — Document Transcript