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Addressing the Productivity Question for IT and Russia

By Tom Hickerson

Alfa Fellowship Program Analytical Paper

May 2007

Tom Hickerson, Alfa Fellowship Program, Spring 2007 2

Abstract

Russia is becoming a large player in the Information Technology (IT) sector, with

positive growth of the sector chronicled during the past five years. Taking a look at the

numbers for overall viability of IT in Russia, however, we can see that it still only

accounts for 1.5% of overall GDP. How can we spur growth in this sector? One of the

methods is to change the perception of IT as a driver of productivity. This paper will

chart how trying to improve ‘productivity’ is difficult both inside Russia and abroad, and

provide research that shows there is promise in IT selling productivity, and thus driving

adoption, in Russia.

Problem Statement

Russia is a country with over 65 million employees and a 10 million personal computer

(PC) install base. Approximately 2-3 million of these computers are estimated to be in

companies that are classified as the ‘small business sector’ in terms of PCs, that is, less

than 50 PCs in an organization1. In the drive to modernize Russia, foreign companies

are keen to increase Information Technology (IT) adoption in companies, especially

those in the areas outside Moscow and Moscow Region. These numbers above tell us

that there is indeed room to grow in domestic IT, even if the major cities of Moscow and

St Petersburg are reaching saturation.

Other encouraging facts about the domestic IT market are that Russia is rich with

human capital; Russia is said to have 1.3 million computer programmers, and over 10%

1 Source: Microsoft Research


of its employees in IT companies have doctorate degrees2. The richness of human

capital has been offset by a “brain drain” to the West. Additionally, in an empirical study

in the European Journal of Comparative Economics, experts admonished that “human

capital does not ensure economic growth. It is necessary that investments in human

capital, investments in R&D and incentives in the workforce exist in order to reach a

high growth equilibrium.”3

In general, the numbers supporting wide adoption of IT in Russia and the overall

viability of IT as a reliable sector of the Russian economy are not supportive. The IT

sector only accounted for 1.5% of Russia’s GDP in 2005. IT spending in Russia

reached almost $15 billion in 2006, but over two-thirds of that was in hardware spending

alone4. While there are already close to 28 million people using the Internet, a

significant number of the Internet users are connecting at work or through their

universities; according to a continual study provided by the Fund of Social Opinion, only

58% of Russia’s Internet users connect at home5.

Several things impede IT growth in Russia; they include lack of project management

and English skills, decaying telecommunications and power infrastructure, and the small

size of most Russian IT services firms (averaging only around 100). According to a

recent paper, several business school professors noted that the dearth of venture

capital encourages Russian firms to stay small, which has its own advantages and

disadvantages:

2 Source: EIU Viewswire, “Russia: Telecoms and Technology Profile”, January 2007 3 Algieri, 2006 4 Source: EIU Viewswire, January 2007 5 http://bd.fom.ru/report/map/projects/internet/internet0701/int0701, accessed May 6, 2007.


Aside from a general shortage of venture capital funds, most Russian investors have a short-term focus. This has led many firms using e-business in Russia to be pressured to quickly become profitable. The result has been that many firms in Russia pursue less elaborate e-business models than in other countries, where an elaborate strategy of incremental development can be pursued. The quest for immediate profitability resulted in fewer e-business failures in Russia when the dot-com bubble burst than in countries like the United States or Sweden, since investment in e-business in Russia was based on being profitable immediately6.

Another one of the roadblocks that impacts IT adoption is the low perception of IT in

relation to productivity. We have already seen that, while demand is growing, it has not

reached the growth in telecommunications; in mobile penetration alone, Russia has

already reached 100% penetration, implying more than one mobile account per Russian

citizen7. Using productivity as a selling point in IT can lead to more aggressive adoption

in firms that have already reached plateau in hardware and software spending, for

example.

Aside from the sluggish numbers above, reports support that IT is a growing sector, but

eclipsed by the sectors driven by natural resources; AT Kearney published its Global

Services Location Index report in 2006, listing Russia as the 27th most attractive country

to base IT/Engineering outsourcing operations, lagging behind its neighbors in Easter

Europe (Czech Republic was 7th, Bulgaria 15th, Poland 18th and Romania 24th)8. The

Rating Agency “Expert” also published its domestic IT Ratings survey in 2006; they

reported that overall, investment in IT was hindered and that the Russian government

should take the leading role of the initiating and encouraging this process.9

6 Fey, de Konig, Delios, 2006. 7 EIU Viewswire, January 2007 8 AT Kearney, 2006 9 http://www.raexpert.ru/ratings/it/2006/, accessed May 7, 2007


How can we improve the perception of IT in Russia? How can we make a clearer

association between IT and productivity in Russia, and thus spur growth and adoption?

These are the questions we want to start to explore in this paper. We shall identify real

obstacles to make this happen in Russia today, and then discuss what promising trends

are out there that can link IT to productivity in Russia in the near future.

Problem #1: Benchmarking

One of the problems with productivity and IT in general is that it is difficult to benchmark.

Many believe the very idea of productivity surveys came to IT from a different (although

related) discipline: “The bulk of the project-management body of knowledge has been

developed by the engineering profession” one professional noted. Transferring the

policies, practices and ideas from the engineering world to manage IT projects does not

take into account “distinct differences” between the two10. This includes:

1. Clearly defined end state; in the engineering world, this is usually something

physically defined. In the IT world, this may not be the case, or no clear end

state may be defined at all.

2. Linear project phases; a construction project has phases that are linear and well-

defined. In IT projects, phases can overlap and repeat on top of one another.

3. Deterministic deliverables; in engineering and construction, the end product, or

deliverable, is usually very well defined. In IT, the end products are usually not

defined to an exacting level of detail, and, as such, remain open to interpretation.

10 Kapur, 1998


In short, we see that IT and IT-related projects can become very amorphous, even

though the practices of benchmarking that it takes as its own are from a profession

which is anything but.

Problem #2: Different definitions generate a paradox

Economic studies of productivity are also often flawed, or miscommunicate results; one

scholar reported that there is a paradox in trying to measure productivity and IT. “The

relationship between information technology and productivity is widely discussed but

little understood,” writes Erik Brynjolfsson. Brynjolfsson wrote his report on productivity

and IT in 1993, when everyone was sure that IT would usher in great gains in

productivity. During that time, though, he reported that “disillousionment and even

frustration were increasingly evident” leading to a paradoxical situation. Together with

other scholars, he researched a great deal of literature that discussed productivity in

different sectors and how it was related or not related to IT. The four problems that

created the paradox were cited as the following:

1. mismeasurement of outputs and inputs,

2. lag in spending vs. results,

3. redistribution and dissipation of profits gained by productivity,

4. mismanagement of information and technology.

Brynjolfsson summed up his research with the statement: "traditional measures of the

relationship between inputs and outputs fail to account for nontraditional sources of


value"11. It is no surprise, then, that productivity is a measurement which is not taken

seriously in the workplace.

Problem #3: The Russian Environment

The most common cause of lower productivity would have to be its environment. One

can think that the usual Russian stereotypes can affect the manager’s perspective, but

positive or negative Russian cultural attitudes towards productivity do not play a role

here. In many local sectors, there is a natural desire to lower costs and generate more

profit, that is, to be more productive. The Russian political environment, however,

inhibits the drive to be more productive for the business. Lack of transparency, fair

competition, and legal protection in Russia often place demands on the managers that

are far more important to the life of a business than concentrating on improving process

and productivity. “Productivity advantages are quickly lost to random taxes, arbitrary

energy costs and other such penalties,” wrote the chairman for Russian brokerage firm

Aton12.

Other sources concur that IT can be very profitable, but the government needs to step

in and influence events. “Russia has [a] very positive growth potential,” wrote one

Russian professor, “However, the Russian government should stimulate and motivate it

to develop due to the lack of internal financial resources in Russian IT companies.”13

Another unique problem to Russia is the inequality of resources between the regions

and Moscow. In an analysis of growth in the regions from 1999-2003, it was proven that

11 Brynjolfsson, 1993 12 Halloran, 2000 13 Selioukova, 2006


Russia’s disparities grew faster than that of neighboring China, and pointed out that

regions with a lower per capita GDP were able to generate new opportunities, but

lacked the funds to finance them14.

With so many problems, why should we even try to improve it?

It should come as no surprise then, that Russian managers do not see ‘productivity’ as

a driver to adopt IT programs and practices. Looking at the actions of independent

firms in Russia, we can see the following, however:

• Over forty firms reported adoption of either Enterprise Resource Planning (ERP)

or Customer Relationship Management (CRM) software in 2006, with a desire to

‘automate processes’, ‘integrate systems’, or bring systems up to western

standards, all of which can be considered to contribute to productivity;

• Many of the abovementioned companies are either subsidiaries or privately held,

which means public benchmarking statistics are unavailable;

• However, spending in the enterprise software space (which includes the above

types of systems) for 2005 totaled $236 million15. When we compare this to the

overall reported amount of IT spending in Russia for calendar year 2005 ($11,9

billion16) this is minor, but the International Data Corporation estimates that

spending on enterprise software in Russia will continue to grow at a cumulative

average growth rate (CAGR) of 28,1% through 2010;

14 Belov, 2006 15 Semenovskaia, 2006. 16 Source: EIU Viewswire, accessed January 2007.


In a collection of press releases from 2006 related to over 40 firms adopting an

enterprise software solution, the following phrases were encountered often:

• “We automated X number of places at our firm”

• “The solution we implemented made it easier to work with our clients”

• “We will be able to expand our network with this project”

• “We are now able to integrate systems with a Western firm”

• “We will be able to integrate new solutions in our products17”

For example, the Russian division of Renault Trucks worked together with the local

consulting firm IBS to implement Microsoft Dynamics NAV, so that the company could

automate processes between itself and its parent company. All accounts were

standardized, which allowed the parent company to access status reports about orders

and inventory remotely.

The benefits, as reported by IBS, were the following:

• Creation of a single information space, integrating accounting systems with

Microsoft Dynamics NAV;

• Automation for accounting and tax forms with respect to Russian law;

• The removal of the ability to create duplicate entries in the system;

• The removal of the ability to exploit the current accounting system18.

While these benefits do not actively contribute to Renault’s bottom line directly, the

indirect effects of standardization will be able to contribute to the revenues to the firm

17 See Appendix 1. 18 http://www.e-commerce.ru/news/2006/03/29/news13895.html, accessed January 19, 2007.


from this point onward. Monitoring firm progress after system implementation shows us

some results, however; Renault posted an increase in sales of 136% in a six-month

period, only three months after the system was implemented19.

Other examples continue to show the promise of Russian implementation of productivity

saving programs, either with software provided by major world players or without; the

Russian company Reksoft has made a profession out of assisting other companies get

to higher levels of productivity by implementing and building systems for them. For

example, Vimpelcom worked together recently with Reksoft to implement an online

billing system that was able to bill their huge base of mobile users, “improving customer

experience and increasing customer loyalty.”20

Concluding remarks

In short, despite overall numbers that state IT has yet to grow into its role as a part of

the Russian economy, and despite the weaknesses and threats that plague the Russian

business environment today, there are signs that IT adoption will grow, thanks in part to

the drive for productivity. Firms pursue software and IT to make their systems more

productive for either themselves or the entities that they serve. Also, it is clear that they

see the IT solutions as integral to either firm-wide standardization or integration with a

Western counterpart. The word ‘productivity’ is not used in many press releases, but

the goal is the same; lower costs, streamline processes, and efficiently manage growth

and change.

19 http://www.renault-trucks.ru/www.renault-trucks.ru_2001204_0.html?lang=ru, accessed January 19, 2007. 20 http://www.reksoft.com/customers/case-studies/beeonline/ accessed May 7, 2007.


To conclude, we have made the following initial observations about IT and productivity

in Russia:

• ‘Productivity’ in IT is difficult to benchmark anywhere, not just Russia. This

problem downplays its importance as a major driver of new technology adoption;

• Many managers in Russia have to deal with a shifting legal environment and

mere ‘productivity’ is not an essential element of their survival;

• However, Russians are interested in productivity for a number of specific

reasons, and while spending in productivity-enhancement systems in IT is still

small, it is forecasted to grow aggressively.

• Since there is promise for productivity-improving systems in Russia, the

relationship between IT and productivity should be improved, and used as a

selling point for firms to increase domestic adoption of IT systems.

Research

Appendix 1: Table of companies conducting Customer Relationship Management or

Enterprise Resource Planning operations in 2006, as reported by major news sources.

Company Name Sector Reason for change Specific Product

Holding Company

OkeanProduct Retail Automation of processes 1С 8.0.

Evromet Finance/Banking Automation of processes Custom product from BB Software Co.

Alcona Finance/Insurance

Strategy/Client-

orientation/Call-center Terrasoft CRM

Vozrozhdeniya Finance/Banking

Optimization of

processes/Client-

Softline Solutions and Microsoft Dynamics

CRM


orientation

Favorit Gaming/Bookmaking

Optimization of

processes/Client-

orientation Terrasoft CRM

GK Alina Business/Consulting Partnership Terrasoft CRM

NB Retail Finance Automation of processes Cognos

Vimpelcom Telecommunications Call-center

U Service+ Services Client-orientation Cognos

Ingosstrakh Finance/Insurance Partnership Oracle

Agency Kontakt Recruiting/HR System Integration Microsoft Dynamics CRM 3.0

АТН Business

Travel Solutions Travel

Customer segmentation

and services Microsoft Dynamics CRM 3.0

Askona Retail

Automation of business

processes Galactica ERP.

Uralskaya Stal Metals Automation of processes mySAP ERP

MMPP Salyut Manufacturing/Aviation Automation of processes SAP All-in-One ERP Baseline Package

Severstal-metiz Metals

Automation of

processes/Merger BAAN IV

Beerbrewery

Heineken Baikal Food/Beer

ERP-systems of Russian company

Monolith

OKB Sukhovo System integration Documentum, Oracle E-business Suite

Petrokommerts Finance/Banking mySAP ERP, CRM, SAP BW

BANANA-MAMA Retail System integration mySAP ERP

Pacific Ocean

Management

Company

Holding

Company(Retail) Automation of processes Oracle E-business suite

Svyazinvest Telecommunications HR/Automation Oracle E-business suite


TsB PROTEK Pharma/Distribution Improve processes Oracle E-business suite

Dalsvyaz Telecommunications

Improve

processes/Modernization Oracle E-business suite

SibirTelecom Telecommunications HR/Automation Oracle E-business suite

Irkutsk Aviation

Factory Manufacturing/Aviation

Migration/Automation of

processes/increase in

functionality SSA ERPLN (Baan 6.1)

GIS Co. Oil/Gas Automation of processes Microsoft Dynamics AX

Vyksunsky

Metallurgical

Factory Metals HR/Automation Oracle E-business suite (Payroll)

Cryogenmash Manufacturing

Strategy/system

Integration SAP Packaged Solution IM&C

Renault Trucks

Vostok Transport

Standardization of

accounting Microsoft Dynamics NAV

Televisions Studio

NTV Media

Standardization of

accounting Oracle E-business suite

SKM Furniture Retail

Standardization of

accounting Microsoft Axapta

TsentrTelecom Telecommunications Infrastructure Oracle E-business suite

Polysan Pharma Production standards SSA ERP (Baan)

MiG Manufacturing/Aviation Production standards SSA ERP (Baan)

Louis Dreyfus Vostok System integration Microsoft Navision

Notes of collection: the above list of companies was collected from press releases listed

in 2006 through the websites operated by CNews.ru, SMI.ru, and Gazeta.ru. We list the


sector, prime reasons for adoption, and software used to show the range and diversity

of requests.

Sources

A.T. Kearney. “Building the Optimal Global Footprint: A.T. Kearney’s Global Services

Location Index”, Summer 2006.

Algieri, Bernardina. “Human Capital in Russia.” The European Journal of Comparative

Economics; 2006, vol. 3, no. 1, pp. 103-129.

Belov, Andrey. “Regional Inequalities and Effectiveness of Investment: Russia and

China in the Period 1999-2003”. The Business Review, Cambridge; Summer 2006, vol.

5, no. 2, pp. 280-283.

Brynjolfsson, Erik. “The productivity paradox of information technology”. Association

for Computing Machinery, Communications of the ACM; Dec 1993, v. 26, no. 12, pg. 67

Fey, Carl; de Koenig, Alice; and Delios, Andrew. “How Similar Is the World in the

Internet Era? A Comparison of E-Business in China, Russia, and Sweden”, Thunderbird

International Business Review, September-October 2006, vol. 48, no. 5, pp. 727-747.

Halloran, Peter. “Linking productivity to profitability”. Central European; Dec 2000/Jan

2001, pg. 31

Kapur, Gopal. “Why IT project management is so hard to grasp”. Computerworld; May

3, 1999, vol. 33, no. 18, pg. 32


Selioukova, Yana. “Development of the IT Market in the Russian Regions: Case of

Moscow, St. Petersburg and Novosibirsk”. The Business Review, Cambridge; Summer

2006, vol. 5, no. 2, pp. 306-313

Semenovskaia, Elena. “MARKET ANALYSIS: Russia Enterprise Application Software

2005-2010 Forecast”. International Data Corporation Report, 2006.

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