ERP market in Russia

VM Consult – “Your first step onto a new market”

www.consultvm.com

1

Doing Business in Russia:

ERP market overview

Prepared by VM Consult

Russian Federation

May 2011

www.consultvm.com

www.consultvm.com


www.consultvm.com

2

Executive Summary This report will present a general overview of the Russian ERP market for a target audience of foreign

managers and executives considering a move onto the Russian market. After providing a brief

introduction we move on to general describing of Russian ERP market and ITCT industry and with the

help of statistical data and our own experience we analyse the current state of these sectors, identify

trends and try to provide a forecast for the future. Next we look at potential driving factors for bus iness

relations between Russia and the EU and explain our choice. Following this we draw on our own

professional experience as well as reports, testimonies and other data in order to identify and inform

about the challenges of doing business in Russia for a foreign entrepreneur. In the conclusion we draw

all of our points together and try to provide some points for further reflection.


www.consultvm.com

3

Table of Contents

About Us............................................................................................................................................ 3

1. Introduction ............................................................................................................................... 4

2. ICT market in Russia .................................................................................................................... 4

3. ERP market in Russia ................................................................................................................... 6

4. Critical success factors for entering Russian market ...................................................................... 8

5. General Challenges of Doing Business in Russia............................................................................. 9

6. Conclusions .............................................................................................................................. 11

CONTACTS ....................................................................................................................................... 12

About Us

VM Consult is an international business consulting firm that specialises in Russian market entry

consulting. We create value for our clients through attaining a considerable increase in the

probability of the success of their venture onto Russian market.

We offer a full spectrum of services for foreign small- and medium-sized enterprises wishing to

break into the challenging Russian market - from preliminary market research to building of

local partner networks, from analysis of the economic expediency of working in Russia to

support with product localisation.

Our core advantages are:

- Result based pricing (we are confident in achieving positive results and are able to base part of

our price on achieved results)

- Holistic approach (working with our client we suggest not a set of activities, but a complex

approach aligned with the client's goals)

- Industry experience (we can involve not just marketing professionals in projects, but also

specialists with specific industry experience)

VM Consult does not promise any secret tools or magic formulas that will provide you with

enormous results overnight, but working with us will help you to significantly increase the

certainty of your foreign market projects.


www.consultvm.com

4

1. Introduction

With a population of 142 million people and a place within the top 10 economies of the

world, Russia is, without a doubt, an emerging economic powerhouse. Following on

from the tumultuous early years of the transition to capitalism, since late 1999 and the

advent of high oil prices and the arrival of President Putin, the economic situation in

Russia has stabilised and in many cases even flourished.

But Russian ICT market and is still much less developed in comparison with Western

Europe. And there are still impressive opportunities for IT overhaul in both

infrastructure and application space, especially in the field of corporate software

applications.

For example more and more Russian companies realize their business need in

automation of their business processes by implementation of ERP solutions and experts

forecasts the stable growth of Russian ERP market on next years . Although all major ERP

player are already presented on Russian market. But there still a lot of opportunities for

niche ERP solutions.

2. ICT market in Russia

The Russian ICT market represents 2% of the world ICT market and is still less developed

in 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 the

Minister of Communications, Igor Shchegolev. The share of telecommunications services

in the sector’s turnover was 74.2 % against 72 % for the previous year, amounting to

RUB 1.3 trillion ($43.9bn).

The Ministry of Communications estimates that the IT market will exceed the GDP

growth rate in Russia in 2011-2013 – a 14.6 % increase is forecast in 2011, 15.8 % in

2012 and 18.1 % in 2013. It is estimated that the turnover of the IT market in 2013 will

reach RUB 887bn ($29bn). The Ministry estimates that total revenues in communication

services will reach RUB 1.7 trillion ($55.6bn) in 2013, a 33 % increase in comparison to

2009.


www.consultvm.com

5

The most promising sectors are manufacturing, utilities and the public sector. Thanks to

the strong Russian educational system (around 2/3 of the population are educated to

degree 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 industry

emanating from the highest echelons of government and industry.

More than a half of Russian IT market is formed by hardware products. But the most

potential growth is shown by software products, and besides 70% of software products

in Russia are imported.

Situation on Russian IT market was described in SWOT analysis made by Roland Berger.


www.consultvm.com

6

Except untapped markets in many Russian regions, there are a lot of opportunities in

running IT business in Russia. Pierre Audoin Consultants has pointed out the main

trends 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

government

Vast majority of big IT players are already on Russian market and competition is quite

hard, that’s why only high quality solutions with clear defined target customers and

proven ROI will get a good chance for successful market penetration.

3. ERP market in Russia

At the crisis 2009 ERP market reduced on 18 % (while the total software market in

Russia felled on 35 – 40 %) and fall down to $492 mln. On 2010 ERP market partly

recovered, but is expected to reach the volumes of 2008 just at 2012. IDC forecasts that

on 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, increasingly

aggressive competition, cost cutting, optimization of internal processes and, finally, by


www.consultvm.com

7

streamlining and centralizing the reporting process. However, many Russian

organizations have already made significant cuts in their IT budgets, which is forcing

local software vendors and integrators to re-think strategies for their ERP business.

Many planned ERP projects have been frozen with local companies spending strictly the

bare minimum on required IT, such as maintenance around core ERP modules.

On the application side, the most frequently implemented ERP modules on the local

market are financial, logistics and control modules although CRM and BI solutions are

also becoming popular. As for ERP services, this market is currently evolving better than

the ERP applications market, since many companies, despite drastic cuts in IT spending,

continue to allocate budget to maintain the functionality of the core modules of

previously implemented ERP solutions. The main goals of implementation of the

corporate IT solutions in Russia are automation of bookkeeping, finance and human

resource management.

Core players on Russian ERP market are SAP, 1C, Microsoft and Oracle. SAP became the

market leader in 2006 and expanded its market share from 39.7 % to 53 % within

several years. On the contrary, Oracle, being on the second place, strongly reduced its

market share. Russian 1C, which in 2006 controlled 12% of the market, is on the second

position and shows the stable growth. IDC forecasts that 1C will reach the market share

of 20 % on next years.

53%

19%

8%

8%

12%

Russian ERP market breakdown

SAP

1C

Oracle

Microsoft

Others


www.consultvm.com

8

According to IDC, the leading Russian industry for ERP implementation is continuous

production, on the second place is retail, than goes discreet manufacture and energy

sector.

The major part of market is concentrated in Moscow and St. Petersburg, but there is

increasing demand on ERP solutions in other regions, for example in Ural region.

4. Critical success factors for entering Russian market

The most critical factors for successful market penetration of foreign ERP vendor are: Right local partner Proper software localization Strong marketing background Proper price

Right local partner. Strong partner will help foreign vendor to understand the needs of local 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. Right partner should have experience in target industry, have necessary geographical coverage and should be ready to invest time and resources in development of new

product on Russian market. Proper software localization. Due to language and legal differences Russian penetration will require strong localization efforts for translation of screens, adaptation for Cyrillic letters, building interfaces with local accounting systems, development of Russian language documentation etc.

Strong marketing background . All major ERP players are already presented on Russian market and it will be hard to get any new client for unknown solution without 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 Russian market penetration seems to be between Microsoft AX and Russian 1C.


www.consultvm.com

9

5. General Challenges of Doing Business in Russia

Bureaucracy - Corruption, the rule of law, questions as to the independence of the

judiciary, red tape and customs formalities are just some of the problems which can be

located under the broad umbrella of bureaucracy. The enduring problems with

bureaucracy increase the transaction costs of any potential venture on the Russian

market and must be taken into account when planning.

Language and culture – Language remains an obvious stumbling block for many would

be entrepreneurs both from small and large companies. Competency in Russian as a

foreign language remains relatively low in Europe and despite improvements in the

English language competency of many Russians it is still to be expected that many firms

will not communicate effectively in English. There are also some differences in

corporate culture and etiquette which should be anticipated and researched

thoroughly.

The “risk” factor – This commonly heard cliché refers to the idea that Russia is an

inherently risky place to invest. Political stability has been achieved but it is young and

widely criticised and the Russian government is known for making u -turns in policy and

sometimes attacking the very foreign assistance it once encouraged, as in the case of BP

and TNK in the late 90s/early 2000s. High-profile cases such as the Yukos affair highlight

the sometimes capricious nature of the authorities and while progress has been made in

the spheres of property rights and the rule of law, for example, a potential investor

must carefully weigh the benefits and risks associated with any move onto the Russian

market.

Difficulty in raising capital – Businesses continue to complain of strict credit terms and a

lack of available credit from Russian banks. Interest rates remain high in comparison

with Western counterparts and terms remain mostly short which makes locating capital

for large, complex and time-consuming ventures difficult. The situation has improved

somewhat with the entry onto the Russian market of leading European and Western

banks such as Barclays, HSBC, Raiffeisen and others but this still lack of capital still

hampers small- and medium-sized enterprises especially. Tax evasion as a means to

increase cash-flow still takes place among some Russian businesses.

Finding the right partner – In numerous surveys of representatives of business, (when

the question is included) difficulty in finding partners is nearly always listed as a key


www.consultvm.com

10

concern for foreign companies. The difficulty is not one which besets only small - and

medium-sized enterprises but, in fact, has proved a decisive factor even for giants such

as Walmart which recently closed (temporarily at least) its Russian office which had

been engaged in trying to find a partner for the retail behemoth for years. 1 Visa

regulations for foreign workers have become stricter over the last years which makes

finding local partners a more pressing need yet language problems, cultural differences

and a lack of equivalency to Western/European standards all make the search for an

effective partner a difficult affair.

Source: WEF Global Competitiveness Report Russia, 2010-11

Poor 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 bulk

of 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 support

Russia’s expanding role as an energy superpower and net exporter of resources, yet

they remain inefficient. The situation with the ports is compounded by the fact that

most rivers in the centre of the country run from North to South/South to North rather

than from East to West/West to East as may benefit the transport industry. Road

1 http://www.npr.org/2010/12/14/132046158/Wal -Mart-Abandons-Efforts-To-Enter-Russian-Market

2 Handbuch Logistik Russland | Doborjginidze / Abelmann 2005 (http://www.logit-

club.de/fileadmin/upload/Handbuch_Russland.pdf)

http://www.npr.org/2010/12/14/132046158/Wal-Mart-Abandons-Efforts-To-Enter-Russian-Market

http://www.logit-club.de/fileadmin/upload/Handbuch_Russland.pdf

http://www.logit-club.de/fileadmin/upload/Handbuch_Russland.pdf


www.consultvm.com

11

density is very low at 40m per km² and the majority of roads are of low quality with

asphalt used in many cases as an inferior alternative to the more expensive concrete. As

a result average speeds achieved on the country’s roads remain low and the frequency

of accidents remains high. Moreover, there is an acute lack of roads throughout the

country 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 sector

which can exacerbate the problems with infrastructure. All in all, across rail, roads, sea

ports and airports there is a lack of efficiency and a dearth of modern facilities and

practices.

6. Conclusions

Russia is no longer Churchill’s “riddle, wrapped in a mystery, inside an enigma” but the

market is certainly challenging. A lot of the spectacular growth that has occurred has

had more to do with catching up than with real dynamic processes within the country

but this does not detract from the fact that a huge and tantalizing market awaits the

bold entrepreneur.

Russian ERP market opens favorable opportunities for niche ERP solutions, but to get

success foreign vendor have to find right local partner, organize proper software

localization, build strong marketing background and offer its product on competitive

price.

This report was compiled by Viacheslav Makovich on behalf of VM Consult in May 2011.

The author can be contacted with questions/comments at [email protected]

mailto:[email protected]


www.consultvm.com

12

CONTACTS For more information on any of the issues dealt with by the report please contact:

VM Consult Ltd

Russian Federation, 190103 St. Petersburg, 10-a Tsiolkovskogo street

Tel.: +7-911-932-7890

e-mail: [email protected]

http://www.consultvm.com

mailto:[email protected]

http://www.consultvm.com/

ERP market in Russia

Business

Transcript of ERP market in Russia