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Doing Business in Russia:
ERP market overview
Prepared by VM Consult
Russian Federation
May 2011
www.consultvm.com
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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.
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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.
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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.
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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.
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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
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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.
Russian ERP market breakdown
12%
SAP
8%
1C
8% Oracle
53%
Microsoft
19% Others
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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.
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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
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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)
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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 makovich.v@consultvm.com
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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: info@consultvm.com
http://www.consultvm.com
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