AnalyticalAlfaReport FINAL
description
Transcript of AnalyticalAlfaReport FINAL
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
Tom Hickerson, Alfa Fellowship Program, Spring 2007 3
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.
Tom Hickerson, Alfa Fellowship Program, Spring 2007 4
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
Tom Hickerson, Alfa Fellowship Program, Spring 2007 5
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
Tom Hickerson, Alfa Fellowship Program, Spring 2007 6
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
Tom Hickerson, Alfa Fellowship Program, Spring 2007 7
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
Tom Hickerson, Alfa Fellowship Program, Spring 2007 8
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.
Tom Hickerson, Alfa Fellowship Program, Spring 2007 9
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.
Tom Hickerson, Alfa Fellowship Program, Spring 2007 10
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.
Tom Hickerson, Alfa Fellowship Program, Spring 2007 11
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
Tom Hickerson, Alfa Fellowship Program, Spring 2007 12
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
Tom Hickerson, Alfa Fellowship Program, Spring 2007 13
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
Tom Hickerson, Alfa Fellowship Program, Spring 2007 14
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
Tom Hickerson, Alfa Fellowship Program, Spring 2007 15
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.