From state-guaranteed order to consolidation

The state made its contribution to the IT industrial development. Now a lot depends on rates of business consolidation.

By Larisa Krashchenko

Selfmade and industrial policy

The IT branch of industry is quite young – almost all companies in the sector were incorporated in the post-perestroika time. This might be the cause for a stable stereotype: the industry development is explosively rapid with almost ideal competitive conditions.

But, in fact, the IT industry has been formed as a result of a wildcat and, probably, spontaneous industrial policy. First of all, from the very beginning the state has been securing the demand for IT products and services. About one fourth of the industry revenues come from budgetary allocations of all levels. This is something the electronic industry may only dream of.

Current policy of the state has become more conscious. Recently several steps have been made to contribute favorably to the IT industrial development. First, the government adopted a resolution on budget forecasts for the period of 3 years. Together with a new tender legislation it will help to rationalize the process of the state purchases and – more important - make it more predictable. Second, by the end of 2005 certain steps were made to resolve the issue of financing construction of technological clusters. Probably, the situation would change for the better within 2-3 years. The problem has been urgent to the utmost. All IT companies face totally catastrophic situation with reproduction of their personnel. Third, the State Duma adopted a law on tax benefits for the Russian IT companies. The law should make them more competitive at the world markets and encourage export growth of IT services.

Diagram 1. Volume of IT-market has increased by 28% during the year

Diagram 2. Almost half of the market falls at supplies of equipment

But even this kind of active state involvement so far has not resulted in any serious breakthrough. In 2005 volume of sales of the largest IT companies in the “Expert-400” rating (9 companies) increased by 28.7% (five percentage points lower than “Expert-400” average) and amounted to 114 billion rubles. Altogether the companies’ rates of growth do not deviate from general market tendencies. More important – the rates remain stable for the last couple of years. According to our studies, within the last year aggregated earnings of the largest IT companies at the Russian market went up by 28% (diagram 1). Such rates would enable our IT industry (currently 1.4% of GDP) to catch up with Western, precisely, American indicators (4.6% of GDP) only in 35-40 years.

No wonder, financial, human and intellectual resources of our IT companies mostly correspond to the moderate level of Western companies. None of our companies is big enough to service, for instance, the RF Ministry of taxes and collections, same as EDS in the USA. One can say: so far projects of certain scope are hard nuts to crack for our companies. The labor market has been overheated, too. New qualified specialists are simply out of stock. Meaning the industry is not ready to make more effective contribution to our economy.

Policy of enlargement

It would not be fair to present the industry as a burden for the state. Many IT companies understand their problems and are actively engaged in consolidating efforts and attracting investments. Almost every second company, known at the market, makes plans related to IPO, loans, mergers-acquisitions and tries to implement the plans into practice. The interest is quite understandable. Large-scale and complicated projects with long-term investments are on the increasing side (see “Rating of IT-companies" analysis). They require powerful potential — material, human and technological resources. And ability to work quickly – another important resource.

Altogether the game is worth the candle. With big investments you can acquire companies with unique branch competence and develop “global portfolios”. Besides, together with a company you acquire its clientele, signed contracts, certificates and other quality components – important factors for success. As distinct from majority of companies in other branches of industry, attracting investments to increase their floating capital or implement local projects, IT companies are mostly focused on strategic development.

What are the main spheres of the development? If you strive for growth, all available means come handy. And the largest share in the market structure – about 50% - is taken by works with pretty modest added value: distribution and supplies of hardware and software in the framework of integration projects (diagram 2). The last year total increment in the sectors amounted to 48% (comparing with 13% in domestic manufacture area).

As to areas generating so called added value, software development is accountable for 47% of the increase. Robust and large-scale solutions – processing centers, data storage systems, serious telecommunication projects – are demanded most of all. Within the next couple of years one may expect further technological development to improve reliability, build clusters, consolidate servers and introduce virtual and terminal technologies.

Another fast-growing sector is supporting services, outsourcing, in particular. Annual increment in the sector totaled 57%. Its popularity in 2005 is easy to explain. Increment of integration services reached its peak in 2004. Therefore, naturally, integrated solutions should be somehow serviced. Besides, lack of specialists at enterprises has become more and more urgent – hence the need in outsourcing. This particular area of development looks very promising to many Russian IT companies. They have many obvious pluses comparing with Western companies. First, almost all large local integrators have acquired good knowledge of introducing Western systems, after being trained by software developers. Second – the issue of costs. Clients pay significantly less for local labor. Third – mentality of a Russian client. He has never favored the idea of disclosing the information about oneself, least of all to foreign companies.