Russian information and communication technologies, 2006

In pursuit of potential

The Russian IT market has all prerequisites for speedier growing. But domestic IT companies are mostly incapable of executing large projects.

Diagram 1. Consolidated revenues of the rating participants increased by one third within a year (consolidated sales of the largest Russian IT companies)

Within the last five years rate of development of the Russian IT market has remained practically unchanged. In 2006 consolidated revenues of IT companies in the rating went up by 28% and amounted to 259 bln rubles (diagram 1). (Revenue rates of IT companies between 2002 and 2005 were 30, 25, 32 and 28% accordingly).

Annual stable growth seems to be there. What else should you need? Probably, nothing for any other branch of industry, but not for IT. In IT case such a situation looks, at best, ambiguous. The consulting adjacent market has been growing annually by 40%-50%, and, according to IT companies themselves, the demand for their products from business and from the state has been showing similar growth.

According to the National Computer Corporation president Aleksandr Kalinin, "Russia plans to join WTO. Only those branches and enterprises capable of operating on equal terms with "capitalist sharks" would feel at home. To achieve this you need new information technologies. Therefore I am convinced that interest to implementing and automating systems of industrial planning, automating management of technical servicing and maintenance and implementing ERP systems is going to grow year after year".

IBS general director Sergey Matsotsky: "The state keeps on playing an important role in the IT area. The situation will remain the same for several years due to implementation of long-term backbone projects. The process has been connected with the social sector speedy development – educational or health care programs etc. Such activity is financed by big money and requires more efficient control and management, including applications. For instance, you need to calculate staff salary in a more efficient way or centralize statistic data collection".

So, the demand side is fine. The problem lies in supply: the industry can not offer adequate industrial potential. Although for the last five years (we have been regularly studying the IT market within the period) companies have been doing their best to grow due to distribution and supply of equipment and software in line with integration projects. The IT companies’ revenues through such activities had shown annual increase of 1.5 times, and their share covered a good half of the market (see ratings 2002, 2003, 2004, 2005).

Sour grapes

What limits the IT companies’ potential? First, demand has drastically changed in the last several years. The main thing is the growing complicity of tasks at hand - to resolve them you require global and comprehensive solutions. I-Techo president Shamil Shakirov comments: "Presently specialized and customized solutions have gained popularity instead of cross-industrial systems. After completing the initial base of its IT infrastructure, majority of large holdings and enterprises are in need of more specific IT solutions directly connected with their main business". Vassily Shabat, business development director in Otkrytye Technologyi, says: "The more complicated information systems of our clients are, the more interconnections are there between different applications and subsystems – the more our services are on demand. Now large Russian clients enter the stage of complex automation of their business processes – as distinct from previous stages, when only certain, most important functions were automated. It provides for the use of a large kit of interacting instruments". Obviously, it requires higher level of competence. And that is where the crunch is, so far.

Graph 2. Share of "transparent" revenues is only 16% (information transparency of IT market, structural revenues of IT companies)

Second, deficiency of qualified personnel has been growing in catastrophic proportions. And you can not deal with large-scale projects without thousands of top-level specialists. Says Sergey Matsotsky: "The labor market is overheated - there is practically no source to take new specialists from. The majority of Russian IT companies are lacking human and intellectual resources to tackle global long-term projects – as a result, they can not grow. Besides, so far for several reasons we are not accustomed to signing long-term contracts, which, again, does not foster the market players’ qualifications". "Personnel deficiency is there at the IT market even in a larger extent, than at other markets, — says Boris Bobrovnikov, KROK general director, — pretty often new technologies reach the market faster, than corresponding specialists". Anton Sushkevich, Envision Group general director, agrees with his colleagues: "Domestic IT market has already encountered with the problem of poor resources to exercise projects – despite proper financing and real demand we perform our tasks with delay. Naturally, it relates to serious tasks, where you require highly qualified staff and large teams, involved for long periods of time".

Third, our companies have been lacking experience of dealing with large projects. As a rule, foreign brands are given preference in case of selecting a contractor for large and comprehensive projects. Domestic companies are at best involved for some subcontract elementary functions.

Fourth, according to companies themselves, for the market to grow faster than it does now, the state support should be different. Says Shamil Shakirov: "The state definitely pays more attention to IT development. Important statements were accompanied by steps to develop innovation nature of the Russian economy and to invest to high-tech areas". But so far the processes have been going through initial stages and produced no desired effect. According to the market players, their companies may grow only together with nigh-tech sector of economy. Such an approach would be much more effective than direct increase of IT expenses by the state.

Finally, the IT sector investment activity seems to have slowed down. It is indirectly confirmed by discontinuity of the last year dramatic market movement towards transparency. Only 20 companies, as distinct from 28 last year, agreed to confirm their 2006 achievements with official papers (financial accounting and audit results). Almost none of them are big enough (IBS is the only exception) to be able to attract significant sums of money. Presently the share of "transparent" revenues constitutes only 16.4% against 25% in 2005. Only half of the other 83.6% of the rating participants - 55% (against 63% in 2005) confirmed their revenues by naming their clients (products or services). About one third of total revenues were not confirmed at all (see diagram 2).

Victims of the market "invisible hand"

Big companies can tackle complicated tasks. But high-tech "monsters" are definitely lacking in Russia. For instance, large companies in the rating cover only 31% of total revenues (software development companies). The share of average-sized companies is about 55%. And their revenues grow much faster than those of large companies 36.2% against 23%.

The market competition picture looks quite idyllic. But the results make you feel sad: some companies have mass (although not always of good quality, since large companies are mostly engaged with supply, that is trade), others are quite flexible in responding to demand or intellect. But in the long run neither is capable of giving full service to a client.

The best way is concentration – and the process has already been underway. Two trends are in sight. The first one is vertical: large universal companies get united with narrow-competence companies – either software developers or consultants. The second one is horizontal – highly intellectual or specialized companies (for instance, programmers) merge together.

President of Verysell Mikhail Krasnov: "2006, same as a previous year, saw lots of merger deals at the Russian IT market. The trend is characteristic for strategic development of large Russian IT companies. It will prevail in the next year, too. The IT market structure has been undergoing gradual changes towards the market in Western Europe".

It may be added that two or three years ago such mergers were rather of private nature and reminded of reorganization and transformation of business within companies, but presently the situation changed drastically and related to the market leaders or their areas of activities. Consequences of such changes make an impact on distribution of forces at the market.

Thus, TopC Business Integrator (26-th in the rating) at the beginning of the year got united with Sistematika systemic integrator – a component of the domestic IT market leader, National Computer Corporation. The principle is simple. According to the market participants, main players of the IT market have notably increased their share of servicing; specifically, IT services - not supply of equipment - constitute main sources of revenues and competitive advantage for such companies. TopC Business Integrator presents broad range of services – consulting, systemic integration, support services, software development. Sistematika and TopC Business Integrator complement each other in a unique way. The first one is strong in large-scale infrastructure IT projects and informatization of the state components. The second is good in consulting and implementing business proposals based on SAP, Oracle and Microsoft solutions and is strong at the market of commercial enterprises in electric energy, machine building, insurance, pharmaceutics, distribution and retail - that is how the companies present themselves in their press release.

Last April IBS and Borlas made public their intention to join forces. One of the main purposes of the deal is to set a group capable of tackling projects of any scale and complicity. Initial public offering is not far away. According to the companies the merger would make it possible in 2008.

Software developers also tend to consolidate their efforts. Last autumn EPAM Systems merged with Vested Development, Inc (VDI), which was 9-th in our 2005 rating (project software). The merger would enable the company to have seven large centers of the software development only in Russia, specializing in management and IT consulting, implementation of ERP systems, integration of proposals in distribution systems, development of solutions for electronic business and comprehensive software developments. 2200 persons would be on the staff in eight countries of the world. About 2000 professional software specialists would work in the centers for development and client-servicing in Russia, Belarus and Ukraine. Therefore the merger results are effective. So far the group, being quite young, managed to increase EPAM Systems revenues by 77.8% and take the firm lead at the domestic market of software specialists.

Leaders and outsiders

Diagram 3. Rates of growth of the main market segments show movement "away from hardware" (growing revenues of the largest IT companies (main areas of activity)

Mikhail Liashch, CompiuLink president, refers to another plus of mergers: "Software/hardware ratio gradually moves in favor of software. Some time ago the market share of equipment was about 80%, but presently the sector of IT services shows rapid build-up. Formerly clients were mostly interested in the supply of equipment, its adjustment and commissioning, but presently other services are more on demand: business-consulting, IT consulting". Pretty often mergers have ambitious goals in mind. "We keep on implementing our plan of new purchases and strong potential of the companies, included in CompiuLink. We expect to take leading positions in a number of the IT market segments", - says Mikhail Liashch.

Statistics on different market segments also confirms the movement "away from hardware". Thus, last year witnessed the most active development in the sector of services. The increment reached 41.5% against 19.5% in 2005. And the sector’s share went up from 32.6% to 37.7% (see diagrams 3,4). The largest contribution was made by companies with specialty in systemic integration, support services (including outsourcing) and consulting. Their annual progress was 61.5%, 30% and 23.4% accordingly. (For example, annual integration revenues in Open Technologies and Quazar-Micro jumped over 10 times!).

Shamil Shakirov comments: "Clients have mostly formed their IT infrastructure. Presently quality IT support is extremely highly demanded. Consequently, special attention is paid to preparatory stages of projects, their future efficiency and specific business-processes. Oftentimes such a philosophy makes a serious impact on clients’ demands – they need services of preliminary consulting, project management, quality control and outsourcing. Comprehensive approach, like development and implementation of IT concepts, gains popularity in case of systemic integration".

Diagram 4. Service sector’s share neared almost 40% (sales structure of the largest Russian IT companies, 2006 (without НКК)

It is especially good to see IT specialists seriously concerned about consulting. Says Mikhail Krasnov: "What we deal with now is management consulting, electronic circulation of documents, information security. Growing demand for such services may be explained by initial market saturation with IT equipment and necessity to acquire abilities to use world-wide modern technologies to manage your business in the most efficient way. Partly, IT services and management consulting are demanded due to current lucrative financial instruments for attracting investors’ capital. Transparent structure of business is a key precondition for a successful talk with an investor – modern information technologies are of great help in this respect".

Software developers’ increment is steadily on the rise – the last year figure is 34.1%. As was already said, the lion’s share of revenues (12.4%) went to the software development segment leader - EPAM Systems, and to Kaspersky Laboratory – 8.4%.

But the most successful are those combining the two types of activities (services and software development). Among them are I-Techo, Optima, KROK and Technoserv А/С. Their consolidated sales increased last year by 56.8%, 40.6%, 36% and 32.2% accordingly.

According to Boris Bobrovnikov, companies are interested in integration – both internal and inter-industry, including interface between technologies. "Say, projects to integrate information technologies and automate management of technological processes are being implemented now in energy sector: for instance, in 2006 the first telemechanic system of new generation was commissioned at Nevinnomyssk Hydro-Power Station – a part of OAO OGK-5. Projects to integrate business-applications are also very urgent. Our specialists prepared a corporate portal for RAO UES of Russia and united more than 20 RAO applications. Projects to integrate centers of data processing with data transmission centers and engineering systems are also on demand. A project like that was implemented for a Khanty-Mansi bank" – says Boris Bobrovnikov.

As to traditionally successful areas of distribution and supply of hardware and software for integration projects – they have lost their popularity. Last year the sector gained only 11.3% comparing with 48% in 2005. The share of the activity in the general market structure lost five percentage points and amounted to 44%. First of all, it may be explained by the market saturation with expensive equipment which resulted in decreasing demand.

Investing big

We would not be judges of whether the state properly supports the domestic IT industry, but one thing is clear – without the state’s participation companies would not be able to grow even with such rates. In a year the state sector share in total demand for products and services of IT companies went up by four percentage points and reached 24% (see table 2 and diagram 5). Mass consolidation without the state would also be questionable.

In a year the state sector share increased by four percentage points (structure of demand for products and services of IT companies by industries and sectors of economy, %)

Olga Uskova, Cognitive Technologies president, says: "Maximum economic results in Russia are achieved when the state sector becomes active. 2006 was a good example in this respect. For a long time we kept on talking of necessity to set large IT companies in order to be competitive at the world high-tech market. The task was resolved by the state – federal target-oriented programs allocated significant budget funds for IT development. It was followed by a number of mergers, acquisitions and unifications, which brought forth really big players to the market, capable of performing large-scale state projects. Technological parks – large IT companies, as a matter of fact – came into being. So far such structures operate domestically, but after a while they will compete for orders from abroad".

Last year the state actively promoted several plans in support of IT development.

First, two funds with the state participation were set. In August of 2006 the government endorsed the establishment of OAO RIFICT - Russian Investment Fund for Information and Communication Technologies (attached to the Ministry of Information and Communication) – to invest its finances to IT development. For the same purpose the Ministry for Economic Development initiates Russian Venture Company (RVC). The funds are to attract potential investors to our domestic IT market.

Second, last year witnessed active development of technological parts — groups of infrastructure projects. Presently seven such parks are planned to be built with partial state financial support: four in the Moscow area, others in St.-Petersburg, Novosibirsk and Nizhny Novgorod. With time they will look for new interesting ideas and their successful implementation. But such projects would demand colossal investments, not to be incurred by the state alone. Therefore the key to success of all investment potential of the IT market in Russia is the private business involvement – the state should only initiate the process.

Anton Sushkevich says: "The state declared increased RF budget allocations for the industry in 2007 – more than twice, up to 22 bln rubles, plus about 2 bln rubles to set technological parks in high-tech area, which may mean a lot for the IT market. Also, a new draft law on special tax treatment for IT companies may potentially influence the market development".

Two non-state sources of demand are also to be mentioned. First – electric energy. In 2006 orders from the industry almost doubled to reach 12.7%. The reason is current restructuring of the electric energy industry.

Second - retail. Aleksander Kalinin says: "Client-oriented enterprises are in the lead – they are interested in supporting high level of service and securing terms and conditions. They operate in competitive environment and have to "fight for clients", for instance, among distributors and food holdings. Mining companies, insurance and financial sectors have also shown big interest in automating systems of enterprise management. IT services are actively consumed by authorities in certain regions of Russia – they have been introducing elements of "Electronic governments". The result is obvious. Thus, retail enterprises increased their demand for IT products and services from 4% to 6.2% within a year.

Who may participate in the rating of IT companies

Lists of the largest IT companies are annually compiled by the Expert RA rating agency.

The rating is both for separate IT companies (RF incorporated legal entities) and for groups of affiliated companies, operating at the Russian IT market and specializing in manufacturing equipment, developing software, providing IT and communication services and distribution. Distribution companies may be involved in the project, if their area of activity is there in the group. Participation of manufacturers of semi-conducting materials is not allowed.

The main ranking criterion is volume of sales of a company or a group within a set period of time.

To be rated you need to fill a questionnaire and have it signed by your general manager and stamped.