Russian information and communication technologies, 2007

State-like scale

The IT market structure will undergo changes due to interest of the state in large-scale projects. Big players have all the chances to strengthen their stand.

Aleksey Khodyrev

Chart 1 The IT-companies unprecedented gains are to be first of all attributed to large-scale projects Accumulated sales by the largest Russian IT companies in 2007

The IT Russian market in 2007 made a confident breakthrough: the rating IT companies altogether earned almost 350 bln rubles, exceeding 2006 figures by 43% (see diagram 1). Dynamic and quantity indicators broke an absolute record in the history of our studies: former successful results at the IT market were achieved in 2003 and 2004, with total volume of sales increased by 37.5 and 32% (the next two years it was 28%).

Still, the notable consolidated growth does not seem to fully reflect the market rates of development. Revenue increment for the rating companies, "cleared" from distribution and re-sale, looks more representative. It was 26.2% in 2007, and the year before the result was 29.6%.

Anyway, the acceleration is quite speedy. But do we really have to rest on laurels? According to the rating results and opinions of top-companies' heads, a role of large-scale projects acquires utter importance. "Clients are less and less interested in just purchasing some equipment: most projects relate to comprehensive development solutions", - says Vitaly Podshivalov, I-Techo general director. "Nobody is interested in hardware as it is any longer, - agrees Aleksander Kireev, R-Style first vice-president. By the way, the rating participants consolidated revenues in "distribution" went up by mere 14% (see diagram 2).

Increased demand for big-size IT projects was noted in the last year studies. The past year unambiguously singled out the market participants capable of perceiving the economic situation and properly using it. Among them are diversified holdings with a knack of selling things and providing more intellectual services. Sergey Matsotsky, IBS general director says about the 2007 consolidation tendency: "IT business is extremely sensitive to sizes, since it is built on teams of people, their competence and experience".

Chart 2 The state countering piracy brought software developers to the industry forefront The largest IT-companies' revenues by main areas of activity (%)

The state remains to be the chief market prime-mover - for a number of years the state structure orders secure about 25% of the rating participants' revenues. Relative quietness in 2006 was replaced by avalanche of orders in 2007. Says Aleksander Kalinin, the National Computer Corporation president: "The past year was marked by forthcoming parliament and presidential elections. It may be the reason for formerly announced national projects entering the active stage only in 2007. Revenues of our companies definitely changed their structure. Aquarius, for one, experienced sufficient supply of solutions to education and health areas".

According to Aleksander Kalinin (our rating leader), large clients, including the state, require large contractors. "Current clients understand: to get good results from informatization you have to follow unified IT strategy. If you are surrounded by numerous small companies with un-coordinated operations, you can hardly expect good results. Therefore the market consolidation trend will prevail in coming years. The IT market situation will change. Each segment will retain five-ten big players, others will fall significantly behind".

Compulink group demonstrates the best incremental revenues in our current rating: the calculated sales went up by about 300%. Such sky-rocketing, according to Compulink president Mikhail Lyashch, may be mostly attributed to large-scale projects, including integration ones: "The most dynamic results were domestically achieved in telecommunications, financial and professional services, oil and gas, distribution and consumer goods". The company's largest projects (completed and current) include, according to Mikhail Lyashch, Federal Customs Service, Federal Informatization Center, Registry offices in the subjects of the Federation, Rostelecom, MTS, Gazprom, some enterprises of Sibur Holding and ТНК-ВР, retail network Technosila etc.

The second reason for Compulink to grow (characteristic for other large players and ever more important in recent years) is M&A activity, implying purchase of strong IT-market niche players with further synergetic and comprehensive interaction with clients. According to Mikhail Lyashch, the group implemented a number of successful strategic deals in 2006-2007. It purchased Quorum (software developer for financial and telecommunication sector), and REDLAB/REDCENTER (IT-training company). Besides, management consulting company Milestone was incorporated.

An alarming signal

Our studies exposed quite an alarming phenomenon for the IT-market players.

The largest incremental sales were registered in the area of soft and hardware supply for integration projects - the segment consolidated revenues achieved as many as 92%. Logically, outstanding supplies were to secure similar dynamics in the IT-services sector, too (consulting, integration, support, including outsourcing, training and certification). Obviously, someone has to tune equipment and configure programs, bring about integration with existing systems etc. For instance, estimates of world leader SAP for implementing ERP-systems show: about 50% of the budget goes for services, the other 50% - purchase of soft and hardware. In case of integration projects, related to 1C: UPP-based implementation, cost of consulting, configuring completion, training users - IT-services costs - is usually much higher than cost of licenses and expenses for updating your computer park.

But, judging by results, sent by the rating companies, IT-services area has lower acceleration rates, comparing with integration-processes-related supplies. Accumulated IT-services' revenues went up by 30%. It is practically impossible to establish specific correlation between the two segments in the structure of revenues, but we may safely say, that certain connection is there. But how come the difference is so great?

The first explanation - personnel policy change. Says Vitaly Podshivalov: "Our experience and competence in project management undoubtedly grow up year by year. But our clients follow the same trend. They are no longer in control of financial issues only - we deal with excellent managers". Pretty often personnel potential in production, trade, financial and other companies is strengthened by people, formerly involved with integration projects. After successful projects a client company offers lucrative jobs to the most bright, capable and promising IT specialists. Thus, the part of the pie, which might be controlled by an IT company, is supervised by clients' IT departments.

Anyway, the hypothesis should hardly be considered a main explanation of the discrepancy we found. The IT company staff moving to a client's company usually relates to expanded range of automation tasks - clients should not or simply can not do it all by themselves. So nobody takes rightful earnings from IT companies away.

Another explanation comes to mind: clients of IT companies dramatically changed their demands. You can safely say that the majority of the largest Russian companies have already put their management accounting to order. Tagir Yapparov, IT board of directors' chairman said about the 2007 main trends: the largest organizations mostly redirected their activities from IT-infrastructure construction to information system support and development. Expert RA project "Successful IT-cases" says stories of IT companies' success. Judging by published responses of the project participants, one can say: costs of supporting implemented business applications are lower than costs of implementation itself.

As to the state structures, low degree of automation in the majority of enterprises contributes to increased supplies of soft and hardware. Besides, the UN current report on electronic governments ("United Nations e-Government Survey 2008: From e-Government to Connected Governance") places Russia to position 60 in the electronic government readiness index ranking of the UN members.

Finally, there is another explanation of why IT-services growth lags behind supplies. One of the market participants confessed privately: the overwhelming majority of IT companies are not public, so it was possible to overrate their sales revenues in the questionnaire. Obviously, the IT market transparency is far from perfect. The presented data was supported by financial reporting only by a number of companies: IBS, Gars Telecom, Compulink, Sibintek, FORS - Center of Development, NETA, PTSoft, Parma-Telecom, Berkut, ARKTIKA, MCFER-consulting.

Access code

Software developers were especially successful in 2007. Consolidated revenues in the segment went up by 46%, which is far from limit, judging by large-scale state projects. So far revenues were doubled in Kaspersky Laboratory, R-Style and Armada earnings exceeded 50%.

The notorious Ponosov's case, as well as an ambitious task of making free software with an open original code, played into developers' hands and accelerated passage of the Russian business and state enterprises to licensed software. As of January 1, 2008 VAT for software is not to be paid, which will add up to expanded activity of software developers and vendors.

"Software development has been and will be growing, - says Aleksander Kireev. - The software increased consumption all over the world is quite natural. Large software manufacturers tend to be more open in relation to their development partners and present their platforms for creating new software products".

Georgy Gens, LANIT president, notes two key trends in the developers' world: special attention to copyright and free software. "In 2007 the RF Ministry for Information Technologies and Communications showed genuine concern about free software and open IT standards; a schools' free software supplier was chosen. The trend is to reduce the state dependence on licensed software suppliers and to encourage free software development". Certain IT companies have thoroughly prepared to capitalize on these state initiatives.

According to Aleksey Kuzovkin, Armada general director, last year the company started implementing a large-scale project: Linux-based free software development in Russian general education institutions: "We have prepared distributives of operation systems and applied programs. In 2008 we shall test our software in a thousand plus schools in Tatarstan, Tomsk area and Perm territory. Free software package would be implemented in over 60000 education institutions all over the country in 2009. Annual savings from licensing payments for proprietary software would amount to1 bln rubles".

Time will show the real free software prospects. But licensed software is currently supplied to schools at a very quick pace. According to Mikhail Lyashch, Compulink has already equipped schools in Russia with licensed software, and by the end of 2009 the company plans to prepare school software basic package and present renewed software versions. The project has opened an information portal - Первая ПОмощь 1.0, and a service-support call-center.

Dangerous simplicity

Chart 3 Distribution and supplies bring to IT companies about 50% of their revenues Largest Russian IT companies' revenue structure, 2007 (without NCC), %

In 2007 the least "intellectual" segment of the market - distribution - demonstrated slower development in comparison with other segments: incremental revenues in distribution came to 14%. Companies with revenues from distribution exceeding 50% usually lag behind more diversified companies in relation to incremental revenues. The leading positions were occupied by soft and hardware suppliers for integration projects. It really means increased importance of large-scale projects - to be implemented by big companies. So far many companies may earn on reselling hardware, but the future may tell the different story. Aleksander Kalinin says: many foreign manufacturers turn to supplies to Russia on DDP and DDU basis (delivered duty paid or unpaid). It may soon shorten a list of distributors.

"A number of distributors should go down, because logistic component in their activity would be ousted by other values, - says Kalinin. - Leadership would be taken by value-oriented companies, providing their regional partners with the most convenient labor conditions - opening regional offices and stores, sending high level technical experts for consultations and test activities (since many companies are incapable of assessing their projects and testing them)".

Outsourcing as a point of growth

Numerous representatives of large diversified IT companies refer to growing importance of the IT-service sector, securing over one third of the rating companies' revenues (see diagram 3). According to Tagir Yapparov, service-oriented big systemic integrators have already achieved the service revenue level of about 50% (IT - 56%). Outsourcing of business-processes is said (Expert poll among heads of companies) to be one of the most important factors of IT-services growth: demands to IT specialists are too high for companies to maintain all necessary IT-processes in-house (like supporting users and IT-infrastructures). Andrey Shandalov, Optima, chairman of the board of directors, also indicates increased interest to IT-outsourcing: "Many companies followed Western tendencies to entrust outside companies with all implementation and business-operation functions. The banking sector is definitely in the lead - its turbulent development in recent years compelled its players to change their main business applications. Sometimes it is not only integration, that clients are interested at, but subsequent outsourcing of numerous complimentary business-processes". By the way, financial structures may play the first fiddle for IT companies - the financial sector's share in the rating consolidated revenues is surpassed only by state structures (see diagram 4).

Chart 4 Financial structures have caught up with oil and gas sector Demand for products and services of IT companies by branches of economy

Despite the above advantages of outsourcing, its development has certain limitations. First, it is widely discussed lack of qualified specialists and insufficiency of financial resources of IT companies. "Initial outsourcing investments, including investments into people, are made by an outsourcer company, - says Tagir Yapparov. - Return on the investments in such a model comes after 3 or 4 years, if a contract is signed for 10 years. Therefore such contracts require big funds on the side of an outsourcer. So far Russian IT companies do not possess free capital, sufficient for serious outsourcing operations. Some of the world-accepted business models are not good for us due to objective reasons, since out IT companies are not capable of dealing with the market demands, lacking scope and resources. The problem may possibly be solved by attracting funds at the financial market".

As to the personnel problem, IT companies have built up cooperation with higher educational institutions and opened education centers of their own. Thus, IBS opened their magistrate courses in MFTI, Compulink signed an agreement with MGU department of computational mathematics and cybernetics to start a new training and re-training programs for IT specialists; IT group has opened chairs together with technical educational institutions, organized training students abroad and generally expanded such activity outside Moscow - new resource centers are to be opened this year in the Urals and the south of Russia.

Such initiatives are important for the industry without any doubt. Personnel deficiency at the IT-market can nor be rectified without the state involvement. Boris Bobrovnikov, KROK general director, says about the scope of the problem: "Consistent growth in the industry requires annual influx of 200 000 new specialists, but higher educational institutions are capable of providing 40000 at most".