What potential remains
in Russia for IT and what is your general assessment
of the IT market in Russia?
First of all, I would like to mention that I do
not consider myself an expert in the general IT
market. Of course, I try to have my own views on
what is going on as, before starting my business
career, I was an academic and I understand how to
carry out market reviews. Ernst & Young are
making a report and some other agencies are also
trying.
Regarding the Russian IT market and its prospects,
the market emerged quite recently in comparison
with western ones; it only has about ten years of
history and development.
This is the basic explanation of what we see now
- why the western IT market is not in a great shape
and why the Russian IT market is growing pretty
fast.
Ernst & Young's evaluations are quite conservative.
Some sources think that growth will be even more
significant than Ernst & Young thinks. The explanation
is that the basic western problems are the result
of overestimation of demand and over-investment
in the sector. Especially in telecommunications
and, before that, in traditional IT with the Y2K
problems. Business created an artificial demand,
threatening people with the Y2K problem, which later
turned out to be less significant. People made investments
based on their understanding of the need. That is
why there is now a significant slowdown.
As for the telecoms industry, the origin of the
slowdown is slightly different but is mostly because
of attempts to develop new services and markets.
People happened to be more conservative in their
demands. In Russia, we are talking about the fulfilment
of basic needs: it is not the development of new
services and new market but fulfilling basic needs
in computers and phone lines. There is a huge shortage
now in fixed phone lines in this country. There
are many villages which do not have any communications
at all and there are a lot of small- and medium-sized
towns where several families have to share one telephone.
That means the demand is strong and straightforward
and the potential is very strong and very clear
in that area. The only factor limiting growth is
a lack of investment, a lack of capital to install
more equipment and provide more access to communications.
In the IT sector, again, most companies are still
working on productivity tools and this is the area
where IT products - computers - and the benefits
of technology are absolutely clear and the results
are obvious and fast. If you compare the number
of PCs the Russian people have to the number western
and eastern European people have, then you can easily
see that there is really a lot of potential in that
area. In the west, we can see a certain decline
as this demand was fulfilled long ago and the industry
has gone on to creating complicated, efficient management
systems; the results that they bring to companies
are not so straight forward. They just offset certain
negative trends, they do not help growth or increase
the profitability of a company. That is why there
is some slowdown, after which we will definitely
see more growth. In Russia, however, the proportion
of such investments is relatively small and those
kind of expenses are not dominating the demand,
which is mostly to fulfil basic needs. Take the
major tenders by the government agencies like the
Ministry of Education as an example: people just
buy thousands and thousands of computers and it
is still not enough.
Verysell is the oldest company in the Russian
IT market and has witnessed the development of
Russian IT. How has Verysell developed within
this market?
The Russian IT market consists of two big parts:
one part is telecommunications and the other part
is traditional IT. It is different from the US,
for example, where the market was integrated a long
time ago and in fact forms one market: there is
no clear division between these two segments.
In Russia, the traditional computer market has been
developed since the very beginning as an open, competitive
market where the government plays a significant
role. The government has always played a very important
role and continues to do that. It is not, however,
the dominant role. In the communications sector,
the reorganisation and creation of a market economy
didn't start so long ago. Initially, a few companies
were operating in new services like mobile telephony
but that was a very small portion of the whole market
and the main portion was the SvyazInvest organisation
which is a monopoly, a natural monopoly. The reorganization
of the natural monopolies started a year and a half
ago, two years ago maybe and we have seen the main
results, the main changes, most clearly over the
last year. That is why there are significant differences
in the two segments.
Verysell was created and positioned in the traditional
IT segment from the very beginning. The company
was founded as a joint venture and the main participant
of this joint venture was Merisel Inc., the US based
international distributor. At that time, in 1990,
it was the leading international distributor and
it was bigger than Ingram Micro at that time. The
other participants were individual venture-type
investors from Europe, from Switzerland actually,
and also a number of Soviet participants, as the
joint venture was formed in quite a Soviet way,
like almost all ventures at that time. The strategy
of this company was first to achieve a substantial
high-profile goal from a national economy point
of view. The goal was to take an active part in
bringing the best technology from the west into
the Soviet Union. That was why the company was formed
and this strategic goal has never changed.
Our business is unique in this field and all activities
are targeted on taking the best from the leading
manufacturers in the west and supplying that technology
to the Russian economy. The second strategic goal
was to create new business in Russia, to develop
it to the stage where it could become a part of
the multinational Merisel Inc. because Merisel Inc.
entered this project of course expecting to buy
all shares of the company, when it will be more
or less clear that this company can work according
to the rules of the big American multinational.
That is why a specific business area was chosen
to match the specialization of Merisel Inc. It was
distribution of computer products. It does not mean
that this was the best area in terms of profitability
or demand.
I would say that at the beginning of the 1990s the
software market was not quite ready for developing
a classic distribution model and the manufacturers
preferred to sell directly. There was actually no
direct channel at the start but that was the target
and it was achieved within about four years. By
1994, the company was substantially developed and
the legal form changed. The Soviet organizations
which took part in the joint venture were bought
out and the Russian company became the only subsidiary
of the Swiss holding. The joint venture was founded
in Switzerland with the subsidiary, that was the
legal form. The distribution business was developed
pretty well, given the possibilities of the time.
Most of the leading manufacturers signed agreements
with Merisel, then Verysell. Merisel Inc. started
negotiations with the other shareholders about the
purchase of the shares but, unfortunately, such
negotiations never ended in an agreement because
Merisel Inc. had certain financial difficulties
which resulted in it selling all of its foreign
entities, including its participation in the joint
venture. The company is still around but not any
more as a very significant player, only in the US
and Canada. So Merisel Inc. sold its companies in
Latin America and Europe. It terminated all its
international operations because of certain mistakes.
Over the years, you have developed distribution
and at the moment it represents 50% of your revenues.
What are the links within Verysell between IT
and telecoms and how are they balanced?
The initial strategy was developing the business.
First according to international standards as a
specialized distribution company. After Merisel
Inc. changed its plans, the company lived through
several years of reorganisation then the company
made its first private offer and approximately thirty
per cent of the shares of the company, by then a
group, were bought by three institutional investors
- quite well known investment funds then active
in Russia. That helped us to live through that period
until the sale to CHS Electronics.
The first strategic goal of developing the business
to be sold to a multinational was achieved and the
agreement was signed but this agreement ended in
nothing because it provided for a two year period
of evaluation and transition and, right in the middle
of this period, CHS Electronics went bankrupt! The
agreement was terminated and the shareholders (me
first of all: I am one of the founding shareholders,
I started as a minority shareholder and manager
of the Russian operation, I have been with the business
ever since and am now the group's majority shareholder),
split over strategy disagreements. The institutional
investors decided to liquidate their investments:
it was after 1998, they invested expecting certain
returns in three or four years and were not very
optimistic about the future of Russian IT and Russia
in general.
The reorganization plan that I provided to the shareholders
demanded certain new investments. The business passed
through two major hits and the collapse of CHS Electronics,
which for quite a while damaged the business significantly.
That split was resolved by the management buy out.
I organized it, the institutional shareholders were
bought out and the new strategy was adopted and
approved, providing for diversification of the business.
At that time, it was clear to me that distribution
was not the most promising segment of the IT market
and that it was much better to have a diversified
company, especially in Russia. This is today the
general trend of the market and we decided to position
the company in other segments as well: in systems
integration, in the telecoms business and retail.
Two out of three were successful and one was a failure:
the retail business was very different and the fact
that the warehouses where we acquired a controlling
stake were specialised and only sold computer products.
The nature of the business was so different from
the rest of the Verysell Group that we decided to
exit the start up and focus on the other two activities
which were quite successful: integration is good
and the telecoms business is very good, especially
since we have started to see changes in Svyazinvest,
our main client.
We entered this business at exactly the right time
and now Verysell is a group of companies with three
businesses: distribution, telecoms and systems integration.
We are also starting two more new companies: one
is an IT consultancy business and the other is related
to IT but is already more than that: the intellectual
building. Verysell Engineering offers this technology
to the market - management systems that provide
the management of all the facilities of the building
- office, industrial, airport. It is quite unique
in Russia and the competition comes mostly from
international companies: Honeywell, for example.
If you take the composition of the revenue, then
in volume terms distribution represents approximately
50%, we are developing distribution. We recently
even acquired a new distribution company to fill
a certain product niche but, of course, the most
dynamic and profitable part is Verysell Telecom
because we have been able to provide not only technology
but also financial services to the market.
We sell equipment on extended terms - up to three
or four years - and that is quite unique. This is
in great shortage because, in Russia, capital is
available right now but only short term capital,
short term loans and bridge financing. If you talk
about leasing or long term funding, that is in great
shortage. Verysell Group developed a very interesting
cubic scheme to make it possible and we started
co-operating with companies like Lucent and Alcatel
in this area and after two years became the main
partner of Lucent Technologies and one of the largest
partners of Alcatel. I do not want to say that it
is easy to import in Russia because you have to
handle all the difficulties with customs and taxes
and so on, especially with this huge territory.
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How important is
local knowledge?
Local knowledge is very important, we have very
good relations with manufacturers and a very good
credit history - after twelve years, no bad cases
at all despite all the problems that I mentioned
to you. That is why the level of vendor credit to
the group is approaching 20 million dollars. That
is very substantial for Russia. We also have well
developed financial services, internally. We act
as a bank in project financing. They already have
those kind of resources, Russian banks participate
in that but the schemes that we provide let us attract
resources from the vendor, from European banks and
from Russian banks. It is a combination.
Do you think telecoms' increasing importance will
become a definite trend? If we were to meet in
five years time, do you think telecoms will have
overtaken IT or do you expect a 50- 50 balance?
I expect the shift towards telecoms to continue
but I do not think the prospects for development
in the IT segment are good. The whole IT market
is about six or seven billion dollars, and telecommunications
would represent two-thirds of this, so it is natural
that if a company wants to be positioned in every
segment, it will have a substantial telecoms segment.
I would say I view the development as more like
a converge into one market. The consultancy business
is positioned to deal with telecoms and IT, if you
take any major project it is not possible to make
this division between telecoms and IT: it is both.
There is no IT system without telecommunications.
That is why the future will not be split between
telecoms - non-telecoms but more focused on customers'
needs, positioning companies to fulfil certain demands
and for the customer the classification whether
it is a telecoms vendor or non-telecoms vendor is
not really important. The distribution business
will continue to fulfil needs of dealers and this
segment of the market is growing and is quite important.
Systems integration companies are targeted at more
classic IT solutions, most of all corporate management
systems or accounting systems, corporate e-mail
and consultancy; telecoms are more targeted towards
large scale projects and, as I said, Verysell is
engineering an attempt to go a little bit further
and try to do some business which is IT or connected
to this: a very big potential demand area because
any new investments, especially in the industrial
sector, create demand for this kind of technology.
We plan to build a business which will be very well
balanced. We are looking at new segments, not any
segment: we are not trying to position ourselves
in offshore programming, for example, or just software
products development because there is no synergy
with what we have. We are trying to develop a business
where there is a clear synergy.
Very often your clients will ask you how they
can reduce their costs and how they can become
more efficient. How can Verysell help them add
value to their operations?
That is what we are developing, as I mentioned:
we call it a consultancy business, and not just
a technical consultancy but quite a broad area of
management, legal and information consultancy. Of
course, we try to provide a turn-key solution for
the client and it really is very important because,
if you take our major clients, most of them are
not Moscow-based clients. They are based in different
Russian cities, some of them in CIS countries and,
for such clients, it is not enough just to bring
in some hardware, it is definitely not enough at
this point of time. It is necessary to provide a
full solution and also target the final result of
what you are doing. We believe that because we have
quite a strong financial and economic department
dealing with this. We only have professionals on
our staff. They deal not only with the technology
side of the business but also with its economic
side.
You must be bringing something to Oracle, Lucent,
Alcatel and HP which makes them happy to work
with you. What exactly are the benefits of working
with them?
First of all, we bring local knowledge and local
expertise because business in Russia is very specific.
Despite some positive changes in recent years, business
is still operating in a very unfriendly environment.
In the legal and tax environments there is a high
level of corruption. That is why for major international
companies it is sometimes impossible to work without
reliable partners who take all of these problems
on themselves and who do not create new problems.
Probably, in the history of Verysell, this is one
of the significant factors why we were chosen by
so many manufacturers. First of all, we know how
to do business in Russia and we know how to do business
with international companies: Verysell was part
of an international company twice in its history.
First with Merisel Inc., who was the main shareholder,
the company was very closely integrated into the
structure. I travelled to management meetings twice
a month in the USA and Europe and, very often, people
from Merisel Inc. came here to give us some training:
it was a really close integration. This was repeated
to some extent with CHS Electronics.
That is why the company has two faces. We can do
business both ways: the western way and the Russian
way which is very necessary for most international
manufacturers. It is much easier for them to outsource
these kind of services. Russian-based companies
are more competitive than international companies
in providing services. It is not a local flavour
but a general feature. Of course, Russian companies
cannot really compete on the manufacturing side:
a very well developed assembly industry is not really
manufacturing. I would call it a configuration service
because what the so called Russian PC makers like
Aquarius or R&K are doing is not really manufacturing,
it is configuration. They are very competitive not
because of tax efficiency or importation efficiency
but because they do things faster then Compaq, IBM
and HP. That is why they own 25% of the PC market
in Russia.
The same is applicable to systems integration or
consultancy. Russian companies have acquired some
excellent professionals over the last five years
or so. We employ many people who used to work for
international companies and now they work with us.
It is a general trend because we pay a competitive
salary and we provide better job opportunities,
better career growth possibilities.
Russian companies can be more flexible and fulfil
customers' needs better because of the lack of bureaucracy.
That is another consideration why international
companies need local or locally based companies:
legally Verysell Group is an international company.
The financial centre of the group is in Switzerland
and the Russian companies are subsidiaries but if
you take the management and human resources 95%
are Russian based people and the internal relations
are organized the way it is accepted here. Legally,
it is also convenient for international companies
to deal with our company.
Management which is also very important for
any company. Could you introduce yourself to our
readers and outline your vision for the company?
My career is quite typical for Russia. Before Perestroika,
before all these reorganizations, I used to work
for the Academy of Sciences. That was probably the
only choice for me after university. I graduated
from Moscow University and, like many people at
that time, I did not want to go to a ministry or
any other state agency. So the Academy of Sciences
was the only place where you could be free. I spent
14 years there, starting as a postgraduate student
and leaving as a head of department and Doctor.
It was more or less a nice academic career because,
at my age, I was 36 at that time, it was not bad
to be the head of a department: it meant that in
some three or four years I could become a full professor
. Then Perestroika started and at that time I spent
half a year in the US working for the UN. Then I
came back and it was a natural decision to make
a change and to try to put into practice something
that I learnt before because I am a professional
economist. At that time, I thought I understood
the way business was organized, I read a lot of
books. That was the motive. That was the reason
basically to take the position of general manager.
After the fist two or three years I understood that
I knew nothing about business. I was trying to learn
and for me it was relatively easy to pick up the
things I needed because of my professional background:
it was easier than for some people with a technical
background, for example. A lot of people left the
Academy of Sciences and other research Institutes
and went to do business. That was quite typical
for the time. I came to business as a professional
and I always wanted to do business professionally,
to organize it and run it in a professional way.
I never let myself get involved in any venture type
enterprises. Maybe it was not all that wise because
a lot of people made big money in making different
kinds of pyramids and financial schemes but for
me it was not really interesting.
I think that business is organized in a professional
way here; it is also a reflection of my personal
likes and dislikes. For me, it was interesting to
try and work abroad and understand how things are
organized outside Russia. Right now, I am probably
spending 50% of my time in Russia and 50% abroad,
working in the Swiss office and travelling to different
conferences. The IT business is very interesting
because we have to travel a lot. The current professional
goal for me is, as we decided, to try to sell the
business to a strategic investor for the third time.
Two attempts didn't work so we decided that it was
probably not very good for ourselves to do it because
multinationals cannot survive with this type of
arrangements. So, with Merisel Inc. and CHS Electronics
together, maybe something is really wrong on our
side. Something like a black mark!
We decided to try to go public. First of all,
it is interesting and challenging. So far only
telecom companies have taken this step. I mean
going public in the US or in Europe, not just
in Russia. If you talk about traditional IT business,
a lot of Russian companies are going public. We
simply invested a lot in this.
Verysell is a unique company, with twelve years
of experience. Since the very beginning we have
worked with Deloitte & Touche: the minimum
requirement is five years, if I am not mistaken.
Then the legal structure is fully transparent,
we invested a lot in this because it was a very
difficult task to stay competitive, especially
as regards tax and importation. Very contradictory
goals as you understand, but we managed them:
this approach was developed and we will gain something
from it.
The third consideration is that future development
is very much dependent on this access to capital
because right now the group is pretty well funded,
we have quite a substantial capital which was
created over all those years. It is enough for
this stage but I understand that in two or three
years from now we may enter in new businesses
which will require very substantial investments.
By that time it would be very good to have an
access to world capital: NASDAQ. This is the current
goal for myself.
Apart from that, of course, I am trying to lead
new projects, to establish good relations, to
make the right connections, to attract new clients
- this is my role in the business. And take care
of the critical relations with the major banks
for example, with the major manufacturers.
What would be your final message to the international
and Russian business community?
I think the message is that there are substantial
Russian and Russian-based companies which are reliable
partners for international businesses, able to deal
with major development projects in Russia because
the market has developed to the stage where we can
talk about not only distribution products, but very
substantial, large scale IT projects. What we do
in telecoms is a very small part of the potential
we have, if we have really good partners in the
west. I am sure that international companies need
companies like Verysell because it is much more
efficient to do such things with partners than do
them alone. |
Mr. Mikhail
Krasnov