Digital transformation is not just about adoption of technology. It’s better described as a journey, and it’s one that impacts processes, culture, human resources, business models, relationships with customers and everything in between. It’s complicated, but it is also an essential driver of economic growth.
I wanted to understand how digitally mature Russian businesses are, and the factors affecting their digital journeys. That’s why I spoke to Dr. Daniel Thorniley, President of DT-Global Business Consulting GmbH, a firm that provides advice and information on global business and emerging markets with a focus on the CEE-Europe and Russia-CIS region. Danny is a three-time author, one of the world’s leading authorities on Russian economic history and a former East-West affairs specialist for the UN.
In the first part of the conversation, Danny and I spoke about the progress of digitalisation in Russia, how it compares to that of other countries and the technologies Russian businesses are adopting. In this blog, we move on to the challenges Russia faces with regard to digitalisation: the specific traits of Russian business, culture and society, and the widespread disruption caused by COVID-19.
As we discuss, while lessons can be learned from best practices established internationally, the unique challenges faced by Russian businesses mean that they must think differently, taking their own unique paths to digital transformation.
The Impact of COVID-19 on Russian Digital Transformation
Gennady: We’ve talked about where Russian businesses have already seen digital success and where there is room for improvement. Now, COVID-19 is threatening to derail the digital transformation plans of many organisations. How do you feel the pandemic will shape Russian digital transformation?
Danny: It’s making transformation very challenging and there is no doubt it is triggering a fixation on controlling costs. While digitisation can actually help to foster cost efficiencies and improved ROI, the current situation makes it much harder to have the digitalisation conversation at board level, and is driving short-termism.
Remarkably, though, only 12% of businesses say they will now delay investment in digitalisation. According to our recent survey of Russian business leaders, 51% of companies are retaining their original plans, while 37% say they are targeting more investment. Nevertheless, there is going to be a growing need to conserve cash over time, and in the long term that is really going to start to erode the adoption of technology in the Russian market.
Alongside impacting the deployment of technology, COVID-19 is going to influence HR, too. In order to make a success of digitalisation, Russian businesses require skilled people. But the vast majority (85%) of our clients have initiated a hiring freeze. This places pressure for businesses to invest in re-skilling existing staff, but the short-termism means they will be trained in an often rapid and rudimentary way. This could result in problems – you could, for example, end up with a Head of Digital who is not experienced enough to command such a role. In addition, out in the open market, a lack of digital talent could trigger salary inflation as demand increases.
We’ve established we’re in a period where Russian businesses are very closely monitoring their costs. Russian businesses are going to have to find a way to strike the balance between progressing their digital plans and getting the right people in to support them, all against this backdrop of restricted expenditure.
The Problem of Legacy Systems
Gennady: So, we can see that COVID-19’s effects are going to be felt for a long time. But it’s not as if digital transformation was simple before the pandemic. Many businesses tell me that legacy technology is holding them back. What do you think are the biggest challenges Russian businesses face in getting digitalisation off the ground?
Danny: Our recent survey tallies with your conversations, Gennady. We found that the biggest issue is dealing with legacy systems (52%), both on the technological and operational side. Almost half (49%) of respondents say internal corporate issues such as managerial resistance are a problem, while the allocation of resources for digitalisation is a barrier for 47% of Russian companies.
It’s no surprise that legacy equipment and resistance to change have arisen as barriers to digitalisation. The structure of business and employment is much more traditional than it is in the West. Companies have a long heritage of providing jobs-for-life, a canteen, kindergartens and internal societies. That’s good for employees, because the minimum wage is relatively low, and the same goes for out-of-pocket health insurance and pensions.
But there are challenges down the road. Digitalisation is going to have a profound impact on employment, which Russian businesses need to consider seriously. They must think about what they can do to help their employees adapt to this new world, whether that’s through re-training, personal development or other initiatives.
Finding Its Own Path
Gennady: Agreed. Some companies in Russia have doubts about automation technologies and AI, as when these innovations are deployed by businesses, they can free up a great deal of labour, and that will threaten job security. As AI pinpoints areas of value and automation takes work out of human hands, businesses are going to see where manpower is no longer required.
So, Danny – how do you think Russia can simultaneously embrace digital transformation while ensuring people are ready to adapt to the change?
Danny: The Russian economic and social model is fundamental to what makes the country special. It cannot become the same as Munich’s or London’s overnight, and in fact I wouldn’t want Russia to progress the same way as the West has done.
For the last ten years, the West has struggled to understand employment in terms of modern ways of working. For example, before the pandemic, British unemployment was at 3.4% - the lowest it’s been for 40 years. Fantastic, eh? But of all those people employed, 49% did not have traditional jobs working in corporations or the government, 16% were self-employed, 16% were temporary and 16% were part time. All these people are insecure. They don’t have pensions; they don’t have health insurance.
The COVID-19 crisis has really underlined how insecure employment can be. Nobody has got a grip on that. Corporations may say they want to leverage technology to open cost efficiencies and streamline operations, but outside of Russia they lack that social responsibility to their employees. Russia is in a different place right now, so we’ll need to see how that balance of protecting jobs and leveraging technology goes.
Gennady: Thank you Danny. To summarise, I’m hearing that you feel Russian businesses must identify their own path to driving business benefits from digital technologies. They shouldn’t cut and paste approaches that have worked in other markets. While they might be able to learn from best practice in other countries, they have to develop a bespoke plan that caters to Russia’s unique social structure by introducing digital change smoothly and incrementally. What Russia must do is support its traditional economy while it is enabling businesses on this digital transformation journey. Does that cover it?
Danny: That’s a good summary, Gennady. Great to talk with you.
A Different Perspective
There is often a perception Russia is lagging behind its international counterparts in digital transformation, but this view is not entirely justified. Read the first part of our discussion, where Dr. Daniel Thorniley and I consider the status and trajectory of digitalisation in Russian business.
Visit the Management Perspectives hub to learn more about digital transformation, both locally and around the world, and find valuable resources for executive industrial decision-makers.