INTERVIEW: IBS at the heart of Russia’s digital transformation

INTERVIEW: IBS at the heart of Russia’s digital transformation
Moscow HQ of IBS, which is at the heart of Russia’s digital transformation. / IBS
By Ben Aris in Moscow February 5, 2018

IBS is the grandaddy of Russian tech. When Russian President Vladimir Putin took over from Boris Yeltsin and held his now-infamous “oligarch meeting” in 2000, Anatoly Karachinsky, the founder and co-owner of the IT services company, was among the business leaders invited.

Karachinsky has become something of a legend in Russia and played a crucial role in bringing Russia into the modern world following the collapse of the Soviet Union in 1991. A maths and computer whiz who was a product of the Soviet Cold War’s emphasis on pure science, he went into business as a young man in 1987 when Mikhail Gorbachev allowed the first private businesses to be set up during perestroika. He broke into big business thanks to Gorbachev’s wife, Raisa, who wanted to bring Russian women up to date and so pushed the launch of the German magazine Burda Moden. IBS built the publishing system for the magazine, Karachinsky told bne IntelliNews in an exclusive interview in 2012.

“It was a different world then,” relates Svetlana Balanova, who is today’s general director (CEO) of IBS. “Karachinsky was a pioneer, building up a business on the rubble of what remained of the Soviet Union. Today, we are in the midst of a digital transformation and things are moving extremely quickly.”

IBS expanded overseas, but in 2013 Karachinsky decided to spin off the international business and set up Luxoft, which held an $80mn IPO in May 2013. Today, Luxoft is the number one international software company in many of its niches and holds a large share of the US automotive and aviation software markets, to give two examples. Since then, IBS has focused exclusively on the domestic IT market and is the ‘Russian SAP’. The Kremlin is pushing hard to create a digital economy and IBS is going to play a central role in this.

“The IT revolution is speeding up. Companies used to have a 10- to 15-year strategy – they would work on the ideas for two years and then one year to get approval and another year to set it up before implementing it over the next 15 years. Now you can’t take that long,” Balanova told bne IntelliNews in an exclusive interview at the company’s Moscow corporate headquarters. “You need to understand what direction you are going to take and the agility to change immediately. But today the technology is a lot more complex, so you need someone to help you navigate through,” says Balanova.

The nature of the IT business in Russia has changed since the days of simply building publishing systems or making ATMs work. With the advent of financial technology and Russia’s mushrooming e-commerce industry, technology has become a central part of every Russian company’s strategy. At the same time, the collapse of oil prices in 2014 and the subsequent heavy devaluation of the ruble has made companies a lot more cost conscious.

“Russia was too fortunate with high oil prices. There was no cost pressure. People would buy the most expensive, as they assumed it was also the best. And often it was. But now it’s about efficiency and getting the best value – now companies can’t afford to overspend,” says Balanova.

The business of business is business

Russia’s IT business is still growing: today, the entire IT sector accounts for about 1.4% of GDP, according to Balanova. That is only half of the IT sector in South Africa (3.2%) or Brazil (3.3%), so there is still plenty of room to grow.

“Russia tech industry has grown 60% in the last five years and the pace of growth is easily outstripping the country’s economic growth. But there is a still a big difference between Moscow and the rest of the country. The digital services in some business and some regions is better than in the EU, but less so in the small cities and towns,” says Balanova.

Russia’s IT market is today worth about $20bn and IBS is a top ten player and the leading applications consultant  Balanova says that Russia’s companies have to invest into IT. During a downturn in 2013, companies cut back on spending, “but with IT you can only get away with that for about two or three years, after which you start to fall behind. Moreover, now that technology is moving so fast, the dangers of not investing are getting greater,” says Balanova.

IBS has three main business segments under the IBS umbrella. The first is corporate solutions and business applications. IBS is the Russian partner for SAP and has installed the German company’s software in the state-owned Russian gas behemoth, as well as designed the software that the Central Bank of Russia (CBR) uses, to name two big customers. “You can’t copy everything that exists outside Russia,” says Balanova. “So we perform the maintenance of systems for these big companies as well as providing bespoke solutions.”   

Then there is the replication solutions business, where business come to IBS with specific needs that are relevant to many different businesses. “These are ready-to-go solutions for businesses that they can put together like Lego,” says Balanova.

The third part is providing BFT (Budgetniye i Finansoviye Tekhnologii) services, which are proprietary systems, mostly financial, for Russia’s regions and municipalities.

This last part is typical of the Kremlin’s drive to digitise government. One of the services provided under BFT is to move a region’s financial treasury operations into the cloud and centralise it. “Then the region can meet payments ‘just in time’. It makes for enormous savings and much better cash flow management,” says Balanova.

Since the fall in oil prices, the Russian government has desperately been trying to cut costs and make better use of its now more limited resources. The problem with budget funds is that they are allocated in job lots but the cash might not be needed for months. By putting the treasury operations into the cloud, a region can calculate its cash needs more accurately and manage its cash flow more efficiency. The upshot is a massively reduced need for cash.

Perhaps the most dramatic example of the savings the Russian government has made from IT upgrades is the new system that was introduced at the federal tax service at the start of 2017. “Since a new IT system was introduced, tax collection is up 40% over the last two years as a result of the improved system, especially for organising VAT rebates,” says Balanova. “The government has started to understand that if they invest cleverly, then they can earn a tremendous return.”

And the customs and tax service have both been put on the same system. Next up are federal social services, which are going to get the same treatment, says Balanova. “Now an imported good can be tracked from when it crosses the border to its destination on a shop shelf. It has hugely increased the efficiency of collecting taxes,” says Balanova.

The introduction of centralised cloud-based treasury systems in the regions and municipalities is a work in progress. IBS has been working on the BFT project for years, but Balanova says that now it is accelerating as interest is rising and the regional debt is becoming a bigger problem. “When the government starts on one area, pretty soon it involves everyone,” she says.

People power

One of the projects that IBS is most proud of was to take over the recruitment services for leading Russian supermarket chain X5.

The turnover of staff in supermarkets is high, so stores are having to constantly look for new workers – usually advertising positions as shelf stackers or checkout personnel with flyers in its stores. “We quickly became the largest recruitment outsourcing company in Russia despite not having a single recruitment person on our staff,” says Balanova.

IBS fully re-engineered the recruitment process for X5, which meant they didn't need staff, as the process was largely automated. Although there was still a call centre, if there were no operators available, then the applicant would end up talking to a chat-bot that could go almost all the way through the screening process. “X5 advertises for employees using leaflets in its stores. Then they call the centre and get processed. We can screen them and send a suitable applicant to an interview,” says Balanova.

The system is typical for IBS and the sort of solutions that Russia’s leading companies are looking for.

Looking forward and Balanova says that the “silent crisis” of 2015 and 2016 has now passed and the economy is gathering momentum again. The outlook for IBS is good, as thanks to Russia’s very backwardness most companies and government benefit from the “leapfrog” effect. As they have no legacy systems, IBS customers skip over the iterations and go straight for state-of-the-art systems. IBS is driving that process on its own and even in the depths of the most recent crisis it was still investing into its BFT and HR systems.

While currently IBS can fund its investment and growth from retained earnings (the company declined from giving concrete financial information), Karachinsky said last year IBS could IPO this year, joining the existing queue of companies that are lining up with market offers.

“We are considering all the options on the table, and an IPO is definitely one of the options,” says Balanova.