Insightegy Consultants
Challenges of corporate transformation in Russia: soviet legacy

Business transformations in a post-soviet economy such as Russia face a range of specific problems. Understanding and managing these risks is key to achieving success in any business transformation process.

Transformation is needed when the current corporate operations do not comply with external conditions. It happens when either the company begins losing its market share or rapid firm growth forces the firm to consider new ways of doing business.

There are some traits evident in all post-soviet economies. These features can be broadly grouped into the following:

  1. Business model. During the transitional period, many holdings were formed with the mindset: “let’s buy this while it’s cheap and we’ll see what to do with it later.” This rationale caused problems down the line for many of these firms. There are 2 ways to overcome such issues:

    • a) concentrate on core markets by building a horizontally or vertically integrated company and filter out the remainder;
    • b) Turn the holding into a kind of investment fund rather than a traditional management company.

    Even within a single enterprise, there may be some loss-generating non-core businesses. In Soviet Union, when all the profits were controlled by the state, the only thing enterprise could seek to develop was a social infrastructure aiming to improve its workers’ living conditions: a canteen, a hospital, a sanatorium, recreation center etc. These often mismanaged and value-breaking assets, offering better quality services than those provided by the state and for much lower price than private ones, may really matter to the employees.

  2. Operational structure. The operational structure of one simple enterprise might be unclear and misleading. Responsibilities are not clear and every manager will try to find the source of the problem in another department. This comes from the soviet management model, when managers tried to keep their post and avoid penalties from superiors rather than improve effectiveness. Clear responsibilities and accountancy are required for every manager to force them to concentrate on their performance rather than on finding scapegoats.

  3. Labor. Whatever is declared, in the soviet state social stability and people’s right to work were given more attention than profitability and productivity. The result of course being low labor productivity and huge numbers of underpaid employees at many former industrial giants.

  4. Management. There are several top class specialists in management positions but not all of them are ready to change their usual way of doing things. That was not encouraged in the Soviet economy. Also bear in mind that every manager can have hidden interests in keeping thing the way they go: it was restricted soviet economic system that turned private initiative into spheres of criminality. Some of those management risks can be managed. Many require changing personnel. But changing people without changing the “rules of the game” will scarcely have any positive result.

  5. Accountancy and legal structure. Soviet accountancy did not fit a market economy. In the 1990s, the tax burden was too heavy and served as a “competitive disadvantage” in many sectors: if you pay all the taxes, your price would be too high and you’d lose the market. Hence, accountancy became an instrument of dressing figures up, hiding profits etc. A complicated and nontransparent legal structure helped as well. Building up an adequate budgeting/reporting system for managerial needs as well as transforming accounting systems to meet international standards has become important issue.

Business transformation is a challenging task in post-soviet countries. But all the “post-soviet” era, risks can be managed successfully. More and more Russian companies entering London and New-York stock exchange are now showing this to be the case.