Russian management consulting market returns to growth

29 August 2018 Authored by Consultancy.eu

Despite its size and comparative wealth, Russia is home to a consulting industry which has notoriously struggled to tap into that fertile ground in recent years. Thankfully for consultants in the country, however, the market finally returned to growth this year, following three years of sharp retraction.

In line with the majority of the world’s largest economies, Russia features an upper-middle income mixed economy, featuring state ownership in strategic areas of the economy. While some important aspects of the economy are pragmatically controlled by the state – such as energy and defence-related sectors – market reforms in the post-Soviet restructuring of the 1990s saw much of Russian industry and agriculture privatised.

Despite this programme having brought the Russian economy in line with much of the West, the growth of the economy remains largely dependent however on one particular line of business. Russia's vast geography is an important determinant of its economic activity, with some sources estimating that Russia contains over 30% of the world's natural resources, and the World Bank estimating the total value of Russia's natural resources at $75 trillion. As a result, Russia remains heavily dependent on energy revenues to drive most of its growth.

In line with many of the Gulf states, when oil-prices tanked in 2014, thanks to falling demand, improved energy efficiency and rising production, the Russian economy took a major hit. In fact, as it was also hit by economic sanctions thanks to the nation’s continued meddling in Ukraine, and the subsequent flight of capital this provoked, Russia would soon enter recession. While in 2014 GDP growth remained positive at 0.6%, in 2015 the value of the ruble collapsed, with the Russian economy shrinking by 3.7% and expected to shrink further in 2016. Amid such adverse conditions, it is typical for a nation’s consulting sector to likewise encounter hard times, as consulting fees are often the first place ailing businesses look to make savings when tightening their belts.

Bad times

According to the latest market data from Source Global Research, this downturn in business saw consulting revenues decline a dramatic 13% over the course of 2014, and a further 14% by the end of 2015. Between 2013 and 2015, consulting revenues fell by €146 million in just two years, including a double digit contraction for the second year running, with the market shrinking 13.7% in 2015. 2016 saw the slowing of this, though the consulting industry in Russia still saw a decline of 2%, reaching a value of €435 million. Thankfully for the sector, things were on the brink of changing.

In these years, financial services, which makes up almost 40% of the market, and energy & resources consulting fared the worst. Financial services predictably suffered thanks to the double body blow of the recession and being the main targets of sanctions (as is still the case). This restricted the ability of Russian banks to borrow abroad, with much of the discretionary work previously done by consulting firms in this regard subsequently surplus to requirements. The consulting work that did take place focused on cost cutting, regulation, and risk management.

Russian management consulting market ($ / million)

Commenting on the state of play, Igor Boldyrev, Partner of Advisory Russia at EY explained, “The six biggest banks in the country are all state-owned, and they really struggled with their business model. Investments have fallen sharply, and banks are looking at different operational excellence measures to help the cost of delivery and the cost of sales.”

As would seem inevitable following the collapse of oil prices, another hard hit sector in past years was energy. Russian energy companies felt the strain as sanctions prohibiting the supply of certain equipment and services, as well as restricted access to EU sources of capital, really took hold. As a result, there was some demand for cost cutting and operational improvement work, but it was hardly significant.

Better times?

After the World Bank and the IMF estimated that Russia's economy would begin to recover by 2017, with the Russian economy rebounding to a slow but steady 0.3% GDP growth in late 2016, the sector is back on a positive trajectory. As Russia’s growth continued in 2017, with an increase of 1.5%, the consulting sector saw expansion, albeit a smaller one, of an estimated 1%. Further to this, analysis by Consultancy.eu suggests this may improve further to 2% by the end of 2018.

When it comes to functional consulting services, Source’s figures show that strategy consulting is now the largest service line in Russia, followed by operational improvement, and risk & regulation. Risk work is up because new regulations have given a moderate boost to demand, in line with the consulting markets of most leading economies. By contrast, as is also the case in almost every other international market, digital and technology consulting is growing fast. HR and change management is the smallest of the service areas measured by the researchers. Oddly, one aspect of consulting has benefited thanks to the programme of sanctions, which is in work around import substitution – a necessary government initiative thanks to the difficultly of importing many formerly much-relied upon Western goods.

This trend is illustrative of a wider adaptability within Russian consulting, which has been essential to its survival in the notoriously volatile superpower. By and large, the biggest consulting firms have likewise adjusted to the new normal, just as customers have had to, according to a recent Boston Consulting Group investigation. Global firms in particular are starting to see their continued investment in the region pay off, to that end.

"We've been on an improving trend," Oliver Wyman's Philip Gudgeon commented. He added, "2017 saw us beginning to emerge from a trough that we had been in since 2014." Alexei Romanenko of KPMG agreed; “There was very strong growth in 2017 driven by client concerns around efficiency, supply chain optimisation, procurement strategy.”

Other industry figures were less enthusiastic about the figures, however. “Overall. I think the consulting market is growing slowly – maybe accelerating a bit, but not dramatically, over the last year,” Stanislav Grafski, of Grafski Consulting, contended.

Mikhail Roma of EY added, “We had a strong 2017, but I don't think it is indicative of the wider consulting market.”

Indeed, to some extent, the fractured relations between Russian and the West could impact on the progress of the wider consulting market in the country. Several large Western firms have lost work in Russia, especially in the government sector. Another issue for Western companies is that because of the dropping ruble, consultants found their contracts were worth a lot less once they had converted revenues into dollars or euros for their global firms. Consulting firms that have a presence in Russia include McKinsey & Company, BCG, Bain, Roland Berger, Oliver Wyman and the Big Four, among others.

With fewer resources and a more local client base, meanwhile, smaller firms are still finding life in the market extremely difficult. According to Mikhail Ivanov, an independent management consultant, the struggling economy is affecting a lot of medium-sized businesses. He explained; "A lot of them simply don't have the money to spend on consultants."

Outlook

Researchers expect 2018 is likely to be another year of slow-but-steady growth. However, the market remains volatile, with oil prices still fluctuating, sanctions still in place, and business confidence still relatively low. Deep-rooted structural problems with the economy remain, stemming all the way back to the privatisation of the 1990s, with those who would become the oligarchs having pressured ordinary Russians, who were struggling to make ends meet, into selling their state shares for less than they were worth. This resulted in a major lack of competition, while an overly dominant state protects this stagnant status-quo.

As Russian businesses look to build momentum on the economy’s recent signs of life, they will likely look to the consulting sector to provide them with innovative new business models and methods of improving output. While, at €441 million, the Russian consulting industry is still a far cry from its size in 2013, the market had seen rapid growth in the lead up to 2014, and could return to that if Russia can consolidate on its recovery now.

In the hope of achieving the stability necessary for this, having recently completed the hosting of an exceptionally well-received World Cup, international relations between Russia and the world received a much needed shot in the arm. At the same time, however, Russia remains under intense scrutiny abroad for its disputed role the in the Skripal poisonings, as well as allegedly meddling in the 2016 US Presidential election. At home, meanwhile, though long-time leader Vlamimir Putin obtained another five year term in elections held in 2018, his popularity has plummeted in recent months. Following a leisure centre fire which killed 64 people, with government corruption blamed for the poor safety standards of the facility, Putin has seen confidence in his abilities fall from 77% to 63% since elections in March, alongside a controversial rise in the pension age, which was announced on the first day of the World Cup.

News