Digital Russia

Nikolai Verkhovsky is Professor at the Moscow School of Management in Skolkovo. In his opinion the fintech business is by far the most digitalized industry in Russia. But there are more to watch.

Nikolai Verkhovsky, Professor of Practice, Director of the Chief Digital Transformation Officer (СDTO) program’s project work, Executive Director of SKOLKOVO Centre for Digital Transformation.


Which Russian industries are the most digital?
Nikolai Verkhovsky: In Russia, the undisputed leader is fintech. Logistics business is second most digitalized. Third is retail.


Sberbank, Russia´s biggest bank has more than 15000 employees working in IT. Is it a good example or has it gone digital just because everyone else is doing this?

The CEO Herman Gref’s thesis is: ´We are not a bank, but an IT company with a banking license´. This shows that the state corporation is becoming an on-line platform, and this is the final part of digital transformation. The company ceases to own physical assets and acquires virtual ones, which allow real entities to communicate with one another with a view to creating a product.


We will visit the Sberbank during CIOmove, so let´s talk about companies that will not have the chance to present themselves. You mentioned logistics. Who is digitalized well in that industry?

A representative of this sector is Emex, a company that has been reorganized based on a platform business model without using any sophisticated technologies, and now operates quite successfully. Newly founded companies such as Monopoly and Business Lines are actively developing digital services. For example, they are introducing cross-docking—the distribution of shipments and reloading of goods from heavy vehicles into small-tonnage ones for more expeditious delivery to outlets, and robotization of intra-warehouse logistics.


You said, the third most digitized sector is retail?

Yes, we can see it on the example of VkusVill, a recently established supermarket chain, which appeared out of thin air. Its management team is not afraid to experiment and is now confidently pushing another chain of premium food supermarkets—Azbuka Vkusa—from the market. Another retail chain—Х5 Retail Group—is also investing in the development of digital technologies. They have created a Big Data project management department to improve customer service, scale up the business and develop omnichannel sales.


When Westerners think about Russia, we usually talk about the oil and gas companies. How are they doing?

Representatives of the oil and gas industry heavily invest in digitalization. For example, Gazprom Neft has significantly progressed towards creating a technology platform that allows it to manage physical assets in a virtual environment, to make a transition from tracking to modulating processes along the value chain. Also, the company was able to streamline the process of developing initiatives for improving operational efficiency from the bottom up, and this is one of the key success factors of digital transformation—company employees themselves become agents of change.


Any more good examples?

The engineering industry, in particular KamAZ, is progressing well too. It is worth mentioning a few others such as Transmashholding, Atomstroyexport, MTS, Rostelecom, Otkritie Bank, and Severstal. Many companies have already determined their own key values to be gained from digital transformation, launched pilot projects to study hypotheses, which is the main step toward success in this area. The mining sector, however, lags far behind the general pace of digitalisation; construction and medicine are developing very slowly.


Is the Russian digitalization the same as in Europe?

The digital processes that can be observed in Russia are different from those taking place in Europe. Today, almost each large organisation in Europe has a so-called Digital Lab or Digital Hub, which Russian business, unfortunately, doesn’t have. Another specific feature is that there is no meaningful environmental pressure on business in Russia, unlike Europe, where a company is required to be energy-efficient and to reduce the negative impact on the environment, without compromising the quality of its products.


So, what is your definition of digitalization?

Digital transformation is a frontier area— so no one in the world fully understands it. There is no possibility of proving end-to-end cases accurately. According to our research, the world has not yet seen a single case of completed digital transformation of an entire company. Individual technologies have been introduced, but there has been no final analogue-to-digital transition. There are digital companies such as Uber, Airbnb, Facebook, but they were actually founded as digital businesses. Therefore, we see digitalization as a transition to new business models that used to be impossible due to lack of technology.


Traditional companies usually have their problems adopting new – digitized – ways of working. What is the general attitude to digitalization in Russia?

Talking about our experience in discussing this topic with business companies, fewer than all recognise the importance of digital transformation and its impact on the competitiveness of a company or a product in the future. Many companies go digital because there is a corresponding active promotion campaign on the part of the government, although, in fact, they have no desire to do so. On the other hand, there are other companies that are actively moving on this way and launching digital production conveyors, starting with the most obvious and proven solutions for example, predictive maintenance of equipment.


What do you think are the most important features?

The cornerstone of digital transformation is total information transparency. In the past, companies earned from the asymmetric distribution of knowledge. The best examples are taxi drivers who earned more than other people, because they knew the city better and could often cheat their clients by driving them longer routes. With the advent of mobile maps and navigators in a smartphone, the knowledge of the area ceased to be a critical skill, so taxi drivers lost a large part of their income. In addition, the digitalization of such services has led to a decrease in the price of the entry ticket to the profession: today, any person who has a car and a mobile phone can work as a taxi driver, which has also affected the final price for the client.

The second most important feature of digital transformation is that one is permitted to make mistakes. Digital transformation needs to be treated as an experiment, not a project. It is natural that an experiment may fail, which will also be a useful result in itself. In project activities, on the other hand, failure is not accepted; successful completion is the only permitted outcome. This is something that Russian companies cannot put up with so far—for them, failure is out of the question. Everyone wants only successful projects with quick payback and minimum costs.

It is also important to form mixed teams of innovators—one external employee and one representative of the business. In this case, one of them understands how the transformation work should be done, and the other—how it should not. Such intersection may give rise to a new non-trivial solution that will act as a powerful impetus to the business. People have already realised that innovations normally emerge at the intersection of technology and industries; therefore, the drivers of digitization are to be found not in the company, but rather outside it.


How can foreign companies profit from their developments in Russia? Are there any IT solutions in your country that work better than those developed in the Silicon Valley?

Today, we can see three ways to implement digitization using Russian developments. These are disruptive technologies that facilitate the digitization of companies. The first one is platform technologies, which allow companies to make a transition to a new economy through the introduction of digital solutions aimed to improve interaction between systems and users. This process is often called “uberization”—open competitive environments. The main advantages of this approach are simplification of distribution and scaling, new ways of creating added value through interaction with external ecosystems, and an opportunity to work in several markets simultaneously.

The second solution comprises everything related to digital twins or virtual modelling. These technologies enable businesses to reduce costs and uncertainty throughout the value chain. Previously, a manufacturer of motor vehicles intending to launch a new car model onto the market had to smash several hundred cars during testing, incurring significant costs for the production of prototypes, and moreover, spend a year of precious time on it. With a virtual stand, a car maker can conduct several thousand tests in one night. A digital twin allows an enterprise to simulate different types of workloads, thus ensuring compliance with safety certificates and reducing CAPEX.

The third solution includes new methods for data analysis and processing. This is artificial intelligence (AI), which can perform routine operations much better than people. Compare the following: General Designer can keep 500 critical parameters of a product in their mind; while AI is able to hold 50,000 parameters in the memory and, moreover, combine them, which ultimately affects the development speed and quality of the solution.


At the Skolkovo Business School you created a program to train Chief Digital Transformation Officers. What exactly are you teaching there?

The market faced an acute demand for digitization managers, but there was no corresponding training programme in Russia. Ideally, there must be a specialist responsible for digital transformation—a Chief Digital Transformation Officer (CDTO). His or her task is to integrate all of the company’s services, to develop new business models and to search for additional sources of income. It is important to note that it is next to impossible in Russia to grow a company’s own CDTO from IT Department employees, because IT units mostly perform a service function, while CDTOs are entrepreneurs, business representatives by their nature. They must learn not only certain IT skills, but also business, team building and leadership skills, and many other things that can be learned during training.


What are the main problems associated with digitalization in Russia?

Our research shows that one of the key drivers of digital transformation in the world is the high cost of labour. For example, Rio Tinto Group, an Australian mining and metallurgical company invests in mining and processing technologies that do not require human involvement. The work of miners is getting more and more expensive; it is cheaper and safer to replace them with robots. In Russia, unfortunately, a person is cheaper than a robot. For example, when we described the benefits of digitization to representatives of a construction company, they replied: “We are not interested in this as long as we have cheap labour.” Thus, the low cost of labour in Russia is a barrier to the development of technology.

Another major obstacle to digital transformation is the high cost of infrastructure for primary data collection. It is necessary either to replace a large amount of equipment, or to attach multiple sensors to it and then determine what data each sensor will provide. Very often, business companies get the following advice from experts: all you have to do is to build Data Lake and start collecting data into it; eventually, you will figure out what to do with the data. The problem is that any such initiative requires considerable investment, and its ill-conceived use will be just a waste of money. It can entail additional costs for the maintenance of the useless infrastructure. Digitization always involves risks, as it is an attempt by an analogue company to become a start-up and to go through the Death Valley Curve again. The project must first reach payback before exponential growth will start. According to our estimates, this will normally take 3–7 years, depending on the starting point. This is the reason why many companies are reluctant to start the process.


Which countries have achieved the greatest success in terms of digitalisation?

According to the IMD World Digital Competitiveness Ranking 2019, the top five countries are the USA, Singapore, Sweden, Denmark, and Switzerland. Russia ranks 38th in this rating. The composition of the top five clearly suggests that the key factors for the success of digitalisation in the country are the availability of venture capital, a small territory (as we can see, the countries occupying the 2nd to 4th positions are small), and the concentration of entrepreneurial talent.

When we visit Europe (Germany, France, the Netherlands) as part of SKOLKOVO Chief Digital Transformation Officers Training Programme, we clearly understand that the problems faced by companies in these countries are similar in many ways to those that we can observe in Russia, and the average level of digital maturity of business is not much different from ours. On the other hand, the progress of companies in the USA and the more so in China is impressive—they have managed to accumulate significant digital competencies in a short time.


How does the business school develop its international agenda?

Our focus on international development is versatile—from inviting well-known international professors to creating programme modules in different countries. Last year, we achieved important beneficial results on the global arena. SKOLKOVO Business School received EQUIS accreditation from the European Foundation for Management Development (EFMD)—one of the most prestigious international accreditation system of educational institutions, which has been awarded to only 1% of all business schools. Now we are part of this exclusive group.

Moreover, our school was officially admitted to the Global Network for Advanced Management (GNAM)—an association of 30 leading business schools from around the world, where SKOLKOVO Business School is the only representative of Eastern Europe, Central Asia and the CIS. This is an elite club, the most prestigious association in the field of business education. It evidences that our work meets all international standards. Further, we joined the GBSN international alliance, which brings together business schools and universities to ensure knowledge sharing and educational collaboration.

SKOLKOVO Campus hosted a UNICON conference for 78 managers of corporate areas from 53 leading business schools of the world. As far as, the Moscow School of Management SKOLKOVO is the only Russian business school included in the association.


What is the difference between the SKOLKOVO Business School and other business schools in Russia and the CIS?

SKOLKOVO Business School is one of the leading business schools in Russia and the CIS. Our primary differentiating feature is the international agenda. We are actively developing cooperation with other business schools and educational alliances, regularly organise programme modules in different countries so that our students are able to get a complete picture of the markets, new trends and competencies. Russian and foreign students are among our programme participants.

We are proud to have 150 world-class professors and 9 research centres designed to create our own academic base. Our school develops its own programmes and practices, which successfully gain global recognition. We have received 6 international awards in the business case category. 2 years ago, the case Monocities: A Long Journey of Transformation educational programme of the SKOLKOVO Business School won the 2018 EFMD Excellence in Practice contest in the Infrastructure Development category. This was the first and so far the only time that an educational programme from a Russian business school had received a gold award in a competition which sees some of the world’s most prestigious educational institutions go head-to-head.

The School has well-developed networking. Our graduates form SKOLKOVO Alumni Community, creating various interest clubs and keeping in touch with the business school long after graduation. In 2019, SKOLKOVO Business School took the first place in the rating of Russian business schools, compiled by the reputable Russian web-portal MBA.SU—the so-called people’s rating of Russian business schools. It is believed to be the most objective, since it is based on the ratings of MBA / Executive MBA programme graduates.


Why is collaboration between different schools and cooperation between our business representatives so important?

At SKOLKOVO, we believe that cooperation between international business schools is the future of business education. Now that we have modern technology at our disposal, the world is shrinking—we all have become noticeably closer to each other. For example, St. Gallen, ESADE, Shanghai Jiao Tong University, the University of Toronto and other business schools include cases created at the SKOLKOVO Business School into their educational programmes. We, in turn, invite international professors to the SKOLKOVO Campus and conduct international modules for our students.

Cooperation between entrepreneurs on a global scale helps identify current challenges faced by the industry, understand the opportunities, gain valuable experience and develop useful competencies for their companies.