07.02.09

The Post-Merger Integration Process: The “Russia” Factor
Renee Stillings, Partner, Alinga Consulting Group (Moscow)

Russia is increasingly feeling the effects of the global economic crisis. In addition to the lack of access to credit and investment, plummeting commodity prices and capital flight are bringing back the recurring nightmare of the devalued rouble. While this will lead to a decrease in foreign investment in the short-term, it is still important to look at the integration process in terms of existing and particularly recent mergers or acquisitions, with an eye towards potential opportunities for less expensive market entry in the current economic climate. In recent years, the heated investment climate put tremendous pressure on the limited labor and professional resources available to the international business community in Russia. It seems inevitable that this pressure will lessen and a greater pool of local and international talent can be tapped by new-to-market companies.

There are several issues that are of specific concern to companies expanding into the Russian market.  These include HR management, selecting a CEO, legal compliance, and financial reporting.  General functional integration issues are directly related to the size of the organization and the industry in which it works and less dependent on the specific business environment.  In Russia, there are integration issues that apply to companies of all sizes and sectors.  Indeed, these same issues also apply to those establishing a new business in Russia.  The areas we will focus on are knowledge sharing, customer orientation, management, legal advising, and financial reporting.

HR Management: Knowledge transfer and the ‘kollektiv'

The number of organizations who have decided to internationalize their operations has increased dramatically.  For the competitive advantage of international expansion to be realized, however, effective knowledge sharing must offset the potential disadvantages of physical distance and cultural differences.  Foreign managers with an understanding of the specific challenges related to transition or post-Communist business environments such as Russia will contribute more successfully to the integration process than those who lack in this knowledge.

Because international partners have typically brought technology and management know-how to the table, most of the focus has been on the one-way knowledge transfer from international business partners to local subsidiaries.   However, it is important to note that knowledge transfer is a two-way process and it is perhaps the facilitation of knowledge transfer back from the subsidiary that is the greater challenge in Russia.

Key factors in Russian cultural and organizational behavior include the following:

• The concept of in-groups and out-groups plays a very important role. This concept is reinforced by the notion of the kollektiv, a term used to refer, fondly, to one’s colleagues.  The size of the group referred to as the kollektiv may vary.  In a very small company it may be everyone. In larger companies the reference may become departmental in nature as interaction across departments is less prevalent.  It can be assumed that the kollektiv referenced by any one individual is their in-group.  Note that managers and employees often view each other as separate out-groups, although a direct supervisor is likely part of a departmental in-group.
• Russians focus on the relationships created over time.  These relationships, hierarchical in nature, repeat themselves in a social setting.  In other words, the professional and social “in-groups” are far more intertwined than in western nations.  Information is shared more readily with those with whom there is a long-term relationship established. There is an aversion to sharing knowledge with those outside one’s in-group.
• Russians are apt to share information such as salary levels readily with colleagues. While this tends to happen more frequently within perceived in-groups, it is not unusual for an employee to receive questions about his or her salary from colleagues the first day on the job. It is likely the employee will not find this unusual at all and will readily share this information. Company policies should discourage this by making it clear that asking and sharing such information is unacceptable.
• Throughout the Communist era, Russians were encouraged to conform, not deviate from the group, and not to admit mistakes.  While the western approach has been to view mistakes as learning opportunities and to be shared, this is not the case in Russia.
• Russians have come to view personal connections as a substitute for reliable government and established rule of law.  As such, in-groups and personal networking (referred to in Russia as blat) are an integral part of business.
• Russians have a tendency to amass knowledge but to then hoard it. Reasons range from saving it for possible future advantage to fearing that if the knowledge is shared, it might be misinterpreted to the sharer’s disadvantage.
• Management has been strongly top-down in Russia.  As such, Russians don’t believe that knowledge can be acquired bottom-up in organizations.
• Russians appreciate regular and clear communication, especially about any new company rules and regulations.  In the absence of clear communications (and even with it) Russians are prone to believing rumors and facilitating their dissemination.  Russians are by nature skeptical (particularly of authority and rules).

Many will read the above points and wonder if or why these characteristics really still dominate.  It is important to realize that these are deep-rooted – often going much deeper than simply the influence of the Communist era.  It seems that, over time, there have developed more frequent exceptions to these rules, but a global change has yet to be effected.

What can management do to encourage information sharing given this cultural legacy?  The first step is to gain a solid understanding of the dynamics at play.  Then, don’t try to “break” current relationships and in-groups, but rather try to determine how best to enter them.  This may require intermediaries in the short term and one strategy is to focus on departmental managers with pre-existing networks.  Don’t create special work groups in an attempt to bridge out-groups.  While many argue that this works in the West, it can lead to conflict in Russian business culture by creating new out-groups and tension in the pre-existing in-groups.  Consider group-based incentives and rewards; in Russia this can stimulate knowledge sharing within the group. Well designed group training exercises and internal seminars in which employees are the presenters can be very beneficial by creating mechanisms for knowledge sharing.

Customer Service: Does it exist in Russia?

Service companies face additional challenges in Russia. This situation has changed considerably over the past few years with Russians traveling extensively abroad and bringing home some degree of greater service expectations.  Furthermore, companies catering to the elite and afluent carefully select and train their staff, contributing to the number of service-conscious participants in the labor pool. Still, most are surprised when they receive good service in Russia and if you are managing a service company in Russia, it is important to consider a few additional aspects of Russian culture.

• In general, the customer-employee relationship is more oriented toward the employee, who is in the position of power. The customer is often expected to show politeness, humility, and perseverence. Even with this approach, there is a good chance of being ignored or shunned. Particularly in government and other low-wage sectors, this sense of empowerment is associated with self-respect.
• Russians associate good service with wanting to please someone important or famous or when there is something to be gained. An ordinary customer is usually perceived as more of a nuisance than as "beneficial to the company" and an average employee is likely to behave in a way that lets the customer know this.
• The service industry has been traditionally a low-status field in Russia, generally home to those who were not accepted into college. Obviously the situation has changed considerably, but not the underlying perception. Young people currently filling the ranks of the service sector view it as a temporary situation with flexible hours while attending school. Very few choose hospitality as a profession.
• Those working in the service sector have relatively low wages, meaning that they are less likely to travel abroad, eat out, or otherwise have opportunities to experience higher levels of service.
• Even in professional services where the overall “status” and wages are higher, the concept of customer orientation is not nearly as instinctive as it is in the West. The professional knowledge and work output may be excellent, but it often does not take the client into account. Often, clients can be presented with data without interpetation or recommendation, meaning that the client will feel they are left to do much of the substantive work. Related to the knowledge-sharing issue described earlier, there is a tendency towards “why didn’t you know” or “you didn’t ask” as opposed to “why didn’t we tell you.” Another common complaint is a lack of time-sensitivity or urgency on the part of the professional.

Training and retention go hand-in-hand in attempting to instill customer orientation in staff at all levels. Some companies, notably the western brands, provide excellent training in customer service.  If the Russian economy faces an extened downturn, Russian companies will also focus more on customer service so as to remain competitive.

Top Management: Local or imported expats – or repats?

Facilitating knowledge transfer and building personal networks both inside and outside the organization are the greatest challenges of the CEO of a Russian subsidiary.  As such, abilities and experience in this area could be the single greatest asset of a potential candidate for this position.

Regardless of other commercial titles that may have meaning in the West, the Russian Generalni Direktor (CEO) is clearly the top of the heap in the historically top-down management style.  He/she will be responsible ultimately for implementing policies and strategies going forward.  Therefore, any changes to the CEO position should be decided on during the merger/acquisition process.  If possible, the previous CEO should remain in a deputy director position, helping to preserve current in-groups and facilitating the new CEO’s entry into these groups.

Who will have the best chances of success as the new CEO?  Realistic candidates include a local expat, an “imported” expat, and a “repat.”  For the purposes of this article and its emphasis on the international aspect, we will not consider a local Russian, although there are increasing numbers of Russians who have acquired an international education and/or international work experience and are viable candidates.  Still, companies entering the market for the first time rightly feel they need to have “one of their own” on the ground.

A local expat is a known quantity.  By “local expat” we refer specifically to those professionals with a solid track record in Russia, whom, in the current environment, you will likely need to headhunt.  He/she usually knows the language and culture, and has often made a lifetime commitment to Russia by marrying and having children there.  He/she is likely familiar with some of the “ritual” surrounding breaking into an in-group and likely already has business and social in-groups beneficial to the position.  The costs and risks surrounding such a candidate are lower than the other two candidate groups considered.

An “imported” expat often has no prior work experience in Russia.  Indeed it is possible that he/she has not worked overseas ever, but has knowledge of the industry and management experience at home.  Most with specific industry experience will not speak the language and may not have the slightest interest in Russian history or culture or adapting to them (which almost always affects the manager’s ability to enter in-groups).  The risks, including the candidate simply not being prepared for daily life in Russia, are significant.  Short-term or commuter expats may be able to succeed in specific departments and tasks within the company, but usually not at the CEO level.

The Russian “repat” is a relatively new phenomenon.  He/she grew up and was educated outside of Russia, but spoke Russian and was exposed to Russian culture at home.  Such candidates with business degrees and industry experience are finding a new home in companies in Russia.  In considering such candidates it is important to note that while they may have the language skills and cultural sensitivity, their entire professional background, including networks (social and professional), may have nothing to do with Russia.  A repat is not necessarily more qualified, then, than an expat, and in fact can in certain situations be viewed negatively – as an individual who left Russia when times were tough and only returned for the good.

For any of these candidates to succeed in the integration process, language ability and cultural sensitivity are important, and many companies even try to ensure that they are instilled vis-à-vis an intensive pre-posting training program.  While Russians are known for a degree of xenophobic and anti-western sentiment, young Russian professionals are most often eager to learn from an experienced expat boss.  The CEO with experience, professionalism, leadership skills, and cultural sensitivity will quickly gain their respect.

While management and the challenge of knowledge transfer really only have in-house solutions, there are two areas in which outside professionals can assist with transitions, fill initial gaps, and even provide part or all of a long-term solution.  In what is currently still a very tight labor market for top-notch professionals, it is often good to know there are options.

Continued Legal Support And Compliance

The work of your legal team does not end with closing the deal and filing all immediately relevant documents with the corresponding government offices. Evolving laws and regulations combined with inspectors that correlate more laws with increased opportunities for income, means that businesses of all sizes continuously face the economic choice of whether or not to pay for legal advice.

Depending on the nature of the business, an in-house lawyer or a relationship with an outside legal counsel may already be in place in Russia. In many cases, this may be sufficient.  If the foreign partner is a public company, perhaps subject to Sarbanes-Oxley, increased sensitivity to compliance in all aspects of the company’s business may necessitate an in-house lawyer with more experience (international), foreign language skills, and the ability to work with both the in-house lawyers at the home office and with outside counsel on complex matters.  Legal support for any Russia-based offices should have specific experience not only in that regulatory environment in general, but also in industry-specific areas.

Challenges In Accounting And Financial Reporting

The Russian Accounting System (RAS) is in a state of slow transition. The process of aligning this system with International Financial Reporting Standards (IFRS) is currently underway, and reasonable progress is being made… at least on paper.  The greater challenge is in transforming the approach of Russian trained accountants toward applying the financial accounting rules rather than only thinking in terms of “tax accounting.” Accountants focus far more on reporting to the tax authorities than to management and the application of substance over form is still missing from the mindset of your average Chief Accountant.  Particularly in situations of economic downturn, a lack of management accounting is perilous.

The task of preparing financial reports for a home office is two-fold —choosing a system and finding the personnel to implement it.  Currently this issue is addressed in one of three ways, depending on the size of the company:

1. Maintain parallel accounting.  This can be done by using two accounting systems independently or by using one of a select number of systems that generate statements in both formats with some degree of accuracy.  This can often be cost prohibitive for smaller companies.
2. Maintain accounts in RAS and do periodic “transformation” of the financial statements for reporting to the home office.
3. More and more the the major ERP providers (Microsoft, SAP, Oracle) are successfully adapting their programs to be compliant with the Russian tax filing requirements and as such provide a single accounting system for both RAS and home office accounting. The acquisition and implementation costs of such a solution is still rather high.

The first two methods above, depending on the size of the company, could be performed in-house, or partially (transformation only) or wholly outsourced to a specialized professional services firm.  The shortage of Russian accountants with IFRS and foreign language abilities means that smaller companies will often outsource at least the transformation of statements to an audit firm with IFRS experience and larger companies will bring on board a CFO to build a suitable accounting department.

While similar challenges likely exist to some degree in any international integration, those addressed here are Russia-specific, or at least specific to transition and/or post-Communist economies.  They should be considered in planning the recruitment and allocation of resources.

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