Look Out for Efficiency Champions
03 June 2009
By Mikhael Grigoriev, / Director, Strategy Partners Group
By now everybody finally recognizes that achieving Russia's ambitious GDP growth goals will depend on dramatic changes in the area of productivity. Indeed, productivity in the Russian economy is 3-10 times lower than in the United States, depending on sector, and if average productivity here reached that of the United States, the economy would grow by 50 percent. This is especially important now when commodity prices seem to be in the downward cycle, and relatively high utilization of assets makes the situation very different from 1998, limiting the potential for import substitution, which led Russia out of the crisis then.

While this is undoubtedly an interesting topic for economists and policymakers, there are practical aspects of the productivity problem, which affect every actor in any industry in Russia. If we think about what productivity really means we come to a very simple formula -- producing more with less resources, or, in more widespread terms, being efficient. And if we take a retrospective look at what has been happening in Russia during the last decade, we will see that efficiency often was the first victim of expansion based on abundance of cheap financing. Retail chains have been growing at mind-boggling speed, and the growth of organizational complexity associated with ever-multiplying number of stores often outpaced economies of scale. Russian companies listed on foreign exchanges, often created bureaucracies to ensure SOX compliance of scales that sometimes defeated the purpose of transparency and efficiency.

Of course, the reason for this phenomenon is primarily the fact that everybody was so busy with growing bigger than the competitor that there was little management attention left for such mundane things as efficiency improvement. One would think that the crisis had to change this, but in most cases cost-cutting is limited by downsizing following plummeting demand and does not pursue the goal of changing the underlying business model so that a leap in efficiency can be made and new heights can be taken. And at the times of poor demand and tight financing it is the most efficient companies, not just the ones with access to resources, who will lead the markets out of the crisis now, unlike 1998.

Whether you are a banker who wants to know where trusted clients can be found, or an economist looking for signs of recovery, or looking for a challenging and exciting job, look out for the new efficiency champions. How do you recognize them? There are several indicators to monitor.

Pay attention to companies that radically adapt their business models to expand to new markets in times of crisis; not just by M&A, but by redefining the products and customer segments they work with. It is always worth keeping in mind that efficiency is not just about having lower costs, it is also about making and selling more. Vast resources may be accumulated in the state-owned companies and big telcos, but private initiatives like Scartel's Yota take the worldwide lead in offering services around new telecommunication standards such as WiMax.

When was the last time you have heard about somebody being rewarded for a dramatic change he proposed or introduced in his company that led to an efficiency improvement? If you have, take a close look at the company – it may be a rare case of a pay-for-real-performance culture there!

And, of course, with massive personnel and cost reductions, there are companies that not only improve their profitability in this quarter, but maintain and even grow their market share – i.e. doing more with fewer resources.

Those will be the new big names when the crisis is over, and you will certainly win if you know them in advance.


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