Sustainable IT solutions in the context of growing threats

18/05/2022
Business today is unthinkable without IT. For example, the heart of almost every enterprise, except very small ones, is their Enterprise Resource Planning (ERP) system. ERP systems are used to manage almost every aspect of internal and external company operations.

In Russia, nearly half of the ERP solutions in use currently come from abroad. The market leaders, besides homeland giant 1C, are SAP, Oracle, and Microsoft’s enterprise solutions.

With many foreign IT vendors announcing the suspension of operations in Russia, limitations for businesses are increasing and the sustainability of business operations in Russia is at risk because of a lack of IT support. Current examples are:

  • SAP is not selling new licenses to Russia, the Russian SAP cloud (used by SMEs) will move abroad by the end of 2022, and the SAP branch in Russia will be closed
  • Microsoft similarly is not selling new licenses to Russian companies, including the ones for Windows operating systems, Microsoft Office and their ERP software (Dynamics NAV)
  • Oracle has ceased business in Russia. This affects database management software, ERP and business applications such as XStore used by some retail chains in Russia
  • Access to many other cloud services has been restricted or blocked for users in Russia by foreign vendors.

Although current agreements are being served for now, experts believe it is only a matter of time before these services will be phased out.

Against the above backdrop, common threats for companies using foreign software solutions are:

  • Immediate restriction of access to services – this mainly affects cloud solutions, but some headquarters have also blocked access to their corporate systems for their Russian branches.
  • Non-cloud solutions (operated on companies’ premises or hosted locally by Russian providers) will receive less or no maintenance in future. This leads to non-compliance risks. Statutory regulations change often in Russia; without ongoing IT updates, the fulfillment of these obligations will become impossible.
  • No growth is possible because of the absence of new licenses.

What “Plan B” options can be considered by affected companies?

1.     Immediate Plan B

If essential IT solutions are no longer accessible from Russian locations there are two ways to bridge a short time period: either ‘copy-paste’ the system to a local server or ‘neutralize’ geolocation while connecting to the global system.

  • Copy-pasting’ the system to a Russian server is technically possible for smaller solutions but not feasible for large systems. Additionally, restrictions such as stopping licenses can make this solution “illegal” from the provider’s point of view. However, the question of legality and potential consequences should be clarified by experts, since the Russian entity has the right to take measures to fulfill its local obligations.
  • The second immediate option is technically feasible in most cases. Besides using a VPN, globally operating companies can provide an option for their Russian branch to work through a foreign location. In the worst-case scenario, physically working from a neighboring office outside Russia can be considered. Some companies have already relocated members of their Russian teams to other countries.

The above ‘firefighting’ measures are not suitable as a permanent solution. Both mid-term and long-term measures should be initiated as soon as possible by companies that do not want to wait for help from state or fate.

2.     Mid-term solutions

The most common mid-term approach at the moment is hosting IT solutions outside Russia. There is already a lot of activity from IT suppliers in Kazakhstan, Armenia, Turkey, Azerbaijan and other countries. New data centers are planned to host IT solutions that are no longer delivered to Russia and to give Russian companies access to them. However, some aspects must be considered:

  • Technical quality: Different regions have different infrastructure quality, mainly in relation to internet provision. Regional hubs and “last mile” infrastructure can vary. This will become a key factor in regions where the cloud service industry is growing rapidly and new data centers are built. Companies considering such a scenario should consult experts.
  • Overall stability: Global enterprises have their own regional assessments. Some regions are considered stable, while others are “sensitive”. The risk of sanctions on other countries also plays a role. Last, but not least, connectivity between Russia and the ‘clouding’ region can be a risk factor. IT companies with good experience in the relevant regions can support corresponding analyses.
  • Licensing models of software rights owners: There is a risk of license bans affecting Russian entities as ‘end-point’ licensees, independent from the physical location of the IT system. Certain available facts lead our experts to believe that such a risk is high. In that case, the only solution will be having a non-Russian licensee who then gives access to Russian users. However, the issue of Russian updates remains. These must be organized individually e.g. through independent experts.

A special measure to mitigate risk is the replacement of compliance-sensitive software with a local product. Due to data privacy regulations (152-FZ), most SMEs and even large companies already use local solutions for payroll and HR administration. What generally remains is financial accounting and tax reporting. This is a small part of any overall ERP solution and can be split off with moderate effort. Typical projects take 3-4 months. As a result, local software such as 1C is used for financial accounting and tax reporting, while typical interfaces connect local data with the company’s global resources such as master data, sales and revenue numbers, goods movements etc.

The above concept is becoming more and more popular and specialized IT integrators have comprehensive experience in these kinds of projects. The main advantage is the long-term assurance of local compliance, independent from foreign solution providers. Also, pure data exchange (unlike the direct use of an IT system by a Russian entity) is not subject to licensing.

3.     Long-term perspectives

The majority of international companies already use local IT solutions for their Russian branches, interconnected with their global systems. The leading Russian software manufacturer 1C offers a wide range of business applications such as 1C:ERP, 1C:Complex Automation, 1C:Retail, etc. There are specialized IT integrators with strong experience in both local solution implementation and interconnection with global systems.

Companies still using global systems in Russia are also now starting to look for replacements. For trading companies including retail chains as well as for straightforward local manufacturing, this is the most preferable long-term solution in the face of new restrictions. However, for complex manufacturing processes there are functional limitations. An individual analysis is recommended in both simple and complex manufacturing situations before deciding on full-scope replacement.

Conclusion:

There are several options – and available implementation experience – that can be employed to build sustainable IT solutions in the context of growing threats. Where Russian IT products are not sufficient to cover the whole spectrum of functionality needed, local software is recommended for compliance-sensitive processes such as financial accounting, tax reporting, and HR administration. Affected companies are advised to act soon.

About SCHNEIDER GROUP

SCHNEIDER GROUP has been helping businesses to expand to new geographical markets since 2003, offering a full range of business support services: from developing strategy for successful market-entry to helping arrange or optimize accounting, reporting and financial planning processes and establishing efficient IT infrastructures.

500 top experts in 9 countries take care of all resource-consuming non-core business tasks, so our customers can focus on achieving their business goals. We offer services in Armenia, Austria, Belarus, Germany, Kazakhstan, Poland, Russia and Uzbekistan, with minor regional variations. Get in touch via our contact form to request details of specific service packages available in your target country.

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