What lessons has big business learned from the coronavirus pandemic and what should it become in order to survive?

The key lesson of the pandemic for business

What lessons has big business learned from the coronavirus pandemic and what should it become in order to survive?

EastRussia's questions were answered by Alexey Erokhin, head of the Far Eastern branch of EY (Ernst Young) – one of the world's largest audit and consulting companies.

– Alexey Vladimirovich, in a corporate report, EY calls 2020 the year of “updates and transformations”. How was it for the business in general, and for your company in particular?

“Obviously, 2020 has been a challenging year for business. New challenges emerged, companies were forced to adapt and change, even to simply continue to exist. However, only negative factors cannot be taken into account. Under the pressure of the situation, many companies have invested in the development of technology, and some types of business have even received a boost to development. Thus, according to a study conducted by EY at the end of 2020, 61% of business representatives surveyed see new opportunities in the challenges of 2020.

According to a study by EY and Forbes Insights, large Russian businesses turned out to be better prepared for the crisis compared to global participants in the Forbes 2000 list, moreover, 100% of domestic companies expect their business to grow over the next three years. Negative and pessimistic forecasts came true only partially. For example, according to EY, at the end of the first and beginning of the second quarter of 2020, Russian banks expected a decrease in net profit by more than 20% and a decrease in return on equity to 10%, while in fact net profit decreased by only 6%, and return on equity was at the level of 16% compared to 20% in 2019. Of course, serious changes in the business of our clients could not but affect the activities of our company. Nevertheless, according to the results of the EY global report for 2020 financial year, the revenue growth rate, although slightly reduced, remained positive and amounted to 4.1% compared to 2019. If we talk about Russian indicators, then according to the traditional Expert RA rating, for the 7th time we took first place among the largest Russian audit groups and networks, with a 10% revenue growth in 2020. As for the transformation, our work experience allowed us to build the process as flexibly as possible, using different formats, including remote ones. Therefore, I can say that we were ready for an unexpected and abrupt transition to online. If we talk about services, now there is a high demand for large transformational projects, such as technological transformation and business process optimization, as well as tax issues related to international taxation, risk management issues, and, of course, audit.

– The year 2020 has shown how dangerous it is to underestimate the likelihood of force majeure. And in what a difficult situation were companies, transport, tourism and other industries. What do you think the pandemic has taught businesses?

– The rapid negative changes associated with the restrictions imposed to combat the pandemic really hit the transport, HORECA and entertainment industry first of all. At the same time, some foodservice enterprises have restructured their business model, switched to online delivery of products, and thus reduced the negative effect. Flexible and, in a sense, innovative thinking, the use of modern technologies and solutions has become important for business. Naturally, not all types of business can be transferred online. That is why companies were forced to start managing their risks more actively and reduce costs. Retention of qualified personnel became a priority. In the difficult conditions of the pandemic and restrictions, it would be difficult for many affected companies to cope without government support. In general, the new situation that has arisen due to the pandemic has allowed the management of many companies to identify weaknesses and identify areas for development and improvement. Thus, according to an EY study, 95% of Russian companies expect that the greatest changes will occur in the field of personnel management, corporate strategy and culture (63%) and innovation processes (63%). Readiness for change, reliance on qualified personnel and the ability to assess risks and transform business in accordance with market needs are the most important lessons of the pandemic.

– How has the pandemic affected the transformation of business in Russia?

– The new reality dictates new business management methods – according to a survey of senior executives conducted by EY and Forbes Insights, 63% of Russian companies are preparing to increase spending on the transformation of their activities. Among the key tasks of the transformation is the reallocation of resources and the allocation of new significant investments. At the same time, Russian companies plan not to change the structure of their business through mergers and acquisitions or changes in the management unit, but to invest in new technological solutions and begin a comprehensive transformation of the business, and without cutting costs. The ability to comprehensively take into account geopolitical risks, readiness for digitalization and the introduction of breakthrough innovations are the necessary competencies for developing and increasing business sustainability in the face of uncertainty. Interestingly, 54% of Russian companies participating in the survey believe that climate change and environmental protection also directly affect the solution of the tasks of transforming their business. The most important qualities of a change leader for Russian leaders are openness, innovative thinking and management of many continuous changes in the company.

– How have you changed business requests to the pandemic (among your customers)?

– Our customers began to pay more attention to the issues of forming a corporate strategy in the context of constantly changing external factors, risk management issues, as well as new methods of working with personnel in “remote” mode. According to a study conducted by RBC and SAP, 53% of respondents noted that it was required to rebuild personnel management processes, 51% – marketing. Significant issues of digital transformation and sustainable development have become. In connection with pandemia, 76% of large Russian companies accelerated the process of business transformation. Since information and data have become an integral part of business, analysis and data protection are now also important for customers. The study of RUSSOFT, published in October 2020, showed that for 70% of Russian companies, the issue of data protection is the main problem associated with cybersecurity. In addition, a lot of attention from customers is paid to managing supplies chains. According to EY forecasts, the restoration of the global economy after the pandemic will have the appearance of a saw with small local falls and subsequent growth, which will require flexibility companies, the ability to quickly recover and a quick reaction.

– What projects involving foreign investment in the Far East deserve attention? What are the trends in the Far Eastern market?

– Over the past 8 years, the share of foreign investment in the Far East has increased 16 times and amounted to 1 trillion 300 billion rubles, and by 2024 the volume of investments will increase another 4 times and will amount to 5 trillion rubles. Of the latest large projects in the field of energy, it is a joint complex “Rusatom oversiz” and the French Air Liquide (manufacturer of industrial gases), in which it is planned to build an enterprise for the production of 30–100 thousand tons of hydrogen per year on Sakhalin. For this volume, according to experts, it may be required to build about 500 MW of the installed atomic generation capacity, which is estimated at 200 billion rubles.

According to the Ministry of Health, the number of Far Eastern projects with Chinese participation since 2018 increased from 29 to 59. The total volume of Chinese investments in these projects is $ 2.4 billion, this is 73% of the total foreign investments in projects implemented in the Far Eastern Federal District. In the future, it is planned to expand cooperation with Indian companies, which now considers possible projects for the supply of hydrocarbons from the Far East to India, as well as exploration, production and processing of oil and other energy resources.

– In 2021, there are hopes for the restoration of the economy and growth, and if so, what?

-In its April forecast, the IMF improved estimates for the restoration of the global economy from the January 5.5% to 6.0% year (G-K-G) in 2021 and from 4.2% to 4.4% year to year in 2022The IMF expects China to be the key driver of global economic growth in the coming years, accounting for more than one-fifth of total GDP growth until 2026. According to the investment attractiveness survey, which EY traditionally prepares for the St. Petersburg International Economic Forum, FDI is expected to grow in 2021 due to the emergence of pent-up demand for project implementation: 40% of respondents plan to develop or expand business in Europe (including in Russia ), while at the beginning of 2020 this figure was 27%. According to an EY and Forbes survey, business recovery will begin this year. 76% of respondents from Russia note that a moderate increase in revenue is possible.

In the first three months of 2021, there were indirect signs of industrial growth in the Russian economy. In particular, the pace of electricity generation increased by 1 sq. 2021 by 4.9% y-o-y, and the PMI index of the manufacturing sector remained above the 50-point mark throughout the quarter. In its April global economic outlook, the IMF raised its estimates of Russian GDP growth from January, up 3.8% y-o-y for 2021

– About three years ago, speaking about the sphere of public-private partnership, you noted that state and administrative institutions do not understand business. Is the situation changing?

– On the one hand, the situation is certainly changing, because, firstly, the market for PPP (public-private partnership) projects has grown and competence grows with experience, and secondly, training in the field of PPP has become popular. On the other hand, in state structures there is a turnover of those personnel who have received appropriate training and gained experience working on specific projects with external consultants. As a rule, specialists leave for higher-paid jobs in business or consulting, since the demand for labor resources in this area is still high. In order to maintain competence within state structures, it is advisable to consider the allocation of PPP specialists to separate PPP centers for the consolidation of personnel and competencies.

– EY works with projects in the format of public-private partnerships and concessions. To what extent and in what areas are such projects in demand today? How do you assess the Far Eastern Concession mechanism, which is currently being actively discussed, based on its presentation to the business community by the Ministry for the Development of the Far East and the Arctic?

“EY supports both investors and the public sector. In the field of PPP, the range of services includes the development of organizational, legal and financial models of the project, support in negotiations, preparation of documentation: a private offer or tender documentation, development or examination of a concession agreement or an agreement on public-private partnership.When interacting with the state, EY is also involved in the preparation of regulatory legal acts necessary for the implementation of the PPP project. EY is mainly approached in connection with the implementation of projects in the areas of transport infrastructure, social infrastructure, as well as in the field of healthcare. Recently, there has been increasing interest in projects aimed at creating information technology objects.

The mechanism of the Far Eastern Concession arose, among other things, in connection with the exclusion of the possibility of installment payments under government contracts. At the same time, the region still needs a clear way to implement socially significant projects with payment to the investor in installments, in which the private side will create infrastructure, and the public side will reimburse the agreed costs over a long period (20-30 years). In this situation, the state needs to carefully evaluate the financial model of the project in order for the project to be truly beneficial to both parties, not only in the short term, but also after decades. The mechanism of the Far Eastern Concession can work effectively with the full support of the Ministry for the Development of the Russian Far East and the Far East Development Corporation, in which all the necessary decisions will be coordinated in a balanced and prompt manner. It is obvious that the creation of an investment accelerator and the definition of criteria for selecting projects to be launched according to the Far Eastern Concession model is currently a top priority.