A business overview of the gas company Gazprom

Gazprom is the largest gas company on the planet. The major activities of Gazprom include production, exploration, transportation, storage, processing and advertising of gas as well as generation and marketing of heat and electric power. The purpose of the company is to make sure that Russian customers’ need for gas and heating are always fulfilled, and to provide for steady supply of gas for international customers. Gazprom was founded in 1989 on the remaining of the Soviet Gas Industry Ministry. In 1993 the Company went public, with its share trading on the Moscow Stock Exchange. Gazprom has a significant brand name, and it is internationally recognized as the biggest gas company.

The beginnings of oil industry

An independent USSR gas industry was created in 1943, during the Second World War. However, Russia had not always been a gas power. It only became a major gas exporter with the of gas fields in Siberia and Ural. The entire gas production process was done by Soviet Gas Industry Ministry, the predecessor of Gazprom. In August, 1989, the Gazprom became the first Russian corporation. The company was still state owned, but through a stock mechanism, 100% of which were in the governmental property.

When the Soviet Union collapsed in 1991, Gazprom became the official owner of all gas-related assets on the Russian territory.

Privatisation

The new leadership of Russia decided that the Russian economy could transform into a new economic entity, where the general public would own shares of newly privatised state companies. Shares of Gazprom and many other companies were distributed among the Russian population. By 1994, 33% of the Gazprom’s shares were bought by the private sector. 15% of the stock was also distributed to Gazprom employees. The state retained 40% of the shares, but the amount was gradually lowered to 38%. Trading of Gazprom’s shares was severally controlled, since foreigners are not allowed to own more than 9 percent of the shares. However the policy to establish a new type of democracy in Russia did not turn out as the government expected, as due to privatisation, there was a sudden increase in prices. This high inflation forced people to turn to barter economy and share coupons were traded for less than 1% of their value. This situation led to the birth of the oligarchs, who gathered the biggest amount of shares.

Between 1997 and 2000, Gazprom was involved in several tax evasion affairs, and suspicious dividend payouts.

Vladimir Putin, the current prime minister of Russian Federation, had a large influence in the transformation of the company into a modern enterprise that we know today. In his battle against oligarchs, Putin established the state control over the enterprises that proved to have a crucial interest for the future of Russia; Gazprom was one of those companies. The battle was based against people who were striping Russia of its rightfully owned assets.

Establishment of government control

In June 2005, 11 percent of Gazprombank, Gazpromivest Holding, Gazfond and Gazprom Finance B. V., was sold to a state-owned Rosneftegaz for 7$billion. Several western analysts evaluated this to be an undervalued price. The sale was complete in December 2005, and gave the control of the company to the Russian Government because of the previously owned 38% share of the State Property Committee.

The government introduced a new policy where foreign investors were allowed to invest in the company, removing the previous barrier of 20% restriction on foreign investment.

On 20 July 2006, Gazprom became an exclusive exporter of natural gas according to the Federal Law on gas export which came into force.

Issues in Gazprom

In 1999, Gazprom created Vostokgazprom (lit.East-Gazprom) with its primary goal to provide gas to Eastern Russia and widen the horizon of their business operations by entering the Asia Pacific region, as the gas they produce has enormous potential on this emerging market.

Vostokgazprom deals with all parts of the energy business including exploration and production, to refining, transportation and marketing of hydrocarbons. Their core competence consists of long term experience in the industry along with their ground-breaking technological and managerial approach.

Nevertheless, Vostokgazprom has problems with the climate of business operations as the temperatures usually go down to – 50°C.

This environment created inefficiencies that had to be improved and removed. The new management of Vostokgazprom turned their attention to this matter and implemented new policies of improving the management of revenues and costs, investing only into the operations that are vital for the business and achieving improved operational efficiency.

For this to be done correctly, the company needed to have the sufficient information about all the issues mentioned previously, however, the scattered data and its inconsistency made it harder to focus on the objectives.

Way of dealing with challenges

The management of Vostokgazprom had understood that the way data is stored in their company was not appropriate to its size. They noticed that relying on old financial systems and simple data spreadsheets to analyse their company and create financial reporting and managerial budgeting of any kind would not be enough to complete its goals of reducing inefficiency. There had come a need for an efficient and much more sophisticated system that would be able to gather and use the data effectively.

To be able to connect all the processes of its business operations with a natural data flow, Vostokgazprom asked PricewaterhouseCoopers for help. PWC professionals dealt with this challenge for a year. PricewaterhouseCoopers’ team examined the current situation in the company and based on it created methodologies to be used in creating the perfect match of and IT system.

Identified problems

PWC professionals identified five major problems in the current situation of company’s database management. Firstly, Vostokgazprom used multiple computer applications for similar and different business processes, none of which had one primary source of data. Having no unique server or database led to a creation of inconsistencies in the data and consequently the reports created form it. The second problem was that the reports with inconsistent data and of unstandardized structure made it hard for the senior management to analyse them. The third identified problem was the use of different methods and systems in accounting, budgeting and management systems.

Fourthly, the system of budgeting they used was paper based, making it really inefficient in its use for problem solving and running simulations of different approaches in budgeting. The last problem, and the major one the PWC team showed was the lack of collaboration between the various systems and software used across the company.

Solution:

The PricewaterhouseCoopers project team found a Corporate Performance Management solution, which would have the company organization be structured in such a way that strategic goals could be achieved on every level of the company. CPM creates an integration of all the processes of the company and enables all workers to access the same primary data source.

By the end of the project, the Vostokgazprom Company initiated a complete use of a newly developed CPM system. This CPM system includes a budgeting characteristic that connects all participants of the budget to the value chain. With this feature, it enables effective analysis and simulations to be made and is fully comparable with management reporting as it is based on the same calculation, consolidation and interpretation assumptions. The issue of management reporting had also been addressed as the CPM system enables an overlook of all costs and revenues by any criteria such as activity or time period to be made. It ensures reliability of data so timely actions can be implemented when needed. In addition, Key Performance Indicators have been added, that enable benchmarking and evaluation of company’s performance to be done at any time.

Ultimately, PWC helped Vostokgazprom select and devise software and IT methods corresponding to their business needs.

Corporate performance management

Corporate performance management (CPM) is the integral part of BI (business intelligence) concerned with controlling and running company’s performance, with respect to key performance indicators (KPIs) for example income, return on investment (ROI), operating costs, fixed costs and special costs. For internet based businesses, CPM includes supplementary variables such as number of clicks on a page, load of the server, network interchange and the number of transactions / second. CPM is also recognized as business performance management (BPM) or enterprise performance management (EPM).

Profession of CPM contain all the practices, technologies, methodologies and metrics used to collect and apply appropriate information. CPM software includes forecasting, budgeting and planning functions, as well as graphical add ons to show and distribute corporate information. A CPM interface typically displays information for key performance indicators so that workers can follow individual and project results in relation to corporate goals and plans. Some companies use established organization methods with their CPM systems, such as balanced scorecard or Six Sigma.

Usually used inside finance departments, CPM software is now planned to be used enterprise-wide, frequently as a addition to BI systems. Neil Chandler, a CPM and business intelligence (BI) analyst at Gartner, estimates that merely about 60% of big corporations and less than 30% of mid-sized organizations have implemented CPM applications. The greater part of users is still using CPM technology for financial purposes, Gardner reported.

Application software types

Experts working in business intelligence have developed programs and systems that relieve the process of CPM, particularly when the business-intelligence task is related to assembly and analysing huge amounts of unstructured data.

Tool categories normally used for CPM include:

OLAP – online analytical processing, sometimes simply called “analytics” (based on dimensional analysis and the so-called “hypercube” or “cube”)

score carding, dash boarding and data visualization,

data warehouses Document warehouses

text mining

DM – data mining

BPO – business performance optimization

EPM – enterprise performance management

EIS – executive information systems

DSS – decision support systems

MIS – management information systems

SEMS – strategic enterprise management software

Potential impact of CPM on Austrian SMEs

Enterprises qualify as small and medium-sized enterprises (SMEs) in Austria if they fulfil the criteria of having less than 250 employees, turnover less or equal to â‚¬50 million, and a balance sheet total less or equal to €43 million.

Concerning the turnover and balance sheet total, an enterprise qualifies as an SME if it meets either the turnover ceiling or the balance sheet ceiling, but not necessarily both.

This definition of a SME shows that it is more flexible to work with clients, more agile in taking decisions and has a more personal approach. Flexibility is achieved also through a more personal approach as everyone in the company can be made aware of what is going on at any time, because the news would spread faster. Decisions are taken faster and the solutions are implemented with much more focus because of the size of the company and relatively lower size of information that has to be analysed. The personal approach is achieved also because of the rather small size of a company compared to a conglomerate or a multinational corporation. People have names and feelings in SMEs, while in bigger companies they are all just analysed by benchmarks, ratios and efficiency multipliers.

The problems that some companies in SME Austrian sector are more related to a more passive attitude towards business that the entrepreneurs have in Austria.

According to research, by SME Trainet (European Lifelong Learning Program 2009), seven out of ten entrepreneurs needed further education and training to enter into business. The report states also that entrepreneurs lacked the know-how to improve their core competencies and extend their service portfolio and enhance their management skills.

Only a few of mentioned entrepreneurs fell back on supportive coaching by external experts

or consultants during their first year of existence. A core problem is that only few perceive a continuous need for further vocational training and lifelong learning.

This is an obstacle of a personal manner, which CPM cannot improve.

Most of Austrian SME entrepreneurs use legal advisory services and networking events in terms of consulting. These are not professionally executed and aimed solely at delivering a corporate performance management solution solely to a given SME.

These events and services are usually more standardized, and executed just to show that something has been done for SME sector, where in the end, no tangible result has been delivered.

Financing is rather also passively executed as only a few entrepreneurs state that they require external financing in addition to their own capital which is broken down to mainly bank loans. Problem lies in the fact that most of them did not attend trainings to develop a strategy for finance and investments. Some considered that the information they received from the banks was enough, and others say that the training that they are not satisfied with the training offered.

Another in the line of problems is that SME entrepreneurs in Austria do not have a vision for the future. They do not know where exactly they want to be, they think rather generally and for from the present to the unknown future. This implies that they do not set a portfolio of goals which they want to reach, objectives they have to achieve in order to reach their goals, and finally they do not know how they will do it.

Most of them have attained training in strategic planning, but are unsatisfied with the fact that the knowledge is not tailored to the SME approach to business.

If corporate performance was introduced in an Austrian SME it could solve most of the problems listed above because of its tendency to be tailored exactly to the company it is made for. The CPM system in an SME would work well in areas like

BUDGETING

offer a solution to model different business scenarios for the future and prepare the small enterprise for otherwise unexpected event. In such a way, entrepreneurs would learn from their own enterprise without having to take risks. Certain long-term learning would be accumulated which could then be used in business situations.

MANAGEMENT REPORTING

because of a more personal approach of a small enterprise, sometimes the SME overlooks the important management factors. If a CPM was introduced to an Austrian SME, it would allow the entrepreneurs to analyse business situations further away from the personal level, taking the company on a higher corporate level. People would not become numbers on a spreadsheet like in multinational corporations, but it would take personal implications away from the equation of decision making. Value chain analysis could be executed with a more detailed approach than usual, which could lead to tie-breaking decisions.

Another part which would be improved is the linking of core competency to the strategic planning. Entrepreneurs would see where they want to be in the future and then work their way up.

Example of an Austrian Company

KIKA is an Austrian company that sells furniture mainly in Europe, with recent entry into the Russian market. The company was established in 1973 and opened its first store in Vienna the same year. Currently, they have 32 stores in Autria, 6 in Hungary, 6 in Czech Republic, 2 in Slovakia, 2 in Croatia and 1 in Serbia and 1 in Romania. They have a well established supply chain and the success of KIKA can be well attributed to the well planned out business processes and environment.

The logistics of KIKA is much customised based on analysis of efficiency and effectiveness, having consolidation warehouses all around Europe and a well connected rail, road and sea networks.

The supply chain of the company starts with purchasing, and to keep the supply of products up to date with trends, KIKA purchasing department experts research the market by visiting different relevant fairs with the mission to find out what the market might evolve to, to be able to adapt.

KIKA also constantly works on improving their human resources and enriching their personnel development programmes. It rarely outsources skills required to keep up with the requirements of human resource management.

Concerning marketing, the company always tries to keep its goals and actions on the same level as the needs and wants of the customer. The marketing department sees brand management as one of the most important factors for success. Therefore they try to ensure a constant communication with the customer and a clear positioning in the minds of customers.

The sales department is extremely important as the employees of the KIKA store are the ones who are in direct contact with the customer. Due to the huge product range and thousands of possibilities offered, the personal consultation in the KIKA store is the key to the success of KIKA.

With having so many business processes that are planned out so thoroughly, a need arises for a system to measure the performance of products, employees, methods, stores, countries, departments and so on. If a company is able to measure its performance, only then can it take appropriate actions.

It would require a system that provides a broad overview of the whole supply chain process of each product in order to manage its efficiency effectively. An IT system would be needed that enables employees and management to access a primary source of data on any product, employee, supplier, customer and store in any country, in order to be able to identify success and/or failure of performance of previously mentioned factors and take appropriate action.