Global Report

Why Russia is tough but rewarding for this Canadian exporter

3esi Innovation on dealing with a difficult market

The church of St. Petersburg

(Loic Lagardge/Getty)

Wayne Sim, the founder of Calgary-based 3esi Innovation Inc., had worked with clients in Russia’s sprawling and inefficient oil and gas industry for almost two decades. Until recently, however, he hadn’t planned on expanding his eight-year-old enterprise software firm into that notoriously complicated market until 2015.

3esi was growing its international presence systematically, says Sim. “We were leaving the harder markets for last.”

But when commodity prices plunged, the lumbering Russian energy giants came calling. 3esi is now about to dive into the intensely political, high-stakes world of Russia’s oil sector.

3esi helps oil and gas exploration and production firms squeeze every last drop of efficiency out of their internal operations. The company sells sophisticated business planning software to replace the hundreds of spreadsheets that most firms rely on to monitor budgets, supply costs and capital assets. Those tools, in turn, reveal inefficient practices and give customers an opportunity to implement change management initiatives, often in partnership with 3esi’s consultants.

The firm, which generated $6.2 million in sales in 2012, has spent the past several years building a customer base in the U.S., southern Europe, Africa, Australia and Latin America. As of last year, almost 90% of its revenues came from outside Canada.

Despite a rapid growth approach to new markets, Sim says that the company made a strategic decision to defer entry into more challenging markets, such as China, where many domestic oil-and-gas firms already use similar software programs. Russia also fell to the bottom of the list with its aging infrastructure and labour practices left over from the Soviet era.

Sim had to re-consider the company’s priorities when, in addition to the nosedive in commodity prices, the U.S. fracking sector made its impact on the world of big oil by flooding global energy markets with less expensive oil. Russian firms then had little choice but to confront the reality that they need to implement new business processes and technology to drive down costs and improve margins as they increasingly depend on international markets for new revenue.

“Their margins on a barrel of oil could be considerably larger,” says Sim.

In other words, the Russian market was both a huge opportunity and also a daunting challenge.

Sim is quick to point out that he and his partners are not new to the Russian marketplace. In the late 1970s, and just out of university, they set up Hyprotech, a company that made process engineering software for large industrial customers. By the time they sold the company, in 2002, they had thousands of customers in 140 countries, including Russia. “We had former colleagues in Russia,” Sim says. “We had people who could sponsor us” with the Russian energy giants.

That experience proved to be highly useful when Sim and his partners decided to launch their new venture. “From day one, we had an international presence before we even had a product.”

The idea for 3esi emerged from a series of exploratory conversations with senior executives in Calgary’s oil and gas sector. Sim and his partners wanted to know what sorts of IT problems they faced. Armed with that reconnaissance, they began to develop what Sim calls a “solution map”—a prospective set of software tools designed to boost efficiency for oil and gas companies. To test their ideas, they went back to the same executives for feedback.

After an early version of their software proved to be too difficult to implement, Sim decided to focus on helping clients improve their internal workflows.

To broaden their client base beyond Canada, Sim’s team re-connected with their contacts from their previous business, effectively replicating the overtures they had made to oil-and-gas executives in Calgary. He says those meetings weren’t sales calls so much as a form of local R&D that allowed 3esi to gain important insights into energy sectors around the world.

That approach also positioned 3esi to adopt a different business model than Sim’s previous company. Hyprotech’s revenues, he explains, came almost entirely from licensing fees paid by private and public sector customers. 3esi, by contrast, sells both licenses for its software and consulting services, so its clients can understand how to use the technology to spur changes in internal accounting, sourcing and capital asset management. The company’s consultants, many of them locally hired, work out of regional offices around the world.

“We go in and understand the ‘as is’ process and design the ‘to be’ process,” says Sim, alluding to the company’s approach to diagnosing a customer’s efficiency shortfalls. “It’s a hybrid model.”

The firm’s savvy, experience and pragmatic outlook has proven to be a winner in countries from Brazil to Australia. The company’s Russian clients, Sim allows, have put 3esi’s skills to the hardest test so far. As he acknowledges, “It’s a difficult place to do business.”