Localization: is it only the price that needs to be adjusted? . 90

The most interviewees acknowledged the challenge that is directly inherent to the service sector is necessity for localization. Service firms that want to successfully serve Russian market have to adjust not only service itself to the demand and specifications of consumption of these services in the market, but also the business processes themselves, for example, in terms of service delivery, pricing, marketing, etc.

“The main challenge in service industry is adaptation of the service and business to the local environment. You cannot expect doing everything the way you do it in Finland,

so you have to do a lot of good planning for adaptation. There will be something that you have to do differently, some part of the service or legislation, paperwork contracts” -

Expert H, - “The service can be done differently due to the legislation or customer preferences.”

Russian market is a competitive market with much lower price level than Finland. Even though Russian customers in B2B sector are not as price sensitive as private users, and ready to pay more for sustainable quality of the service and its delivery, before launching the internalization process, Finnish company has to find out whether it is possible to adjust the price to the competitive level that Russian customers are ready to pay for. Many Finnish firms had to leave the market due to the fact that they were not able to adapt their pricing. Case Company E has been also experiencing this problem: it has been difficult to lower the price for their services as the engineers were employed in Finland and were much more expensive than the Russian alternative firms.

I think that Russian customers want quality and they are quite price sensitive so they know what the price should be and every if it's too high they will not even talk with you” - Company A, - “So, you have to understand what the price level is and adjust

your offerings.”

“Of course our potential clients know the price level very well and it cannot be manipulated a lot. So, in my opinion, it has to be a combination of service that they need

and the reasonable price level because they can always find a cheaper provider if your price is too high” - Company B.

“... Services needed to be adjusted locally” - Company D.

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Marketing adaptation for Russian customers should be taken into consideration for Finnish service SMEs, as due to their resource constraints it is very important to correctly and efficiently focus their marketing and sales efforts. The adjustment of the marketing processes should be done according to how Russian people want and used to getting information. Company should go through all the 4Ps of marketing mix (Price, Place, Product, Promotion) and adopt them to the conditions of the Russian market. One of the examples:

emails as a marketing channel are not efficient at all in Russia, while in some countries it is one of the channels companies reach their potential customers.

Another important point is that Finnish service SMEs have to take into consideration is the educational level of Russian people in the technology Finnish firm provides. If the awareness of the topic is not good enough, first Russians need to be educated. One of the good examples was shared by one of the experts:

“We had one customer that offered professional education for adults and professionals.

They organized educational sessions in Russia for Western-based companies but the participants were Russians. The topic was related to energy efficiency in buildings.

Finland is more developed in this area than Russia. Thus, for Russians you have to explain this topic from scratch. There must be deeper description of the processes and why energy efficiency should be used. So they had to understand what Russians already

know and give them the value they needed” - Expert F.

Russian customers in B2B sector have their expectations how certain service should be and how it should be delivered. They often want some processes to be done in their way and they may not accept the ways foreign providers are suggesting.

“You usually do not happen to come to the market where there is no competition, there is players who have already created system there, so the customers expect to get

something and you have to understand this” - Expert H.

“Russian customers always want to adjust the service according to their national and their specifics” - Company C, - “One of the example is one project in St. Petersburg:

from the beginning they were trying to enforce their specificity, they wanted to change well-formed Finnish processes for the system of St. Petersburg”.

It is not only about the mentality but also legislation and regulation in Russia that often requires Finnish service companies to adapt the service is the legislation and regulation in Russia.

“One client provided IT software for energy measurements of houses. They heard from somewhere that in Russia new legislation that each house needs to have an energy certificate came into force. Local legislation played a huge role: it changed the way the

process has to be executed and then every house needed to have a certificate. Because Russian people are used to do this procedure manually and slowly, it is logical that there is a potential for this company. But what happened is: there was an interest in Russia and Russian service providers were really interested in using the program. But

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it turned out that if you do not have a certificate, the fine is so small that people just pay it and they did not do this energy inspection” - Expert H.

Company C is currently seeing the necessity in opening the local office due to the requirement of all the companies in the industry to proceed with a services and products to be registered and other legal aspects. Moreover, in certain industries it can happen that Russian-made products and services are preferred. So that Finnish companies are not able to sell anything to the Russian companies. As an example: in a public tendering process where public money are involved, they demand to be have a certain percentage of an ownership by Russians to be able to take part in this tender. Company D had to adjust their service by integrating Russian payment providers into their system as Russian consumers are used to pay in different ways than users in Finland.

It is not even under the discussion that the service has to be delivered in Russian. If there is a competitor that offers the same service in Russian, foreign company will unlikely to get a deal.

“Translation to Russian is a must as well” - Expert H.

“Price sensitivity is related more even to the service sector because services are typically locally-produced” - Company B.

“When you provide services, Russian customers probably demand that they are in Russian” - Expert F.

“Our expenses are much higher and Russian customers can find same services produced in Russia with much cheaper price. Our cost level is too high” - Company E.

To eliminate this challenge, Finnish SMEs should do market research before market penetration in order to understand how the service needs to be adjusted (e.g., if there certain legislations that regulate the players in the industry, price level is sufficient or if the behaviour of the Russian potential customers differ in certain ways). Secondly, based on the results of the research, the sufficient entry mode can help to eliminate certain challenges connected to localization: local partner can help with bringing in language proficiency, knowledge about how the service needs to be localized, he also can help with promotion of the service and the company and much more. However, it will not give a Finnish company a 100% control of the business operations and the process of choosing a right partner can be tricky. On the other hand, by settling the local office Finnish company will remain the total control of the business as well as hiring local employees will lower the price level as a result of savings on labour costs and local production of service; it will also bring the localization of the business processes of the Russian branch.

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4.2.6. Difficult economic situation and weak rubble

Since the crisis hit Russia in the end of 2014 and repelled foreign investments due to the sanctions set by European countries and USA against Russia, its economic recovery continues nowadays. The decrease in purchasing power was significant during the past four years; however Russian economy returned to the growth stage in 2017 after a long period of recession. Russia‟s growth is expected to be modest during 2018 – 2020, between 1.5 and 1.8 % (World Bank Group, 2018). However, short-term forecasts vary due to the uncertainty associated with oil prices that affect country‟s revenues from oil.

Moreover, deceleration of recovery and negative effect on investment to the economy may occur due to the risk that major economies will accelerate trade tensions and restrictions. Such an uncertainty in political and economic situation as well as weak Russian Ruble were referred as two main challenges of the Russian market for Finnish service SMEs. For these reasons Russia often is not in the list of the attractive markets for many Finnish companies.

“It is not so popular nowadays to go to the Russian market due to the current political and economic situation. Rubble is now weak and Finns understand that their services can be quite expensive” - Expert H, “If the purchasing power in the country is not so

good then it's not the first market they put their efforts to.”

“Currency (weak ruble rate) is the biggest problem of the market” - Expert F.

“Mostly the exchange rate of the Russian ruble, not a political situation, is a challenge for us as we have to buy materials from abroad and sell in Rubles” - Company A.

Because Russian ruble is weak, foreign services and goods become more expensive for Russian buyers and Russian providers become more affordable.

As a result Russian market is seen by interviewees as a competitive market with low price level.

“From Russian point of view they are quite expensive” - Company E.

Moreover, price sensitivity is a more perceived as a challenge in the service sector because services are typically locally-produced. Therefore, the importance of the market research should be highlighted again in order for a company to understand whether or not it is able to compete with local players and price they set as well as with current instability of the exchange rate.

Producing the services locally may help a Finnish company to set the price level closer to the average. However, opening an office is not required if the company can find consumers who are not as price sensitive and value quality more. Company D pointed out that while in product industry the price is one of the most important criterias, in the service sector quality and safety is one of the

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keys things, and price is not the only thing customers are considering. Another good point is: if the service is unique Russia can be a very interesting market with high potential.