HBR CASE STUDY
V
A young American
usinessman in a developing
country discovers that
nothing gets done unless
palms are greased.
Should he play the game
y his personal ethics-
or the local rules?
The Shakedown
y Phil Bodrock
" l l O W MANY OF THEM WERE THERE?
Were they armed? Did they confis-
cate any papers or disks?"
Pavio Zhuk suddenly realized he was
shouting, though for once the telephone
line to Kiev was crystal clear. Zhuk was
in a state. The grandfather clock in his
sprawling farmhouse in Redwoods, Cal-
ifornia, had stRick 6 AM, and the young
software entrepreneur had just come
down to the kitchen when the tele-
phone startled him. His friend Kostya
Hnatyuk, who headed Zhuk's software
development center in Kiev, was calling
to say that the center had had visitors
that day-and not very welcome ones.
Hnatyuk patiently repeated what he
had said a moment earlier. "I'm on my
way to the office, Pavlo, so I don't have
all the details. Taras Borovetz called me
15 minutes ago as 1 was getting off the
plane and said that three or four UTA
agents showed up this afternoon. That's
Ukraine Tax Authority. Only one of them,
a woman, entered the office. I suppose
the men could have been armed, but
Tarasdidn't say so-"
"What did the woman say, exactly?"
Zhuk inte
upted.
"She said that her name was Laryssa
Ossipivna Simonenko. She claimed to be
a UTA special agent. She told Taras that
she and her boss, who heads something
called the Special Audits Department,
want to meet with us soon," Hnatyuk
eplied. "She says that we haven't filed
five of the 17 schedules we were sup-
posed to last quarter and we owe the
government tax a
ears of 86,954 hryv-
nia." Zhuk quickly converted the figure
in his head: close to $i6,ooo. "It's a
shakedown," Hnatyuk concluded.
"1 can't believe it!" Zhuk cried. Had
his life somehow turned into a B movie?
"Why are they picking on us? We did
everything by the book. How much
time did she give us?"
"She said next week. Don't wo
y,
Pavlo. Our accountant can dig out all
the tax papers, and I'll keep the lawye
on call in case Simonenko drops in again.
Meantime, I'll figure out who she is and
whether she's really conducting an offi-
cial inquiry. She could be running an ex-
tortion racket on the side..."Hnatyuk's
voice trailed off; then he added: "I'll get
our security guy to post two guards out-
side the office 24/7, starting tonight. No
one else gets in unchallenged."
Zhuk was rattled by the thought of
the Ukraine Tax Authority laying siege
to his company's office. Standing bare-
foot in his kitchen, he felt powerless to
HBR's cases, wbich are fictional, present common managerial dilemmas and offer concrete solutions from experts.
MARCH XXXXXXXXXX
HBR CASE STUDY • The Shakedown
deal with the situation. "Look. I'll try to
get on that Lufthansa flight out of LAX
this afternoon. I should be there before
the weekend. Maybe it's just a misun-
derstanding, but if we're in the tax au-
thority's crosshairs, this could be big
trouble. I'll call you again before I head
out. Tell Taras and the other guys not
to panic."
nia. Pavio, the last of six children, was
om the same year and grew up speak-
ing English and Ukrainian at home. He
was the academic star ofthe family.
After graduating with top honors from
an engineering school on the East Coast,
he worked for three years in Silicon
Valley as a systems analyst and then
entered an MBA program at a premie
Because of the cu
ent backlog of orders,
Mylofienko informed them, it would take some
time to install the lines in their office on
Predslavynska Street-about three years, in fact.
After putting the telephone back in
its cradle, Zhuk took a deep
eath.
He stared out the window toward the
woods, hoping to spot the family of
foxes he'd seen playing there a few days
earlier. Waiting for his coffee to
ew,
he went out for the newspaper and
scanned the headlines. He stopped again
to take in the countryside. It dawned
on him that for the first time in memory,
he wasn't looking forward to packing
his bags and heading for Kiev.
Back in the USSR
Six months earlier, Zhuk could hardly
wait to land in Kiev. When the plane de-
scended through a thin layer of clouds,
he saw the setting sun reflecting off the
Dnieper River and Kiev's golden domes.
Without a doubt, this i,ooo-year-oldcity
was the most beautiful sight he had eve
seen from the air. Sacked by the Mon-
gols in the thirteenth century and vir-
tually destroyed by the Nazis and the
Red Army in the twentieth century, it
had still clung to much of its magnificent
Renaissance and Baroque architecture.
Zhuk had his own connection with
Kiev's past. His parents had fled the city
at the end of Worid War II and by 1951
had found their way to the United
States. The family first settled in Cleve-
land but moved in 1973 when Zhuk, Sr.,
an engineer, accepted a job in Califor-
Phil Bodrock ( XXXXXXXXXX) is an
adjunct professor of management science
at Northeastern University in Boston.
West Coast school. He hadn't even grad-
uated when he decided to set up his
company. Customer Strategy Solutions,
to develop software for order-fulfillment
systems. That proved to be a lucrative
niche. After five years, the start-up
employed 35 people, generated annual
evenues of $40 million, and reported
profits.
Then, with the help of his friend
Hnatyuk, Zhuk drew up a plan to create
a software development center in Kiev.
Hnatyuk, a British national of Ukrainian
descent, had graduated from a New-
castle polytechnic as an electronics en-
gineer. The two had met years before
while Zhuk was summering in the UK
as an exchange student. Their Ukrainian
oots - and love for soccer - had kept
them in touch.
Before joining Customer Strategy So-
lutions, Hnatyuk had been based in Kiev
as the vice president of a German com-
pany that sold seeds, pesticides, and fer-
tilizers in the Commonwealth of Inde-
pendent States. His company had been
doing business in Ukraine for more than
six years but hadn't turned a profit there
until recently. When Zhuk had called
a year ago to chat about his desire to
set up a software development center,
Hnatyuk immediately volunteered to
quit his job and help set it up.
Without discussing it much, the men
oth knew they were motivated by a
feeling that this wasn't just about busi-
ness; something more basic was at stake.
Ukraine was a land where, due to two
world wars, an ideology-created fam-
ine, the Holocaust, and political purges
too numerous to list, 17 million people
had lost their lives during the twentieth
century. A tenth of Western Ukraine's
population, including one of Zhuk's
uncles and many of Hnatyuk's relatives,
had been deported to Siberia. Zhuk
and Hnatyuk's return was an assertion
of resilience. They were driven by a de-
sire to create opportunity, to
ing hope,
and to help build a modem society in
Ukraine.
Zhuk thought he was well on his way
to proving the naysayers - those who
had pointed out the political turmoil
and co
uption in Ukraine and told him
he should think twice about setting up
shop there-wrong. He appreciated thei
concern but thought it was ove
lown.
As he'd told his 80-year-old father at
Thanksgiving, he felt quite at home in
the country of his ancestors.
Don't Know How Lucky
You Are
As Zhuk disembarked from the aircraft
at Borispol Airport, he felt less at home
in Kiev than ever before. Hnatyuk
picked him up in his beat-up Land Rove
and seemed to think that despite the ex-
tortion threat, it was business as usual.
"Check it out," Hnatyuk said as he drove
toward the city apartment they shared
whenever Zhuk was in town. "Anothe
McDonald's, and a new Wimpy's is
going in across the plaza." He knew that
Zhuk would be heartened by the sight:
While most Western companies were
eluctant to invest in Ukraine, fast-food
estaurants were opening ail over Kiev.
When he got only a weary grunt of
acknowledgment from Zhuk, Hnatyuk
piped up again: "By the way, 1 haven't
had a chance to tell you about that
USDA meeting." The Ukrainian Soft-
ware Developers Association had held
its annual meeting the week before,
and Zhuk had asked Hnatyuk to check
it out. "I was quite impressed," said
Hnatyuk. "Do you know there are ove
25 medium-sized IT companies here -
not just in Kiev, but also in Lviv, Kharkiv,
and Dnepropetrovsk? We're still the
only development center for a multina-
32 HARVARD BUSINESS REVIEW
The Shakedown • HBR CASE STUDY
tional. Everyone there was talking about
how two Ukrainian firms had beaten an
Indian rival and won a contract to de-
velop embedded systems for a big Amer-
ican corporation. The Association fore-
casts that Ukraine's exports of IT-related
services will double over the next two
years"
Zhuk perked up momentarily. "There's
no question, we're here at the right time,"
he said. His business model was simple.
Like India and Ireland, Ukraine offered
a virtually unlimited supply of highly
skilled and, by American standards,
easonably priced programmers. The
country had a tradition of excellence in
scientific and technical education that
dated back to the formation of the So-
viet Union. But most engineers and pro-
grammers had lost their jobs since the
Soviet Union's demise and were looking
for new openings. Meanwhile, Ukraine's
schools produced 50,000 fresh technical
graduates every year.
That was great for Customer Strategy
Solutions because, despite an economic
downturn in the U.S., the company had
more work than it could handle. It
had started out installing off-the-shelf
order-fulfillment systems, but its pro-
fessionals increasingly consulted with
clients on custom solutions and, more
oadly, on innovative digital strategies.
With Zhuk's top talent being pulled into
strategy-related work, he needed more
programmers to engineer systems.
On his previous visit, Zhuk had helped
Hnatyuk recruit a core group of pro-
grammers, mostly through Hnatyuk's
personal network. Later, as they made
the rounds at Ukraine's universities and
polytechnics, they found other institu-
tions, such as the Institute of Cybernet-
ics in Kiev, that were great sources of
talent.'M feel like a kid in a candy store,"
Zhuk had said at the time. In a week,
they hired 12 top-notch programmers,
all in their twenties and with an average
of three years'experience.
Zhuk wanted the best talent and was
willing to pay top dollar for it. That was
another point the two men had agreed
on before hiring anyone: They would