Monday, January 21, 2008

When fast growth drives international expansion

By Gene T. Barton Jr. and Harald Horgen

Your company is on a fast-growth track, and the decision is made to expand your business overseas. It sounds simple enough, but international expansion requires careful planning and a broad understanding of cultural differences.

There are three basic ways for fast-growing technology companies to set up overseas operations. A company can license its name and allow a local entity to manufacture and distribute goods abroad, it can start a direct operation, or it can distribute through indirect channels.

Why do companies build rather than buy? There are many advantages:

• Control -- Building an operation means you have the right to choose location, corporate structure, pricing, sales channel, marketing strategy and personnel. By choosing the people who sell, support and market your products, a certain consistency in approach and execution can be achieved.
• Profit -- Prices internationally are often higher than in the U.S. market, particularly for localized products. The ability to set end-user and transfer pricing allows for greater control over profitability and repatriation of those profits.
• Customer control -- When going through a channel, the vendor will not always know who the end users are, and issues such as customer support, maintenance collection and upgrade sales can get very messy. In some markets, developing a channel is difficult.
• Investors' ideal -- First, revenues ramp up faster if they are not shared with a channel, so the potential value of the company increases faster. Second, there is still a "bricks and mortar" mentality among many investors, who like the feeling of company-owned assets on the balance sheet.

So what's the downside in establishing a branch or subsidiary?

• Lack of control -- Short of going to manage the business yourself, control over a subsidiary is usually a matter of degree and compromise. Notwithstanding the often misguided belief that "they all speak English," cultural differences account for some of the most difficult, frustrating and time-consuming management challenges in managing a successful international operation.
• Higher costs -- The establishment of a direct foreign operation can hurt profitability, particularly in the early years. While your product's price is often higher in international markets, it is by no means unique -- everything in these markets is also more expensive. The domino effect drives the cost of doing business significantly higher. As an example, American companies are often shocked by contract-based employment laws in Europe, which reduce labor flexibility and complicate hiring practices.
• Less flexibility -- Contract-based employment means that any significant policy change affecting labor may require government approval, which can then cost thousands to implement in the approved fashion or to pay out the often-generous severance allowances for employees who do not want to move, change positions, or possess skills the government believes to be in surplus (for whom you may be responsible for retraining).
• People problems -- After investing considerable time, effort and money recruiting, creating equitable labor contracts, leasing company cars, and buying cellular phones ... why is it not working? Welcome to one of the greatest management challenges in running international operations: cultural conflicts. Just because people look alike and speak the same language does not mean they are the same. The caution for hiring managers is to review employees carefully, because they may be with you forever.

Overseas expansion can be extremely complicated, but when done correctly, the rewards are worth the effort. A careful review of U.S. tax treaties and the laws of individual countries, particularly social welfare laws, is a good starting point in developing a successful overseas expansion plan.

Gene T. Barton Jr. is a principal in the corporate and securities group in the Boston office of Fish & Richardson PC. He can be reached at barton@fr.com. Harald Horgen is the founder and CEO of the York Group, an international business development organization with offices in over 20 countries. He can be reached at hhorgen@theyorkgroup.com.

Gene T. Barton Jr. is a principal in the corporate and securities group in the Boston office of Fish & Richardson PC. He can be reached at barton@fr.com. Harald Horgen is the founder and CEO of the York Group, an international business development organization with offices in over 20 countries. He can be reached at hhorgen@theyorkgroup.com.