Going Global
By Kim Benjamin, Assistant Editor, BusinessXL

The lure of international markets has never been more appealing. Reduced
trade barriers and rapid technological improvements and innovations have increased the trend towards operating on an international scale. Kim Benjamin reports on the going global phenomenon.
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Many businesses find themselves trading internationally by accident. Increased orders from abroad can mean spiralling administrative costs and valuable time away from the core parts of the business. Setting up business in
a foreign land offers the potential to tap new lucrative markets, lower production costs, attract more customers and expand faster. But all of this comes with considerable cost issues, and involves negotiating a complex minefield of language barriers, cultural differences and legislative issues.
Many companies have tried – and failed – to expand successfully, and are too late in realising that what has worked back home no longer applies in new foreign markets.

Replicating your business model successfully is just one of the challenges you face when expanding abroad. So what makes one business thrive internationally where others have failed? And what measures need to be in place to ensure the business continues to grow and succeed?

Think like a start-up
Even if you’re established in your domestic market, adopt the mentality of a start-up. This means taking all the precautions you would if setting up for the first time.

Businesses end up making mistakes because the costs of setting up are usually underestimated, and the prospects of trading abroad over-estimated,’ explains Andrew Godfrey, head of international and European markets at corporate financier Grant Thornton.

Godfrey believes the companies that should be looking to set up internationally are those that have a strong brand, or operations which can be easily translated and aren’t specific to their home country. He offers the following words of caution: ‘Before setting up, you need to have experience of trading internationally from your domestic base. Setting up abroad is a risky business – you must proceed carefully. If you’re unsure, think about setting up a joint venture or hiring an agent overseas (see box on page 32) to test the water.’

Organic expansion versus acquisitions
For companies looking to expand abroad, one issue is whether to do so organically or via acquisitions. Expansion by acquisition can be an excellent way to break into a market, and growth is achieved faster. But it is an expensive option. And if you’re trading abroad on your brand, warns Grant Thornton’s Godfrey, you’ll find it difficult to acquire a company.
Ajay Chowdury, a general partner at IDG Ventures Europe, a $100 million venture capital fund aimed at entrepreneurs looking to grow their companies globally, recommends organic expansion. He believes acquisitions are only successful if a company has solid revenues. Joint ventures, he advises, are also a sensible way to break into foreign markets.
Preferred International set up its first office in Southampton in 1999, and has since grown from five to 90 employees. The company – which recruits contract and permanent IT, sales and procurement professionals for a range of employers throughout the UK, Europe, Middle East and Africa – opened another office in Leeds, and has recently expanded into Amsterdam. Plans are afoot to enter the US market later this year. Founder and director David Clayden explains the company’s strategy: ‘Our expansion has been organic, largely guided by our client base and word-of-mouth. Our key focus has been finding someone local who has a good, existing network that they can bring to the company. If you’re expanding abroad, you need to set up with someone who understands the legislation.’
Clayden agrees that when expanding abroad you can come across a minefield of legislation. He reckons his company’s success to date is down to it expanding slowly and in a controlled fashion. ‘Larger recruitment companies have made a big splash about opening all over the place, but we’ve never made a song and dance about it.
‘We also don’t have to answer to any shareholders, and can make decisions quickly. We feel fairly confident about our strategy as we have done a lot of investigative work.’

At Ariadne Capital, a venture capital firm that helps businesses to scale across Europe, founder and chief executive Julie Meyer believes organic growth is a sensible way to grow internationally. She says this can be speeded up by, for example, outsourcing. ‘We’ve seen many companies that went on acquisition sprees being unravelled, and many start-ups acquiring companies without being willing to understand, for example, the complexity of another business’ technology platform.’

Her rule of thumb is to avoid fixed costs for as long as possible, ideally until you’ve a guaranteed revenue stream in your new market.
She advises: ‘Stay in inexpensive places and commute. An international presence is a luxury that you can afford after revenues. The biggest mistake we see with companies scaling abroad is a lack of focus. It’s more important what you don’t do than what you do do. Assess what the company’s priorities are – 80 per cent needs to be connected to achieving profitability.’

He believes the reasons most companies fail when they go international is because they underestimate the time it takes and fail to adapt their styles or their products.

Focus on the core business
Allen Timpany is chief executive of Vanco, a company he purchased in 1988 for £1. The virtual network operator has since been transformed into an international company operating in 30 countries, with customers in 41. Vanco listed last year on the London Stock Exchange.

Timpany puts the success of the firm’s expansion down to it working within its means and never losing the focus of the original business. ‘The best advice I would give is simply to start. Companies think that trading internationally is going to be complex – it is. But you only need to make a small commitment, so you don’t put a strain on the business. It also gives you the opportunity to look at your business from the perspective of another country, which can be valuable for CEOs.’

Vanco’s initial expansion was into the Spanish market, which was mostly customer-driven. It then rolled out to Amsterdam, as it felt this was a central point from which to tap into the French and German markets, without having to have a physical presence there.
Not all of Vanco’s expansion has been along the same lines. It has a representative office in the Far East, as Timpany wanted the exposure but not the staff costs.
For Vanco, hiring overqualified local employees and almost overpaying them is another rule of thumb. Timpany’s strategy is not to recruit for the present. Having an over-skilled team means having staff with the ability and talent to take the company where it wants to be in the future.

Organic growth has also been key. For Timpany, this is the preferred way to go in a service industry. ‘You need to start relatively small and employ local nationals – they’ll have an undiluted view of the market. In terms of scaling the business, you must have a non-linear relationship between revenues and the number of people you employ. Doubling turnover doesn’t mean doubling staff.’

Be careful with revenue recognition
Cambridge-based software company the Aveva Group (originally known as Cadcentre) set up its first international offices using expatriates. But chief executive Richard Longdon now believes that recruiting locally brings more benefits in the long term, and its offices are run by local managers.

Aveva’s global strategy is based on expanding its products to meet customer demand. It originally used agents as sales channels, in both the UK and overseas, but decided to build its own salesforce in 1983. Aveva opened its first international office in the US in 1985.

The firm began its global expansion in earnest in 1992, with offices in Germany, Austria and Switzerland. It now operates in diverse locations such as Hong Kong, Paris, Japan, Malaysia and Singapore, and recently opened an office in China. ‘Looking at Germany, the competition was huge,’ says Longdon. ‘Our rival had 100 customers, compared with our two. But we knew we had a good product. We went to trade shows and people asked where our offices were. When we told them Cambridge, England, we may as well have said Pluto, so it made sense to set up overseas.’

For him, building a successful strategy is down to finding a good local legal firm (he advises choosing one with offices in the UK, as this keeps your costs down) and accountancy practice. Above all, he believes in keeping a close eye on revenues – and ensuring that invoices are sent out and paid promptly. ‘As a software company we’ve been very cautious about revenue recognition, and have very rigid procedures in place to ensure deals are valid. We don’t accept a local manager’s word regarding a deal – we need to see physical evidence, such as a signed contract. This can mean a ten-day delay in putting together an accurate picture of revenues, but it’s better than not getting them at all.’

As part of its international expansion, Aveva has used a mix of agents or set up its own offices. Longdon claims that getting rid of agents has been easy in 80 per cent of the cases. But the company has also been through a valuable, and sometimes painful, learning process. ‘We’ve only recently terminated our agent in Italy, which was underperforming, partly because the contract was a nightmare.

This was due to naivety on our side, as the contract was done in the early days in the 1990s. But we won’t get caught in that situation again.
In Japan, we bought our agent out for £500,000 and ensured there was no embarrassment on either side, as that’s an important factor when doing business there,’ says Longdon.

Aveva now only uses agents in South America, because of the size of the area it has to cover, and eastern Europe and Iran, where the business is more difficult to run.

Longdon says language has never been a significant barrier to Aveva’s expansion, but he admits that setting up in China has been a struggle. Language is a barrier there as the staff don’t speak English at all and can’t understand company e-mails that are sent to all the international offices.

It’s been very difficult to expand the office and find the right level of skilled people.’

Plan for the pitfalls
Failing in your international expansion plans is a costly experience that can have a severe impact on the business you’ve worked so hard to establish. Lessons have been learnt from the implosion of dotcoms that notched up spiralling costs after opening office after office around the world. If you have to retreat, it’s wise to have measures in place so that the impact on your core business is minimal.

Renarc, set up two years ago, provides services to SMEs expanding beyond their domestic markets, and is currently working with 15 such clients. Managing partner Trevor O’Hara’s advice is simple: planning is crucial and companies need to be prepared for both the good and bad times. ‘The degree of success goes back to the levels at which you’ve planned. This also means planning for the eventuality that things may go wrong. ‘What is your fallback strategy? You need to know when to pull back in case of failure.’

Ensure your costs are as flexible as possible – and not fixed, advises Grant Thornton’s Godfrey. And, whatever you do, don’t sign long leases. If you limit your fixed costs and what you’re committed to, you can pull out without pulling down your whole enterprise.
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