Plan To Succeed - Going Direct
Setting up an Office Overseas
Setting up an overseas subsidiary may be the right move for some companies, but it is not a decision to be made without careful consideration.
One of the most important decisions management will make when it decides to expand internationally is whether or not to set up an overseas office. For many this is a no-brainer: "Of course we want to run our own show!" They know how to run their business at home, so it is simply a matter of transplanting the same model overseas. However, as is true in medicine, transplanting an organ into a foreign body can carry high risks of incompatibility and rejection. It is an operation fraught with risk and the consequences of making a mistake can be critical to the long-term survival of a company.
Let's start by looking at why it might make sense. Setting up a company-owned subsidiary, or buying an existing business, can be the right thing to do in key markets. Some of the advantages of doing this are:
Quality control. It is easier to implement the company’s selling and tech support processes with company employees. Marketing and branding programs will be applied consistently, so the products will be have the same profile in each market. If a company is going through a distributor, it loses this element of control.
Market value. Many investors require that companies have their own operations in key markets. For one thing, the top line will be larger if revenues aren’t shared with distributors, and as technology companies tend to be valued based on revenues, this becomes a key factor. Since subsidiaries can book 100% of the revenues instead of giving up to 50% to the channel, subsidiaries will increase the value of a company.
Motivation. In theory, employees are easier to motivate than channel partners. Threatening to terminate a distributor, who will have a portfolio of other products to generate revenues, will not have the same impact as threatening to fire employees that don’t make their numbers.
Client control. This can be a big issue, especially for complex solutions that require a fair amount of support. When going through a channel you won’t necessarily have any direct contact with your clients, and in some cases you might not even know who they are, which puts you in an awkward position if the distribution agreement is terminated. How do you support the installations, and how do you collect maintenance?
But setting up a subsidiary carries with it some significant risks that have to factored in.
Dismal success rates. The sad truth is that most foreign subsidiaries are disappointments or outright failures. Most small to medium-sized companies that set up overseas offices either lose money or make much lower margins than expected.
Employees are not the secret sauce. In selling to the corporate market in Europe or Asia, relationships with clients are often more important than the price or the specific product features. If you are hiring employees that don’t bring these relationships with them, the ramp-up is going to be slower than expected.
Long sales cycles. If the sales cycle is 2-3 months in the U.S., it will be 3-6 months in Europe, and even longer in countries like Germany and Switzerland. Be prepared to support overhead and marketing expenses during this time.
Expensive to open. High salaries and rents are compounded by high social charges, which can add 70-100% to payroll. We did a study for a Canadian company, to determine the best place for their European office, and what the costs would be, and the numbers were twice as high as they had budgeted based on costs in Canada.
Expensive to close. And if things don’t work out, they can be expensive to close. Notice periods are longer than in the U.S., for example six months in Germany and as long as two years in Italy, and employers are responsible for unemployment payments that include lump sum indemnities. In addition, lay-offs have to be approved by the government in many countries.
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