Whether it’s to cut costs or tap into new markets, most serious entrepreneurs will give thought to expanding outside the UK.
Tony Machin is the group managing director of Freedom Finance, a lending brokerage. Back in 2002, Machin thought Spain would be a lucrative country in which to set up operations.
‘The UK market at the time was buoyant but I suspected it wouldn’t last and looked towards diversification in Europe,’ he explains. ‘Eyebrows were raised among our competitors when we chose Spain as, culturally, debt consolidation was not something that was understood there.’
According to Machin, the company had to start from scratch in Spain, training a team to be brokers. ‘It took two years but we now have 200 staff and we expect to break even this year,’ he says.
Ensure a stable environment
Aside from Spain and the UK, the company has operations in Finland, Norway and Sweden, and it has recently set up in Ireland. ‘We do analyse a country both politically and economically before establishing a presence,’ Machin says. ‘Seeing if, for instance, people use debt consolidation or if there is an appetite for credit. We’ll also look at the regulatory environment and see what the legislation around financial services is like.’
It’s no secret that countries like Brazil, China, India and Russia are providing enormous growth opportunities. A recent study estimates that by 2050, these four countries will account for 44 per cent of global GDP.
Stephen Weatherseed, an international business partner at accountancy firm Grant Thornton, urges entrepreneurs to take entering a new territory seriously: ‘Do your homework on where you’re going to operate, whether it’s producing a product or trading overseas. You’ll need to, as it were, test the tyres.’
Initially, it’s wise to go down the official route, consulting organisations like the British Chambers of Commerce and the Government backed UK Trade and Investment body. ‘They can also make introductions for you and they’ll help you get a feel for the red tape and economic landscape,’ adds Weatherseed.
Crucially, he suggests that you speak to people who have been there and know what the business reality is and, if you do decide to set up an entity or an office, send in your own people to be the eyes and ears of your business. ‘You also need to visit on a regular basis and inspect what is going on,’ he says.
This go-slow approach may not square with an entrepreneurial business that needs to grow. If a sale is agreed or partnership signed, there won’t be time for intellectual analysis.
It’s a point touched on by Terry Trench, the senior vice-president of commercial operations for mobile phone payment provider Upaid. ‘All our openings are classic sales or a purely opportunistic manoeuvre,’ he says.
Upaid operates to a white-label model, offering services like direct top-ups and bill payments to second-tier mobile operators like Telefonica and MTC in North Africa, the Middle East and Asia. Fifty per cent of the company’s business comes from Brazil.
Established in 1999, Upaid attempted to do business in Western Europe but found the competition from the major players too tough. It now seeks business in the developing economies.
Trench explains that the company, which also needs to form partnerships with banks, is growing quickly. He says: ‘If you’re a large company with a cash cow, then you can look to replicate that model across the world. With us, it’s different as although we deal with an enormous number of transactions, we have a small amount of customers or, if you like, partners. We look to make four sales a year.’
In essence, Upaid has to follow the money. Nevertheless, the company has to properly assess the market and ascertain whether it is viable and has longevity if a deal is going to be struck. Trench comments: ‘Being entrepreneurial, we’re focused on growth rather than revenue. So it would take five years for most of our deals to mature into a proper cash-flow business.
‘As a result, we will only invest in a market where we see our partners doing the right things. We run revenue share agreements so it’s critical that we assess correctly whether we’ll get the right return.’
As mentioned by Weatherseed, having a trustworthy person on the ground can ensure that things are proceeding as agreed. In addition, they can be useful for generating new business.
For Trench, this is definitely true: ‘In Serbia we work with 12 banks and two operators. We can function remotely but we’re currently hiring a person as we don’t want complacency to set in. You must have someone to network effectively and ensure operations are running smoothly.’
If you are considering the foreign route, lured by the prospect of lower overheads and a fresh customer base, then be aware that differences in language will be the least of your problems.
Machin says: ‘When you go into a country there may be different sorts of technology to consider. Certainly, for us, we have to study the regulatory systems and matters like data protection. In Europe, they are far more sensitive to what can be revealed about a person than over here.’
The sector you’re in will pose idiosyncratic challenges. Trench states that you have to scrutinise the finest details: ‘The difference between how things are bought and sold in countries is incredible. For instance, in Russia, if you top up your phone, you normally pay the merchant a little bit extra, whereas in Nigeria you might be able to haggle for a 10 per cent discount.’
Hard to overcome
Difficulties can range from the obvious, like tax, to countries having a different calendar year to there being three digits behind the decimal point. Get it wrong and your product, brand and reputation will be ruined before you can book the next flight back to the UK. Trench says: ‘The challenge for a growing company is to try and find the product or service that limits your deployment costs. You need to simplify and concentrate your sales process, while being sensitive to every eventuality.’
From this perspective, staying in the UK might not seem like such a bad option. Mark Williams, chief operating officer at B3 Cable Solutions, believes the UK remains a vibrant market, even in the manufacturing sector, providing you understand exactly who your customers are.
The company produces the bulk of its telecommunications cable from a base in Manchester. ‘Everyone knows that you can source most things today from China at exceptional quality and at a good price,’ says Williams.
Opting to go overseas is not, however, automatically going to improve your business. ‘There is a fine line,’ he adds. ‘For some of our products, it is clear that we could absolutely buy the materials cheaper, but then you have to throw shipping costs into the mix as well. You have to model these things carefully.’
The company outsources parts of its operations to China, the Czech Republic and India. He continues: ‘In the past five years, we have gone from not importing any products to probably bringing in the best part of £20 million to £25 million worth. That is done alongside growing sales in Manchester, where the factory continues to be full.’
The company has struck a balance between keeping production costs low â“ by outsourcing where appropriate â“ and forging relations with clients in a niche sector. This is all to the good, but suggests that UK manufacturers can really only stave off companies seeking cheaper alternatives through quality of service.
Paying for piece of mind
‘A lot of our customers feel safer and are prepared to pay a premium for us remaining in the UK, although I’m sure they wouldn’t admit this,’ Williams concedes. How sustainable this view is over the long run as the emerging markets grow in sophistication remains to be seen.
It shouldn’t be forgotten that companies are coming to the UK, such as Dataflux, a US outfit specialising in data management. Tony Fisher, the CEO of Dataflux, which also operates in France and Germany, says that you need to bear in mind that your brand needs to be built up and you mustn’t extend beyond your own infrastructure.
The company has an advantage in that it’s a subsidiary of a multi-billion dollar software services giant SAS, although Fisher states that the company does ‘live within its means’.
Once a business is set up, Fisher says, you can’t relax if you intend to launch other products and services: ‘With a feasibility study, there are a lot of aspects you need to consider. How do you define the market? What’s the size? Is there an understanding of the business problems the company is trying to solve in the market?
‘You have to research the competition as the problems that you may be able to solve will be discussed among some subset of the population. You have to do all of that upfront.’ For the UK, that process took eight to nine months.
It’s useful, says Fisher, to use analysts and consultants to size up a country. In Dataflux’s case, it can also draw on knowledge and expertise from SAS. ‘We had a leg up on that one,’ he says.
As for looking at Eastern Europe and other fast-developing areas, Fisher is cautious: ‘Can you sell products at the rates you need to be commercially viable? Emerging economies tend not to have much money and that means you have to make some hard decisions.
‘It’s expensive to provide the support and infrastructure, especially if the prospect of return isn’t clear. Microsoft might decide: “This is a ‘loss opportunity’ for us strategically as we can get into the market early”. We can’t afford to make that decision.’
There’s no reason why you should think differently about how you can control and monitor your finances abroad. ‘We always have a financial controller in place; all the numbers are reported back to our head office in Wilmslow,’ says Freedom Finance’s Machin.
Moreover, he keeps track of what is going on in the offices: ‘Each of the MDs knows what to expect. I will visit a site each month and we’ll discuss how the business is performing, measuring the KPIs [key performance indicators]. Every so often we’ll also send an accountant or an analyst to check the figures.’
Maintain domestic procedures
Grant Thornton’s Weatherseed has seen a surprising amount of complacency in this area: ‘People can be too trusting. Once an agreement is signed, sometimes it’s forgotten that you need to check that what has been discussed is actually done. You trust people to do things, thinking the commitment is there, but it isn’t. Life isn’t always like that.’
The ability to form strong and reliable local partnerships, particularly in places like China where the culture could not be more different, will often make or break your expansion plans. Just be sure not to take for granted that going overseas will be cheaper. And even if it is, it certainly won’t be easier.
Fisher says: ‘There are so many things that are different from a legal and financial perspective. It takes time and energy.’