Center for Management of Emerging Companies

ACC Docket Article on International Sales Agents

I recently had the opportunity to collaborate with colleagues on preparing an article on selection and management of interntional sales agents which was just published in the June 2010 issue of the ACC Docket.  While this information was prepared for an audience of lawyers it is important for anyone in the organization dealing with sales agents and distributors in foreign countries.

FCPA Enforcement Trends

Many countries, including the United States, have specific laws on conducting business with foreign government officials that may come into play in any given export sales or other international transaction.  While the US Foreign Corrupt Practices Act (FCPA) is of particular important to public companies it is important for all businesses, regardless of size, to be aware of issues that might arise whenever there is a possibility that foreign government officials will be the subject of bribery by companies or their local agents.  This month's report provides an overview of recent and future FCPA enforcement trends.

The Many Faces of Going Global

When describing a global company, many people continue to think of a giant multinational corporation with operations in every major metropolitan area aound the world.  However, global companies now come in every shape and size as discussed in this week's report on the "many faces of going global."

Exporting - Evaluating Local Foreign Sales Partners

As difficulties continue in domestic markets US companies looking to survive and grow must take a serious look at expanding their businesses through exporting.  There are a number of export strategies that can be used; however, the most common method that firms use for getting their feet wet outside of the US is engaging a local sales agent or distributor in the target foreign market.  In this report I discuss some of the factors to be considered when evaluating and selecting local foreign sales partners.

Tips on Cross-Border Transaction Due Diligence

One of the principal sources of public financing to assist US businesses looking to finance new or expansion projects in foreign markets is the Export-Import Bank of the United States, commonly referred to as the "Ex-Im Bank."  In this report I discuss some of the guidelines the Bank uses in evaluating proposed financing transactions including recommended "best practices" for conducting due diligence on a particular transaction and on foreign parties who will be under an obligation to perform--which means paying the agreed price on the terms provided in the contract!   These tips can be valued for any type of cross-border transaction.

Look to Foreign Markets to Keep Business Growing

In turbulent times companies should always look to foreign countries as potential new markets for their goods and services.  New foreign markets can increase sales, diversify the company’s customer base, amortize new product development costs and provide protection against variations in the domestic business cycle.  Foreign markets also provide good opportunities for selling older, more mature, products that have become obsolete in more advanced markets.  In addition, a network of global facilities allows a company to quickly divert products and supplies into regions where demand is booming.  While a global sales strategy is more risky when economic conditions are weak in many parts of the world it is still important for managers to consider from the very moment that new product development activities begin.  My report this week focuses on some of the reasons that emerging companies should be thinking about selling their products and services outside of the U.S.

Challenges for Strategic Planning in Developing Countries

The introduction of formal strategic planning programs among firms in developing countries has been slow.  The best candidates for planning are those companies that recognize that they are under pressure to improve their performance, either from the government or from their customers and other business partners.  Unfortunately, however, the general economic and political environment in many developing countries has often stymied the ongoing development of strategic planning.  For example, senior managers in government-owned or controlled firms are hardly secure in their position, with changes anticipated whenever a new administration assumes control.  As a result, these managers cannot be blamed if setting long-term goals and objectives, and establishing strategic plans to attain them, is not a high priority in relation to their other day-to-day activities and responsibilities.  Moreover, attempts to implement industrial policy are often marked by frequent restructuring of enterprises, thereby destroying the continuity necessary for the planning process to be accepted and successful.

One fundamental area of concern is ensuring that managers in developing countries obtain the necessary skills and training to enable them to successfully conduct the planning process.  For example, managers must develop the capacity to identify various alternative options and then select those options that are most suitable for the firm and its resources.  This requires training in decision making techniques, including cost-benefit-analysis and computation of risk-adjusted return on investment.  Managers in developing countries must also receive training and experience in planning techniques, including opportunities to actually implement their plans in their organizations.  The later element is often missing in current training programs, which are largely limited to lectures that are not tied to actual planning projects back at the firms of the participants.

Another factor that often influences the planning process in developing countries is that many locally-owned firms lack experience in formal strategic planning.  For example, it has been noted that African enterprises tend to simply produce budgets and forecasts of future revenues and use this information as a basis for requesting the funds thought to be necessary to cover operating expenses.  What is lacking in this approach is any detailed research on environmental factors, market trends, or the activities of competitors.  Also, efforts to introduce strategic planning in developing countries are often hampered by the traditional cultural beliefs that the future is best left to fate and that planning is just futile.  Moreover, the high levels of economic and political instability in developing countries tend to frustrate attempts to create reliable forecasts.  Finally, while large foreign firms in developing countries are used to sophisticated planning systems, often extending out for a number of years in the future, parastatals and locally-owned firms are rarely able to move beyond the most basic planning sequence.

A related problem in this area is the historical tendency among firms in developing countries to rely on outside consultants in whatever planning process that may be used.  Under this scenario, consultants come to the firm, interview the managers, and return with a completed plan for approval.  This approach misses important opportunities for managers to be involved in the planning process and apply knowledge and information they may have collected during training and lectures.  Moreover, if the managers are not intimately involved in the process of creating the plan, it is less likely that the plan will be implemented due to a lack of real emotional commitment to a plan that is largely the work of outsiders.

Successful planning in developing countries will also require some changes in the management style and organizational culture.  Planning is a collaborative exercise and requires that managers must be open to innovation, change, and new ways of doing business and communicating.  Specifically, managers in developing countries must abandon their traditional notions of their relationship with their subordinates and be willing to accept and embrace employee participation and set up a whole set of procedures and practices that support the employee involvement in the planning process.  For example, if the plan includes performance targets, appropriate changes in the incentive and reward systems in the firm may be required.

The content in this post has been adapted from material that will appear in Going Global: A Guide to Building an International Business (Fall 2008) and is presented with permission of Thomson/West.  Copyright 2008 Thomson/West.  For more information or to order call 1-800-762-5272.

Basic Elements of an Outsourcing Agreement

As companies continue to turn more frequently to outsourcing solutions for back office processing services it is important executives and senior managers to have a basic understanding of the key elements of an outsourcing agreement.  While every deal is different there are some guiding principles that can be applied in most instances.

First, while the parties obviously contemplate a long-term relationship with significant investments on both sides it is wise to provide for a “pilot period” during which the parties can evaluate how the services are being provided and whether they can establish procedures and protocols that will allow them to achieve the goals and objectives for the contract.  One of the key planning tools for the contract is the preparation and acceptance of an implementation plan and schedule that will be appended to the contact as an exhibit.  The plan and schedule should include acceptance tests that would need to be completed before the services can begin.  The pilot period would commence on the “implementation completion date,” which is the date that the acceptance tests are completed.  The parties should schedule a full-scale review of service provision to be completed on or before the end of the pilot period.  Assuming that the arrangement continues beyond the pilot period the agreement should specify the initial term of the contract and procedures for renewal and extension.  In that regard it is very important for the client to insist on “termination assistance” that ensures that the services will continue to be available for a reasonable period following a decision to terminate in order to allow the client to make arrangements for a new vendor or performance of the outsourced services on its own.

Obviously one of the most important parts of the contract is the description of the services to be provided to the client by the vendor and the parties should prepared a detailed schedule of services that includes objective measures of the anticipated “service levels” as well as an overview of possible incidental services that are not specifically described yet are likely to be required in order for the goals and objectives of the contract to be achieved.  The description of services should be accompanied by a schedule of fees and appropriate details regarding the manner in which the vendor intends to provide the personnel necessary to achieve the mutually agreed service levels.  The parties should be prepared to discuss any changes in the level of services due to increased or decreased demand by the client and/or changes in applicable laws and regulations.  The vendor should be prepared to provide the requisite training for its personnel and render reports to the client regarding the level and quality of services provided under the agreement. Among other things the reports should cover employee work hours and absenteeism and the volume and quality of work performed by vendor employees based on mutually agreed performance metrics.  Weekly and quarterly business reviews should also be conducted.  Finally, a procedure should be established for reviewing possible requests by the client to the vendor for new services during the term of the contact including preparation and review of a written proposal for new services that include an analysis of the additional resources that the vendor would need to devote to the relationship.

Other key issues that need to be covered in this type of agreement include communication procedures, including designation of relationship managers by both parties; identification of key vendor personnel who will be dedicated to performance of the activities contemplated under the agreement; allocation of ownership and usage rights with respect to any intellectual property that may be created or exchanged during the relationship; force majeure procedures; billing and payment procedures; representations and warranties; dispute resolution procedures; events of default and termination procedures; notice procedures; and governing law.

The content in this post has been adapted from material that will appear in Going Global: A Guide to Building an International Business (April 2008) and is presented with permission of Thomson/West.  Copyright 2008 Thomson/West.  For more information or to order call 1-800-762-5272.

Reasons for Unsuccessful Offshoring

During 2007, the failure of outsourcing arrangements, particularly in China, became headline news.  Primarily for quality failure reasons, a number of US and European companies including Sony and Bausch & Lomb had to recall goods that they had made in China.  According to an article appearing in the July 27, 2007 edition of Fortune Small Business, The True Cost of Outsourcing to China, many US companies are now rethinking the advantages of outsourcing to China in light of these recent product recalls and bans.  The following story from that article is illustrative:

When Amber McCrocklin launched Paws Aboard, she followed a pattern familiar to thousands of small-business owners. McCrocklin, now 35, had created a line of gear for pet owners who like to take their dogs on their boats. She started by handcrafting boat ladders, life jackets, and waterproof leashes with the help of a local engineer.

When the orders began pouring in, McCrocklin decided to shift operations to China, which could trim costs by half and give her time to design more products to expand Paws Aboard (pawsaboard.com)….

Then the problems started. The clasps on her life jackets were breaking, the shipments were late, and her contact in China was unresponsive. McCrocklin's patience finally expired when she opened a container of 3,000 leashes-all defective. "The colors were completely reversed, and the logos were all upside down," she says. The factory would not make good on the order, and McCrocklin didn't want her clients, retailers and online stores, to see the shoddy work. "I'm not sure if I'll ever be able to sell these," she says.

As a result of this and other examples, outsourcing to China-standard procedure for thousands of entrepreneurs-is being more carefully reconsidered. Companies are now adding to their Chinese production costs a "recall allowance".  In some cases, the total cost is more than the cost of retaining production in the US.  Another solution referred to in the FSB article is the use of in-country consultants to assist US companies with identifying and selecting outsourcing partners and managing the outsourcing arrangement.  For example, a consultant may locate a foreign manufacturer and ensure quality control by regularly inspecting the production line and overseeing packaging and shipping of the products.  In some cases the consultant will assume liability for defects in the products; however, the indemnity is only as good as the financial resources of the consultant and the ability of the US firm to compel payment and usually carries a high price tag in the form of a commission for the consultant.  As always, great care must be taken in conducting due diligence on these consultants and US companies are counseled to seek recommendations and performance histories from trade associations and other firms involved in the import of similar products.  And, of course, US companies should always be mindful of the following common reasons for unsuccessful offshoring:

• Failure to adequately qualify providers;
• Initial aggressive demands made on providers;
• Outsourcing innovative or unstable activities;
• Inadequate investment of time and capital;
• Management problems;
• Non-overlapping business hours;
• Staffing problems;
• Lack of a clear and efficient change process; and
• Lack of technical tools to manage the relationship.

It should be noted that market conditions are changing and that US companies and their potential foreign outsourcing partners are each taking steps to mitigate some of the risks of an outsourcing relationship and improve the chances of success.  For example, foreign firm are voluntarily improving their security and quality control procedures and increasing English-language training for their workers.  In addition, some outsourcing companies are beginning to open up facilities in Latin America so that they can work in the same time zone as their US-based clients.  For their part, US companies are changing their view of outsourcing arrangements from a cost-driven, customer-supplier model to a true strategic partnership.  This means investing additional resources in communication and managing the relationship including regular meetings and designation of specific managers to work exclusive with outsourcing partners to ensure that all goes well.