Outsourcing the challenges of international expansion

International expansion is a challenging time for any business. This is especially the case where there is a background of economic uncertainty and increased focus on finance departments delivering cost efficient service. The question arises therefore as to would an outsourcing project at this time help or hinder an already overstretched finance department.

It is certainly the case that an appropriate provider can make significant savings in both ongoing costs and as against the cost of making mistakes. This latter point, in particular, can be significant if overlooked. There are numerous examples of it taking a year or more of ever increasing professional fees to try and unwind the damage done by pushing ahead with an international expansion without considering the most appropriate structure or the differences in regulation that can exist between different countries.

To highlight some of the differences between countries you need only look at the process of establishing a corporate entity. At one extreme the UK has a very simple process. An agent should be able to establish a trading entity within twenty-four hours to forty-eight hours without any resident directors or shareholders and with no minimum share capital. In Germany there is a reasonably significant minimum share capital required and in France there are numerous pre-requisites before the necessary documentation can be submitted to a Court of Commerce. For example, these include stating an official address for the headquarters together with a signed lease, the name of managing director and details for a bank who have agreed to open an account.
 
I will use an example of a recent company who utilised outsourcing relationships successfully in their expansion from the US to multiple European territories to demonstrate how a company can reduce the burdens and increase the speed of expansion through a carefully structured process.

The company in question are a pharmaceutical company who have developed and successfully licensed a treatment in the US. There is a significant market in Europe for this treatment, but meeting this demand (and helping to sustain/expand upon it) requires sales staff to be present in each country. Satisfying the demand requires stock to be held in a central European location, in a specialist warehouse, for ease of distribution. The company appreciated that finding the sales staff with the relevant experience would be a significant challenge in itself. They focused their time as a management team on the recruitment process and dedicated the task of fulfilling the accounting, sales order processing and distribution processes to a separate project team.

The company then approached finding outsourcing partners in a logical manner. They began by taking advice on the likely group structure and the ways this would be modified depending on where contracts were signed, stock was held, when the title of stock was passed and the like. This gave them certain answers they would expect a partner firm to know where they could effectively test the knowledge of firms in a simple up front phone call. They approached their existing professional advisers and government agencies to receive recommendations about outsourcing companies who had worked with similar organisation to themselves. From such top level recommendations they made introductory phone calls covering some of the key questions they had armed themselves with to allow the creation of an initial short list.

The project team then prepared a detailed “request for a proposal” outlining their needs in each area. This was sent to a shortlist of around three providers in each area where due diligence, including references and agreement of key terms, was completed.

Running alongside this process key hires were being finalised. The company focussed initially on the sales order and order fulfilment process, knowing that the accounting provider would need to tailor their systems to fit around the outputs from this provider. One provider was found who could provide both sales order management and order fulfilment across a number of European countries including the UK, the Netherlands, France, Germany, Italy and Spain.

This was quickly followed by finding one firm who could offer centralised accounting support across all the planned territories with one team of contacts. This provider was able to provide access to information on line in a live environment so that the finance team in the US and the management and sales staff based within Europe could access the information as it became available.

The project management team effectively consolidated three different services, across six different countries into only two relationships. This continues to save significant management time. It also saves on costs as there is no duplication of effort between the countries.

Importantly, this scenario overcame many problems before they happened due to the knowledge of the providers. For example, the accounting supplier was able to assist with registration of the US entity for VAT purposes in France, which is necessary because of the way the goods were shipped and title was held. They did so through a relationship with a fiscal representative in France. This required co-ordination with a number of parties, which was done without further input being required from the client. This prompt co-ordination, built upon existing relationships, prevented delays in shipping of the goods and the possibility of penalties or unrecoverable VAT.

The above shows how outsourcing can work well when a situation is complex. It should be noted that it was a success because of certain things that the company did in managing the relationship as well as, most importantly, taking time to choose the right partners. An outsourcing relationship will often be a drain on time, and will incur unnecessary costs, where it is assumed that with minimum briefing and minimum up front cost the outsourced partner will be able to handle all issues that arise. Inevitably this does not work out well for either party in the long run.