CHICAGO – Are you exporting technology products or services?

In talking with a lot of technology firms about going global, I’m finding there are a lot of misperceptions about expanding worldwide. One miscalculation is that technology firms are product firms. They are actually service companies in many cases. This makes exporting those services a much different task than shipping a product.

With physical products, you can find partners, train them, localize the product, mass produce it and you’re off to the races. The features and advantages of products are contained in their physical characteristics, which can be easily translated and communicated. After advance costs, margins can be significant.

The problem with exporting services is it’s more like foreign direct investment than the export of a product. For products (an alternative to selling through partners), you can hire employees locally in every market you want to operate in and can replicate your business in as many places as you can. This is a foreign direct investment scenario and it mirrors what you virtually have to do with most services.

While services still need to be adapted, selling them depends much more on the relationship with the buyer. You’re selling time in many cases, which is valued differently around the world. Quality can’t be defined and defended as easily. Service delivery is heavily dependent on the service provider. Finding qualified service providers in other countries that meet your standards can be excruciating.

I attended a function where a search consultant found three qualified firms out of 1,000 to do American-quality work. In many cases, the only alternative is to build your services business from the ground up on a country-by-country basis. This can be an expensive proposition. At a very basic level, services are valued differently in different parts of the world.

Part of the reason for that is the varying price of labor and how time is valued. Where labor is cheap, little value is attached to time and the people who earn their livings in units of time. Interestingly, developing countries are exporting services more and more. They are moving up the value chain in many industries by leveraging labor price arbitrage.

The success of computer consultants is fueled by the qualifications of their consultants. This is highly labor intensive and culturally dependent. Their core competency is knowledge, which is expensive to acquire and must be compensated. How you develop the relationship with the client is crucial and developing relationships in a different cultural context is extremely difficult.

To build an international consulting business, you almost have to hire local consultants everywhere you go. This can be time consuming and expensive. The consulting partners with whom I’ve spoken from firms that spun out of the Arthur Andersen implosion are simply rekindling relationships with former Andersen partners in their new lives.

That’s OK because these partners are known and trusted. They’ve worked with them before. Finding new partners isn’t nearly as easy.

Though Indian firms are encroaching on this space, Web developers and Web hosting companies started off being inherently locally oriented service companies. When these industries first blossomed, they required close collaboration. This meant that proximity mattered. It’s now difficult for western companies to combat the cost advantage of commodity services offered by foreigners.

As some offshore-developed sites haven’t impressed me, local companies still have advantages worth buying. While competitors from abroad are having success coming here, though, it’s difficult to differentiate yourself when venturing abroad because you’re multiples more expensive than the competition.

With the conversion of data and communications, networking companies have seen explosive growth. They too are very service oriented. The only products required include the hardware necessary to run the network. Otherwise, the installation and running of the network is largely a service. Connecting networks across oceans can be problematic and there are physical limitations on the possibilities.

If you think getting permits and dealing with regulations are a pain here, they’re even worse in some other countries that are bureaucratic havens. Aside from consumer-oriented and shrink-wrapped products (of which there are relatively few), very few software developers create software that doesn’t have to be customized to some extent.

Many firms make their living customizing the software created by global companies and adapting it to the needs of local customers. Software developers have to provide service and support to their customers in different languages throughout the world. Even technology products companies have to provide services as well.

Pricing services presents problems too. Pricing for products can be somewhat more complicated for export once you add in landed costs, duties and tariffs. Financing is relatively straightforward. Though pricing for services might be simpler and more consistent, it’s more difficult to implement at higher rates. Though the U.S. dollar is still relatively low versus many currencies, sending Americans abroad and charging Western rates in developing countries can price you out of growth markets.

American service providers typically charge the highest hourly rates, retainers and project fees in the world. The only alternative is to grow a local business at local rates. Because the financial levels are lower, the potential volume for profit is less. Financing might be more difficult to justify.

Selling services is quite different from selling products as well. Rather than sending off a product brochure and price sheet, the services sales process requires a strong foundation of trust. This takes time and understanding to develop. Americans are typically more impatient than most of our foreign prospects. We make little effort to learn about what’s important to them both culturally and specifically by not learning the language of customers.

We’re the salesmen of the world. We’ve done a good job of proving the value of services. Ironically, it’s been our success in selling technology services to the rest of the world that has led to the rise of many global competitors. I was in contact with a potential Middle Eastern client looking for engineering partners here. I was getting impatient, and when I first asked about how much was in the budget, I was dropped like a hot potato.

I hadn’t yet earned his trust before talking about money. I lost the opportunity. Americans have been leaders in incorporating services into the World Trade Organization (WTO) at least partially because we are leaders in providing services to the world. We have advantages in many service industries that we’ve taken abroad with great success. That happens in many cases in technology only when we convert those services into products.

Am I saying technology service firms shouldn’t go global? Certainly not.

There are many opportunities out there. There are many advantages to building your own services businesses around the world with control and profitability being two of them. It’s just that education and training for export are still geared very much toward products because in many ways it’s simply so much easier. We haven’t reoriented our educational system to reflect the change in orientation from product to services in our global economy.

Like your good angel or venture capital investor says, create a replicable and protectable product. Standardize what you do as much as you can so your offering is as consistent as it can be across markets. The more you can make services like products in every way, the better. They’re scalable and ultimately more profitable.

Michael Muth is managing director of GATA, an international business development consultancy that helps technology companies build international partnerships. He can be reached at muth@midwestbusiness.com.
Click here for Muth’s full biography.

Previous Columns in 2007:
Q&A: ‘Get Ahead By Going Abroad’ Author C. Perry Yeatman on Working Abroad (5/12/2009)
Q&A: Changes From Siemens, Toshiba Amid Today’s Economic Recession (4/27/2009)
Q&A: Lih Tah Wong of Computer Mail Services on E-Mail Filtering, Blacklisting (4/13/2009)
Q&A: World Trade Center Illinois Chairman Neil F. Hartigan, Director Bilal Ozer (3/3/2009)
Recession: International Causes, Effects of Today’s Global Financial Crisis (1/19/2009)
Q&A: Ex-Chicago Tribune, ‘Caught in the Middle’ Writer Richard Longworth (1/5/2009)
Q&A: Midwest Regional Director Michael E. Howard of Export-Import Bank (6/17/2008)
Q&A: Intetics Managing Partner Alex Golod on Belarusian Economy (4/15/2008)
Q&A: Intetics Managing Partner Alex Golod on Protecting Intellectual Property (4/9/2008)
Q&A: Intetics Partner Alex Golod on Being a Jack of All Trades (3/31/2008)
Q&A: Motorola WiMAX Director Tom Mitoraj on Unstoppable Freight Train (11/26/2007)
Q&A: Motorola WiMAX Director Tom Mitoraj on Global WiMAX Differences (11/20/2007)
Q&A: Motorola WiMAX Director Tom Mitoraj on Widespread WiMAX Growth (11/12/2007)
Q&A: InterPro Translation CEO Ralph Strozza on Translation Tools, Costs (9/18/2007)
Q&A: InterPro Translation CEO Ralph Strozza on Globalization, Translation (9/11/2007)
Q&A: InterPro Translation CEO Ralph Strozza on Intercultural Translation Issues (8/7/2007)
Q&A: Madison Capital Partners CEO Larry W. Gies on Specific Country Issues (7/10/2007)
Q&A: Madison Capital Partners CEO Larry W. Gies Jr. on Cultural Differences (6/26/2007)
Q&A: Madison Capital Partners CEO Larry Gies on International Private Equity (6/11/2007)
Q&A: Scott H. Lang of S.H. Lang & Co. in Chicago on Foreign Deal Making (5/15/2007)
Q&A: Scott H. Lang of S.H. Lang & Co. in Chicago on Middle-Market M&A (5/8/2007)
Q&A: Scott H. Lang of S.H. Lang & Co. in Chicago on Middle-Market Firms (4/24/2007)
Q&A: George Filley of NAVTEQ in Chicago on Data Localization, Reach (3/27/2007)
Q&A: George Filley of NAVTEQ in Chicago on Partners, Personal Privacy (3/20/2007)
Q&A: George Filley of NAVTEQ in Chicago on Digital Mapping (3/7/2007)
Click for 2006 column archive.
Click for 2005 column archive.
Click for 2004 column archive.

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