The mission of Going Global, which appears on MidwestBusiness.com
on most Tuesdays, is to educate and inform Midwest technology companies
on what local technology companies are doing internationally so other
firms can learn from the successes of like-minded peers.
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.
the government uses the term “services exports,” I’m a little confused.
In many cases services, they can’t be delivered in one place and
consumed in another. Straight Internet-enabled services – like
paralegals proofing legal documents abroad or health care workers
diagnosing X-rays in other countries – might fit the description. I
don’t think so otherwise.
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
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.
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
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.
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.
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
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.
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
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
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.
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
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
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 email@example.com.
Click here for Muth’s full biography.
Previous Columns in 2007:E-Mail This Article to a Friend or Colleague
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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)
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Q&A: George Filley of NAVTEQ in Chicago on Data Localization, Reach (3/27/2007)
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Click for 2006 column archive.
Click for 2005 column archive.
Click for 2004 column archive.
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