Subsidiary as a Service Vendors

Challenges of opening foreign operations

Addressing the challenges associated with opening foreign operations is essential when considering international expansion. During their growth, Companies will evaluate the option of opening a foreign operation to access customers in a new market and/or to acquire talent that brings additional capabilities to the organization.

Establishing a foreign subsidiary can be daunting for small and midsize (SME) companies because of the resources and level of commitment required in an unknown region. Bigger corporations with greater financial resources have more options to consider, such as doing a Joint Venture to share risks, or to gain already built capabilities by acquiring a local company.

Local Incorporation challenges for SME’s

Level of Investment: Setup costs (advisory firms, government & local entities) and maintenance expenses of a fixed structure to support it.
Potential risks: Submitting to foreigns laws for the company. Managing risks associated with legal, licensing, labor, trade, tax and permits, including the learning curve of developing a local business.
Managing Uncertainty: when to start, size of the operation, and local timelines.
Right Team: Getting the local talent right from the start.

For a business owner, establishing a company in a new country is never misunderstood or described as an easy task. Rather, something significant must motivate them to pursue it, and they often embark on this journey reluctantly due to the associated added risks and unforeseen costs.

Post-pandemic, Tech Companies of all sizes know that being capable of running foreign operations is a key capability when competing in the IT Industry. Most start by hiring different vendors for each task (Headhunters, Employer of Record Platforms, International Legal Firm, Real State Advisor, Market Research Firms, etc), but soon realize that the new region differs greatly to their home country when starting a business, as unforeseen needs keep appearing that the current army of vendors don't have the needed expertises, or are not responsible, so another vendor needs to be added to the mix. Soon, the need of having one vendor that can be responsable for the whole journey is imperative. Those companies experienced in expansion know that soft landing options are more common in countries that are know for attracting foreign investment, with the added benefit that these vendors are specialized by industry, so they take advantage of this.

By leveraging these options, companies can start their own foreign operations under a local company umbrella. These approach enables companies to start in a shorter time, while saving costs by benefiting of their economies of scale and local know-how, sheltered from local risks. Depending on the industry and vendor, this can also be used as a strategy to pilot first the region, test assumptions, scale, and then do a full local incorporation.

Tech Industry

The cost of developing and launching a software-based product has fallen by a factor of 100 or more in the past twenty-five years, so vastly more products get developed and launched. Why think that opening new operations in a foreign country hasn’t evolved in the past 25 years?

Tech companies have been using this approach as well, by working with vendors that offer a similar framework but adapted to the higher flexibility required by the IT Industry and less dependent of fixed assets. These type framework is known as a Subsidiary as a Service (SUBaaS), Turnkey Subsidiary or Virtual Foreign Subsidiary, as the operation is managed and owned by the foreign company, instead of the local company. This is the opposite of outsourcing or subcontracting a dedicated team from local tech company, that has the potential risk of training a future competitor.

The as-a-Service model is well known in the IT Industry, in which the customer only pays for what is using, benefiting from shared infrastructure. This approach brings down costs by using economies of scale and can be used in shorter time. It adds flexibility and can scale and functionality when needed, and not before.

Case Study: Mexico

Because of its privileged geographical location in the Americas, Mexico has plenty of available options. Foreigners open a business in Mexico to support North America, or as the gateway to Latin America.

In Mexico the Manufacturing Industry has had for more than 30+ years the option of the Shelter Program Model, which enables foreign manufacturers to operate under an existing Mexican corporation, providing a "shelter" from legal and financial exposure. The Shelter transfers to their customer their economies of scale benefits and takes the responsibility of Recruiting, HR & Payroll, Procurement, Facilities Management, Accounting & Finance, Gov't Support & Compliance, and others.

Subsidiary-as-a-Service Category

Salesforce launched its CRM Software-as-a-Service in a market that was dominated by legacy on-premise solutions that took months to implement, train, and adapt to the business. It was designed for small- to medium-sized companies that couldn’t afford traditional business software solutions and didn’t have the resources to support in-house the solution.

Salesforce enabled businesses to scale as needed, instead of being forced to purchase most of the capabilities upfront without knowing what level of usage they would actually need. SME companies could now start using the chosen capabilities from a menu in a matter of weeks—not months—while adding new functionalities as needed. It lowered the barrier to entry by eliminating the setup costs.

Subsidiary as a Service, SUBaaS, resembles the as-a-Service model, as companies pay only for users (workers) they use, benefiting from shared infrastructure. Economies of scale further lower costs and its benefits can be used in shorter time. With the option of scaling in size and adding functionality when needed.

Similar to how business software incorporates best practices, this framework has built-in industry know-how which assists foreign customers to avoid the initial learning curve of the local market and enhances the likelihood of success of local strategies.

Not to be confused with a Virtual Subsidiary that does not have brick and mortar characteristics, the SUBaaS can provide full foreign subsidiary capabilities for operations and local presence.

what it solves

Certain tech companies may be aware of the potential advantages and new revenue opportunities that can arise from establishing a presence in a different country. However, they may choose to delay this strategic move until it becomes an imperative, driven by the complexities associated with foreign expansion.

Setting up a foreign office demands a substantial allocation of resources and time, the precise magnitude of which remains subject to estimation. Additionally, the crucial tasks of identifying and hiring the right personnel on the initial attempt and navigating unfamiliar local laws beyond their borders require meticulous consideration.

The Subsidiary as a Service framework lowers substantially the entry cost and associated risks of entering a new region. But also, companies can start before to test their assumptions and scale when ready. It can start small or big operations, temporary or permanent, using the framework.

Different configurations can be built depending on the level of commitment the foreign company is ready to make: a temporary project team, a small sales team for market entry, a large Center of Excellence and many more.

Because of multiple safe landing vendors, SUBaaS specialize to serve better and differentiate their value proposition by including local and industry-specific know-how.

The SUBaaS vendor saves time and spending additional resources for learning local practices. For local operations, this could mean efficient procurement spending, setting up employee’s benefits packages according to location and market, best facilities location, relocation processes, partnerships already established with local universities and so on.

Moreover, it is customary for the vendor to specialize in a specific sector, with the most prevalent industries being Manufacturing, Call Centers/BPO, and Technology. Not only the foreign customer will not need to train them on their industry, but the vendor will give early feedback on the customer's overall business strategy and provide insights into the finer aspects of building effective business practices.

The vendors that provide the highest added value are those who can make their customers feel as though they have acquired the capabilities and industry-specific expertise of a local company (minus the installed customer base).

Benefits to be expected

In summary, you can count on that leveraging the Subsidiary as a Service model will help the organization on multiple fronts:

Start benefiting from the foreign operation in days instead of months, with faster scaling capabilities.
Avoiding high setup and unnecessary costs.
Minimize greatly the risk, while still owning the operation by a USA contract.
Because of the built-in industry local best practices from the SUBaaS, additional savings can be expected and a higher success rate of local strategies.
No need to start big. If needed, being able to pilot the region before a full deployment. Confirm potential customers that the organization can support them in the new country if required, with the SUBaaS ready to be turned on.

Each is a great benefit, but all of them together, is what makes a SUBaaS approach the logical choice.

What capabilities vendors need to have

When doing Market Research when evaluating SUBaaS vendors, several items need to be checked so they can offer end-to-end capabilities in the industry they specialize. These are the main capabilities that vendors should have in place.

Local end-to-end infrastructure and resources

The as-a-Service model relies on benefiting from economies of scale, so it means that they should have plenty of assets, infrastructure, and staff from multiple business areas/departments. Having a customer portal with a great interface is just that, a nice interface. Being able to run Payroll is just one feature of multiple roles a local operation has. Be careful with companies that promote how they have multiple partnerships to be able to deliver locally, as it will aggregate additional layers of costs and it will lack a cohesive experience.

Long Trajectory

The foreign customer benefits from avoiding the learning curve, so the SUBaaS should have checked already this item on their own. Success odds will dramatically improve with a SUBaas, than facing alone the learning curve of a new stand alone operation.

Be aware of vendors with 2-4 years in the market announcing their software is available in 160 countries. That is a feature, no company will have experience in each of those countries, unless it acquired 160 local companies that had more than 10 years of local experience in that industry.

Industry capabilities

While achieving savings and minimizing risks are undoubtedly crucial factors, the ultimate determinant of the move's success lies in effectively establishing a thriving presence in the new region. The vendor's ability to provide expert industry-specific local know-how will play a pivotal role in accomplishing this objective.

Example of use cases

Talent Pool

Pilot the Region

Market Entry

Access additional talent and gain newl capabilities. It can be temporary for a regional rollout or permanent for nearshore delivery.

Market Entry

Pilot the Region

Market Entry

Access new customers in a new market ro diversify the company revenue. Develop a pipeline first and grow according to revenue.

Pilot the Region

Incubate or Test a temporary operation first, validate talent and costs, and scale accordingly.

Regional Office

Pilot the Region

Open a large permanent operation in the region: Regional Office, a Center of Excellence, Delivery Center, GCC, etc.

The Subsidiary-as-a-Service Strategy