Challenges of opening foreign operations
Addressing the challenges associated with opening foreign operations is essential when considering international expansion. During their growth, IT 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, because of the conduct of a new business in the foreign country. 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, right 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. Even today, why should this be the prevailing scenario?
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. Those companies that don't follow use there are more options, based on their commitment level and needs. Most start by hiring different vendors for each task (Employer of Record, Headhunting, Compliance Advisory Firm, etc), but soon realize that the new region differs greatly to their home country when starting a business, 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 Safe 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.
When using these safe landing options, the foreign company can start their foreign operation in the new country 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.
Mexico: Case Study
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 benefit and takes the responsibility of Recruiting, HR & Payroll, Procurement, Facilities Management, Accounting & Finance, Gov't Support & Compliance, and others.
IT 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. Is crucial to not confuse it with subcontracting or outsourcing to a local tech company, which bills a percentage of their own team that will dedicated to a customer for a specific period.
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 when needed.
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.
Example of use cases
Add Talent Pool
Pilot the Region
Add Talent Pool
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
Add Talent Pool
Access new customers in a new market ro diversify the company revenue. Develop a pipeline first and grow according to revenue.
Pilot the Region
Pilot the Region
Pilot the Region
Incubate or Run a temporary operation first, validate talent and costs, and scale accordingly.
Regional Office
Pilot the Region
Pilot the Region
Open a large permanent operation in the region: Regional Office, a Center of Excellence, Delivery Center, etc.