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Scaling up for international growth: key considerations


April 2019


When is the best time for tech SMEs to go international? We talk with BDO’s leading experts for their advice on overseas expansion.

 

As the global market shrinks due to technological innovation, the opportunities for tech SMEs and scale-ups to take advantage of the world stage grows. The potential for exploring new markets and increasing revenue is perennially appealing, but the process of expanding abroad comes with its own particular hazards.

We sat down with leading figures at BDO to ask for their expert view on the preparation, the execution and the potential gain of expanding abroad. Our panel included:


Tony Spillett, BDO UK’s National Head of Technology and Media

 


Kevin Doyle, BDO Ireland International Tax Partner

 


Scott Rodie, BDO Canada Partner & Head of Global TMT

 

David Butcher, BDO UK Technology and Media Partner

 

 

What are the key considerations before expanding internationally?

Tony Spillett: ‘It’s advisable to do research on the size of your potential marketplace in the target country, city or region, and work out whether each needs to be a core location for the business. You also need to project quite carefully as to what your costs on the ground are going to be as you expand.’

Scott Rodie: ‘If you're looking at an expansion project, you should look at it almost as a new company, and should have a growth budget to guide you. You have to consider core growth and profitability metrics in the new jurisdiction, such as customer acquisition costs and customer value metrics for SaaS type businesses.’
 

What tax preparations should be put in place beforehand?

Kevin Doyle: ‘There are two aspects to the tax consideration. There’s the wider group impact and there are the tax issues specific to the new market or territory.

‘At the group level, the finance team will probably compare a number of potential jurisdictions, in terms of the impact a new entity or presence there will have on the group, including the impact on its effective tax rate. They will also compare information about tax incentives and tax barriers across the potential jurisdictions, as well as the need or otherwise for an intermediary holding company.

‘At the local level of the new market, there’s a myriad of practical tax issues to be worked through across all tax heads. The foreign tax advice should always be provided or signed off by local tax experts. Investing up-front on a detailed understanding of the tax attributes in new markets and locations should help the finance team to frame a realistic business plan and ultimately help make the decision to internationalise a successful one.’

Tony Spillett: ‘Research also has to be done into what particular area of tax is the main concern in the new market. Though corporate tax might be your big issue in the UK, it could easily be employment tax, sales tax, or a local tax that’s key elsewhere.’

Scott Rodie: ‘As you expand into other markets, the tax issues are extremely important. There's also the regulatory environment, and understanding what sort of trade agreements exist between the countries, what the local regulations are and how they differ from the home country.’
 

When is the best time for a business to go international?

Tony Spillett: A good time is when you land an international client that requires your business to be on location. We’ve had several clients that created elaborate group structures with a view that when they set up in situ, they'd find clients. The results were mixed at best.

‘When you've got people and clients there, and when you're starting to look at office space, then that's when you should set up a structure. My view is that the process should be led by a profitable, revenue-earning opportunity.’

Kevin Doyle: ‘I think there can be a slight geographical aspect that affects timing. For example, when Irish businesses start out, they're almost always thinking internationally from the outset, because the Irish domestic market is small. Due to technology, that does not necessarily mean they need a physical presence outside of Ireland from day one, but because they are generally importing and exporting, they encounter cross-border issues very early in their business life cycle.’

Scott Rodie: ‘I agree with Tony and Kevin. I do believe that holding off on scaling internationally until a very advanced business phase is reached is an outdated view. With innovation and competitors’ reactions to your product offering proceeding so quickly nowadays, you really have to look at product differentiation and what your long term distribution strategy is. I think it's almost never too early to start to consider the possibility of expanding internationally to counter the accelerated pace of business competition today.’

Tony Spillett: ‘I’ve had clients that have said, ‘Well, we want to open up in, say, Dublin, Montreal, New York, Shanghai, and Dubai, and we'd like to do all of that tomorrow.’ I think there is a need to consider the art of the possible, because you can get dragged in many directions very quickly. Working out where you really need to have international presence, particularly when the senior management team is getting dragged in all those directions from the senior management team, that can be quite tricky.’

Scott Rodie: ‘It does takes a lot of focus. You really have to be very, very specific in  your approach. You also shouldn’t take bets on a market just because it might be an easy location in which to expand,  or because you might have a particular contact in that jurisdiction.’

David Butcher: ‘The only thing I would add is to be conscious of whether you need to follow clients to a new location, or whether you can service that market from your existing operations. There are pros and cons to being in-market and being out of market – it’s worth keeping this in mind.’
 

Is it possible to go international too soon?

Scott Rodie: ‘Business ideas are replicated quickly today, and there is a lot of visibility in the market, where competitors are looking to copy good ideas. You have to move quickly to avoid being out-competed. Get to product market fit as quickly as possible, and then build distribution. Building infrastructure to expand market reach is excellent future-proofing.

‘I think you have to proceed with careful due diligence and find a way to quickly assess the best opportunities. You should certainly not bet the farm on a particular project in another country. Good entrepreneurs are the ones who are prepared for the fast-moving world of today.’

Tony Spillett: ‘I think businesses find it relatively straightforward to raise cash at an early stage for the stated intention of setting up internationally. Foreign Investors seem to understand and actively back international expansion.  As long as businesses are quite sales-focused, and they're not setting up too much infrastructure, then ‘as fast as you can expand sensibly’ would seem to be the way forward.’


What can businesses do to offset the inevitable costs of expanding internationally?

Scott Rodie: ‘These costs should be viewed as an investment in the company’s future. In today's world, you also don't have to invest in significant capex or big investment projects as part of your international expansion. You can accomplish good results with a fairly lean approach.’

Tony Spillett: ‘There’s so much shared workspace available around the world, and that’s really changed the landscape. You can send people into the target countries for six month periods, or get visas for longer – it’s no longer that difficult. You can use all the technology that is available for communications and sales. When done carefully, it can be done very, very effectively without laying too many fixed costs down.’
 

What hiring decisions should be made once expansion is planned?

David Butcher: ‘Once you’ve made the decision to enter a market, you need to make the decision about your first key hire in terms of the role that you need. Then, it's about ensuring you hire that first person quickly, while ensuring that due diligence is done and that they are a good cultural fit.’

Scott Rodie: ‘The recruiting strategy in the target country is going to be very important. I think you would like to  end up with a mixture of local talent and some expats from the home country, and it’s vital to look at how those talent pools interact. You don't want to end up with a  team that isn’t integrated.

‘I'm a big believer in cross-skill training, and taking a look at secondment programs. I think businesses scaling internationally do benefit from exchanging individuals from their local country.’

David Butcher: ‘Another vital step when you're establishing the business is to make sure that you, as the home office, are showing that you're engaged and invested in the expansion. By that, I mean emotionally and on a personal level.

‘The new office needs to feel included. Make sure you do things such as setting up conference calls with the home office at a time that works for the target market office, to show that you're embracing the local dynamic rather than imposing.’
 

How should teams function across offices?

Kevin Doyle: ‘I think the idea of having shared service centres within your group structure makes sense. I don't think you have to replicate every department and every role you have in each of your underlying subsidiaries or entities. Businesses can now use tech tools to manage the sharing of certain functions and expertise globally.’

Scott Rodie: ‘You will have some team members from the home country that are very aware of corporate strategy, operations, and  products, and they are a significant part of communicating the corporate vision to the local office. Then you’ll have team members from the local jurisdiction who will have a different knowledge set, because they understand local markets, business relationships, HR issues, local regulatory issues and more.

‘You need to try to meld those two knowledge sets together, and promote strong  communication and interaction. I think it's important to look at it from that perspective when you're considering the different functions that you need to fulfil across the teams.’
 

What are the key mistakes to avoid when expanding internationally?

David Butcher: ‘I think the main mistake I see is not knowing the target market well enough. By that, I mean not knowing who your potential customers are, not knowing who your potential competitors are, or what branding and reputation is like in the market. It’s often the case that businesses make the mistake of going into a new market remotely, when being on the ground is what they should have done.

‘For example, a lot of UK tech businesses look to the US market as their immediate overseas market. Those that do badly are those that try and service it remotely from the UK, without having an in-market presence. That puts them on the back foot to any local competitors, because chances are there will be a local competitor.’

Scott Rodie: ‘Another factor is understanding cultural nuances in target markets. I think one of the most sensible moves is to start to develop your management team in that new jurisdiction early.

‘Businesses have likely established strong product market fit in their home country. They're now scaling rapidly, but they really don't necessarily understand how their product will be received in another country without local expertise and perspective.’

Kevin Doyle: ‘I think the danger is underestimating localisation. Sometimes we've seen companies under-invest or neglect to take the correct advice as part of their initial set-up. They might have gone for the cheapest approach to incorporate or to get their branch registered, and have missed out on the joined-up approach.

‘Tidying up issues after the fact is usually costlier, and oftentimes companies wish they had viewed the move and associated professional advices as more of an investment in itself. It’s easy to be under the illusion that a certain jurisdiction is  just another English-speaking jurisdiction that companies assume they can sell into or can understand based on brief research.’

David Butcher: ‘There’s also the issue of country, versus continent. When entering the North American market, one of the mistakes companies make is not realising that doing business in New York is completely different to doing business in California, even if they are in the same country. Hyper-localisation may be needed.’

Tony Spillett: ‘You also have to maintain the culture of the business. A great business founder I worked with made the correct decision to move himself to their new US market for six months, to help recruit a local in-country head who would fit the company culture. They were able to bridge the gap between the company’s UK culture and the new US market, and that worked really well. If you do it well, new locations should be more than just service businesses for the head office, and should be winning global work.’
 

Are there any key learnings that you'd want to impress upon businesses who are considering going global?

Tony Spillett: ‘It’s all down to business culture, and keeping it cohesive from the starting office is a scaleable way to succeed in an international rollout of a business. Any new additions need to feel like they belong. I would advise the founders of the business to travel as much as they can to meet the new hires, and to impress the importance of culture on new locations.’

Scott Rodie: ‘Having a strong corporate culture is very important and I really think internal branding is vital for tech companies. The leadership team’s message around vision and strategy can mobilize the global team and ensure that the  internationalisation strategy is successful.’

Kevin Doyle: ‘On a practical level, I think there's a tendency from everyone's perspective to underestimate the timeline required to actually set up your business and get it up and running in another jurisdiction. You can pretty much double the amount of time you first estimate it’ll take. Also, adding contingency planning to your overall strategy is something that clients often say they didn’t do enough of when they first put their business plans together.’

David Butcher: ‘I’d add that businesses shouldn’t underestimate the cost. Yes, you can do it cheaply, but don’t underestimate all the costs of going international. It will cost more than you anticipate.’

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