As finance chiefs help their companies search for growth opportunities, more and more often they find themselves looking outside the United States rather than at home. While the domestic market remains plagued by a seemingly endless slow-growth recovery, not to mention the fierce competition endemic to a highly developed economy, emerging markets offer the allure of double-digit growth. But CFOs know — often from hard-won experience — that those developing markets not only offer the promise of great reward but also pose many risks.
How should finance executives proceed in foreign markets in 2012? In our inaugural CFO/360° report, we offer advice from several distinct vantage points, as determined by the editors who oversee our coverage of each topic area. Our goal is to provide highly focused, actionable insights to help you navigate whichever challenge is most relevant to your company's situation. Of course, you may well decide that our entire package is indispensable. Either way, this CFO/360° report will be a very useful and efficient way to enhance your knowledge of global business practices. Throughout 2012 we will bring you quarterly CFO/360° reports on a range of core finance challenges and opportunities.
HUMAN CAPITAL
The Help
Logistical and legal challenges abound when hiring overseas.
When consultant Bill Hite told a New Hampshire client who wanted to expand into Europe that in some countries he would have to offer not two weeks, nor four weeks, nor even six weeks of holiday pay to locals who work more than a 35-hour week, but a full 36 days' worth, the CFO balked. At the U.S. company, the most vacation time awarded was four weeks — and that was only for the chief executive.
"He could not get his head around it," recalls Hite, whose firm, Hull Speed Associates, helps companies set up subsidiaries around the world.
U.S. companies have been expanding globally for decades, but it's still hard for many U.S. executives to fully grasp that they're not in Kansas — or New Hampshire — anymore. A common initial stumbling block as companies skip down the yellow brick road is the realization that while in the U.S. most employees are hired "at will" and can be let go with no strings attached, in many other countries workers have employment contracts that spell out compensation, working hours, vacation, termination, and severance — much of it more generous than what U.S. companies typically offer.
To avoid incurring such expenses unawares, finance chiefs should do their homework for each local market. Small to midsize companies that are moving abroad for the first time but are "highly U.S.-centric" are the most likely to get into trouble, says Shan Nair, founder of human-resources and accounting-services firm Nair & Co., whose clients typically have sales between $300 million and $3 billion, with anywhere from 20 to 1,500 employees worldwide. "The temptation is to do things on the cheap and cut corners, to think, 'We're small and won't be on anybody's radar screen.'" But when things don't work out, employees may complain to the authorities, and the costs of ignoring local laws can pile up.
Companies just starting to do business abroad may believe they are on safe ground by hiring locals — particularly salespeople — as independent contractors until they determine whether the market proves profitable. But that tack can prove problematic if the person works for just one company, carries a company laptop, or drives around in a company car. Under those circumstances, he is likely to be considered an employee. In Brazil and China, in fact, it's actually illegal for a foreign company to employ individuals as contractors. One option for new market entrants in Brazil is for the foreign company to partner with a local company that can then hire local staff. In China, foreign entities need to either establish a wholly-owned foreign subsidiary or find a joint-venture partner.
In Europe, contractor agreements can work — but typically for assignments of no more than a year. After that, Nair says, the individual gains additional employment rights. For those entering the European market for the first time, Nair recommends hiring people on a short-term contract, with no responsibilities beyond that, so that the company doesn't incur ongoing employment liabilities.
It's hard to undo the damage if contracts aren't written properly. In certain European countries, for example, employees are entitled to the equivalent of an extra month's worth of their annual base salary to pay for their vacations; U.S. employers must take care to ensure that contracts stipulate that the amount is included in the yearly salary, or they may have to provide it as an additional payment.
Meanwhile, in Finance
When it comes to establishing a finance department overseas, many global companies use a mix of local talent and expats. "As you're getting started, it makes sense to have someone from within your company relocate to the new market," says Thack Brown, SAP's CFO for Latin America. "You need to make sure you have someone you trust who can keep an eye on things and extend the culture of your organization." That person also needs to be adaptable and willing to learn what are typically quite different tax and labor laws.
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