VideoThe cost-conscious approach helped the company turn a healthy profit in 2005. Digital Focus is using the revenues from the initial engagement to fund further operations in the UK, including, finally, the lease of an office in London. While that workplace is three times as expensive as the consultancy's space in Herndon, the London office isn't exactly the equivalent of a Park Avenue suite. "We could have gone someplace [fancy] like Covent Garden, but we wanted to reinvest our profits," explains Smith. "There are coffee stains on the rugs, but our clients like that. They say, 'At least we're not overpaying you.'"
No Net, and Loving It
For those courting clients, not overpaying is crucial, particularly in the early days of a cross-border expansion. As Marakon's Langford points out, "Companies that are the most successful with their expansions are often the ones that can be profitable early."
That's easier said than done. Setting up cross-border operations can strain a finance chief's ability to control administrative costs. CFOs accustomed to dealing with one set of books and one set of federal tax codes suddenly find themselves dealing with several general ledgers and multiple tax regimes. Differences in accounting treatments only add to the complexity.
For larger operations, the answer is simple: hire more finance staff to master local issues and support each business location. A start-up with five overseas sales offices can't afford that, however. Neither can managers at resource-strapped small-cap companies. "You want good data from your country offices," acknowledges Stu Fuhlendorf, CFO of Isilon Systems, a manufacturer of clustered storage systems. "But you don't want a huge international infrastructure, especially when you already have the burden of Sarbanes-Oxley."
To some extent, advances in technology are easing the pain. "Ten years ago, you had to have someone in every country to create and load a payroll tape," says Bob Cecil at EquaTerra Inc., an outsource and insource advisory firm. "With self service and the Internet, you don't need that anymore."
Letting someone else do the legwork is another option. Consider Isilon's arrangement. The Seattle-based company has offices in Tokyo, Seoul, London, and across continental Europe, yet it has no permanent finance staff in any of those spots. Instead, Isilon management hired High Street Partners to help it line up local accounting firms in each market. Every month, High Street collects the numbers from the firms, reviews the figures for accuracy and consistency, and then passes the data along to its client. This allows Isilon to tap into local expertise without incurring big fixed costs. "We are ramping up very quickly, and this makes it easier for us to get into new countries," says controller Pearl Chan. "And if we have to ramp down, we can do that, too."
The arrangement is helpful, given that the business-process-outsourcing industry hasn't quite caught up with the needs of smaller global companies. Large BPO specialists generally focus on more-profitable accounts, meaning large corporations. And while finance-outsourcing boutiques such as Core3, Outsource Partners International, and Savista (owned by Accenture) do offer some overseas services, they tend to stick to certain countries or industries. Savista, for example, serves small-to-midsize companies in the restaurant business.
Even with outside help, international business is undeniably harder on finance at smaller outfits. "Having overseas subsidiaries means doing more with the same resources," says Don Pratt, CFO of Ellacoya Networks Inc., which makes hardware and software to control broadband networks. "We effectively have a 24-hour workday. If you need to talk with someone at 9 or 10 at night, you just need to do it."
Of course, executives at some small companies say they welcome the challenge of going global without the reassuring infrastructure and resources of a big multinational. That appears to be true for Bruce Ferber. "As a former GE Capital finance guy, I've played in the international space before," he says. "But this time I'm working without a net. It's exhilarating."
Shortcut This Way
With or without a net, flops happen. Before venturing into China, The Hoffman Agency tried to crack the Japanese market. Taken aback by the country's high prices, CEO Lou Hoffman came up with what seemed like a bright idea: he hired a consultant to help him find a local Japanese partner who could share office space and help sell his company's PR services in Japan. "I was feeling proud for being so clever," says Hoffman. "But it was a disaster."
Hoffman's partner was a Japanese-English translation service with three employees. As it turned out, the local partner was neither interested in learning the high-tech PR business nor able to win much new business. There was a cultural problem, too: many Japanese executives are reluctant to do business with companies that aren't incorporated in Japan. "We came across as second-class citizens," recounts Hoffman. After two years without progress, Hoffman canceled the partnership and started again.
Better planning may have prevented the problem. As Michael Collins, a partner with Bain, points out, "You need to realize that the right time to start looking at expansion is long before you need it to hit your top and bottom line." Businesses don't always have that luxury, however. When Security Innovation yielded to its customers' requests that it open an office in Europe, managers at the Wilmington, Massachusetts-based software security company moved quickly, taking just three months to make the arrangements. "It wasn't enough time," concedes CEO Edward Adams.
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