I just read a compelling Harvard Business Review article purporting the incredibly low success rate companies have going global. On the surface it shows that companies, on average, do better investing their capital at home than attempting foreign investment strategies. The metric the authors use is average Return On Assets (ROA) and while the difference between domestic ROA and international ROA is actually very slim, they suggest that companies should consider home growth before looking abroad, we think there is another way to increase international success.
While you can prove anything with statistics, we see this as a chance to shout from the rooftops about the new way companies are expanding overseas. Since the dawn of time companies have been told the very first thing they should do when entering a new country is set up a subsidiary. Anyone who has ever expanded operations outside their own borders knows that this sets off a chain of significant costs, major time commitments for the executive team, and a structure that cannot bend as country demands change. So of course the HBR authors found that Return On Assets is weak – the investment is huge!!!
Why, therefore, wouldn’t a company seek a way to reduce their costs when entering a market and increase international success? Why wouldn’t they seek a light footprint that keeps startup costs low and maintains flexibility on the chance that the strategy doesn’t work out exactly as it was drawn up in the board room? If companies could reduce their cost of international expansion by 60%, wouldn’t it turn this study on it’s ear? Of course it would, now let’s show you how.
The time commitment and costs to set up a legal entity varies widely across the globe. But given our years of experience (and significant study on the topic), we’ve determined that the average cost to set up and operationalize a subsidiary is $17,500. Once that subsidiary is live you have in-country maintenance for that entity that comes in the form of bookkeeping, tax filings, resident director fees, insurance, payroll, etc. Again, these costs vary wildly (UK is low and Brazil is high, for example) but the average annual cost to just maintain the entity is $35,000. The bummer part is that you’re not done yet, you typically have annual returns and filings that average $12,000 per year. So for those of you keeping track at home, the startup costs going the “old fashioned” entity route are almost $65,000 in the first year and $47,000 per year thereafter. No wonder it’s hard to get a Return On Assets deployed. Plus, heaven forbid the strategy ultimately fail – you’re still stuck with that dormant subsidiary and the associated costs.
What if a company could reduce their costs by 60% or more? Would the Return On Assets suddenly be more like 25%? And what if a different way of expanding means you could pull out at any time and not have lingering financial liabilities? Such an approach wouldn’t make the domestic-focused argument look that attractive any longer.
There’s a better way to expand overseas and it’s called International PEO. By utilizing other companies’ infrastructure in that country you can literally get operational in the matter of days, reduce your costs by half, keep the flexibility to pivot if things aren’t working out. Just as Airbnb, Lyft, and “The Cloud” have given people access to assets and infrastructure in a unique and novel way, Velocity Global has brought the sharing economy to overseas expansion. Reduce your footprint. Save money. Speed time to market. Duh, right?
Friends don’t let friends expand overseas the old fashioned way. If you or someone you know cares about a successful international growth strategy, send them this post. And if you want to learn more about how you could use an International PEO to greatly increase your chances of international success, give us a call at Velocity Global. We are reinventing global expansion.