09Mar
By: Mike Doonan On: March 09, 2016 In: Michael Doonan's Blog Comments: 0

In my decade-plus in executive search, I’ve always viewed my role in furthering my clients’ success to go way beyond recruiting. Given I speak to thousands of executives each year from every sector and company size, I’m in a particularly unique position to recognize patterns of behavior in the market that my clients can take advantage of. If you pay attention to the less-than-obvious data points, this really is a fascinating line of work…

One theme that has become clear but also bothersome to me is that U.S. companies are vastly underinvesting in international markets. My fear is that these companies – many of them my wonderful, long-time clients – will find themselves with their pants down as the market inevitably turns.

“Why worry?” you may ask. After all, the U.S. markets have been on fire for years and purple unicorns continue to prance down Main Street (I hit two on my way to work this morning).

But seriously, large and small companies alike are leaving themselves dreadfully exposed to risk by focusing too heavily on the U.S. Whether because of pressure from Wall Street, short-term gratification or good old patriotism, far too many U.S. technology companies are failing to build long-term, sustainable value through geographic diversification.

I’ve spoken recently to dozens of executives running international businesses for U.S. entities, and most agree that this trend of myopically focusing on North America to the near-exclusion of the rest of the world is nearing a tipping point. So now I am ringing the bell and suggesting, with all due respect, that international markets deserve your attention as a priority for continued expansion.

To get a better sense for the international markets, with Europe in particular, I spoke with close friend and partner, Steve Lavelle of London-based European search firm Gillamor Stephens.

For the first installment in our two-part discussion, please read on. Our hope is to provide some insight into why you and your company need to be putting wood behind the arrow in international markets, particularly Europe, TODAY. Enjoy!

Steve, where do you see the biggest opportunities for North American companies thinking of expanding into Europe?

It’s clear that establishing a successful European subsidiary is a must-do for most North American tech companies. To begin with, it’s simply too big a market to ignore. While there may be some opportunities to serve existing U.S.-based customers who are active in Europe, the bigger opportunity is the huge indigenous market in major countries and/or regions such as the U.K., DACH (Germany, Austria and Switzerland), the Nordics (Denmark, Finland, Norway and Sweden) plus France, Italy, Spain and Holland, as well as a host of smaller countries.

Yes, but how much are these countries actually spending on technology?

According to Forrester Research, the U.K. alone spent $170 billion on technology in 2015 and Germany $125 billion, with overall European tech spending rising to 5 percent in 2015. Don’t be distracted by the media focus on some of the problem areas – yes Greece has severe financial problems, but it’s a tiny country with a very small economy (less than 2% of Europe’s total).

You and I have had many conversations on the various European “crises” making front page news in the US. Talk to us about your view on these issues.

Don’t let the media amplification of certain events give you an unbalanced view of reality. Yes, there is a migrant crisis in Europe right now but no, it is not affecting daily life here and the impact on business is minimal.

The so called “Brexit” (the UK potentially leaving the European Union) will be generating headlines in the run up to the June referendum here. Even if the vote is to exit, the implications for US companies doing business in the UK and Europe will be minimal and will take several years to play out.

Why should VC-backed startups and other smaller companies consider expanding into Europe?

For many early-stage U.S. companies, getting European revenues to about 30% of their corporate total is often a prerequisite for a successful IPO or M&A event. And that is what these companies are ultimately aiming for.

And apart from the revenue opportunity, your competitors are probably active in Europe, so you don’t really have a choice if you think about it.

As in the U.S., tech markets attracting significant investment there include Big Data analytics, consumer Internet, enterprise software, games, mobile apps, software-as-a-service and security.

And what about larger companies? What are their motivators?

Again, the principle opportunity is for increased revenue and economies of scale. For example a major hardware player like Dell will enjoy lower costs-per-unit manufactured globally because of increased volumes from international markets.

Expanding into Europe also can help companies to decrease their dependence on North America, thus diversifying their risk and exposure to economic cycles.

European markets also offer access to early technology adopters, such as U.K.-based telecom giant BT, which has a reputation for buying one of nearly everything!

What challenges can U.S. companies expect to face when expanding into Europe?

The list of countries itself illustrates the greatest challenge, including both major economies and a host of smaller countries, which together contribute to the scale of the market opportunity. We are all familiar with the U.K., France and Germany, but could you locate Estonia, Latvia and Slovakia on the map? (Don’t worry – most Brits can’t either). There is huge diversity within this region, not only in such obvious characteristics as language and currency, but other critical factors such as employment law, business culture and the cost of doing business. It can take a while for companies to appreciate this diversity, and develop strategies that take advantage of this, play to early adopters in different geographical markets etc.

There is also the fascinating and important issue of “Which nationality gets along well with who?” Europe’s rich history of alliances, invasions and outright war has left a complex pattern of relationships, alliances and tensions stretching back over millennia. The “Entente Cordiale” between the U.K. and France, for instance, currently represents the two countries’ friendly relationship, but when it was signed in 1904 it marked the end of nearly 1,000 years of intermittent conflict.

In addition, there will almost always be costs for localizing languages, currency and other factors. Never forget, Europe is not one homogeneous market. That is probably the single biggest wrong assumption that U.S. companies tend to make.

So how do you mitigate these risks?

It’s often not a question of succeeding or failing, but of the time required to succeed. Most companies figure out these issues once they are on the ground – but the smart ones seek out good advice and take action to get there quicker, in generating revenue, profit and cash.

How do you suggest companies compress the time required for success?

Develop a coherent strategy to get your European business to key mileposts, including revenue generation, partnerships, hiring and investment in people and financial resources. Quantify your goals and embrace the diversity in Europe. Hire a qualified local leader with a successful track record of setting up subsidiaries of US companies in the region and whose work is referenceable.

 

For the rest of this conversation, stay tuned for Part 2 in this series which will be released in the coming weeks.

SPMB Partner Mike Doonan specializes in C- and VP-level executive searches for publicly-traded as well as PE and venture backed companies. A closet quant geek and ardent follower of international relations and economics, he joined SPMB in 2004 to help the partnership develop and implement SPMB’s current analytics-focused search strategy.

Steve Lavelle is Partner and co-founder of the London-based European search firm Gillamor Stephens. A specialist in online, software and cleantech industries, he has devoted most of his 25-year search career to supporting the growth of U.S. technology companies in Europe.

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