Understanding the Hidden Costs

Written By Charlie Mayes, Managing Director, DAV Management

The Trade and Investment Minister Lord Green is campaigning to increase the number of British exporters by roughly a quarter in 2013. If this is achieved,it is estimated that about £36 billion could be added to the UK economy. Lord Green has been impressed by the way that many firms have seized on the export opportunity since the launch in 2011 of UK Export Week, a national series of events designed to inspire and provide practical advice for new and experienced exporters.Charlie-Mayes

We know that there are £19.5 billion worth of exports generated by companies in London and the South East alone and a recent survey undertaken by workplace solution provider Regus found that of the Berkshire firms that don’t currently trade overseas, 29% are planning to start in the next two years. Clearly there are many benefits to doing business overseas. A recent research report unveiled by the UK Trade and Investment (UKTI) shows that many UK firms are increasingly venturing beyond traditional export markets such as Europe and the US and into high growth markets in Asia and Latin America.

The UK has always been a great trading nation and the report shows that those companies that continue this tradition by thinking globally stand to reap sizeable rewards. 58% of entrepreneurs said exporting led to a ‘level of growth not otherwise possible’. Most economists agree that the biggest story of the twenty-first century will be a shift in the economic centre of gravity from the developed world to high-growth markets such as China, India, Russia and Brazil. Companies of all ages and sizes are increasingly finding success in these markets.The report also highlighted that two in five small exporters (with less than 10 employees) already do business in at least one high-growth market. Many internationalised firms experience a ‘virtuous circle’ where exporting leads to new innovation, and where those innovations then lead to further exporting. Over half of all the firms surveyed (53%) said that a new product or service evolved because of their business outside the UK.

However, it’s important to recognise that exporting isn’t an automatic passage to growth and a success for everyone. In today’s economic environment it can be a costly mistake for a business to forge ahead with an export strategy simply because growth in its traditional home markets is slowing down, something that UKTI is keen to emphasise. It must conduct a full and realistic assessment of its business model in the context of the new export markets it wishes to enter; this need to encompass its products, services and commercial propositions. It is unrealistic to assume that a model that has worked in a traditional, home market can simply be lifted into an overseas one that is likely to be driven by significantly different commercial and cultural characteristics.

Such consideration is particularly true if, like DAV, you are a people based business providing professional services. The European market has a largely consistent and mature view of professional services and, whilst there’s no doubt that competition is driving increasingly sharper deals, it’s still possible to maintain the kind of commercial model that service providers have traditionally enjoyed. But, as we have discovered, it’s a whole new ball game trying to take that model into, say, Asian or Middle Eastern markets which have a very different view of the commercial rates they are prepared to pay. Unless you are highly differentiated, servicing these markets with UK based staff, with all the cost this implies, is very difficult to sustain, particularly if your people are likely to be deployed in situ over a long period of time. In our experience, this model only works if you are able to establish an ‘in region’ operational presence and have access to suitably qualified and experienced local resources. Achieving this gives you a commercial model and, if you hire effectively, people that are calibrated to your ‘local’ market. Leaving aside your enhanced competitiveness, this renders you less susceptible to things like currency fluctuations, hidden costs and cultural aspects. It also reduces the likely disruption to UK based staff who may only be at best prepared to work overseas for relatively short periods of time.

So, whilst the UKTI research indicates that exporting offers substantial benefits there are clearly downsides that must be considered. The fundamental principle is that any business thinking of exporting must undertake a thorough due diligence before setting out down this path. Your export business plan needs to consider a multitude of scenarios specific to your business model and, most importantly, companies need to understand what it is that they are trying to achieve and why, and how well suited their business is to exporting. It is very easy to get carried away with the promise that exporting appears to offer, particularly for firms who are experiencing slower growth rates in their traditional home markets due to the current economic environment. But normal business rules apply and an effective due diligence may show that, in the end, export business may be harder and less profitable than the equivalent generated in this country.





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