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sales, partnerships & outsourcing

going global
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the audience: q&a

Audience Member:  I am Stuart Miller of International Business Practice.  We have been doing custom market research about 15 years, and recently launched a new product, InternationalBusinessStrategies.com, with prepackaged international market research reports for over 75 countries sold over the Internet. One of the biggest jobs we have is selling by credit cards.  There are a lot of transaction costs because of a lot of rejection of cards, address verification, and so on.  Over 95% of our customers are international, and the average sale is  around $100.  Has anyone come across a better mousetrap for automatically processing small amounts on a website?

 Mr. Voorhees:  One of the problems you run into abroad is that a lot of cultures are debit societies as opposed to American credit societies.  That presents a huge problem with eCommerce and actuating these transactions.  We have a lot of funds that flow back and forth in large companies with accounts payable.  We do it just like ADP.  When you do a payroll, they suck money out of the company's accounts and pay the employees.  When you do an accounts payable with our company, we reverse debit and suck money out of the client's account, then pay the checks out of our own collateralized clearing accounts.  Through our banking relationships we have been able to look at verification of funds, reservations of funds, and beat up our financial institution partners from a fee basis to that end.  You should talk to your bank or whoever is hosting your online facilities and ask, “Is there any better way we can get at this?”  Don't let them throw up a lot of fees because everyone wants business these days.

Audience Member:  We are in the process of launching a long distance company in Brazil.  The target market is consumers and small businesses who are going to do a lot of prepaying, and they want to do a lot of debit and credit.  Our initial goal was to have somebody in the U.S. do it here, whatever works.  Two things we found we couldn't do: one, is that a certain set of transactions are debit transactions; second, up to 20% of credit transactions are not allowed to be done in dollars.  We found that we have to go to the country involved.  We partnered with a bank there that has the financial platform that works just in Brazil.  Our site and everything else is posted here, but when they want to buy, we ship the transaction to Brazil.  The other reason we have to do that is because, if we did a dollar transaction here, it would show up as a dollar transaction in Brazil.  With the currency exchange rates being what they are, people object to that because a dollar might equal three reals today, and tomorrow it is four reals.  Suddenly they paid 33% more for what they bought from us, and that becomes problematic.

           The way I would suggest you look at it, to agree with Matt, is to see if you can work out a wire transfer arrangement.  I don't know how time-sensitive your product is, but if you can wait two days and the person can wait two days, you can do a wire transfer.  Some places are totally automated.  We were shocked at how easy it was with wire transfer in Brazil.  The customer clicks to auto-generate the wire transfer, then you go on to his bank and pay the wire transfer.  In the U.S. we couldn't do it; it doesn't work here.

           There is another aspect, especially in Europe, that if you don't have a signature for a credit card purchase, for up to six months they could turn around and say, “I haven't gotten paid.”  You don't have credit card security outside the U.S.

Audience Member:  There is an outfit called WorldPay which is a wholly-owned subsidiary of the World Bank of Scotland, the fifth largest bank in the world.  They will do online payment transactions for you.  It's very straightforward.  I believe they have offices here in Sterling, Virginia.  They will take whatever currency that international credit card is in, convert it to U.S. dollars, apply the appropriate conversion fees, and so on.  I believe we're looking at something like 12 or 15 cents a transaction for processing.  I'm not in any way, shape, or form affiliated with the organization, but I came across them and it's a rather interesting technology.

Audience Member:  What are one or two best practices that you have found for intellectual property (IP) protection abroad?  I have found that paying the highest priced lawyer doesn't necessarily get the best service.

Mr. Raja:  That is a good question.  We had the same fear of letting our technology be developed by companies in India and Singapore.  What we did is that none of our suppliers knows the whole picture, only the module they are developing.  They know how it works and they probably have a business idea of how it is going to be used, but we split the whole project into multiple teams so that not one company can take control of it and come back and say, “We have it, so compete with us down the road.”  We did spend a lot of time getting those contracts done with our internal legal person, and that has given us a strong feeling that nobody can take the concept and build it.

Mr. Malone:  Being a very small, young company, and being pragmatic, we didn't have the financial wherewithal to have patent attorneys do anything significant with the IP.  It came down to relationships, who we chose, and how we put the contract together.  We had some credibility with the investors who were looking at us, recognizing that we did know patents and that all the brains existed here in the States.  In our application there is a tremendous amount of change management, and a lot of what changed frequently we were doing here in the States, using Bangalore for more of the core processing capabilities.

Mr. Partee:  From our standpoint, since we don't outsource the software development, the IP is really about licensing issues.  The best part about our relationships is that we are dealing with companies that have significant American presence.  It's great doing business with them because, even when the Norwegians talk to the Germans, they write their emails in English.  It is a very real advantage from that standpoint.  Technology-focused people tend to speak more English.  On the other hand, we get emails from Japan and I think they run it through some sort of translator.  It makes little sense, so we end up spending time dealing with the language issues.  From an IP perspective, we have filed our patents and trademarks and our attorneys are globally focused, so they have filed in other countries.

Mr. Voorhees:  Also, from a pragmatic point of view, you don't want to be subject to the laws of the country that your client is incorporated in or is doing business in.  It's convenient to find a middle ground, like London, England, where laws and business and commerce are roughly congruent with what we do.  We didn't know the laws in Spain, nor could we spend the money to research them down to the most minute detail, but our lawyer was very familiar with the laws in England that pertained to our sorts of transactions.  The compromise in the contract was that any dispute, arbitrations, and so forth, would be handled in England, as opposed to being handled in Spain.  Just make sure it is in familiar territory.

Mr. LeBlanc: What is the first thing an entrepreneur should be thinking about when, one, they start thinking of outsourcing; or, two, developing an international revenue stream?

Mr. Raja:  When it comes to outsourcing development, the first thing is: Do we have the money to do the project we want to do?  First, make sure you have the whole system architecture written down on paper or in whatever form of documentation you want.  The second most important thing is to look at the pricing.  There are so many reasons for going overseas for a project.  One, obviously, is the cost of getting it done in the U.S. You need to compare the prices.  Another reason is finding the people who are available. 

           Get into a relationship with a company that has a process mechanism by which they can deliver what you want in the time frame that you want it.  That is something you will have to ensure through one-on-one working with the company and checking out the process they have in place.  As I said before, there are several ways you can find out whether the company has a process.  There are certified processors, and that is how we did it.  We had all the documentation written.  Every spec was done by our technology person here in the U.S., so we knew exactly what we wanted.  We basically outsourced the labor work to get the software developed.

Mr. Malone:  We looked at outsourcing like any other decision:  What are we trying to accomplish?  What are our objectives?  How are we going to define success?  What are the pluses, and what are the minuses?  Then we made a decision.

Mr. Voorhees:  From a sales perspective, it's just like anything else.  A distribution channel is worthless unless you are going to sell.  You have to figure out how you can leverage, incent, or contract with them for a guaranteed sales volume, which is what we did.  We knew we were putting all this money into the effort, but we were going to have a return.  We were not in a position to go out on a whim and say, “It's great to do business in Spain!  Madrid is fun to visit!  Let's hope that some business comes as a result of that.”  We tied in very specific revenue elements in the first phase of our contract with the accounting firm we worked with.

Mr. Partee:  I was talking earlier about strategic alignment, and I think that is the number one thing to look for, especially when getting started.  It will solve a lot of the other problems if there is some real synergy between your company and product and the distribution channel.  The second thing I'd add is that I was on a panel like this about six or seven months ago, and several of the people were with government-sponsored programs.  I upset them by saying that I wasn't really a fan of using those sorts of outreach programs, and it earned me a number of phone calls afterwards: “Come on, let me prove it to you.”

Mr. LeBlanc:  [Laughing]  Have your taxes been audited?

Mr. Partee:  No, not yet.  These were people in Washington on behalf of other countries and governments who were trying to get us to do business over there.  I'm sure there is good value in those things, but, from my perspective, I'm still unconvinced.  I think that you can get some general ideas and technology, such as Scandinavians adopt first, but it's a small market; people in France adopt last; and other kinds of general guidelines, but I just want to emphasize: Find a win/win with a strategic partner. 

Audience Member:  What advice do you have for addressing communication problems?  Very often your requirements are misinterpreted overseas.  For example, even in the U.K. they speak British English and you speak American English.

Mr. Raja:  Good question.  I have been through that, and I can give you my two cents.  Record all decisions in writing.  For anything you do overseas, the best method is to get it in writing.  Still, it could lead to some misinterpretation as to whether what you said was what they meant.  The way we do that, and we have been successful so far, is that we not only tell our vendor what needs to be done, we also tell them how we are going to measure what they have done.  They know upfront what the measuring stick is, and that is the key for our success so far.  We have been pretty open with them, and that is the relationship we have with the vendor.  They know what we are looking for.  They know what we want.  They know how we will measure what they deliver.  All of this falls into place, and you are fine.  Any transaction we do with them is in writing, and writing only.  We may talk over the telephone, but we still document it because people change and the organization changes.  Unless we have it in writing, we have no other fallback.

Mr. Malone:  My experience has been that when I develop software here in the States, I have the same communications issues as I do developing software in India.  We have people sitting in offices next to each other, making different interpretations, using different assumptions, and they probably don't communicate as much as we communicate now with our software development team in India.  I think there needs to be a communication strategy.  With an outsourced development partner in India, I have a 24-hour development team, since I also have people here working during the day.  They identify bugs and things they need, they send emails, and the team in India picks them up when we leave.  They are working while we are sleeping.  They send us the results, then we are off and running again.  There’s a communication strategy via email and you can have daily phone conversations, but you need to have an onsite presence as well.  Like I said, we were there at least quarterly for a couple weeks at a time.

Mr. Voorhees:  There is great technology out there to assist with this.  In our development, we had to enhance portions of our product roll-out.  New customers bring new enhancements which you can use universally on your customer base and which they may pay for, so it's a very good win/win situation.  There are solutions out there that are expensive to use for young companies, but they record all the threads that go into every conversation online.  It can be tabbed by subject and it can be translated into other languages.  In addition, our Global Crossing conference call bridge bills were huge.  We recorded every technical conference call we had with teams abroad just to make sure, for our own protection, that we were going down the path the client wanted.

Mr. LeBlanc:  You can have all kinds of simultaneous translations and keep records with everything written down, but how do you deal with the nuances of global cultures, such as Japanese sales cycles?

Mr. Partee:  At my last company our development shop was in London.  Like Churchill said, two great countries separated by a common language.  It was my first international experience managing people over there, and it was extremely difficult.  How I incented and encouraged developers here was wholly unsuccessful over there, and they are a very similar culture to ours in many respects.  The only solution I have is to find people in my company here and over there who are the links and who are very multicultural in nature.  I ended up hiring a VP of Development over there who had significant international experience working with American companies.  We brought him and several others over here and we'd take our team over there.  That cross-pollination is really the only thing I found successful.  I’ve done audio conferences, video conferences.  What happens is there is a disagreement and off-camera people are doing funny stuff, snickering.  You are thinking, “They are buying into this, this is great,” but it is not happening.

Mr. LeBlanc:  Relationships.  Basically you can do all the Internet-based audiovisual and the whole bit, but it really comes down to relationship development.

Mr. Partee:  My view is that having that really hard laugh after dinner, connecting with people, that is the only way to make it really work.  When you are selling and promoting a product, it is hard to write everything very specifically.  Beyond that, it is very nuanced.  It's not like writing technical specs for development engineering.

Mr. LeBlanc:  Like trying to do business in Europe in the summer, right?

Mr. Voorhees:  It really comes down to that relationship.  There has to be trust, because things drop through the cracks from a translation perspective, often with a lot of laughter as a result.  There has to be a lot of trust in the relationship.  Brace yourself.  If you think your beeper going off at midnight here is bad, over Christmas I had the luxury of being in Hawaii, but talking to Europe is an affair that begins at 3:00 or 4:00 in the morning.  It didn't feel like I had much of a vacation, which is when we were closing the last deal.  Logistically, it means a lot less sleep.

Audience Member:  Can you tell us about the decision process for selecting an outsourcing partner for development versus establishing your own presence there with your own employees to do the software development?

Mr. Raja:  It's a good question.  I have been there, started one, but ran into trouble.  It's very difficult to manage multiple operations sitting here in the U.S.  It is easier to work with a partner.  You can have your own presence there—incorporating a company is not a big issue—but do you have somebody there who can sit in your position and manage?  That is a decision you will have to figure out.  Having gone down that road before, we decided this time, although we have a presence there as a company, it was a better idea to outsource and let somebody else manage it, even though it probably costs a little bit over what you would do yourself.  It still works out better because you don't need to take on the responsibility of managing 300 or 400 programmers.  We decided to work with third-party companies that have an established presence there and pay them a premium to manage these folks.  You are not spending a lot on the infrastructure trying to build a company.

Mr. Malone:  At NeuStar, now, which acquired BizTelOne, we are a $120 million business and we are looking at significant Indian development based upon the success of BizTelOne.  It is so inexpensive to do our work in India right now.  We have no desire to own a company over there.  It's a distraction and it takes away from time that we would be spending on higher priority issues.  We are very pleased with outsourcing.  We also avoid some of the challenges that Sanders was sharing of having a captive inhouse development team, some in London and some here.  Being a company employee is a different mindset from being an outsourcer.  Right now, we are very pleased with the outsourced relationship and with the value we are able to extract from that relationship.

Audience Member:  We have an overseas client that is willing to invest $10-$20 million in programming time to take a position in a U.S. company.  How would you recommend that we go about finding a suitable candidate company and setting something up?

Mr. Voorhees:  They have the capacity and they want an equity share as a result of giving them their capacity?  I don't know.  You have to structure some relationship with VCs on deals they pass on, or structure a relationship with a VC firm so they could look at a minimized cost structure to that end.

Mr. Partee:  That is a good idea.  I get calls at least once every two weeks from companies trying to sell me outsourced development.  They know we are a software company here, therefore don't we want to do development somewhere else?  In our life cycle at this moment, it is not a good time for us to embark on that.  I don't know how you can break through that noise if they are just jumping in and doing the same.

Audience Member:  They've already done one in California and they are willing to put some money in, as well, but the issue is it's a foreign company in a low-cost programming area that wants to take positions in growing companies here.  We just started this, but it's been difficult to try to figure out how to close the gap.

Mr. Voorhees:  I think that you need to talk to entrepreneurs.  There are a lot of companies out there that need help, both from a development perspective and a financial perspective, but you are going to have to find somebody who is experienced in dealing with all of that from an international perspective.

Mr. Partee:  I'd be interested to know what John has to say.  If these guys offered to do it for you for an equity stake, would that have been attractive?

Mr. Malone:  Certainly, we would consider it, yes.  As Matt said, you have to get the deal flowing.  You have to get in early enough so that you're not in Sanders' situation where you've already got an existing team.  Ideally, you get a team that is in the very early stage, has an idea, has a small management team, and is now embarking on how to develop what they will bring to market.  That would be the perfect time for the relationship to come together.

Mr. LeBlanc:  Speaking of nuance, one factor could be where the company is from.  We talked a lot about India, but we've got Romanians, we have got Russians, we have got a lot of other countries now with “excess capacity,” as they say, that are getting into the outsourcing business.

Audience Member:  I want to bring up taxes.  In Brazil, for example, I have to add 31% for everything I sell as value-added tax (VAT).  If you are exporting to Brazil, you don't have a way of offsetting that; you have to add 31% to the cost of the product.  If you employ somebody, you have to add on 30% in payroll taxes, so for every dollar you add on about 30 cents.  For every dollar you want to repatriate, you pay 40%-60% in taxes, so with every dividend dollar, you lose 60%.  In the case of Brazil and the United States, there is no treaty to offset it against the tax here.  How have you dealt with this?  The way that most Brazilian companies deal with it is that they avoid taxes.

Mr. LeBlanc:  [Laughing] A lot of Americans firms are trying to do the same thing.

Audience Member:  As a U.S. or international company, the tax authorities pay more attention to you.

Mr. Partee:  There are a couple of easy things.  Our European subsidiary is two people, and we bill out of it a lot so that we don't deal with exchange money.  They are self-funding and end up sending us money back.  We have them pay our expenses when employees go over there so the VAT reimbursements are easier.  I'm not entirely familiar with corporate entity structure, but some of the basics that we deal with on a day-to-day basis are how you bill, who you bill, and where does the money flow?

Mr. Voorhees:  Actually, we have completely circumvented that.  We only talk to the American subsidiary of our partner, so we haven't gotten into the financial structures of all of these deals, protecting ourselves from a receivable liability perspective, the payment mechanisms, the bank letters of credit, and so on.  We have the luxury of having a distributor relationship where we can do that.  You are going direct, I assume, and so it creates a lot more headache.

Audience Member:  You need to find a tax lawyer and find out whether Brazil has a reciprocal tax treaty.  You can make an investment that way.  Another way is to buy a product locally and export that.  You can also transfer price, which is legal, so long as you don't abuse the transfer price mechanism covering your expenses locally to pay your VAT.

Audience Member:  Has placing your products in the foreign markets helped improve them?  Do you become a better competitor?  Did you learn something from those markets?  Does it also affect which markets you pick to be in?

Mr. Partee:  It depends on the products you are selling.  At my last company I had telecommunications products.  The usage pattern in different countries is dictated by their laws and such, so the applicability of the software is different, as are the feature sets and all that.  That is a bit of a challenge.  What we do now is fairly applicable universally, so I don't know that there are any special insights that these new markets are giving us, other than more business, more customers, and more usage scenarios.  It's mostly more headaches because our software integrates across networks and customers in foreign countries use devices that are different than the ones we use here.  They are theoretically all compatible, but they aren't, so our software has to adapt to that.  I'd say it is more of an additional challenge than it is a particular accelerator in our case.

Audience Member:  Can you characterize your international cost of sales versus your domestic cost of sales?

Mr. Voorhees: Internationally, ours is much less because we don't have the sales structure in place like we do in the States.  It really has been a win/win situation for us as you look at protection of margin in this business.

           As to the previous question about improving your company, there are several modules that we need to build to our platform, one of which deals with the capture of VAT on invoices and accounts payable.  We were able to help finance this functionality with this contract and end up with a much more robust platform at the end of the day with the expertise of our client in hand.

Mr. Partee:  I think it is not universally one way or the other; it depends on the deal you structure.  For example, our Japanese deal is much cheaper from a cost outlay perspective of what we have to spend, but in the cost of the deal and of our revenue they take a bigger component.  Also, in small companies looking to go international, saying that it's always going to be one way or the other is fallacious because it depends on each individual deal.  The number of deals you are going to do is so small that it's going to vary and not come to a mean.  It depends on the strategic relationship.

Mr. LeBlanc:  Thank you very much.  I want to thank all our panelists.  I think this has been terrific—a lot of content and a lot of advice.  Let’s give our panel a hand.

Mr. Sanders:  I want to thank the Netpreneur program again and Jim LeBlanc for serving as our moderator, as well as our co-hosts the Northern Virginia Technology Council, the Technology Council of Maryland, and Virginia’s Center for Innovative Technology, along with our sponsors  Comerica, Ernst & Young, and Fenwick & West.  A lot of thank yous.  We appreciate you coming.