International expansion strategy: mistakes to avoid

Are you mapping out your international expansion strategy?

If this is a topic that has been on your mind a lot lately, then we’ve got you covered.

In our recent webinar, we discuss the most pressing questions when expanding your business globally.

Here is a quick re-cap of the main points that were touched on during the discussion.

The conversation below has been edited for clarity. To listen to the original webinar, check out the video above.

A quick introduction

Chris:

Hello everybody and thanks for taking the time out to join us today. My name is Chris Fogarty and I'm talking to you today from my home here in Windsor in the UK where it's starting to feel like winter is properly settling in.

The goal of today's session is to share some feedback with you and answer some questions that we’ve been receiving from our clients.

This has been one of the toughest years to try and do business but despite that, we're seeing quite a lot of optimism amongst our client base and a lot of them still with healthy expansion plans for next year and beyond.

What we’ll be talking about today is: Mistakes to avoid when growing internationally.

We’ll be focusing on how you manage relationships with your employees when moving into new countries which is really the essence of the topic. And we’ll share some best practices with you today.

What led to this?

Chris:

Awhile back, I asked one of my colleagues to speak with her clients to see if there were any trends coming up. If there were any questions that were being asked.

Some concerns were raised more frequently than others and we’ve assembled them for today’s Q&A. I'll let my colleague Chiara introduce herself and say hello.

Chiara:

Hi Chris and hi everybody. It's a pleasure to be here with you today.

We've been working in the global mobility and international sector for many years and for this particularly incredible year, I have had the privilege to be in contact with many companies, decision-makers and business leaders ranging from finance departments to HR and procurement teams.

In my daily activity, I get to speak to entrepreneurs and young startups who after two or three years become huge corporations that are in the process of launching the next billion-dollar project in a remote location.

Setting up a legal entity in a foreign country

Chiara:

When it comes to international expansion. there are several trends, problems, and mistakes that the company, regardless of size, country, product or service, are facing.

One of the questions I get asked very often is

“If we want to onboard someone or open up a business in a foreign country, do we have to set up a legal entity in that specific country to be compliant with the law?”.

Chris:

There’s a short answer and a long answer. The short answer is no, it's not always necessary to establish a corporate footprint I.e. a legal entity to trade in a in a new country.

However, it depends on the nature of your business.

If you're in, for example, a capital-intensive business where you have facilities that you need to operate from in that new country or you have a distribution requirement and you're going to build a warehouse there, then of course you're going to need to establish yourself as a legal entity in that market.

However, at the other end of the spectrum, if your first foray into a new country is to hire a handful of business development managers and maybe a product specialist. And let's say an account manager. It's very likely that you won't need to establish an entity there. Doing that might slow down your rate of growth.

So short answer, no. Longer answer is what we're trying to make sure is that you don't buy a problem for tomorrow by mismanaging the way you enter local markets.

Compliance risks and international expansion

Source: ZenZen/Shutterstock

Chiara:

You mentioned problems and of course, these come with risk and in turn, risk management. When operating in foreign countries, there are a lot of factors involving bureaucracy. Such as; extractive procedures, local procedures and compliance.

In your opinion, what are the major compliance risks associated with global expansion?

Chris:

There’s quite a few. We've seen a bit of a trend, particularly with startups, who may be at a very entrepreneurial stage of their growth and they're just looking to be affective and operate quickly in a new market and misuse of some kinds of business visas just to get people into the country quickly and have them operating.

It’s one of those situations where it feels right today but can buy you a significant problem tomorrow.

Another challenge is just keeping really accurate data. If you're moving your staff around to help grow the business, make sure you always know how many days they're spending in each country so that you're not triggering personal tax liabilities for them.

Keeping really accurate tax calendars and also making sure that there's no corporate behaviour in that country that could reasonably be assumed to say “Hey, you now have a corporate footprint in this market. You must pay corporate tax. You have to register yourself for V-80 or GST.”

If you don’t manage your growth in the right way, these problems can come out of nowhere and can be brand threatening if you're caught abusing the visa system.

If you have certain kinds of jobs that are always going to need work permits - get the right work permit and don't short circuit it because you are potentially buying a bigger problem, around the corner.

The hidden costs of international expansion

Chiara:

Speaking of managing in the right way and always knowing the data, I recently had a conversation with the head of a HR department of a company where she is based in the headquarters in the UK.

She opened up about the frustrations in managing their subsidiaries who are based in Spain and Italy. And the culture and mentality are completely different.

Even if there is a local provider and local advisors, when it comes to issues like costs, there are always surprises at the end of the month. The uncertainty and risk make it difficult to implement things such as HR policies and strategies.

What would you say are the hidden costs that managers and decision-makers should look at in the face of international expansion?

Chris:

One of the big ones is assuming, maybe through naivete or lack of experience in-country, that

• setting up a company
• hiring staff
• dealing with suppliers
• filing tax returns etc.

will all be as straightforward as it would be in a home country that you are used to.

For example, Italy has its own set of red tape to navigate through.

It has its own set of bureaucracy and trying to manage that process from afar, you don't speak the language. If you don't have local representation on the ground to help navigate, it can be a hugely frustrating challenge.

In other markets, you can set up an entity in 24 hours, get registered for tax and be fairly operational quite quickly. So, I think one of those hidden costs is misjudging how long it can take to activate a business entity.

It might be that there are translation costs that you haven't catered for or just a lack of familiarity with how business is done in that market that can be challenging for a lot of companies who just want to get on and manage their growth.

Let’s talk about co-employment

Chiara:

True that. Speaking of setting up entities, when it comes to research and looking for new information, one of our major resources is of course, the internet.

Using Google to look up, global expansion for example, we come across an incredible variety of acronyms. Things like GEO, EOR, PEO etc. There is so much jargon that can create a lot of confusion especially for non-native English speakers.

These are all different words that are being used to describe what is more or less the same concept.

So, when we talk about GEO (Global Employment Outsourcing) we are describing a business model of outsourcing resources and human capital to a third-party employer.

This can be quite confusing especially for someone who is new to this type of business model.

Could you please give us a better overview of what co-employment is?

Chris:

You mentioned all the acronyms that are rife in this space, and I'm just going to pick one: Global Employment Outsourcing (GEO).

A simple definition of this is: You're engaging with a provider who's acting as the employer-of-record for some of your employees, so you can have speed-to-market, front and center.

You don't need to set up a physical entity. You’re working with a partner who is the official employer who then, seconds these employees back to you under an agreement.

I think there's almost a danger in the word outsourcing. It implies lack of ownership over the employee relationship, and I much prefer to talk about it as co-employment where the lines of demarcation should be crystal clear.

If we were acting as the employer of record, what exactly are our specific responsibilities?

This might include payroll administration, tax calculations, benefits management, leave accruals and more.

But it should be very clear to the employee and to the client that we know who's doing what.

One of the biggest challenges is that the client has an expectation that the provider will be performing a range of functions that the provider either isn't capable of or never understood to be within their brief.

In my mind, it's a better phrase to use to set a relationship up to say

“Hey, we're in this together, you're still going to maintain the career management of your employees. You're still going to manage their long-term incentive plans.

You're going to be the ultimate decision-makers in in where they work and in what role. But we are going to do the heavy lifting for you with all of that administration and back-end HR support.”

A co-employment dynamic works when everyone knows their roles and responsibilities and they're documented properly during the setting up of that relationship.

What to expect from GEO partnerships

Source:Vector Up/Shutterstock

Chiara:

So, what can we really expect when we partner with a GEO company like Airswift?

Chris:

I would say know what you’re getting into.

At a basic level, the range of services are very likely to be tactical at the beginning and quite administrative.

You're likely to be looking for someone that can reliably do payroll calculations with the correct tax deductions, with the correct social security obligations, a very clear gross-to-nett calculation for employees, and a very clear gross up calculation so that the business knows the total cost of having that employee in country.

What we're seeing from a lot of our clients is that they are looking for more strategic support.

They don't just want a pay slip produced at the end of the month.

They want someone where they can pick up the phone and say

“Hey over the next few months, we're looking to expand into these markets, into these specific countries and cities. What's in store for us? What's it going to cost us? What's the best way of doing that?”

The best I can answer this is to expect at a minimum - reliable, accurate data around payroll administration.

This should be fundamental. In this marketplace, you have a right to expect a strategic growth partner. Someone that's going to go on that journey with you over years to come.

Choosing the right GEO partner

Chiara:

Speaking of partners, when I talk to our clients and the companies that we service, one of the problems they face is that there is such a wide variety of services and GEO partners to choose from.

So as a company looking for a successful international expansion, how do I choose the right GEO partner to help me grow my business?

Chris:

I might be so cheeky as to turn that question around and say “here's how you choose the wrong partner. Or “here is how you could be developing relationships that aren't perfectly suitable.”

One of the fundamental symptoms of a fast-moving company is that decisions get made quickly. Hiring talent, mobilising talent and how the employment relationship is structured with that employee.

These decisions by necessity needs to be made quickly. That’s the one area where I would encourage our clients to just take a breath.

The best answer on how to pick the right provider is: make sure your needs today are being addressed.

They should have the capability to provide you with the service that you need but also have one eye on the future.

Assemble a steering group, even if it's two or three people within the business to say “hey, what projects might we be winning down the line? What countries are we likely to be moving into next”

Pick a partner that will serve you better in the long-term and not just provide you short-term technical support.

The challenges of payroll

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Chiara:

One of our most delicate topics involves our human resources, our capital and expanding abroad. A major challenge often involves payroll and administrative procedures.

So how can we avoid payroll nightmares?

This have been such a source of problems for those in management and beyond.

Chris:

Let's list a few of them. Firstly, chief amongst them is not paying your people on time. You’d be amazed at how frequently that becomes a real issue.

There are few things that are as damaging to the relationship between an employer and an employee as not getting paid in the bank account at the right amount on time.

It raises questions in the employee's mind about solvency. Liquidity with their employer. It's going to make them feel undervalued. It might make them start looking at job ads online.

It should be something straightforward. Put money in the bank account on time. But when you're expanding internationally, it's never as simple as that. There are a whole host of challenges and hurdles to jump through to make sure you have payroll set up properly.

Another problem is not making payroll payments accurately by underestimating the deductions in that country or underestimating statutory costs.

You don't want to be going to an employee and saying “hey, sorry we've overpaid you for six months. Can we have a check please?”

And neither do you want to be underpaying them.

So, the biggest issues around payroll are just making sure you're doing the calculations based on up-to-date data that's being fed to you by a partner or provider that has their finger on the pulse. Because the global landscape changes frequently and keeping a tight hold over payroll management is key.

The best way to mitigate the risk of any of those things happening is having a super robust implementation plan or project plan. If you're working with a new provider, you hope that they would be guiding you through these process steps.

They should be saying to you “hey, we need this information by this date in order to make sure that these people can be paid accurately and compliantly and on time”.

If you're working with a provider and you don't have visibility over that project plan or you don't have it internally, maybe a bit of an alarm bell should be going off.

Payroll issues are the one thing that you can never afford to get wrong but unfortunately, it’s one of the most complex parts of expanding internationally.

The impact of international expansion on the expatriate workforce

Chiara:

On the topic of international expansion, something that we think about immediately is the current state of global mobility and the expatriate workforce in a world that is inevitably changing.

Something that everyone is thinking about right now is “What can we expect?” Most of us are working from home now, most of the borders are closed or are about to be closed again, so how does this affect expats and the future of international expansion?

Chris:

That’s a big question. I shall answer it with a quote from a good friend of mine who’s worked in global mobility for many years.

He said, “Hey, do you think the world is going to wake up and realize that they don't need global mobility anymore?”

It was a little bit tongue-in-cheek but like all things, there was an element of truth to that.

Covid-19 has presented us with enormous challenges, but being the species that we are, we figure out new ways of working really quickly. So, I'm talking to you from my home. You're at home, I would imagine a very large percentage of those joining the call are as well.

That doesn't mean to me that expats will no longer be needed. But, I would encourage organizations to think really carefully before defaulting into very high-cost long-term expatriate-type relocations where employees are really well recompensed.

They're very costly to the business. They’re generally longer-term assignments (two to three years and above) and that there's other ways of growing the global business.

Usually the goal with relocating staff is you have internal business knowledge that you can't buy or hire or rent in an overseas market and so the assumption is that we need to take this talent and move it to that location and cascade it through our new business.

That's perfect logic but I predict that we're going to see a very big change in the types of those assignments. In fact, over the last few years, we already have a much bigger increase of short-term assignments, cross border commuters, extended business travel etc.

There’s a lot of different ways of moving talent around and they all come with their own set of challenges to manage compliantly.

I don't think companies always need to just assume it has to be a long-term assignment overseas. We've learned this year that there are other ways of communicating and doing business with each other.

 A conclusion

We hope the above has been helpful in providing you with valuable insight into how you can take the next steps towards global expansion into international markets.

To learn more about our Employer of Record services and the other solutions we offer our partners across the world, get in touch with today.