Organization and Budget Considerations for Entering Foreign Markets in the Software Industry

Whitepaper from TBK Consult

Author Hans Peter Bech, M.Sc. (econ)

© Hans Peter Bech 2014 First edition Unless otherwise indicated, Hans Peter Bech copyrights all materials on these pages. All rights reserved. No part of these pages, either text or images may be used for any purpose other than personal use. Therefore, reproduction, modification, storage in a retrieval system or retransmission, in any form or by any means, electronic, mechanical or otherwise, for reasons other than personal use, is strictly prohibited without prior written permission. The Business Model Canvas Framework is made available by Business Model Foundry GmbH, Kalkbreitestrasse 71, CH-8003 Zürich, Switzerland. The copyright of other frameworks and information sources mentioned on this whitepaper belong to the proprietor. Published by TBK Publishing® (a division of TBK Consult Holding ApS) Denmark CVR: DK31935741 www.tbkpublishing.com ISBN: 978-87-93116-12-2 TBK-WIPA-020

Organization and Budget Considerations for Entering Foreign Markets in the Software Industry

Table of contents: Target audience

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Abstract

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Author

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Acknowledgements

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The Opportunity and the Necessity

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Web Based Low Touch Business Models

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On Location High Touch Business Models

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Getting Started

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From a Direct to an Indirect Channel Approach

The Organizational Requirements Leading the Globalization Effort Product Management Marketing Support Training

Investment Requirements Return on Investment Higher Valuations

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About the author

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Organization and Budget Considerations for Entering Foreign Markets in the Software Industry

Targeted audience

Abstract

The target audience for this whitepaper is the board of directors, the CEO and the sales and marketing executives of software driven companies1 with ambitions for achieving global market leadership.

This whitepaper is written for software executives preparing for international expansion. It addresses getting those important first steps right the first time ensuring that the probability of success is as high as possible. This whitepaper discuss the organizational and fiscal budget requirements for software companies embarking on international business endeavours. The whitepaper is specifically written for high touch business models where proximity to customers is important and where the value chain needs sales people in the field managing the sales process and the customers’ purchase decision-making processes. The whitepaper initially provides recommendations for how software companies, who have a direct channel approach in their domestic market and want to introduce an indirect channel approach overseas, can organize and manage the two different Goto-Market approaches effectively. The whitepaper recommends engaging a senior executive to head and initially also take personal responsibility for building the first international setups. As software is invisible the appearance and behaviour of the company’s representative forms the potential customers’ and business partners’ perception of the professionalism and quality of the company and its’ products. In today’s busy environment, with a multitude of choices, first impressions can be very hard to change and we may not get a second chance.

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Finally the whitepaper makes organizational recommendations and discusses the investment requirements for embarking on international expansion.

Author

Hans Peter Bech, M.Sc. (econ.)

Acknowledgements

Design and lay-out: Sordako Oü, Tallinn, Estonia, www.kompot.ee Proof reading: Emma Crabtree, ecr@tbkconsult.com 1

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Independent Software Vendors (ISVs)

Organization and Budget Considerations for Entering Foreign Markets in the Software Industry

The Opportunity and the Necessity

Most software based business models have tremendous global potential. The reasons are many and include dramatic economy of scale advantages, very simple value chains and opportunities arising from the rapid changes in the business model environment especially in technology trends.

While many industries enjoy natural barriers to entry making it difficult for insurgents to break through, the software industry has a completely different landscape.

Web Based Low Touch Business Models

At one end of the spectrum we have the web based business models with simple value propositions and no requirements for localization (other than the locale, the language of the user interface and the support documentation). Such business models can be globalized without the need for setting up direct or indirect operations in foreign countries.

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Even business models based on using call centres (inbound and outbound) can globalize without the immediate need for dedicated operations in each and every country. Examples of such business models are TrustPilot, Basecamp, SurveyMonkey, MailChimp, Atlassian, Zendesk and Podio.

The opportunity of managing and controlling a global operation from one or just a few offices carry immense advantages.

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Organization and Budget Considerations for Entering Foreign Markets in the Software Industry

On Location High Touch Business Models

At the other end of the spectrum we have software with substantial requirements for localization, where the proximity to the customers is crucial and where the solutions require substantial customization and implementation efforts. In such business models there is a need for operational resources on the ground preparing and maintaining the local version of the product, driving the value chain including awareness generation, lead generation, sales, implementation and support. While such business models may still have enormous global potential and need global coverage for long-term survival, they are much harder to get started internationally. Examples of such business models are actually dominating the software industry. However, the names may not be so familiar since the companies are operating in the B2B market and are focused on vertical or horizontal market segments. This whitepaper is exclusively dealing with On Location High Touch Business Models!

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Getting Started

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In our whitepaper “Entering Foreign Markets in the Software Industry2� we present an approach for determining the changes we will face when moving outside the comfort of our domestic market. We conclude that the fundamental design or architecture of the business model should not change much. However, introducing and managing our business model in foreign markets obviously requires new activities and additional key resources that will incur cost (investments).

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Organization and Budget Considerations for Entering Foreign Markets in the Software Industry

In this context the big questions are:

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Which organizational changes should we make?

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How much should we be prepared to invest?

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When can we expect a return on the investment?

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What are the critical success factors?

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How do we mitigate the risk?

While no two companies are identical I do believe there are some generic guidelines that most software companies can benefit from following.

From a Direct to an Indirect Channel Approach

Most high touch software companies start out in their domestic market based on a business model with a direct channel approach. Such companies control the entire value chain and take responsibility for building Awareness, spotting and activating Interest, developing Desire and securing Action from the potential customer base. They also take care of implementation, customization and ongoing support.

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Figure : Sample High Touch Software Value Chain As these companies embark on an international endeavor they often shift to a business model based on an indirect approach wishing to delegate some or all non-product related activities to independent channel partners in the new markets.

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Organization and Budget Considerations for Entering Foreign Markets in the Software Industry

In our whitepaper “The Software Partner Channel in a Business Model Context3” we explain how this shift requires complete re-engineering of the business model. Shifting from a direct approach to an indirect approach has a fundamental impact on the entire business model. In general it is not recommended to operate two different business models within the same organization. The conflicts between the two channel approaches will escalate and increasingly absorb critical management resources. However, a software company with a direct channel approach cannot afford to change overnight. My recommendation, to software companies that want to introduce an indirect channel approach for their international business while maintaining a direct channel approach for their domestic business, is to split the company in to two divisions.

The Customer Division

All activities related to what the software company will leave to resellers in new markets should be organized in a separate Customer Division. Thus, the Customer Division is responsible for the exact same activities in the domestic market, as the independent channel partners will be in the foreign markets. The Customer Division is operating at arm’s length just as any other independent channel partner and has its’ own independent management responsible for its’ own P&L. The Customer Division should not be located on the same premises as the Product Division and it should not report to the CEO of the product division, but to a “board of directors” which may overlap with the board of directors of the Product Division4.

The Product Division www.tbkconsult.com

(The Headquarters)

All activities associated with the global strategy, with the products and with recruiting and managing independent channel partners are organized in the Product Division. The Product Division “manages” the Customer Division through the exact same principles that they would manage any other reseller relationship.

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TBK-WIPA-009 The software company may consider divesting the Customer Division as soon as a reasonable evaluation can be established.

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Organization and Budget Considerations for Entering Foreign Markets in the Software Industry

While this construction may appear expensive and bureaucratic at first glance it does force the software company to carefully consider the division of labor between itself and its’ resellers. Implementing these changes at home first will provide immediate response and help build a logical and productive framework for scaling the operation globally.

The Organizational Requirements

The rest of this whitepaper assumes that the software company is operating the same business model domestically and abroad even if it is just using the divisional approach as described above.

Leading the Globalization Effort

Irrespective of whether the business model is based on a direct or an indirect channel approach, the responsibility for the global expansion must be assigned to an experienced senior executive who has no other responsibilities. He or she should not be directly involved with domestic activities and the success criteria should be primarily related to achieving the international objectives. The person should report to the CEO and be part of the Product Division’s executive team. The person must have charisma, excellent business management and communication skills and should be fluent in at least English. The person shouldn’t be too young. As we move out into the world, the first impression of any company is created by the first person we meet. If that person is professional and well articulated we will assume that his company is professional also. The opposite is also the case. We assume that unprofessional people represent unprofessional companies.

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The person should take personal action and responsibility for building the first international setups ensuring direct learning from the projects.

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Organization and Budget Considerations for Entering Foreign Markets in the Software Industry

Product Management

Scaling internationally requires the introduction of structure and processes. Creating an interface between the market feedback/ requirements and the R&D efforts should be supported by the introduction of a Software Product Management function. The Software Product Manager (and her staff) will be responsible for maximizing the global value of the product over its’ lifetime. Localization is very often a requirement in the software industry. Depending on the competitive situation at the destination the investment in meeting local legal and de facto market requirements may be needed before effective market penetration can commence. The Software Product Manager will be responsible for maintaining the requirement specifications while the R&D department must deliver the product5. The IP6 of the full product including localizations should reside with the software company. The Software Product Manager will be responsible for managing the product strategy, the product roadmap and the product release plan7.

Marketing

The marketing function should be responsible for all frameworks, programs and activities that are not related to the individual sales or partner situation. When using an indirect channel approach the responsibility for developing and maintaining the partner program should reside with the marketing department. If the Product Division is responsible for brand building and lead generation, then these activities should also be managed by the Marketing function.

Support

Splitting the organization and introducing international operations will typically also require a reorganization of the customer support function. If the 1st line of support resides with the independent channel partners, then the headquarters must introduce a 2nd line of support and a 3rd line of support (R&D). An appropriate IT system must be introduced to manage the support process and ensure effective communication with independent channel partners and customers.

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Localization should not be left to independent channel partners. Localization should be an integrated part of the core product and should be included on the price list. 6 IP: Intellectual Property 7 TBK Consult offers a 3-day training program for software product managers including ISPMA certification.

Organization and Budget Considerations for Entering Foreign Markets in the Software Industry

Training

Scaling globally requires structured approaches to the training of new partners and of new staff at current partners. As the training must address all levels in the value chain (marketing, sales, pre-sales, implementation and support) all functional departments must be involved in preparing and delivering the training.

Investment Requirements

How much money is required to get a globalization project started?

These are the minimum requirements: xx A full time senior business executive – the project leader. xx A full time technical resource person with excellent communication skills acting as pre-sales support, providing technical training and in-field support. This person can also act as part-time software product manager until this function can be filled with a dedicated person. xx A full time marketing person responsible for multilanguage web sites, presentations, sales tools, partner program development, partner marketing support and other market communication activities. xx A full time internal sales resource organizing the back office and maintaining communication on behalf of the project leader. xx A budget for design, proof reading, legal advice, PR and other marketing and administrative tasks for which you do not have the resources in-house.

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xx A budget for traveling as required.

Starting a globalization project with less than an annual budget of ₏ ½ -1 M will be very difficult. Most software companies will invest much more to accelerate the growth and some will invest much less to minimize risk. You can compare which of those two groups are most successful.

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Organization and Budget Considerations for Entering Foreign Markets in the Software Industry

Return on Investment

When can we expect return on investment?

No one can answer this question even when faced with a specific situation. Expecting a reasonable return in less than three years is not realistic. It may take four or five years before we see that our foreign setups are producing solid and predictable contributions. Thus, embarking on an international growth project with a high touch business model requires a solid position in the domestic market to provide the ongoing funding required.

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Higher Valuations

When the international break-through has happened the valuation of our company will increase dramatically. The valuation of a company demonstrating global potential is obviously higher than the valuation of companies that have only demonstrated the capability of penetrating a single market8.

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Unless that market is the USA representing close to 38% of the global demand for software and software related services.

Organization and Budget Considerations for Entering Foreign Markets in the Software Industry

About the author Hans Peter Bech has been engaged with international sales and marketing operations in the software industry for more than 30 years. Hans Peter was instrumental in building the international business platforms for companies such as Dataco (now Intel), Mercante, Dansk Data Elektronik (now CSC), RE Technology (now Barco), and Damgaard/Navision (now Microsoft). As a management consultant Hans Peter has been consulting on internationalization to companies Microsoft, Danfoss, Proekspert, Jeeves Information eMailSignature, SoftScan (now Symatec), Netop, EG Scandihealth and Secunia.

providing such as Systems, A/S, CSC

Hans Peter is an advisor to IMMIB, the Turkish ICT Exporters Association. He also lectures in internationalization at the Sabanci University in Istanbul, Turkey. Hans Peter is the author of several whitepapers on internationalization in the software industry and he frequently writes articles on the subject. He started his career as a management consultant in 2003 and founded TBK Consult in 2007. Since then he has built the company to its present position with 25 senior consultants in 16 countries. Hans Peter oversees the development of TBK Consult as well as performs management consulting assignments for selected clients. Hans Peter holds a M.Sc. in macroeconomics and political science from the University of Copenhagen. He speaks Danish, English and German and is a certified ValuePerform, ValuePartner and Business Model Generation consultant.

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More about Hans Peter Bech

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