One of the first questions we get from U.S. and Canadian technology companies during this economic slowdown is, “Why should we even consider going international in times like this? Aren't we better off staying close to home?”
We have been helping technology companies from all over the world establish their international presence since 1993, and we have learned that a down cycle can be an excellent time for expanding into new markets, especially for companies that are focused on North America as their domestic market.
The first reason is that the U.S., in particular, tends to overreact to economic cycles. When times are good, optimism is unbounded. Companies increase their spending and sales can grow quickly. On the other hand, when times are tough, as they are today, budgets are slashed or frozen, resulting in a significant drop in sales for technology vendors, longer sales cycles and a higher cost of sales. In the U.S. we are seeing IT companies with a sales run-rate that is 50 to 70% lower than a year ago.
For many products, international markets represent a better opportunity. Although it varies greatly from country to country, the overall cycles in Europe and Asia-Pacific can be less dramatic than in the U.S. Growth is slower when the economy is booming, but the downturn is less pronounced when they are in a recession. Nonetheless, it is critical to carefully analyze each potential market. In Europe, for example, several Central European countries, such as Hungary, are experiencing major economic problems, while many technology companies will still see robust growth in Russia.
A second reason for considering international markets is the availability of good channel partners. The United States is home to the majority of the world's technology companies, and they are a significant force in most markets worldwide. In this cycle, as in earlier down cycles, U.S. technology companies are pulling back from their expansion plans. They are putting plans to enter new markets on hold, they are cutting back on recruiting additional partners in existing markets, and they are reducing the marketing budgets to support their current partners.
The result is less competition for channel partners. In good times resellers, VARs and distributors are inundated with phone calls and e-mails from vendors that are looking for partners. At the same time channel partners are busy selling and implementing projects, and have less incentive to take on new products. The opposite is true now. In many cases they are struggling to maintain the sales of their existing products and services, and it can be attractive to take on a complementary technology that can be sold to their existing clients. And they are getting a lot fewer phone calls from new vendors.
Finally, the timing of economic cycles can make this a favourable time for expansion. A company that is building a channel in the target market as the preferred go-to-market strategy has to plan on spending six to nine months to build out an effective channel. Once the channel has been recruited, in most cases the partners have to go through some level of training, and, depending on the complexity and price of the products, will require three to nine months to build a pipeline and start closing deals.
In other words, the time-to-revenue cycle will usually be 12 to18 months. This means that companies starting out now, during the second quarter of 2009, cannot expect to see revenues until the second half of 2010. Most economists expect that an upturn will take place sometime during 2010, which would position a company to immediately benefit from the improved conditions. If a company waits until the market has turned, they will still need 12 to 18 months to get set up in a new country. At the same time they will face increased competition for partners, and find themselves sitting on the sidelines during a growing economy.
Going international in any economy, good or bad, is not an option for companies that are struggling. It is not a silver bullet that will compensate for slow sales at home, and as mentioned above, it is not a quick and easy process. However, for technology companies with a proven technology, good cash flow and/or investment funds that can carry them through for to two to three years, a down economy can be the best time to expand into selected international markets, laying a foundation for strong growth when the economy inevitably comes back.
Harald Horgen is the CEO of The York Group. He has over 25 years experience in the areas of international marketing and business development, and has consulted to many knowledge-intensive and technology companies in their global expansion. He speaks frequently at seminars around the world, including at the upcoming WiTec Connections 2009 Conference being held in Banff, AB, April 16 and 17, 2009.