British bosses must adapt to make profits offshore

Chancellor George Osborne is keen for UK companies to jump on the export conveyor belt to faster growing economies and, as Rob Langston reports, there are a number of routes open to intrepid British businesses

Expansion overseas has become increasingly important for British companies in recent years as low growth and global economic uncertainty weighs heavily on consumer sentiment, and dampens the UK economy’s recovery.

It has become a political point too, as Chancellor George Osborne has called for greater exports to fast-growing, emerging market economies that have continued to grow. However, numerous factors have made life difficult for British companies to expand overseas.

The Bank of England noted the challenges facing British companies abroad in its November Inflation Report, with the eurozone difficulties contributing to a “gradual appreciation” of sterling earlier in the year, making it difficult for UK companies to compete in world markets.

With the UK remaining in what the National Institute for Economic and Social Research (NIESR) terms a “depression”, expanding overseas can look like an extremely attractive proposition for British businesses.

Indeed, the Office for National Statistics revealed mergers and acquisitions (M&A) activity involving UK companies had increased between the first and second quarters of the year, with 36 foreign acquisitions by UK companies in the second quarter. However, year-on-year comparisons reveal that the number of transactions has fallen approximately 50 per cent, down from 75 deals to 36.

There is still a reluctance from the government to offshore public sector work, particularly if one consequence is a loss of UK jobs

“The days when UK companies could be purely nationalistic in their business strategies are almost over,” says David Robinson, UK and Ireland regional president at ACE Group. “Even many of the smallest companies now operate across multiple jurisdictions. Indeed, some companies are today ‘born global’ and derive a high proportion of their revenues from overseas customers from their inception.”

Polly Owen, partner at DLA Piper, says overseas governments have welcomed outside investment. “One size does not fit all for overseas expansion,” she says. “It is important that companies fully understand the local legislation, red tape and business culture they may face in their target countries, and adapt their model accordingly.”

Ms Owen says there are a number of ways companies can expand abroad, either through joint ventures, acquisitions or by franchising.

Tristan Rogers, chief executive of Concrete Platform, says franchising can be a low-cost, low-risk option for retail brands to expand abroad, adding: “Brands travel – shopkeepers don’t.”

“Many believe that brand control is lost when using this method, as you lose ‘control’ of staff, store environment and customer service,” he says. “It is all too evident that many ‘shopkeepers’ blame their franchise partners for poor performance, when the reality is that the shopkeepers have not provided any consistent brand support to their foreign markets.”

Russell-Cooke partner Jeremy Sivyer says foreign countries have made many changes in order to attract business from overseas. India, for example, has relaxed foreign investment controls and setting up business there has become easier.

“In recent times many more countries have come to appreciate that, in order to attract foreign investment, they need to lower bureaucratic barriers in addition to creating a favourable economic environment,” he says.

Mr Sivyer warns, however, that acquiring or investing in an existing company or taking part in a joint venture can be a time-consuming and demanding process. Others highlight the political risk that can be involved in setting up offshore, particularly during periods of civil instability, as seen during the Arab Spring of 2010.

Despite this, overseas expansion can have a big impact on businesses, even if it may require a change in mindset. For businesses looking to expand overseas, outsourcing can prove a powerful strategic decision to help fuel growth and maximise efficiency.

John Roberts, director of change at consultancy My Proteus, says: “Making outsourcing a success is no walk in the park and requires those considering it to move away from old-fashioned third-party supplier management techniques to be effective.”

He adds that UK companies need to understand the risks involved in outsourcing and not just the financials. “Part of this is considering, at the outset, what will happen if it doesn’t work and you need to exit any arrangements,” he says.

The impact on the end-customer is also a consideration. After all, outsourcing arguably has something of a negative public image in the UK, particularly where it has been the source of job cuts. This may have made some companies wary of moving services to cheaper, foreign alternatives.

Morrison Foerster partner Alistair Maughan says offshore outsourcing has moved on from its IT and call centre image established in the early-2000s. Back then it was mostly financial services and pharmaceutical industries considering the move. Now, more niche sectors are getting involved, such as digital animation, research and development, and claims handling firms.

“Insurance is one of the big outsourcing hot spots at the moment. A lot of the work in that sector is heavily process-driven, which lends itself to outsourcing,” he explains. “There is still a reluctance from the government to offshore public sector work, particularly if one consequence is a loss of UK jobs, but we are increasingly seeing public sector activity through the adoption of cloud computing models as the G-Cloud has been implemented and taken off.”

If UK companies are prepared to consider outsourcing, it could provide a boon for the sector, which has not been left unscathed by the global downturn.

Head of outsourcing at Berwin Leighton Paisner, Mark Lewis, says outsourcers have been hit by the faltering global economy and by reputational damage. “Specialist domain business process outsourcing is on the rise, but staple finance and accounting isn’t,” he says. “Offshoring is under heavy political, economic and social pressure, which now seems to be having an impact. And there is a threat to information technology outsourcing.”

Mr Roberts of My Proteus warns companies against being overly optimistic about the impact of outsourcing abroad. “Sadly, too many organisations believe outsourcing to be the panacea that will single-handedly fuel their growth or address the poor performance of people or processes. The reality is that organisations can’t and mustn’t expect any miracles,” he says.

Of course, there are also legal and regulatory ramifications too. Ernst & Young’s bribery and corruption investigations partner, Maryam Kennedy, says UK companies must remember to operate to the same standards as they would onshore.

“In the current economic environment, outsourcing, often to partners in emerging economies, is an attractive option,” she says. “However, the UK Bribery Act requires that companies make it their business to know the third parties that act on their behalf - and have adequate procedures to prevent those third parties engaging in corrupt business activities on their behalf.”

Ultimately, the fate of UK companies’ hopes may lie with the global economy, with the Bank of England noting a shift in global demand away from activities, such as business and financial services, in which the UK specialises.

At the Treasury, Mr Osborne’s hopes of taking advantage of the fast-growing emerging market economies could also be stifled by the inflexibility of UK companies. A recent survey by global management consultancy Hay Group revealed central rule was holding back UK-based multinationals from succeeding in emerging markets, while a lack of autonomy was preventing some from responding to local market conditions.

With this in mind, it remains to be seen whether UK businesses will be able to rise to the challenge of overseas expansion. However, one thing is certain – there are plenty of opportunities for those willing to take the plunge.