Back in January, one of the discussion topics in this blog related to international business relationships.  Here is one of the postings about the topic. 

Most business relationships have a cultural component.  Even when one is just doing business locally, one may find international business components.  At the NCTC American Leadership Conference held on October 7th, 2006, Jim Falk of World Affairs Council said that:

1 in 5 jobs in the Dallas/Fort Worth area is tied to foreign activity

1/3 of the population in the Dallas/Fort Worth area is foreign born or first generation US born.

These statistics suggest that, even when one does business entirely within the US, it is important to understand cultural differences.

Every relationship is a little different.  Adequate preparation and obtaining appropriate advice is even more important in the international business context than when one is dealing with domestic business relationships.  How might one prepare?  Why is it important to do so?

Common sense suggests that when contemplating business relationships, adequate time should be allowed to prepare.  Let’s touch on three types of relationships that one may encounter.  From there, consider the steps that might be taken to evaluate the opportunity.  Finally, what issues can arise in an outsourcing/offshoring relationship? 

Situations

A firm in Europe asks a company in the US to provide services and products.    English is a second language for the other negotiator.

A school in Colombia wants to license curriculum and access to a computer systems to training students for employment opportunities.

To cut costs, a business is considering having its website developed or hosted in India.

Starting Point

When faced with these issues, it is important to look at a variety of factors.  Here are a few suggestions…

Learn about the culture and laws 

Start by understanding the laws and cultures of the countries involved.  The other country may have laws that look like those one knows.  Looks can be so deceiving though!  While the words may be the same, words must be interpreted in the context of the cultures involved. 

In my MBA program, we had the ability to go on a trip to China.  Chinese contract law is very similar to what one might find in the US.  Time and time again, businesses and consultants shared their stories about doing business in China.  Each time, it became clear that laws in China meant something other than what people in the US expected.  Relationships in China made impossible events possible. 

Risks can be managed better if one investigates the situation and understands the culture.  It can be very helpful to consult with someone who has handled similar transactions between the countries involved.   

International Association of Contract and Commercial Managers (http://www.iaccm.com/) can also be a good resource.  IACCM members have a lot of experience doing business in different countries.   

Build Relationship

Focus on building a relationship and getting to know the other parties.  The firms in other countries may be perfectly qualified to provide the services and products.  Many are.  By taking time to build the relationship, one makes it more likely that the parties will understand what both are seeking so that they can be more successful.  In addition, if one understands the other party, it is easier to care about that party being successful. 

Contract Issues

For people from the US, it can be surprising to do business even with an English-speaking country like the UK. 

A few years ago, I was negotiating a contract for services from a UK firm.  The UK firm did not want to contract directly.  As it turned out, the contract which we were using in the US - about 25 pages in length - was longer than the UK firm was equipped to deal with. 

A different (and larger) UK firm was willing to sign any contract that was presented to it.  The firm was surprised that I took the time to walk through the contract with it.  As we walked through the contract and talked about issues that had arisen on prior engagements with other companies, our teams got to know each other and to understand our differences. 

Outsourcing and offshoring

When outsourcing, products and services are sometimes provided by firms located in India, China, and other countries.  The goal is to reduce cost.  Sometimes, it works.  In other cases, the total cost can actually increase.

Here are a few of the challenges that can sometimes arise in the context of offshoring: 

1. Developing understanding.  It requires a conscious effort to understand the subtle differences in cultures.  The importance of contracts, protections afforded intellectual property, and views about acceptable practices are three specific issues that need to be considered.  Offshoring is generally not a short-term engagement.
2. While it may sound like the other party is saying the same thing that you are, this similarity may be superficial.  Cultural differences often exist.  Talking about specific situations that could arise in the execution can help avoid unpleasant surprises.
3. Decide how the parties will communicate.  In many cases one party is likely to be starting its work day while the other party’s work day is approaching its conclusion.  As a result, both parties are seldom at their best.  In an on-going relationship, it is always a good idea to include verbal discussions, rather than relying on e-mail.
4. Face-to-face meetings are difficult and expensive to arrange.  Many insist on face-to-face meetings as a step in building trust.  Those who do so may discover that the parties do not have representatives in country.
5. Consider the needs of both parties with regard to world events, economic conditions, socioeconomic differences, ethical issues, and political issues.  Such events may impact the need for the products and services, or a party’s ability to deliver the products and services.
6. In some cases, one or both parties may have culturally and legally mandated obligations with regard to due diligence in managing organizational resources.  Decide how to satisfy these obligations as part of the contract negotiation.   
7. Financial ability to deliver or to pay for the products and services can be an issue with international transactions.  Parties are accustomed to certain levels of information and tests to ensure that information is valid.  With an international transaction, additional steps may be needed such as special payment methods, letters of credit, and escrows.
8. Plan for surprises.  This is important in any major relationship, but especially in the context of international business relationships.  If a surprise arises, how will it be communicated?  What is the timeline?  What are the contingency plans for both parties in case the issue cannot be resolved quickly? 
9. Be honest with yourselves and with each other.  If a relationship is not going to meet your needs, it is far better to walk away than to end up in a situation where you and the other party are locked in a contract that sets you up to fail.

Some outsource to firms that offshore as a way of managing the risks.  That can be a reasonable strategy in some cases.  When one chooses this approach though, it is critical to understand the prime supplier’s experience and expertise in managing such relationships.  If the prime supplier lacks experience in this area, where does that leave the customer?

Feedback

Most of these tips are common sense.  Sometimes, common sense gets overlooked or discounted in our quest for more customers and to cut costs. 

In January 2007, I will be teaching a class on international business at a local community college.  If you have stories or suggestions about doing business internationally, please feel free to send me a note.  

revised Jan 4, 2007.

Filed by Coleen Davis at 9:27 am under Business Acumen, Cultural Issues, Negotiations