Authentiq

There is some confusion around Intellectual Property. Many believe it consists of one - maybe two things: Patent and Copyright. These are very important, but not the whole suite of Intellectual Property forms. There are at least 2 other very important forms of Intellectual Property: Trademarks and Trade Secrets.

First off let’s start with some definitions. I took these from Nolo.com which has the best definitions for regular humans. You can also go look in the library or on line for Black’s Law Dictionary.

Copyright: A legal means to provide the owner of a creative work to control how it is used, copied, or displayed.

Copyrights cover books, writing, articles, photographs, music, movies, and many other things. You don’t really have to do much of anything in most places to get a copyright - most often just put the notice some where on the work. If you think it might be at high risk of being copied, then in many places you can actually register the copyright. With many technical and academic articles, journals and books there is the concept of "fair use" - giving others the right to use small portions of a work for educational pursuits - so long as proper citation and credit is given.

Patent: The legal right granted by a government body (USPTO in the US) to prevent others from making, using, or selling an invention. There are also design rights / patents, plant patents, software patents, and business method patents(US only).

Patents cover inventions. There are good and bad things about patents - several small articles would be needed to even to begin to understand it fully. One thing that is often not understood by inventors is that when you patent something you have to disclose how it works to the authority that grants the patent. When you do that - the invention is not longer secret - because they publish your disclosure to the whole world. This process, if done properly can be somewhat expensive - especially if you have an attorney do much of the work. There is a limit on how long the patent lasts, it is different in different countries and possibly for different types of invention.

Trademark: Any word, phrase, symbol, color (or combinations of colors), sound or smell that a company uses to identify its products and services.

Trademarks help customers to recognize your products and to ensure they are genuine. They have to be renewed periodically, if registered. They can be quite powerful. How many times have you been asked for a Kleenex (a tissue is the proper way to ask - Kleenex is a trademark of  Kimberly-Clark) or to Xerox something (make a photo copy is correct - Xerox is a trademark of Xerox) or to drink  a Coke… The list goes on. This is both good and bad for the trademark holder - you want the trademark used frequently to build brand awareness BUT not so often for things that are not your products so that the trademark itself is "diluted" or no longer makes reference to your products.

Trade Secret: A recipe, formula, idea, process, or information that provides a business with a competitive edge for as long as it is kept secret.

Lastly Trade Secrets are just that secret. The whole idea behind a trade secret is not to let many people know, disclose it in a formal way, to an EXTREMELY limited number of people on a strict need to know basis. One of the most famous trade secrets is the formula or recipe for Coca-Cola. There are a number of rumors that circulate about the formula - such as it is in a safe in the office of the president in Atlanta or that no one person knows the whole formula, etc. These may or may not be true. The important thing is that they show the lengths that you may need to go through to ensure that a trade secret is secret. A trade secret is in some ways the exact opposit of a patent which depends on its disclosure for protection.

Even with these somewhat simplified definitions, you may be wondering how and when to use each type of intellectual property. As may of my attorney friends love to say… "It depends!" The best thing to do is to work with a really good IP attorney who can help you sort out what works for your situation. If it requires a patent or a trademark and you have little money, a good attorney will often tell you what to do to lower the cost (such as searching the patent databases - available at the library online).

You may be thinking to yourself, do I really need to patent, trademark, or copyright something? Do I need to cover it with a trade secret process? I am only a small company! The answer is yes (or very likely yes). Too many small companies do a woefully inadequate job of protecting themselves. This leaves them vulnerable to copying or to someone else filing a patent and then shutting them down for infringement. It could happen to you. Attached is an article on small and medium businesses and the affects of patents and the companies interest (sorry it is in French)

http://www.24heures.ch/actu/economie/pme-interet-breveter-inventions-2009-02-08

One of the more common problems with SMEs is they often do not patent or protect enough of what they do. This is often because of the cost, but can also be driven by the fact that the only person who really understands it is the inventor and you need them to be off doing "real work". One option for you is to form a small team to evaluate different inventions with a someone who has done lots of patent evaluations or a good patent attorney who can really guide you to do the right thing.

Just remember that Patents and Trademarks are the dream of IP attorneys. They generate lots of work. Can be quite fun - researching aspects of a patent and figuring out how to write the disclosure for instance. Not to mention the fees that they generate.

Please note: I am not an attorney and do not practice law in any jurisdiction. The above are my own thoughts from working with some of the best IP attorneys in the US and abroad and in no way represent legal counsel. If you have questions, please contact a qualified legal counsel.

There is some confusion around Intellectual Property. Many believe it consists of one - maybe two things: Patent and Copyright. These are very important, but not the whole suite of Intellectual Property forms. There are at least 2 other very important forms of Intellectual Property: Trademarks and Trade Secrets.

First off let's start with some definitions. I took these from Nolo.com which has the best definitions for regular humans. You can also go look in the library or on line for Black's Law Dictionary.

Copyright: A legal means to provide the owner of a creative work to control how it is used, copied, or displayed.

Copyrights cover books, writing, articles, photographs, music, movies, and many other things. You don't really have to do much of anything in most places to get a copyright - most often just put the notice some where on the work. If you think it might be at high risk of being copied, then in many places you can actually register the copyright. With many technical and academic articles, journals and books there is the concept of "fair use" - giving others the right to use small portions of a work for educational pursuits - so long as proper citation and credit is given.

Patent: The legal right granted by a government body (USPTO in the US) to prevent others from making, using, or selling an invention. There are also design rights / patents, plant patents, software patents, and business method patents(US only).

Patents cover inventions. There are good and bad things about patents - several small articles would be needed to even to begin to understand it fully. One thing that is often not understood by inventors is that when you patent something you have to disclose how it works to the authority that grants the patent. When you do that - the invention is not longer secret - because they publish your disclosure to the whole world. This process, if done properly can be somewhat expensive - especially if you have an attorney do much of the work. There is a limit on how long the patent lasts, it is different in different countries and possibly for different types of invention.

Trademark: Any word, phrase, symbol, color (or combinations of colors), sound or smell that a company uses to identify its products and services.

Trademarks help customers to recognize your products and to ensure they are genuine. They have to be renewed periodically, if registered. They can be quite powerful. How many times have you been asked for a Kleenex (a tissue is the proper way to ask - Kleenex is a trademark of  Kimberly-Clark) or to Xerox something (make a photo copy is correct - Xerox is a trademark of Xerox) or to drink  a Coke... The list goes on. This is both good and bad for the trademark holder - you want the trademark used frequently to build brand awareness BUT not so often for things that are not your products so that the trademark itself is "diluted" or no longer makes reference to your products.

Trade Secret: A recipe, formula, idea, process, or information that provides a business with a competitive edge for as long as it is kept secret.

Lastly Trade Secrets are just that secret. The whole idea behind a trade secret is not to let many people know, disclose it in a formal way, to an EXTREMELY limited number of people on a strict need to know basis. One of the most famous trade secrets is the formula or recipe for Coca-Cola. There are a number of rumors that circulate about the formula - such as it is in a safe in the office of the president in Atlanta or that no one person knows the whole formula, etc. These may or may not be true. The important thing is that they show the lengths that you may need to go through to ensure that a trade secret is secret. A trade secret is in some ways the exact opposit of a patent which depends on its disclosure for protection.

Even with these somewhat simplified definitions, you may be wondering how and when to use each type of intellectual property. As may of my attorney friends love to say... "It depends!" The best thing to do is to work with a really good IP attorney who can help you sort out what works for your situation. If it requires a patent or a trademark and you have little money, a good attorney will often tell you what to do to lower the cost (such as searching the patent databases - available at the library online).

You may be thinking to yourself, do I really need to patent, trademark, or copyright something? Do I need to cover it with a trade secret process? I am only a small company! The answer is yes (or very likely yes). Too many small companies do a woefully inadequate job of protecting themselves. This leaves them vulnerable to copying or to someone else filing a patent and then shutting them down for infringement. It could happen to you. Attached is an article on small and medium businesses and the affects of patents and the companies interest (sorry it is in French)

http://www.24heures.ch/actu/economie/pme-interet-breveter-inventions-2009-02-08

One of the more common problems with SMEs is they often do not patent or protect enough of what they do. This is often because of the cost, but can also be driven by the fact that the only person who really understands it is the inventor and you need them to be off doing "real work". One option for you is to form a small team to evaluate different inventions with a someone who has done lots of patent evaluations or a good patent attorney who can really guide you to do the right thing.

Just remember that Patents and Trademarks are the dream of IP attorneys. They generate lots of work. Can be quite fun - researching aspects of a patent and figuring out how to write the disclosure for instance. Not to mention the fees that they generate.

Please note: I am not an attorney and do not practice law in any jurisdiction. The above are my own thoughts from working with some of the best IP attorneys in the US and abroad and in no way represent legal counsel. If you have questions, please contact a qualified legal counsel.

Part II: A New Approach:  The Market Entry Firm

The Market Entry Firm Business Model

A Market Entry Firm (MEF) is a business that is focused on helping young, fast-growing companies penetrate and establish themselves in a new geographic market. The MEF acts as an extension to the client company in the international region. The client company in this case is called the ‘hosted-company’. The MEF provides local management, sales and all the services required to successfully launch and establish the hosted-company’s product. The ultimate goal is to accelerate market success for the product in the new region while reducing cost and risk resulting in a sustainable, local presence for the hosted-company.

How is a MEF different other approaches? There are 4 principal areas where the MEF is different: 1) Controlled growth, 2) Resource sharing, 3) Better capital utilization, & 4) Flexible exit.

:

a) by leveraging processes, infrastructure and resources across multiple hosted-companies simultaneously. The benefit to the hosted-company is delivering sales and market success in less time, with less effort and at less cost than if the hosted-company were to try to manage the market entry on their own. This approach allows the headquarters team to continue to focus on building the home market success that is necessary to ensure its future.

b) Sharing resources also promotes a model where the hosted-company pays only for the resources and people that they use.

A MEF is comprised of a management core and services consisting of customer-facing and back-end (internally focused) functions. The core of the MEF consists of executives and administrative staff that understand the local and regional culture and business environment, and have significant experience in ramping new businesses in the region. The executive team directs the ramp-up which includes hiring key management and sales staff while building the hosted company’s sales and market identity in the region. The MEF also provides, directly or by contract, essential services such as product and field marketing, lead generation, PR, localization (translation and/or engineering), order management, legal, accounting and finance and other functions found in any commercial enterprise.

Ultimately, the goal is to establish the hosted-company in the new geography with a complete business operation - eventually transferring direct control and management to the hosted company. This will typically include transferring some personnel responsibility, especially in the case of sales teams, and include helping the company establish the required business entities and relationships in the countries of interest.

In our example, the concept is that the MEF looks and acts like the European extension of the hosted-company headquartered in the U.S. This is facilitated by assigning a local executive with expertise in both the hosted company’s market and cross-boarder management. This executive coordinates, manages and drives setting up the local hosted business, including selecting and directing personnel and services. Once the business is ramped up, this executive will manage the transition of resources to the hosted company. Throughout the process, the executive and the hosted-company will utilize the MEF executives as a highly involved, local advisory board

While the MEF plays a critical role in this entire engagement, utmost attention is given to projecting the hosted-company’s name and product in the market place (over that of the MEF). After all, the true measure of success for both companies is to have established the hosted-company’s name, brand, and product in the market in a sustainable fashion.

Why Consider a Market Entry Firm?

There are a number of reasons to consider a MEF approach in contrast to either a Headquarter-base Management approach or a DIY Local Management approach. The primary reasons are faster market entry (time to money), reduced risks (including reduced costs and less distraction), better capital utilization and increased company value. Let’s look at how a MEF can address some of the challenges encountered when entering the European marketplace.

A U.S.-based business will observe that the European business environment is different. Vendors with limited experienced in Europe are typically unfamiliar with important legal, procedural and cultural differences. Sales cycles for commercial products are often longer, driven by different purchase criteria and decision-making processes. Furthermore, some European companies may have concerns in dealing with U.S. suppliers unless a good local presence and relationship has been established. These issues are second nature to MEF executives that have the experience in bring products to Europe and the U.K. from the U.S.

A MEF can provide educated guidance in deciding when and where in Europe (which countries) to launch the hosted-company’s products. This will be a function of the product, market conditions, industry structure, finding the best pool of experienced personnel, employment laws, and other factors. In the end, the MEF can more quickly propose a launch plan for the hosted-company’s product, gain approval of the hosted-company and commence building the business.

Recruiting is a significant factor in considering a MEF. Interviewing and hiring are time consuming and can be a more intimidating process when conducted across an ocean and cultures. Even under the best conditions recruitment errors will occur – European statistics indicate that 35% of all hires are considered recruitment errors. Managed remotely, it often takes a prolonged period of time before a bad hire is clearly apparent. Correcting the issue of hiring the wrong person can be time consuming and costly (due to national employment laws) and re-recruiting fees. Having local management with existing business networks (including recruiting firms) that also understand local culture, laws and business practices can reduce the risk and cost of bad hires and can expedite their removal when such a hire takes place.

By providing and standardizing the most common enterprise services, the MEF can immediately provide a broad set of support services – marketing, order management, legal, finance and more. If an exceptional need arises, the MEF’s local staff will have the contacts and knowledge to address the problem quickly.

If managed from the U.S, simply identifying all of the right service firms can be daunting. The problem is compounded by remotely coordinating and directing these service providers. The likelihood of getting acceptable results, quality-wise and time-wise, is low while the likelihood of sidetracking headquarters personnel is high. This coordination role is easily filled and managed by the local MEF team.

Summary

A Market Entry Firm is fully adept in multi-national and multi-cultural business. They understand the benefits of direct local presence and a dedicated staff based in the region(s) of interest. Employing management and sales personnel with the technical and market knowledge aligned to the host company’s product will produce the least risk in establishing a sustainable market position moving forward.

With a business model that is completely geared to promoting and ramping new businesses, the MEF will provide a great many benefits at less cost and with less effort and risk than any other market entry approach.

For global expansion, the MEF provides the best approach to achieve a sustainable international market position for a technology business.

About the Authors:

BobHills – Principal, Classic Business Logic.

Bob has 30 years experience in global high-technology business. He has held executive positions with HP and Intel including a general management position in HP’s OpenView Software Business and Director of Business Development for Intel’s Corporate Technology Group. Bob’s experience includes 4 years as an ex-patriot in Europe to ramp up a new business and 15 years managing trans-Atlantic teams. A vice president at Intel described Bob’s skill as “an innate ability to analyze a situation, target the highest areas for value, and construct highly accurate strategies to execute”. Now running his own consulting practice, Bob has the opportunity to share his global business experience in helping small- to medium-sized businesses grow and geographically expand.

John Harwell – Business Performance Advisor, Authentiq Advisors

John is an executive with 30 years experience in global high tech business. He has led the establishment of new businesses, developed new business models and reinvigorated growth in key areas for a variety of businesses worldwide. He worked for Hewlett Packard for over 25 years in virtually every functional area of business – marketing, research and development, and manufacturing. His tenure at HP spanned both the hardware and software side of HP’s business. John now manages his own consulting business, Authentiq Advisors, based in Switzerland.

Part II: A New Approach:  The Market Entry Firm

The Market Entry Firm Business Model

A Market Entry Firm (MEF) is a business that is focused on helping young, fast-growing companies penetrate and establish themselves in a new geographic market. The MEF acts as an extension to the client company in the international region. The client company in this case is called the ‘hosted-company’. The MEF provides local management, sales and all the services required to successfully launch and establish the hosted-company’s product. The ultimate goal is to accelerate market success for the product in the new region while reducing cost and risk resulting in a sustainable, local presence for the hosted-company.

How is a MEF different other approaches? There are 4 principal areas where the MEF is different: 1) Controlled growth, 2) Resource sharing, 3) Better capital utilization, & 4) Flexible exit.

:

a) by leveraging processes, infrastructure and resources across multiple hosted-companies simultaneously. The benefit to the hosted-company is delivering sales and market success in less time, with less effort and at less cost than if the hosted-company were to try to manage the market entry on their own. This approach allows the headquarters team to continue to focus on building the home market success that is necessary to ensure its future.

b) Sharing resources also promotes a model where the hosted-company pays only for the resources and people that they use.

A MEF is comprised of a management core and services consisting of customer-facing and back-end (internally focused) functions. The core of the MEF consists of executives and administrative staff that understand the local and regional culture and business environment, and have significant experience in ramping new businesses in the region. The executive team directs the ramp-up which includes hiring key management and sales staff while building the hosted company’s sales and market identity in the region. The MEF also provides, directly or by contract, essential services such as product and field marketing, lead generation, PR, localization (translation and/or engineering), order management, legal, accounting and finance and other functions found in any commercial enterprise.

Ultimately, the goal is to establish the hosted-company in the new geography with a complete business operation - eventually transferring direct control and management to the hosted company. This will typically include transferring some personnel responsibility, especially in the case of sales teams, and include helping the company establish the required business entities and relationships in the countries of interest.

In our example, the concept is that the MEF looks and acts like the European extension of the hosted-company headquartered in the U.S. This is facilitated by assigning a local executive with expertise in both the hosted company’s market and cross-boarder management. This executive coordinates, manages and drives setting up the local hosted business, including selecting and directing personnel and services. Once the business is ramped up, this executive will manage the transition of resources to the hosted company. Throughout the process, the executive and the hosted-company will utilize the MEF executives as a highly involved, local advisory board

While the MEF plays a critical role in this entire engagement, utmost attention is given to projecting the hosted-company’s name and product in the market place (over that of the MEF). After all, the true measure of success for both companies is to have established the hosted-company’s name, brand, and product in the market in a sustainable fashion.

Why Consider a Market Entry Firm?

There are a number of reasons to consider a MEF approach in contrast to either a Headquarter-base Management approach or a DIY Local Management approach. The primary reasons are faster market entry (time to money), reduced risks (including reduced costs and less distraction), better capital utilization and increased company value. Let’s look at how a MEF can address some of the challenges encountered when entering the European marketplace.

A U.S.-based business will observe that the European business environment is different. Vendors with limited experienced in Europe are typically unfamiliar with important legal, procedural and cultural differences. Sales cycles for commercial products are often longer, driven by different purchase criteria and decision-making processes. Furthermore, some European companies may have concerns in dealing with U.S. suppliers unless a good local presence and relationship has been established. These issues are second nature to MEF executives that have the experience in bring products to Europe and the U.K. from the U.S.

A MEF can provide educated guidance in deciding when and where in Europe (which countries) to launch the hosted-company’s products. This will be a function of the product, market conditions, industry structure, finding the best pool of experienced personnel, employment laws, and other factors. In the end, the MEF can more quickly propose a launch plan for the hosted-company’s product, gain approval of the hosted-company and commence building the business.

Recruiting is a significant factor in considering a MEF. Interviewing and hiring are time consuming and can be a more intimidating process when conducted across an ocean and cultures. Even under the best conditions recruitment errors will occur – European statistics indicate that 35% of all hires are considered recruitment errors. Managed remotely, it often takes a prolonged period of time before a bad hire is clearly apparent. Correcting the issue of hiring the wrong person can be time consuming and costly (due to national employment laws) and re-recruiting fees. Having local management with existing business networks (including recruiting firms) that also understand local culture, laws and business practices can reduce the risk and cost of bad hires and can expedite their removal when such a hire takes place.

By providing and standardizing the most common enterprise services, the MEF can immediately provide a broad set of support services – marketing, order management, legal, finance and more. If an exceptional need arises, the MEF’s local staff will have the contacts and knowledge to address the problem quickly.

If managed from the U.S, simply identifying all of the right service firms can be daunting. The problem is compounded by remotely coordinating and directing these service providers. The likelihood of getting acceptable results, quality-wise and time-wise, is low while the likelihood of sidetracking headquarters personnel is high. This coordination role is easily filled and managed by the local MEF team.

Summary

A Market Entry Firm is fully adept in multi-national and multi-cultural business. They understand the benefits of direct local presence and a dedicated staff based in the region(s) of interest. Employing management and sales personnel with the technical and market knowledge aligned to the host company’s product will produce the least risk in establishing a sustainable market position moving forward.

With a business model that is completely geared to promoting and ramping new businesses, the MEF will provide a great many benefits at less cost and with less effort and risk than any other market entry approach.

For global expansion, the MEF provides the best approach to achieve a sustainable international market position for a technology business.

About the Authors:

BobHills – Principal, Classic Business Logic.

Bob has 30 years experience in global high-technology business. He has held executive positions with HP and Intel including a general management position in HP’s OpenView Software Business and Director of Business Development for Intel’s Corporate Technology Group. Bob’s experience includes 4 years as an ex-patriot in Europe to ramp up a new business and 15 years managing trans-Atlantic teams. A vice president at Intel described Bob’s skill as “an innate ability to analyze a situation, target the highest areas for value, and construct highly accurate strategies to execute”. Now running his own consulting practice, Bob has the opportunity to share his global business experience in helping small- to medium-sized businesses grow and geographically expand.

John Harwell – Business Performance Advisor, Authentiq Advisors

John is an executive with 30 years experience in global high tech business. He has led the establishment of new businesses, developed new business models and reinvigorated growth in key areas for a variety of businesses worldwide. He worked for Hewlett Packard for over 25 years in virtually every functional area of business – marketing, research and development, and manufacturing. His tenure at HP spanned both the hardware and software side of HP’s business. John now manages his own consulting business, Authentiq Advisors, based in Switzerland.

Options for Penetrating Global Markets

Part I: The Challenge: Where & How To Expand Internationally

The Problem

Many new products have market potential beyond the borders of any given country or region. This is particularly true in the technology sector - which we will consider here. When a new company has achieved a degree of early market success in their home market, for instance the U.S, they are likely to consider expanding to other geographies. This, of course, comes at a time when they have their hands full chasing all the opportunities that are presented to them at home. This is not a light-hearted decision. Timing plays an important role in making the decision – for a variety of reasons, making the move too early or too late can spell disaster for the company and its products. The fundamental questions are: Is our product ready? Have we established sufficient success in the home market? Is our company capable of taking on the challenges of a foreign markets?

Once the thought and need for geographic expansion is established, there are a multitude of options that must be considered. All options must be weighed against the goal of a sustainable international presence and the tactics of maximizing ROI and minimizing costs; all while keeping the home market operations on track and growing. Two questions that will percolate to the top of the list are ‘Where?’ and ‘How?’

Where? – What geography should be targeted to launch a globalization campaign?

Working with the example of a U.S.-based technology company, let’s assume they have decided to expand their presence into Europe (including the U.K.). Typically, this is considered less intimidating, less expensive and safer ground than expanding to Asia or directly to Eastern European countries. However, Europe is not homogeneous – leading to the question of where to get started.

Often times the default answer is to start in the U.K. – after all, they speak the same language! At first blush, this appears to be a low cost way to enter Europe because the need to localize the product and marketing materials is ‘eliminated’, however other costs in the UK can be significantly higher than other parts of Europe - salaries, social costs and real estate to name a few. The fact is, the U.K, which represents 20% of the overall European technology market, isn’t necessarily a good launch pad to reach the remaining 80% of the European market. While it has a significant time zone advantage over the U.S, the U.K. is equally disadvantaged by being outside the common European currency zone (e.g. the Euro-centric economy). And to the initial point, the language and culture are similar to the U.S, but they are not the same.

Another approach is to start with German speaking Europe – what is known internally to Europeans as DACH – ‘D’ representing the symbol of Germany, ‘A’ for Austria, and ‘CH’ for Switzerland. DACH, which represents roughly 27% of the overall European technology market, has a good reach into the rest of Europe – high-growth eastern European regions are easily accessible from Germany and Austria – France, Italy and the Iberian peninsula are accessible from Switzerland – and the UK, BeNeLux and Nordic countries are accessible from Germany or Switzerland. While the initial investment may seem to be higher to launch in DACH, the ROI, especially given the ability to move into other European regions, can quickly offset the expense.

There are other European entry strategies but these examples demonstrate the type of thought necessary to answer the question of where to launch. This is a much deeper decision than “I know a few folks in the U.K. that would be good at selling our product”. A successful launch requires research and execution across cultures, industry structures, business practices, and legal practices. Which leads us beyond ‘where’ and to ‘how’ a company would go about launching a product in a specific country or set of countries?

How? – What is the best approach to launch into the targeted geography?

There are two principal approaches to launch your business in a new geography: headquarter-based management and local management. There are many permutations of these two approaches but they illustrate the concepts well enough.

Headquarter-based Management

We will describe the Headquarter-based Management approach using an all-to-common scenario. This approach has the U.S.-based technology company setting up a very small team of employees in the region and then contracting a few local service providers, all of which are managed remotely from the home office. Given that this is a fast growing company, the home office executive chosen to manage the European expansion will have other responsibilities as well. The service providers will include an in-direct sales channel managed by an agent or a distributor, a marketing services firm and perhaps a PR firm to cover the initial sales and marketing needs. The company will make the decision to provide all the back-end services like finance, admin and legal from the U.S. – but they will quickly learn that it is suboptimal and start looking for those services locally as well. The sales channel and marketing services firm commit a small group of people that are technically literate but not well versed in the company’s specific market or product – nor will they be particularly loyal to the company, especially given its size (assumed to be small). Furthermore, these individuals are spread across multiple client assignments simultaneously. To help get the ball rolling, the company sends an ’expert’ on an extended business trip or two but it won’t fully justify the high investment cost. In the end, the team’s part-time commitment and unfocussed skills will not meet the company’s expectations. This is especially true early in the process when the headquarters team is looking to secure those early customers that are vital in establishing reference sites and fueling further growth.

This approach nearly approximates a remotely managed indirect sales channel. History shows that a channel, managed in this manner, will often struggle to gain traction for the company’s product. Without local company drive and support: product promotion suffers, account control is weakened, sales cycles will be drawn out and forecasting is poor. In general, European indirect channel organizations prefer to work with companies with local presence because they are less risky and provide in-time-zone assistance and supportive marketing programs. While, in this approach, the marketing and PR firms are local, the coordination and management point is sitting back at headquarters in the U.S. – unaware of the nuances in local market conditions.

Despite this history, many fast-growing technology companies will take this route; selecting it as the easy, least costly approach while demonstrating commitment to international expansion with their board of directors. In reality, it is at best wishful thinking and frequently a waste of time, effort and money.

Local Management

With goals for a quick ramp-up and sustainable market penetration, an approach that utilizes a local team run by local company management is the preferred solution. This approach ensures that there is a high level of focus on the company, its products, its customers and its success since the main local interface is staffed by people employed directly by the company. Here, too, the company may decide that the expense of extended business trips or even importing an ex-patriot staff member are justified in order to accelerate and strengthen the market and product expertise, culture and loyalty.

However, this approach has a completely different, and potentially more costly, set of challenges. The initial challenge includes setting up the local operations and recruiting a qualified, regionally-based team. The second is suffering through an initial ROI that is weakened as the team is hired and ramped to become productive – lots of money going out and relatively few sales coming in. Don’t forget that all this while the headquarters team is busy building the U.S.-based business and will have little time for this distracting effort. With this Do-It-Yourself (DIY) approach the company will not understand the complete risk involved in the European launch until it is completely engaged in the process. The full impact of cultural differences, legal constraints, hiring failures, not to mention the costs, will present more risk than the management team ever imagined taking on.

Local Startup Assistance

For either of the above approaches (though particularly the “Local Management” approach) there are a number of government economic agencies, boutique consulting firms and specialized recruiters that are ready to help in business relocation. These organizations usually have a set of skills focused on helping companies relocate or set up in a specific geographic area. They can reduce some of the risk if properly used and managed. Their business model is often focused on moving a multi-national headquarter from one country to another – less frequently in helping smaller, technology focused companies to grow in the new geography. Their fees are frequently heavily front end focused, and generally have a relatively high degree of customized services. It is not unusual for a company to shell out $750K or $800K in the first year just to enter 1 country with legal fees, hiring costs, salaries & benefits, etc. A significant portion of this is can come in the form of fees.

Just an additional word on the government economic agencies, even though many of the services they provide are for “free” – their principal goal is not to find the best place for your company to relocate. Their goal is to relocate you into their specific economic region often guiding you to a city that suits their interests. Many of their services are provided through local contractors, these contractors may not be the best suppliers for companies of your size or industry. They must be carefully managed to ensure that you do not end up in the “wrong” place with the “wrong” structure at a high price.

There is an alternative. A new breed of regionally-resident service companies that focus on launching new technology products into international markets for fast growing companies has come on the scene. We call these companies Market Entry Firms.

About the Authors:

BobHills – Principal, Classic Business Logic.

Bob has 30 years experience in global high-technology business. He has held executive positions with HP and Intel including a general management position in HP’s OpenView Software Business and Director of Business Development for Intel’s Corporate Technology Group. Bob’s experience includes 4 years as an ex-patriot in Europe to ramp up a new business and 15 years managing trans-Atlantic teams. A vice president at Intel described Bob’s skill as “an innate ability to analyze a situation, target the highest areas for value, and construct highly accurate strategies to execute”. Now running his own consulting practice, Bob has the opportunity to share his global business experience in helping small- to medium-sized businesses grow and geographically expand.

John Harwell – Business Performance Advisor, Authentiq Advisors

John is an executive with 30 years experience in global high tech business. He has led the establishment of new businesses, developed new business models and reinvigorated growth in key areas for a variety of businesses worldwide. He worked for Hewlett Packard for over 25 years in virtually every functional area of business – marketing, research and development, and manufacturing. His tenure at HP spanned both the hardware and software side of HP’s business. John now manages his own consulting business, Authentiq Advisors, based in Switzerland.

Options for Penetrating Global Markets

Part I: The Challenge: Where & How To Expand Internationally

The Problem

Many new products have market potential beyond the borders of any given country or region. This is particularly true in the technology sector - which we will consider here. When a new company has achieved a degree of early market success in their home market, for instance the U.S, they are likely to consider expanding to other geographies. This, of course, comes at a time when they have their hands full chasing all the opportunities that are presented to them at home. This is not a light-hearted decision. Timing plays an important role in making the decision – for a variety of reasons, making the move too early or too late can spell disaster for the company and its products. The fundamental questions are: Is our product ready? Have we established sufficient success in the home market? Is our company capable of taking on the challenges of a foreign markets?

Once the thought and need for geographic expansion is established, there are a multitude of options that must be considered. All options must be weighed against the goal of a sustainable international presence and the tactics of maximizing ROI and minimizing costs; all while keeping the home market operations on track and growing. Two questions that will percolate to the top of the list are ‘Where?’ and ‘How?’

Where? – What geography should be targeted to launch a globalization campaign?

Working with the example of a U.S.-based technology company, let’s assume they have decided to expand their presence into Europe (including the U.K.). Typically, this is considered less intimidating, less expensive and safer ground than expanding to Asia or directly to Eastern European countries. However, Europe is not homogeneous – leading to the question of where to get started.

Often times the default answer is to start in the U.K. – after all, they speak the same language! At first blush, this appears to be a low cost way to enter Europe because the need to localize the product and marketing materials is ‘eliminated’, however other costs in the UK can be significantly higher than other parts of Europe - salaries, social costs and real estate to name a few. The fact is, the U.K, which represents 20% of the overall European technology market, isn’t necessarily a good launch pad to reach the remaining 80% of the European market. While it has a significant time zone advantage over the U.S, the U.K. is equally disadvantaged by being outside the common European currency zone (e.g. the Euro-centric economy). And to the initial point, the language and culture are similar to the U.S, but they are not the same.

Another approach is to start with German speaking Europe – what is known internally to Europeans as DACH – ‘D’ representing the symbol of Germany, ‘A’ for Austria, and ‘CH’ for Switzerland. DACH, which represents roughly 27% of the overall European technology market, has a good reach into the rest of Europe – high-growth eastern European regions are easily accessible from Germany and Austria – France, Italy and the Iberian peninsula are accessible from Switzerland – and the UK, BeNeLux and Nordic countries are accessible from Germany or Switzerland. While the initial investment may seem to be higher to launch in DACH, the ROI, especially given the ability to move into other European regions, can quickly offset the expense.

There are other European entry strategies but these examples demonstrate the type of thought necessary to answer the question of where to launch. This is a much deeper decision than “I know a few folks in the U.K. that would be good at selling our product”. A successful launch requires research and execution across cultures, industry structures, business practices, and legal practices. Which leads us beyond ‘where’ and to ‘how’ a company would go about launching a product in a specific country or set of countries?

How? – What is the best approach to launch into the targeted geography?

There are two principal approaches to launch your business in a new geography: headquarter-based management and local management. There are many permutations of these two approaches but they illustrate the concepts well enough.

Headquarter-based Management

We will describe the Headquarter-based Management approach using an all-to-common scenario. This approach has the U.S.-based technology company setting up a very small team of employees in the region and then contracting a few local service providers, all of which are managed remotely from the home office. Given that this is a fast growing company, the home office executive chosen to manage the European expansion will have other responsibilities as well. The service providers will include an in-direct sales channel managed by an agent or a distributor, a marketing services firm and perhaps a PR firm to cover the initial sales and marketing needs. The company will make the decision to provide all the back-end services like finance, admin and legal from the U.S. – but they will quickly learn that it is suboptimal and start looking for those services locally as well. The sales channel and marketing services firm commit a small group of people that are technically literate but not well versed in the company’s specific market or product – nor will they be particularly loyal to the company, especially given its size (assumed to be small). Furthermore, these individuals are spread across multiple client assignments simultaneously. To help get the ball rolling, the company sends an ’expert’ on an extended business trip or two but it won’t fully justify the high investment cost. In the end, the team’s part-time commitment and unfocussed skills will not meet the company’s expectations. This is especially true early in the process when the headquarters team is looking to secure those early customers that are vital in establishing reference sites and fueling further growth.

This approach nearly approximates a remotely managed indirect sales channel. History shows that a channel, managed in this manner, will often struggle to gain traction for the company’s product. Without local company drive and support: product promotion suffers, account control is weakened, sales cycles will be drawn out and forecasting is poor. In general, European indirect channel organizations prefer to work with companies with local presence because they are less risky and provide in-time-zone assistance and supportive marketing programs. While, in this approach, the marketing and PR firms are local, the coordination and management point is sitting back at headquarters in the U.S. – unaware of the nuances in local market conditions.

Despite this history, many fast-growing technology companies will take this route; selecting it as the easy, least costly approach while demonstrating commitment to international expansion with their board of directors. In reality, it is at best wishful thinking and frequently a waste of time, effort and money.

Local Management

With goals for a quick ramp-up and sustainable market penetration, an approach that utilizes a local team run by local company management is the preferred solution. This approach ensures that there is a high level of focus on the company, its products, its customers and its success since the main local interface is staffed by people employed directly by the company. Here, too, the company may decide that the expense of extended business trips or even importing an ex-patriot staff member are justified in order to accelerate and strengthen the market and product expertise, culture and loyalty.

However, this approach has a completely different, and potentially more costly, set of challenges. The initial challenge includes setting up the local operations and recruiting a qualified, regionally-based team. The second is suffering through an initial ROI that is weakened as the team is hired and ramped to become productive – lots of money going out and relatively few sales coming in. Don’t forget that all this while the headquarters team is busy building the U.S.-based business and will have little time for this distracting effort. With this Do-It-Yourself (DIY) approach the company will not understand the complete risk involved in the European launch until it is completely engaged in the process. The full impact of cultural differences, legal constraints, hiring failures, not to mention the costs, will present more risk than the management team ever imagined taking on.

Local Startup Assistance

For either of the above approaches (though particularly the “Local Management” approach) there are a number of government economic agencies, boutique consulting firms and specialized recruiters that are ready to help in business relocation. These organizations usually have a set of skills focused on helping companies relocate or set up in a specific geographic area. They can reduce some of the risk if properly used and managed. Their business model is often focused on moving a multi-national headquarter from one country to another – less frequently in helping smaller, technology focused companies to grow in the new geography. Their fees are frequently heavily front end focused, and generally have a relatively high degree of customized services. It is not unusual for a company to shell out $750K or $800K in the first year just to enter 1 country with legal fees, hiring costs, salaries & benefits, etc. A significant portion of this is can come in the form of fees.

Just an additional word on the government economic agencies, even though many of the services they provide are for “free” – their principal goal is not to find the best place for your company to relocate. Their goal is to relocate you into their specific economic region often guiding you to a city that suits their interests. Many of their services are provided through local contractors, these contractors may not be the best suppliers for companies of your size or industry. They must be carefully managed to ensure that you do not end up in the “wrong” place with the “wrong” structure at a high price.

There is an alternative. A new breed of regionally-resident service companies that focus on launching new technology products into international markets for fast growing companies has come on the scene. We call these companies Market Entry Firms.

About the Authors:

BobHills – Principal, Classic Business Logic.

Bob has 30 years experience in global high-technology business. He has held executive positions with HP and Intel including a general management position in HP’s OpenView Software Business and Director of Business Development for Intel’s Corporate Technology Group. Bob’s experience includes 4 years as an ex-patriot in Europe to ramp up a new business and 15 years managing trans-Atlantic teams. A vice president at Intel described Bob’s skill as “an innate ability to analyze a situation, target the highest areas for value, and construct highly accurate strategies to execute”. Now running his own consulting practice, Bob has the opportunity to share his global business experience in helping small- to medium-sized businesses grow and geographically expand.

John Harwell – Business Performance Advisor, Authentiq Advisors

John is an executive with 30 years experience in global high tech business. He has led the establishment of new businesses, developed new business models and reinvigorated growth in key areas for a variety of businesses worldwide. He worked for Hewlett Packard for over 25 years in virtually every functional area of business – marketing, research and development, and manufacturing. His tenure at HP spanned both the hardware and software side of HP’s business. John now manages his own consulting business, Authentiq Advisors, based in Switzerland.

Recently there has been a lot of talk about "asymmetry". Asymmetry in warfare, in information, just to name a couple. What this means is that there are large variations in the size and shape of two or more items of interest.

Asymmetric warfare is the type of war that the US is fighting in Iraq and Afganistan (also in Vietnam). The US has an extremely powerful, well equipped, modern fighting force. Yet it is frustrated by a rag-tag force of irregular fighters that are ill-equipped, not particularly powerful, not well organized, etc.

When I talk about Asymmetric Revenue Footprints, what I mean is when one product, geography or region has a vastly superior revenue stream than the other products, geographies or regions. The easiest way to look at this is to take a specific example. I will use the example of a manufacturing machine manufacturer. This is a moderate sized business generating on the order of 120M Chf (Swiss Francs) per year. The revenue distribution is close to 100M Chf in Europe, 10+M in North America (US) and 10-M in the rest of the world (principally Asia).

You might ask "So what is the problem?" Structurally there is no reason for the US market to be smaller. In fact, you would expect the revenues in the US to be at least the same as Europe - if not bigger! The revenue streams in the regions outside of Europe are stable to declining.  There is a disproportionate management attention needed for the US, for every Chf made in Europe it takes 2-3 times the attention of the management team to make the same Chf in the US.

"So what is the root cause?" My initial reaction, after hearing how the product is sold, is that the selling motion is not appropriate for this product in this region. The principal focus of the selling motion is on the "technical buyer", the guy who will spec the machine and understands how it is used in the manufacturing environment. The issue is that these machines average in price around 2M Chf per installation. Very often the "technical buyer" does not have the authority to sign for and commit his/her company to buying the machine. There needs to be a much higher focus on the "economic buyer", the person who will sign the order and commit the funds and the company to implementation. This manufacturer has an order that is stale, been on the books for quite some time - but not signed and executed by the customer. I believe the issue is that they have sold the technical buyer, but not the economic buyer (or not sufficiently so).

Given the current economic crisis in the US, it is doubly necessary to sell to the economic buyer to ensure that orders do get signed and executed and not cut from the budget. For this manufacturer, solving this problem would almost double their revenues over time. It would also help to insulate them from regional economic issues. It would put them on the path to move away from a multi-regional business to being a global player, even if their size does not put them in the Fortune500.

There can be any number of reasons for asymmetry in a revenue footprint. They range from poor selling motion for a particular region to poor match of benefits to customer needs/desires/dreams. The only way to find out how to address this is to do a study of why people have bought the product and why others have not bought and why potential customers did not even consider this as a solution.

Recently there has been a lot of talk about "asymmetry". Asymmetry in warfare, in information, just to name a couple. What this means is that there are large variations in the size and shape of two or more items of interest.

Asymmetric warfare is the type of war that the US is fighting in Iraq and Afganistan (also in Vietnam). The US has an extremely powerful, well equipped, modern fighting force. Yet it is frustrated by a rag-tag force of irregular fighters that are ill-equipped, not particularly powerful, not well organized, etc.

When I talk about Asymmetric Revenue Footprints, what I mean is when one product, geography or region has a vastly superior revenue stream than the other products, geographies or regions. The easiest way to look at this is to take a specific example. I will use the example of a manufacturing machine manufacturer. This is a moderate sized business generating on the order of 120M Chf (Swiss Francs) per year. The revenue distribution is close to 100M Chf in Europe, 10+M in North America (US) and 10-M in the rest of the world (principally Asia).

You might ask "So what is the problem?" Structurally there is no reason for the US market to be smaller. In fact, you would expect the revenues in the US to be at least the same as Europe - if not bigger! The revenue streams in the regions outside of Europe are stable to declining.  There is a disproportionate management attention needed for the US, for every Chf made in Europe it takes 2-3 times the attention of the management team to make the same Chf in the US.

"So what is the root cause?" My initial reaction, after hearing how the product is sold, is that the selling motion is not appropriate for this product in this region. The principal focus of the selling motion is on the "technical buyer", the guy who will spec the machine and understands how it is used in the manufacturing environment. The issue is that these machines average in price around 2M Chf per installation. Very often the "technical buyer" does not have the authority to sign for and commit his/her company to buying the machine. There needs to be a much higher focus on the "economic buyer", the person who will sign the order and commit the funds and the company to implementation. This manufacturer has an order that is stale, been on the books for quite some time - but not signed and executed by the customer. I believe the issue is that they have sold the technical buyer, but not the economic buyer (or not sufficiently so).

Given the current economic crisis in the US, it is doubly necessary to sell to the economic buyer to ensure that orders do get signed and executed and not cut from the budget. For this manufacturer, solving this problem would almost double their revenues over time. It would also help to insulate them from regional economic issues. It would put them on the path to move away from a multi-regional business to being a global player, even if their size does not put them in the Fortune500.

There can be any number of reasons for asymmetry in a revenue footprint. They range from poor selling motion for a particular region to poor match of benefits to customer needs/desires/dreams. The only way to find out how to address this is to do a study of why people have bought the product and why others have not bought and why potential customers did not even consider this as a solution.

DIFFERENCES BETWEEN PER DIEM, PERFORMANCE, PROJECT AND VALUE PRICING

Pricing

Pricing methodologies are extremely important to a business. Here I will discuss some of the more common service pricing structures.

Per Diem Pricing

Most service organizations work on a charge per unit of time, by the hour, day or week. This type of charging mechanism was popularized by the large accounting firms around the middle of the 1900s for consulting activities.

It has advantages to the service provider in that it is easy to do the billing. Also if the client changes the scope, direction or resource investment of a project there is little down side for the service provider. While there may be estimates and occasionally caps, typically whatever the service provider works is what is charged out. Since this is the most customary style of pricing, clients believe they understand it quite well and even if they don’t they are usually comfortable with it.

The downside for the client is that there are no built in incentives for the service provider to improve processes, get work done early, etc. There is an old adage that if you see two painters working on different houses, you can figure out which one is being paid by the hour or by the time spent, they will be the one working the slowest :)! This model does have a downside for the service provider when there is a need to interact with the client to gather information and understanding. In this situation, the client may spend too much time looking at the clock and try to hurry things along to reduce the cost. The client is incented to skimp on giving full information or assistance because they perceive that this is costing them money – the meter is ticking. This is not in the best interest of either the client or the service provider.

One particular quirk of per diem pricing is - what is the unit of charge? In copywriting it is often per word, in accounting and legal it is per hour, in consulting it is per hour or per day. The challenge that I see is when does the provider charge? In the case of a copywriter – is “a” a word? Is “supercalifragilisticexpialidocious” one word? One of my all time favorites “notwithstanding” it is a single word but it is made up of 3 words, should it be one or 3? Punctuation can have dramatic affects on the meaning of a phrase or sentence - is a coma a word? If a word does not go into final copy – do I have to pay for it? In time based billing – 60 minutes is an hour, 120 minutes is 2 hours - but is 61 minutes 1 hour or 2? Mathematically you could argue that 89 minutes is 1 hour and 90 minutes is 2 hours but is that fair? And who is it fair to? If I am talking to a provider about the weather how his or her family is doing - do I pay for that?

Per Diem pricing works best for short duration and standard types of projects that are well understood by both the client and the service provider. The precise terms and levels of pricing should be communicated in writing in order to limit disagreements over the resulting price. More information on how service providers can miss-use per diem pricing.

Performance Pricing

In performance based pricing, the service provider charges based on performance against some preset goals. This works best in areas such as revenue improvements, cost cutting, etc. For the service provider there must be a high probability that they will achieve at least the minimum level of performance and the pricing of the project must give them a reasonable return at that minimum level. In addition, payment is normally made AFTER the performance gain (or cost cut) is achieved.

The advantages for the client are that they normally do not pay until the performance is obtained. There may be retainer fees or other expenses which are paid along the way. This ensures that only those service providers who meet their performance expectations are paid. In essence the client gets free work until the goals are reached. The downside for the client is that most performance based engagements have no upside cap, so the charges can be quite high if the service provider sand bags the estimations. The service provider may also lose interest if results are not coming in, in which case the client may have a partially finished engagement that will need to be restarted. The principal advantage for the service provider is the unlimited upside potential that most performance based engagements provide. If the engagement has a quick enough turn around on performance it can be a great way to get into the door of a new client or do something for an existing client who is short on cash.

The downsides are many. Writing the service definition has to be undertaken carefully. If the client falls short on providing the necessary attention and resources to the project or makes modifications along the way, the project can quickly get out of hand. This type of client reaction is most common when the project is not well defined or is of long duration. The principal way for a service provider to protect themselves in this situation is to have severe penalties for client changes or cancellation. This makes it more attractive for the client to finish the project as originally designed rather than to cancel or change. Works best for projects that are short duration and have a well understood performance component.

Project Pricing

Project pricing is often compared to or thought of as value pricing. In my opinion, it is nowhere near. Project or solution pricing is more of a bundled approach to pricing. To do this the provider estimates the amount of work that will go into a particular project or solution. They will then often add some adjustments to factor in certain unknowns to ensure that they can do the project profitably. This then is the project price. Project based pricing is often onetime payment and somewhat fixed, there are often very strict clauses for changes. Changes outside the original scope of the project are then billed at some hourly rate. Frequently, it is the providers reading of the offer that drives what goes in as a change or not. I recently had the occasion to have my website redesigned. The initial approach was to take my existing website and make the modifications from there. At the recommendation of the team doing the changes, I decided that using a totally new template would be a better approach. When I accepted their recommendation, I was charged for the “lost” work. This left me with a bit of a sour taste in my mouth, since I accepted their recommendation – I was paying a penalty.

Value based Pricing

Value based pricing is where the client and service provider determine the value of the overall project to the client. Then the charge is based on a factor of that value (normally between 2 and 20 gearing ratio). You might ask how that is determined. Let me give an example: my clients consistently tell me that by working with me they accelerate their growth by 6 to 9 months at a minimum. I ask them how much revenue they would expect per year once their growth plan is in place. We would then agree on a gearing factor upon which I am paid. So if the revenue projections 1 year out are 1M Chf per year, since working with me accelerates their time to value by six months of that would be 500K Chf, if we applied a gearing factor of 5 the client would pay me 100K Chf (500K/5). This charge would apply regardless of how much time I invested in getting the client to realize the gain. It could be 2 minutes or 2 months or 2 years.

 The advantages for the client are that they know exactly what the project cost will be and what value project will bring. Often times the value based project comes with a guarantee of some sort. This helps because the service provider will continue to stay involved until the value is achieved. Also, many service providers that use value based pricing will give discounts for upfront payments. The biggest downside is specifying the project and getting the value outlined and agreeing on the gearing factor. The advantages for the service provider are that the project is well specified upfront, the revenue is well known and often times prepaid so the hassles of billing are taken care of. The client also does not look at the clock when they should be sharing information or providing guidance to the service provider, so work can progress well increasing the probability of success. The downside, similar to the performance based pay scenario, is that the project can get changed or cancelled; there can also be issues with getting the right resources assigned internally to the client. The service agreement needs to be carefully written to cover these situations. This all sounds quite easy, but in reality it is not.

Clients have been brain washed by years of per diem pricing to believe it is the best if not the only approach to pricing. They are convinced that they understand this per diem rates for attorneys, accountants, consultants and other similar service organizations and even when they don’t understand them they are comfortable with them.

Then there is the problem of when the result appears easy from the outside. It is best characterized by a story that I have heard a number of times (and in many flavors) over the years. It is the story of a ship owner who has ongoing problems with his steam engine. He has a number of experts come in to look at the problem; each of them tries but fails to solve it. Then the owner hears of an engineer, sort of a miracle worker with steam engines. The owner promises to pay anything to get the engine running well. The engineer comes to the ship looks around listens to various things as the steam engine tries to run.  The engineer then takes out a small hammer, walks over to a pipe, gives the pipe a couple of taps. Miraculously, the steam engine begins to run well. The owner is pleased and asks how much he owes. The engineer says £50,000 (this is in the early 1900s). The owner is astounded and asks for an itemized bill. The engineer scribbles on a scrap of paper: “Tap with hammer £1.00; Knowing where to tap £49,999”. The engineer hands the paper to the owner, who then smiles and hands over the money.

In the service business very often it is not the amount of work that you put in, but having the knowledge to put to work and how to apply it. Works best for projects that have high value that can be easily identified. It also works best in situations where the client and service provider have built a strong relationship.

Other Pricing Models

There are numerous other pricing models available, both fixed price and variable price. It is also common to see combinations of different pricing models (e.g. per diem plus performance). I have found no one pricing model that works for all types of service and in all situations. Smaller service providers will often have more flexibility in their pricing model than larger providers. Larger service providers will more often do strict per diem pricing, though they are more likely to be able to absorb more risk, as such are in a better position to offer terms that are performance and value based.

Other Considerations in Pricing and Billing

It is almost never a good idea to have a project completely back end loaded. It is not just the risk involved with the client not being able to pay or disputing the payment. It is also the commitment of the client during the engagement. When there is nothing at risk it is ever so easy to miss meetings, be late on delivery of needed materials and information. The service provider may abandon the project if they feel that they will not see the payback within a reasonable time.

My pricing methods

I have a flexible pricing model. I prefer to do projects on value pricing. I believe that this gives the most value for money for both me and my client. I guarantee my work, so that I will generally continue to work with the client until they are satisfied with the result. Since the fees are fixed based on the value provided the client need not worry about “what is it going to cost” – they already know.

I give a 10% discount if the invoice is paid in full before any work begins. Otherwise, I can arrange a payment schedule on milestones. I will also do blended pricing combining a per diem rate with equity. This allows the client to reduce the upfront cost while giving me the opportunity to participate in the ongoing success that is generated through my work with the client. Normally I will accept around 30% of the payment up front in cash and then take 75-85% in equity.

You are now thinking “Hold on- that is more than 100%?” Blended or delayed payments do have a price, that price is a risk premium. Since I am asked to take more risk and lower return up front, I expect that my acceptance of risk is repaid through a risk premium. Lastly, I will do work on a per diem basis. In this model, I give discounts for engagements that go on for more than a week and I also give discounts for upfront payments (based on estimates).

In any per diem arrangement, I bill every 2 weeks with a 15 day payment window. While this does create a bit more work for me, it keeps each bill low for the client (which is important for startups and small businesses) and it ensures that any discrepancies are attended to early.

Please do not ask me to work on a performance only or results only project or any other payment scheme that is fully back end loaded (payment only upon completion). I do not feel that this is ever in the best interest of my client or our relationship. It may seem like a good deal up front. However, my experience (very painful) it is not. The times when I have done it, I have voluntarily walked away from the client in the end – even when the project was “successful”. The process has so damaged the relationship that I would rather turn away the client than to risk the relationship.

My ultimate aim is to give the client exceptional value for money and to be fairly compensated for the value that I provide for the client.

John Harwell

John is an independent management and company advisor working with small and medium companies to identify, develop, communicate and execute growth strategies.

Copyright © 2007 John Harwell. All rights reserved. No reproduction, copying or transmission of any part of this publication may be made without prior written permission. John Harwell has asserted his right to be identified as the author of this work, in accordance with the Copyright, Designs and Patents Act, 1998.

Disclaimer: The author and publisher assume no responsibility or liability for errors or omissions, or for damages caused from the use of the contents of this publication. We are in no way endorsing any of the resources referenced within this publication.

DIFFERENCES BETWEEN PER DIEM, PERFORMANCE, PROJECT AND VALUE PRICING

Pricing

Pricing methodologies are extremely important to a business. Here I will discuss some of the more common service pricing structures.

Per Diem Pricing

Most service organizations work on a charge per unit of time, by the hour, day or week. This type of charging mechanism was popularized by the large accounting firms around the middle of the 1900s for consulting activities.

It has advantages to the service provider in that it is easy to do the billing. Also if the client changes the scope, direction or resource investment of a project there is little down side for the service provider. While there may be estimates and occasionally caps, typically whatever the service provider works is what is charged out. Since this is the most customary style of pricing, clients believe they understand it quite well and even if they don’t they are usually comfortable with it.

The downside for the client is that there are no built in incentives for the service provider to improve processes, get work done early, etc. There is an old adage that if you see two painters working on different houses, you can figure out which one is being paid by the hour or by the time spent, they will be the one working the slowest :)! This model does have a downside for the service provider when there is a need to interact with the client to gather information and understanding. In this situation, the client may spend too much time looking at the clock and try to hurry things along to reduce the cost. The client is incented to skimp on giving full information or assistance because they perceive that this is costing them money – the meter is ticking. This is not in the best interest of either the client or the service provider.

One particular quirk of per diem pricing is - what is the unit of charge? In copywriting it is often per word, in accounting and legal it is per hour, in consulting it is per hour or per day. The challenge that I see is when does the provider charge? In the case of a copywriter – is “a” a word? Is “supercalifragilisticexpialidocious” one word? One of my all time favorites “notwithstanding” it is a single word but it is made up of 3 words, should it be one or 3? Punctuation can have dramatic affects on the meaning of a phrase or sentence - is a coma a word? If a word does not go into final copy – do I have to pay for it? In time based billing – 60 minutes is an hour, 120 minutes is 2 hours - but is 61 minutes 1 hour or 2? Mathematically you could argue that 89 minutes is 1 hour and 90 minutes is 2 hours but is that fair? And who is it fair to? If I am talking to a provider about the weather how his or her family is doing - do I pay for that?

Per Diem pricing works best for short duration and standard types of projects that are well understood by both the client and the service provider. The precise terms and levels of pricing should be communicated in writing in order to limit disagreements over the resulting price. More information on how service providers can miss-use per diem pricing.

Performance Pricing

In performance based pricing, the service provider charges based on performance against some preset goals. This works best in areas such as revenue improvements, cost cutting, etc. For the service provider there must be a high probability that they will achieve at least the minimum level of performance and the pricing of the project must give them a reasonable return at that minimum level. In addition, payment is normally made AFTER the performance gain (or cost cut) is achieved.

The advantages for the client are that they normally do not pay until the performance is obtained. There may be retainer fees or other expenses which are paid along the way. This ensures that only those service providers who meet their performance expectations are paid. In essence the client gets free work until the goals are reached. The downside for the client is that most performance based engagements have no upside cap, so the charges can be quite high if the service provider sand bags the estimations. The service provider may also lose interest if results are not coming in, in which case the client may have a partially finished engagement that will need to be restarted. The principal advantage for the service provider is the unlimited upside potential that most performance based engagements provide. If the engagement has a quick enough turn around on performance it can be a great way to get into the door of a new client or do something for an existing client who is short on cash.

The downsides are many. Writing the service definition has to be undertaken carefully. If the client falls short on providing the necessary attention and resources to the project or makes modifications along the way, the project can quickly get out of hand. This type of client reaction is most common when the project is not well defined or is of long duration. The principal way for a service provider to protect themselves in this situation is to have severe penalties for client changes or cancellation. This makes it more attractive for the client to finish the project as originally designed rather than to cancel or change. Works best for projects that are short duration and have a well understood performance component.

Project Pricing

Project pricing is often compared to or thought of as value pricing. In my opinion, it is nowhere near. Project or solution pricing is more of a bundled approach to pricing. To do this the provider estimates the amount of work that will go into a particular project or solution. They will then often add some adjustments to factor in certain unknowns to ensure that they can do the project profitably. This then is the project price. Project based pricing is often onetime payment and somewhat fixed, there are often very strict clauses for changes. Changes outside the original scope of the project are then billed at some hourly rate. Frequently, it is the providers reading of the offer that drives what goes in as a change or not. I recently had the occasion to have my website redesigned. The initial approach was to take my existing website and make the modifications from there. At the recommendation of the team doing the changes, I decided that using a totally new template would be a better approach. When I accepted their recommendation, I was charged for the “lost” work. This left me with a bit of a sour taste in my mouth, since I accepted their recommendation – I was paying a penalty.

Value based Pricing

Value based pricing is where the client and service provider determine the value of the overall project to the client. Then the charge is based on a factor of that value (normally between 2 and 20 gearing ratio). You might ask how that is determined. Let me give an example: my clients consistently tell me that by working with me they accelerate their growth by 6 to 9 months at a minimum. I ask them how much revenue they would expect per year once their growth plan is in place. We would then agree on a gearing factor upon which I am paid. So if the revenue projections 1 year out are 1M Chf per year, since working with me accelerates their time to value by six months of that would be 500K Chf, if we applied a gearing factor of 5 the client would pay me 100K Chf (500K/5). This charge would apply regardless of how much time I invested in getting the client to realize the gain. It could be 2 minutes or 2 months or 2 years.

 The advantages for the client are that they know exactly what the project cost will be and what value project will bring. Often times the value based project comes with a guarantee of some sort. This helps because the service provider will continue to stay involved until the value is achieved. Also, many service providers that use value based pricing will give discounts for upfront payments. The biggest downside is specifying the project and getting the value outlined and agreeing on the gearing factor. The advantages for the service provider are that the project is well specified upfront, the revenue is well known and often times prepaid so the hassles of billing are taken care of. The client also does not look at the clock when they should be sharing information or providing guidance to the service provider, so work can progress well increasing the probability of success. The downside, similar to the performance based pay scenario, is that the project can get changed or cancelled; there can also be issues with getting the right resources assigned internally to the client. The service agreement needs to be carefully written to cover these situations. This all sounds quite easy, but in reality it is not.

Clients have been brain washed by years of per diem pricing to believe it is the best if not the only approach to pricing. They are convinced that they understand this per diem rates for attorneys, accountants, consultants and other similar service organizations and even when they don’t understand them they are comfortable with them.

Then there is the problem of when the result appears easy from the outside. It is best characterized by a story that I have heard a number of times (and in many flavors) over the years. It is the story of a ship owner who has ongoing problems with his steam engine. He has a number of experts come in to look at the problem; each of them tries but fails to solve it. Then the owner hears of an engineer, sort of a miracle worker with steam engines. The owner promises to pay anything to get the engine running well. The engineer comes to the ship looks around listens to various things as the steam engine tries to run.  The engineer then takes out a small hammer, walks over to a pipe, gives the pipe a couple of taps. Miraculously, the steam engine begins to run well. The owner is pleased and asks how much he owes. The engineer says £50,000 (this is in the early 1900s). The owner is astounded and asks for an itemized bill. The engineer scribbles on a scrap of paper: “Tap with hammer £1.00; Knowing where to tap £49,999”. The engineer hands the paper to the owner, who then smiles and hands over the money.

In the service business very often it is not the amount of work that you put in, but having the knowledge to put to work and how to apply it. Works best for projects that have high value that can be easily identified. It also works best in situations where the client and service provider have built a strong relationship.

Other Pricing Models

There are numerous other pricing models available, both fixed price and variable price. It is also common to see combinations of different pricing models (e.g. per diem plus performance). I have found no one pricing model that works for all types of service and in all situations. Smaller service providers will often have more flexibility in their pricing model than larger providers. Larger service providers will more often do strict per diem pricing, though they are more likely to be able to absorb more risk, as such are in a better position to offer terms that are performance and value based.

Other Considerations in Pricing and Billing

It is almost never a good idea to have a project completely back end loaded. It is not just the risk involved with the client not being able to pay or disputing the payment. It is also the commitment of the client during the engagement. When there is nothing at risk it is ever so easy to miss meetings, be late on delivery of needed materials and information. The service provider may abandon the project if they feel that they will not see the payback within a reasonable time.

My pricing methods

I have a flexible pricing model. I prefer to do projects on value pricing. I believe that this gives the most value for money for both me and my client. I guarantee my work, so that I will generally continue to work with the client until they are satisfied with the result. Since the fees are fixed based on the value provided the client need not worry about “what is it going to cost” – they already know.

I give a 10% discount if the invoice is paid in full before any work begins. Otherwise, I can arrange a payment schedule on milestones. I will also do blended pricing combining a per diem rate with equity. This allows the client to reduce the upfront cost while giving me the opportunity to participate in the ongoing success that is generated through my work with the client. Normally I will accept around 30% of the payment up front in cash and then take 75-85% in equity.

You are now thinking “Hold on- that is more than 100%?” Blended or delayed payments do have a price, that price is a risk premium. Since I am asked to take more risk and lower return up front, I expect that my acceptance of risk is repaid through a risk premium. Lastly, I will do work on a per diem basis. In this model, I give discounts for engagements that go on for more than a week and I also give discounts for upfront payments (based on estimates).

In any per diem arrangement, I bill every 2 weeks with a 15 day payment window. While this does create a bit more work for me, it keeps each bill low for the client (which is important for startups and small businesses) and it ensures that any discrepancies are attended to early.

Please do not ask me to work on a performance only or results only project or any other payment scheme that is fully back end loaded (payment only upon completion). I do not feel that this is ever in the best interest of my client or our relationship. It may seem like a good deal up front. However, my experience (very painful) it is not. The times when I have done it, I have voluntarily walked away from the client in the end – even when the project was “successful”. The process has so damaged the relationship that I would rather turn away the client than to risk the relationship.

My ultimate aim is to give the client exceptional value for money and to be fairly compensated for the value that I provide for the client.

John Harwell

John is an independent management and company advisor working with small and medium companies to identify, develop, communicate and execute growth strategies.

Copyright © 2007 John Harwell. All rights reserved. No reproduction, copying or transmission of any part of this publication may be made without prior written permission. John Harwell has asserted his right to be identified as the author of this work, in accordance with the Copyright, Designs and Patents Act, 1998.

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