Global Expansion Strategy Viable For Many
January 29, 2010
Case categories include: International Business
By Robert Sher
Many CEOs will take a deep breath before even thinking about putting down a permanent footprint overseas. For years, global operations have been the province of the large firm, but this is changing. Alliance member Raju Reddy, CEO of Sierra Atlantic, stepped into China in August of 2007 without any major hiccups, and in two years has doubled the size of his China team, supporting global sales. Moreover, he is generating significant revenues from sales within China. Sierra Atlantic was only a $56 million revenue firm at that time.
Sierra Atlantic is a software development firm that in 1994 partnered with Oracle on integration work. Having a footprint in India was a prerequisite for growth, and by 1999 they had operations in India. As Oracle’s go-to partner for integration, their work was global by nature.
Selection Criteria for the Region
Starting in 2002, Raju began looking for ways to enter China. There were two key strategic reasons. First, China had both supply side and demand side opportunities. China has many talented engineers and software developers, and a development center there would help staff an ever increasing number of projects, helping him keep up with demand. In addition, Raju saw the growth in opportunity within China to execute projects for Chinese companies. Second, as more and more of the integrations for Western-headquartered firms were taking place in China, Sierra Atlantic was expected to have a presence there as well.
Rather than start from scratch, Raju thought an acquisition might be the best route. He diligently reviewed opportunities, but kept his standards high. His firm made acquisitions in 2004 and 2006, both in Western countries. Having two under his belt, he knew what he was looking for.
A Global Culture
The firm to be acquired must have a global culture. That meant that Raju was not interested in a firm with all locally born, raised, and trained people. The clash in practices, outlooks, values and more, not to mention the lack of comfort with foreigners, was too risky. Instead, he looked for firms that were already doing business in the developed world, with some management that had been trained in the U.S., and a mix of nationalities within the firm. This mix, and the tolerance and openness it required, was a much better match for Sierra Atlantic. At Sierra Atlantic, it was the norm to have five nationalities sitting around the table and a few more nationalities on conference screens. Cultural differences between people were automatically accepted at his firm, and any acquired company had to fit right in.
Scale proves Competence
Raju also wanted to find a firm that had grown to a certain scale, with Western, reference able customers. This was proof that they were doing something right, and that the business was sustainable. Acquisition targets in the home country are difficult to assess and to be confident in the “story”, but it is many times more difficult when the firm is overseas, and still harder in emerging countries. But if they were good enough to sell and satisfy a reputable Western company, confidence in the firm’s management and its future would be enhanced. If they’ve done it enough times to build a sizeable firm, their success in the future is much more likely.
In Raju’s case, most of his customers were based in U.S. or Europe. So he was particularly interested in a firm with a predominance of Western clientele. This would assure that a development center would more seamlessly be able to serve Sierra Atlantic customers, and would understand the West’s expectations of support and quality. Another criteria was that the acquired firm’s capabilities would either deepen the skill sets in the highest demand, or add adjacencies to the service offerings.
Lastly, he looked for a strong in-country management team. They would know the strengths and weaknesses of the team, and would be on-site, providing continuity and local management.
Five years after initial exploration, he found ArrAy Inc. The company was headquartered in Boston, but all of its development work done in Guangzhou and Shanghai. While they were just 12% of the size of Sierra Atlantic as a whole, they were equal in size to Sierra Atlantic’s outsourced product development unit. They fit all the desired characteristics, and having a U.S.-based headquarters meant that the communication patterns between the Chinese development center and headquarters were already in place.
It became clear that ArrAy had a good management team and their president was excellent, and within four months, the president was given responsibility for both firm’s outsourced product development business units. His Sierra Atlantic counterpart was reassigned. After a year of settling in, production volume began rising, and the in-China sales initiative began to bear fruit. This past year, sales to emerging countries are up 55%, with China in the lead. Sierra Atlantic is closing in on the $100 million revenue mark.
Sierra Atlantic’s entry into China was well chosen and well executed. But it must be noted that Raju’s firm was already multi-national, and had developed a culture and management team that understood how to manage a global operation. He had a head start over many firms of equal size, but purely domestic.
Small and mid-sized companies don’t need to become multi-national all on their own. Increasingly, there are service firms that small to mid-sized firms can turn to for support and guidance. Alliance member Kaushal Chokshi, Chairman of Quickstart Global says, “The era of the micro-multinational has begun.” His firm caters to companies from startups to Fortune 1000 firms, helping companies get a cost-effective footprint in ten different locations outside the U.S.
It will always be wise to take a deep breath and think deeply before expanding abroad. But Sierra Atlantic’s experience shows that given the right circumstances and criteria, going global, even for a small firm, can become a strong driver for growth.
Robert Sher is principal of CEO to CEO, specializing in assisting CEOs and business leaders as they navigate critical passages. He is the author of The Feel of the Deal; How I Built a Business through Acquisitions. He may be reached at www.ceotoceo.biz