Offshore options for international trade
Guy Rigby Tuesday, 02 August 2011.
If you’ve decided to set up overseas, there are a number of offshore business models to choose from. The one that’s right for your business will depend on your strategic goals, your reasons for entering the overseas market, the proposed location and the types of activities you intend to carry out.
Here are some of the options:
Offshore freelancing or employment
Using low-cost freelance staff to send work to can be beneficial, as can enabling your existing staff to work from wherever in the world they would prefer to be. The virtual office is now an established reality.
Businesses with diverse workforces may find that staff they employ in their primary location, and who they already know and trust, may want to return to their roots. This can often create opportunities for international expansion.
The outsourcing of IT development and support services to companies in India and other lower cost jurisdictions is typical of this model. An external supplier is chosen and contracted to carry out a project and is given responsibility for its delivery.
These arrangements can work well, but are not entirely without potential problems.
Using a third party supplier can mean that there is less buy-in, less flexibility and less control over important issues like timing and quality. There can also be concerns about the security of valuable IP.
Outsourcing can sometimes create a ‘them and us’ approach, with a lack of integration and responsiveness. Being a supplier is different to being part of a team.
Other factors can also come into play. For example, priorities can frequently change during projects, and managing those changes can be problematic within a process-driven, outsourced environment. Furthermore, when you outsource projects you still need to invest in training, communication and, in many cases, travel. When the project ends the training investment can be lost as the third party provider moves on to another project.
An alternative to offshore outsourcing is onshore outsourcing where you hire a domestically-based company which has a global team and which can pass on its own cost savings through competitive pricing. While the IP, control and training issues may still apply, communications may be somewhat easier to manage.
Under this model, your business enters into a joint venture (JV) with an established local company in the offshore location, allowing you to share ownership and take advantage of their local knowledge and experience. By choosing your JV partner wisely, this should reduce the risks of working in an unfamiliar territory as well as enabling you to tap in to your new partner’s existing supply or sales channels.
Pooling resources can be an excellent solution, but the trick is in finding the right joint venture partner and building appropriate levels of trust. Instinct will help you here, but proceed with caution and carry out detailed due diligence. It’s normally far easier to establish a relationship than to end it.
Similar to the joint venture model, a build-operate-transfer relationship is typically where an offshore supplier operates a dedicated centre for your business. Once it’s successful and established and certain conditions have been met, you can have the option to take over ownership and then run it yourself.
Many companies looking to cut costs through offshore operations simply set up their own operations, known as ‘captives’.
Setting up a branch or subsidiary facility on your own can require a significant investment of time and money. You’ll need to consider your preferred structure and then meet with local advisers, acquire and equip your premises, build your infrastructure and interview, recruit and train your staff.
Moving from a supply based arrangement to owning an offshore captive can often have fiscal consequences for your business. Ask your accountants about tax treaties and get their advice on esoteric but important issues like transfer pricing and thin capitalisation.
With this option, you pay a service provider to help you set up operations in suitable offshore locations. This scalable and quick solution is often appropriate for smaller, growing businesses.
The service provider can help you get to grips with the often complex aspects of working in another country, dealing with recruitment, premises, infrastructure, legal compliance, incorporation, HR and IT, and working with the local authorities. They can also help you to recruit staff.
For more established businesses, buying an existing company may be the preferred way to get a foothold in an overseas territory. In this case, you can acquire a ready-made infrastructure, with premises, equipment and staff, along with existing revenues and profits.
For further information about setting up overseas, contact Guy Rigby on 020 7131 8213.
Guy is an experienced chartered accountant and an entrepreneur. A natural and driven enthusiast, he built and sold his own accountancy firm, as well as pursuing other commercial interests. He has been a director and part owner of a number of different companies, including businesses in the IT, property, defence, manufacturing and retail sectors.
Guy joined Smith & Williamson in 2008 and leads the entrepreneurial services group. His day to day activities include advising entrepreneurs and their businesses and coordinating Smith & Williamson's activities in this increasingly important market.