The Roadmap to Successful Ventures in the Middle East - No 10
Rolling Out Innovative Business Structures to Succeed
By Hugh Fraser, managing partner
Welcome to my weekly note with some personal views on what does/does not work when structuring business ventures in the Middle East region.
My tenth and final theme is “Rolling Out Innovative Business Structures to Succeed.” There are six conventional business models used to internationalise: direct export sales; agencies, distributorships & licensing; contractual collaborations; branch or subsidiary formation; equity joint ventures and acquisitions. The first three routes are rarely fit for purpose when dealing with advanced energy technology and know-how businesses where clients and ICV policies demand local presence in depth on the ground. The second three models involve a significant commitment of investment and a high degree of risk.
This series has explored many of the key themes for successful internationalisation to the Middle East and the key reasons why ventures can fail. It has become increasing obvious to me that the time has come for an intermediate business model which sits between the options of the first three grouping and the options of the second three grouping and much time has been committed in the last 24 months to define and develop that concept to readiness for launch. We have termed it the bridgehead cluster venture or BCV for short.
The BCV model has been built on the following five key principles:
- Strength and Safety in Numbers: the concept envisages a collaboration between 5 to 10 like minded companies, all of whom are ambitious to penetrate the relevant target and who have synergetic and non-competitive products and/or services. This combination will present much more interesting and attractive collective offering of technologies to the end clients and to local partners and will catch their attention more easily than an SME flying solo. The collaboration benefits the participants by sharing costs and preliminary estimates suggest that a US$500,000 initial annual cost to a solo effort can be achieved for less than 10-15% of that amount with a monthly cash commitment of low as US$5,000, thereby opening a door which might otherwise be closed to SMEs. However, the sharing of infrastructure costs will not compromise the principle of operational independence and sole operational risk.
- Piggybacking towards Full Local Presence: the second principle is that the first 12-24 months will see the maximum utilisation of the selected local partner’s trade licence, vendor registrations and resources to fast track the eligibility of the participants towards bids and contracts, but with the statement of the objective being to evolve the venture into a registered and licensed legal entity as localisation/ICV rules increasingly will demand. The key objective here is to minimise costs and to commit to additional essential costs in line with an incoming revenues stream.
- Full Time Local Presence: The third factor is a commitment to the deployment of a proven full-time locally based general manager to represent the cohort. This will stand alongside a proven full-time local partner resource base which is remunerated on a partial fixed fee and incentive fee basis as opposed to the conventional agency sales commission (which serves a major disincentive in the early phases). This on the ground team must be supported by fly-in dedicated supported of specialist business development and operational personnel from the participants. These features seek to go a long way to removing the inadequacies of the conventional agency or distributorship model. Likewise, the BCV model removes the time and risk associated with local partner and general manager selection typically experienced by a solo venture.
- Affordability, Commitment and Freedom: In order to make the economics of the BCV fly and stay in the air the participants will have to commit to fund the piggyback 12-24 months period by affordable monthly contributions but thereafter each participant will have the individual choice to move on to the BCV fully registered and licensed venture or to withdraw from the market or to move on to pursue an alternative business initiative on its own.
- Driven by Goals and Objectives: The BCV model is designed to focus on companies who have the ability and ability to reach US$5.0m of sustainable annual gross revenues in the target market within 3 to 5 years, and to kick start the initial US$1.5m to US$2.0m of initial (bridgehead) gross revenues within the first 12-24 months piggybacking period. It is therefore essential that a rigorous market opportunities review will be conducted for each participant before it enters a BCV. The maths is simple: if a 5 to 10 BCV cohort can reach US$5.0m of sustainable annual gross revenues a clustered US$25m to US$50m business will have been built. This will move the needle from its current position.