The Roadmap to Successful Ventures in the Middle East - No 9
Isolating the Reasons for Failed Ventures
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 ninth and penultimate theme is “Isolating the Reasons for Why Ventures Fail”. It is easy to quote large market sizes and bidding opportunities in the Middle East which makes the region highly magnetic commercially, but it does have inherent challenges and risks which need to be overcome or at least mitigated. It is rarely, in my experience the reason for failure is isolated at the client’s products or services as these may have been already successfully commercialised in the North Sea, Gulf of Mexico or elsewhere.
Here are my Top 5 reasons from past experience as to why some ventures fail to launch successfully:
- Time and Money: The business establishment period and associated investment needed to succeed depends on the timelines associated with identifying and contracting with a solid local partner, conducting technology trials, deploying and acclimatising the management, business development and operational personnel, obtaining the relevant registrations and vendor approvals and the lead time in business development, submitting bids, arranging bonds, executing work and collecting first revenues. A three year “run up the hill” is not unusual and so companies expecting an early positive boost to cash generation may well become unstuck. A frequent error is to over-invest in fixed costs such as premises ahead of a clear- cut revenues stream and the rule of thumb is lever local partner and other established infrastructure in so far as possible in the early stages.
- Local Partner Selection: The most common reason for market failure in the region, in my experience, is the failure to deploy successfully with the right local partner or to allow working relationship to dissolve into lethargy or acrimony. The right local partner can provide first class intelligence and connectivity to market, steer the business through the vendor approval process and provide valuable in-country logistics and support especially in the crucial first years. But it has to be the right local partner, territory by territory, with the right win/win deal and the ongoing effort to maintain and develop the relationship which count.
- Management: A further reason for failure or underperformance is the wrong manager being deployed to lead the venture. The GM must be someone who has an in-depth and proven knowledge and experience of the business and the territory or the risk of failure is magnified. A solid manager from home base may well be a fish out water when deployed in region and the length of learning curve longer than the available investment funds can sustain. Likewise, the “professional ex-patriate” who has held many roles in the region with frequent changes may not have the staying power and commitment to the business which is needed. He must be also being willing and able to work with the local partner team as this combination is often demonstrably the key to success.
- Local Presence and Localisation: The region is notorious for being highly agnostic in dealing with business who do not have a committed local presence on the ground. Initial long- distance sales may get some penetration but experience tells that this will rarely development into a sustainable and growth business unless the long term local presence commitment can be demonstrated. This is being accentuated by recent localisation and in-country policy programmes which are pressurising the agency/distributorship model and driving business towards locally registered and licensed joint ventures.
- Credit Risks and Working Capital: Another common venture killer is bad experiences with payment issues. It can be tempting to allow the credit risk guard to be lowered in the hoping of penetrating the market but there is a regular flow of requests for assistance with non- payment or late payment challenges. The working capital cycle can be uncomfortably large and so having adequate resources to get round the wheel from the outset and to keep going round the wheel is essential.