Organization and Budget

Considerations for Entering Foreign

Markets in the Software Industry

Whitepaper from TBK Consult

Author
Hans Peter Bech, M.Sc. (econ)

 Hans Peter Bech 2014

First edition
Unless otherwise indicated, Hans Peter Bech copyrights all materials on these pages. All rights
reserved. No part of these pages, either text or images may be used for any purpose other than
personal use. Therefore, reproduction, modification, storage in a retrieval system or retransmission,
in any form or by any means, electronic, mechanical or otherwise, for reasons other than
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The Business Model Canvas Framework is made available by Business Model Foundry
GmbH, Kalkbreitestrasse 71, CH-8003 Zrich, Switzerland.
The copyright of other frameworks and information sources mentioned on this whitepaper
belong to the proprietor.
Published by TBK Publishing (a division of TBK Consult Holding ApS)
Denmark
CVR: DK31935741
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ISBN: 978-87-93116-12-2
TBK-WIPA-020

Organization and Budget Considerations for Entering Foreign Markets in the Software Industry

Table of contents:
Target audience

Abstract

Author

Acknowledgements

The Opportunity and the Necessity

Web Based Low Touch Business Models

On Location High Touch Business Models

Getting Started

From a Direct to an Indirect Channel Approach

The Organizational Requirements

Leading the Globalization Effort
Product Management
Marketing
Support
Training

Investment Requirements
Return on Investment
Higher Valuations

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About the author

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Organization and Budget Considerations for Entering Foreign Markets in the Software Industry

Targeted audience

Abstract

The target audience for this whitepaper is the board of directors,

the CEO and the sales and marketing executives of software
driven companies1 with ambitions for achieving global market
leadership.

This whitepaper is written for software executives preparing for

international expansion. It addresses getting those important first
steps right the first time ensuring that the probability of success is
as high as possible.
This whitepaper discuss the organizational and fiscal budget
requirements for software companies embarking on international
business endeavours.
The whitepaper is specifically written for high touch business
models where proximity to customers is important and where the
value chain needs sales people in the field managing the sales
process and the customers purchase decision-making processes.
The whitepaper initially provides recommendations for how
software companies, who have a direct channel approach in
their domestic market and want to introduce an indirect channel
approach overseas, can organize and manage the two different Goto-Market approaches effectively.
The whitepaper recommends engaging a senior executive to head
and initially also take personal responsibility for building the first
international setups. As software is invisible the appearance and
behaviour of the companys representative forms the potential
customers and business partners perception of the professionalism
and quality of the company and its products. In todays busy
environment, with a multitude of choices, first impressions can be
very hard to change and we may not get a second chance.

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Finally the whitepaper makes organizational recommendations

and discusses the investment requirements for embarking on
international expansion.

Author

Hans Peter Bech, M.Sc. (econ.)

Acknowledgements

Design and lay-out: Sordako O, Tallinn, Estonia,

www.kompot.ee
Proof reading: Emma Crabtree, ecr@tbkconsult.com
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Independent Software Vendors (ISVs)

Organization and Budget Considerations for Entering Foreign Markets in the Software Industry

The Opportunity
and
the Necessity

Most software based business models have tremendous global

potential.
The reasons are many and include dramatic economy of scale
advantages, very simple value chains and opportunities arising
from the rapid changes in the business model environment
especially in technology trends.

While many industries enjoy natural barriers to entry making it

difficult for insurgents to break through, the software industry
has a completely different landscape.

Web Based Low

Touch Business
Models

At one end of the spectrum we have the web based business

models with simple value propositions and no requirements
for localization (other than the locale, the language of the user
interface and the support documentation).
Such business models can be globalized without the need for
setting up direct or indirect operations in foreign countries.

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Even business models based on using call centres (inbound

and outbound) can globalize without the immediate need for
dedicated operations in each and every country. Examples of
such business models are TrustPilot, Basecamp, SurveyMonkey,
MailChimp, Atlassian, Zendesk and Podio.

The opportunity of managing and controlling a global

operation from one or just a few offices carry immense
advantages.

Organization and Budget Considerations for Entering Foreign Markets in the Software Industry

On Location
High Touch
Business Models

At the other end of the spectrum we have software with

substantial requirements for localization, where the proximity
to the customers is crucial and where the solutions require
substantial customization and implementation efforts. In such
business models there is a need for operational resources on
the ground preparing and maintaining the local version of the
product, driving the value chain including awareness generation,
lead generation, sales, implementation and support.
While such business models may still have enormous global
potential and need global coverage for long-term survival, they
are much harder to get started internationally.
Examples of such business models are actually dominating the
software industry. However, the names may not be so familiar
since the companies are operating in the B2B market and
are focused on vertical or horizontal market segments. This
whitepaper is exclusively dealing with On Location High Touch
Business Models!

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Getting Started

In our whitepaper Entering Foreign Markets in the Software

Industry2 we present an approach for determining the
changes we will face when moving outside the comfort of our
domestic market. We conclude that the fundamental design
or architecture of the business model should not change much.
However, introducing and managing our business model in
foreign markets obviously requires new activities and
additional key resources that will incur cost (investments).

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Organization and Budget Considerations for Entering Foreign Markets in the Software Industry

In this context the big questions are:

Which organizational changes should we make?

How much should we be prepared to invest?

When can we expect a return on the investment?

What are the critical success factors?

How do we mitigate the risk?

While no two companies are identical I do believe there are some

generic guidelines that most software companies can benefit
from following.

From a Direct
to an Indirect
Channel
Approach

Most high touch software companies start out in their domestic

market based on a business model with a direct channel
approach. Such companies control the entire value chain
and take responsibility for building Awareness, spotting and
activating Interest, developing Desire and securing Action
from the potential customer base. They also take care of
implementation, customization and ongoing support.

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Figure : Sample High Touch Software Value Chain

As these companies embark on an international endeavor they
often shift to a business model based on an indirect approach
wishing to delegate some or all non-product related activities to
independent channel partners in the new markets.

Organization and Budget Considerations for Entering Foreign Markets in the Software Industry

In our whitepaper The Software Partner Channel in a Business

Model Context3 we explain how this shift requires complete
re-engineering of the business model. Shifting from a direct
approach to an indirect approach has a fundamental impact on
the entire business model.
In general it is not recommended to operate two different
business models within the same organization. The conflicts
between the two channel approaches will escalate and
increasingly absorb critical management resources.
However, a software company with a direct channel approach
cannot afford to change overnight.
My recommendation, to software companies that want to
introduce an indirect channel approach for their international
business while maintaining a direct channel approach for their
domestic business, is to split the company in to two divisions.

The Customer
Division

All activities related to what the software company will leave

to resellers in new markets should be organized in a separate
Customer Division. Thus, the Customer Division is responsible
for the exact same activities in the domestic market, as the
independent channel partners will be in the foreign markets.
The Customer Division is operating at arms length just as any
other independent channel partner and has its own independent
management responsible for its own P&L.
The Customer Division should not be located on the same
premises as the Product Division and it should not report to the
CEO of the product division, but to a board of directors which
may overlap with the board of directors of the Product Division4.

The Product
Division
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(The Headquarters)

All activities associated with the global strategy, with the

products and with recruiting and managing independent
channel partners are organized in the Product Division. The
Product Division manages the Customer Division through the
exact same principles that they would manage any other reseller
relationship.

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The software company may consider divesting the Customer Division
as soon as a reasonable evaluation can be established.

Organization and Budget Considerations for Entering Foreign Markets in the Software Industry

While this construction may appear expensive and bureaucratic

at first glance it does force the software company to carefully
consider the division of labor between itself and its resellers.
Implementing these changes at home first will provide
immediate response and help build a logical and productive
framework for scaling the operation globally.

The Organizational
Requirements

The rest of this whitepaper assumes that the software company

is operating the same business model domestically and abroad
even if it is just using the divisional approach as described above.

Leading the
Globalization Effort

Irrespective of whether the business model is based on a direct

or an indirect channel approach, the responsibility for the global
expansion must be assigned to an experienced senior executive
who has no other responsibilities. He or she should not be directly
involved with domestic activities and the success criteria should
be primarily related to achieving the international objectives.
The person should report to the CEO and be part of the Product
Divisions executive team.
The person must have charisma, excellent business management
and communication skills and should be fluent in at least
English. The person shouldnt be too young.
As we move out into the world, the first impression of any
company is created by the first person we meet. If that person
is professional and well articulated we will assume that his
company is professional also. The opposite is also the case. We
assume that unprofessional people represent unprofessional
companies.

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The person should take personal action and responsibility for

building the first international setups ensuring direct learning
from the projects.

Organization and Budget Considerations for Entering Foreign Markets in the Software Industry

Product Management

Scaling internationally requires the introduction of structure and

processes. Creating an interface between the market feedback/
requirements and the R&D efforts should be supported by the
introduction of a Software Product Management function. The
Software Product Manager (and her staff) will be responsible for
maximizing the global value of the product over its lifetime.
Localization is very often a requirement in the software
industry. Depending on the competitive situation at the
destination the investment in meeting local legal and de facto
market requirements may be needed before effective market
penetration can commence. The Software Product Manager will
be responsible for maintaining the requirement specifications
while the R&D department must deliver the product5. The IP6
of the full product including localizations should reside with the
software company.
The Software Product Manager will be responsible for managing
the product strategy, the product roadmap and the product
release plan7.

Marketing

The marketing function should be responsible for all frameworks,

programs and activities that are not related to the individual
sales or partner situation. When using an indirect channel
approach the responsibility for developing and maintaining the
partner program should reside with the marketing department.
If the Product Division is responsible for brand building and lead
generation, then these activities should also be managed by the
Marketing function.

Support

Splitting the organization and introducing international

operations will typically also require a reorganization of the
customer support function. If the 1st line of support resides
with the independent channel partners, then the headquarters
must introduce a 2nd line of support and a 3rd line of support
(R&D). An appropriate IT system must be introduced to manage
the support process and ensure effective communication with
independent channel partners and customers.

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Localization should not be left to independent channel partners.

Localization should be an integrated part of the core product and
should be included on the price list.
6
IP: Intellectual Property
7
TBK Consult offers a 3-day training program for software product
managers including ISPMA certification.

Organization and Budget Considerations for Entering Foreign Markets in the Software Industry

Training

Scaling globally requires structured approaches to the training

of new partners and of new staff at current partners. As the
training must address all levels in the value chain (marketing,
sales, pre-sales, implementation and support) all functional
departments must be involved in preparing and delivering the
training.

Investment
Requirements

How much money is required to get a globalization project

started?

These are the minimum requirements:

xx A full time senior business executive the project leader.
xx A full time technical resource person with excellent
communication skills acting as pre-sales support,
providing
technical training and in-field support.
This person can also act as part-time software product
manager until this function can be filled with a dedicated
person.
xx A full time marketing person responsible for multilanguage web sites, presentations, sales tools, partner
program development, partner marketing support and
other market communication activities.
xx A full time internal sales resource organizing the back
office and maintaining communication on behalf of the
project leader.
xx A budget for design, proof reading, legal advice, PR and
other marketing and administrative tasks for which you
do not have the resources in-house.

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xx A budget for traveling as required.

Starting a globalization project with less than an annual budget

of -1 M will be very difficult. Most software companies will
invest much more to accelerate the growth and some will invest
much less to minimize risk. You can compare which of those two
groups are most successful.

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Organization and Budget Considerations for Entering Foreign Markets in the Software Industry

Return on Investment

When can we expect return on investment?

No one can answer this question even when faced with a

specific situation.
Expecting a reasonable return in less than three years is not
realistic. It may take four or five years before we see that our
foreign setups are producing solid and predictable contributions.
Thus, embarking on an international growth project with a high
touch business model requires a solid position in the domestic
market to provide the ongoing funding required.

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Higher Valuations

When the international break-through has happened the

valuation of our company will increase dramatically. The
valuation of a company demonstrating global potential is
obviously higher than the valuation of companies that have only
demonstrated the capability of penetrating a single market8.

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Unless that market is the USA representing close to 38% of the global
demand for software and software related services.

Organization and Budget Considerations for Entering Foreign Markets in the Software Industry

About the author

Hans Peter Bech has been engaged with international sales and
marketing operations in the software industry for more than 30
years.
Hans Peter was instrumental in building the international
business platforms for companies such as Dataco (now Intel),
Mercante, Dansk Data Elektronik (now CSC), RE Technology
(now Barco), and Damgaard/Navision (now Microsoft).
As a management consultant Hans Peter has been
consulting on internationalization to companies
Microsoft, Danfoss, Proekspert, Jeeves Information
eMailSignature, SoftScan (now Symatec), Netop, EG
Scandihealth and Secunia.

providing
such as
Systems,
A/S, CSC

Hans Peter is an advisor to IMMIB, the Turkish ICT Exporters

Association. He also lectures in internationalization at the
Sabanci University in Istanbul, Turkey.
Hans Peter is the author of several whitepapers on
internationalization in the software industry and he frequently
writes articles on the subject.
He started his career as a management consultant in 2003
and founded TBK Consult in 2007. Since then he has built the
company to its present position with 25 senior consultants in 16
countries.
Hans Peter oversees the development of TBK Consult as well
as performs management consulting assignments for selected
clients.
Hans Peter holds a M.Sc. in macroeconomics and political science
from the University of Copenhagen. He speaks Danish, English
and German and is a certified ValuePerform, ValuePartner and
Business Model Generation consultant.

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More about Hans Peter Bech

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