Going Global with Your Small Business

As domestic spending by the Department of Defense and other federal agencies decreases, more small businesses are turning their attention abroad, a decision, which, if approached correctly, can be very beneficial, but is also one that must be well thought out, well researched, and approached with a good amount of patience.

  

By Michael Sedge, M.SAME 

  


 

Establishing an international operation often means stepping out of one’s comfort zone, where rules and regulations are new and different. It means, in most cases, foreign languages, non-U.S. staffing and employee regulations, international curren­cies, corporate and business laws and tax policies that, on the surface, may appear to make little or no sense.

Over the past decade I have seen too many U.S. firms go after international opportunities with little or no idea what they were getting into. Most come with the attitude: “We are an American company working for the U.S. government, so we know how to do this.”

I dramatically disagree. Let’s take Italy, for example. A major construction company and Department of Defense (DOD) contractor approached me recently saying, “We are going after the DoDDS project at the U.S. Army base in Vicenza. We’ll get pricing from local sub-contractors, bid as prime, and then provide the management support.”

“No you won’t,” I told them. “It is much more complex than that. And you do not qualify.”

Rather than listen to my rational, they said, “In Afghanistan we do it this way, and it has worked for us. After all, it’s an American government contract.”

 

Going Global with Your Small Business

Soil boring in the Port of Djibouti for a NAVFAC host nation project. Most countries where DOD operates have Status of Forces Agreements in place, which often dictates the rules and regulations of U.S. contractors. PHOTOS COURTESY MICHAEL-BRUNO LLC


 

And therein, at least for Italy, Germany and many other countries, lies the problem. Foreign nations have begun “taking control” of projects that are designed and built by DOD, Overseas Building Operations, and other agencies. Traditionally, the U.S. government comes into a foreign country with promises of helping to grow local econ­omies and providing work for local firms. Then they award contracts to American firms that design a U.S.-type facility, bring in third-country national labor to build it, and hire American contractors to manage it.

This model nearly has run its course.

 In the case of Italy, the U.S. contrac­tor ultimately did not qualify for DOD competitions because it was not registered in the country, did not have a local, regis­tered partner, nor did it have the Società Organismi di Attestazione (SOA) certifi­cates required by Italian law to perform construction in the country. SOAs are provided by the Italian government based on past performance in various construc­tion sectors and can only be obtained if you are a registered, host nation company.

 

VALUE OF BEING INFORMED
During a recent presentation to military contractors, I demonstrated a slide with six countries—Brazil, China, Ethiopia, Italy, Niger and Paraguay—and asked the group which two, according to the World Bank’s list of growing nations, offered the best investment opportunities. About 50 percent selected Brazil and China. Others were a mix of Ethiopia, China and Italy.

In reality, GDPs of 2013 indicated that Paraguay, with 13.6 percent, far surpassed China (7.7 percent). Perhaps the best option is Ethiopia (10.4 percent). Despite its European location and historical charm, Italy came in a poor -1.9 percent, the worse showing of all. This illustrates there is much misconception among American firms as to which is the best locations for investment.

Granted, one cannot make a decision based on growth potential alone—but it is a good starting point. In 2007 we decided, at one of my firms, to expand our operation. Our U.S. small business had already set up a company in Europe and wanted to establish another based on the footprint of our key govern­ment clients as well as growth potential. We chose Djibouti. It was the East Africa home of Camp Lemonnier, then a contin­gency base for DOD. After discussing the future of Djibouti with Naval Facilities Engineering Command Europe, Africa, Southwest Asia (NAVFAC EURAFSWA) we were convinced that it would soon become a permanent installation because of its strategic location as well as the U.S. government’s plans for Africa expansion. Our decision has paid off.

Small businesses should first look at their core government customers domestically. Speak with them and their small business managers. Get their input on where their agency is headed. What will their foreign footprint be in the next two, five, and 10 years? Once you have targeted a country or two, speak with the U.S. Chamber of Commerce. They can provide informa­tion on foreign countries and put you into contact with the U.S. Embassy’s Economic and Commercial Officer, whose job it is to help grow American investment and business opportunities in their host nation.

Most foreign countries in which DOD is operating have Status of Forces Agreements (SoFA) in place. This is a critical document. It often dictates the rules and regulations of U.S. contractors within a specific country and how they are to operate. The Embassy’s Economic & Commercial Officer should be able to provide a copy of the local SoFA.

 

STEPPING STONE APPROACH
We were the first U.S. firm to establish a company in Djibouti and remain the only full-service A-E firm in the tiny East Africa nation. Being first led to a number of benefits, including my being asked by the U.S. Chamber of Commerce to establish and oversee the American Business Council of Djibouti. More than that, our choice to develop a long-term presence in Africa to support the U.S. government was a stepping stone to other opportunities.

We were brought into the $80 million Salt Investment Project, through a meeting set up by the U.S. Ambassador, to provide design, engineering, and construction management to support this mining operation. In addition, we are in talks with Istithmar World, a company of Dubai World, to support their efforts in Djibouti.

Utilize expansion with the U.S. govern­ment as a stepping stone into a foreign nation’s commercial market. Djibouti, for example, with a 5.0 percent GDP, is exceed­ing the United States in growth.


NAVFAC EURAFSWA project

The demolition of an aircraft hangar at Naval Support Activity Naples, Italy, was recognized as the NAVFAC EURAFSWA Safety Project of the Year.


 

COUNTRY-SPECIFIC/REGIONAL FOCUS
While one should focus their interna­tional efforts to a specific country, they should keep regional opportunities in mind. Our Djibouti office, for instance, acts as our East Africa hub. Our Bahrain office covers the Middle East region and our Naples loca­tion covers European operations.

By being a country-specific company with a regional focus, one is able to expand their opportunities while reducing overall operational costs.

Finding a good partner in your chosen country can be the key to your success. A good, in-country partner can be more beneficial than hiring lawyers, accountants and notaries. Why is this? If you research and select your partner(s) correctly, they can guide you through the legal and bureaucratic procedures of their country. A good example is the firm that planned to bid the DOD school project in Italy. Had they listened to us, we could have provided them with the steps necessary to go after this work: 1) find a host nation construction partner that has the required SOA certifications; 2) set up a company in Italy—and we could have guided them to the right lawyers, bankers, and notaries; 3) enter into a joint venture with the partner, that allows for them to be the managing partner; 4) register the new firm for govern­ment contracts; 5) bid; 6) win; 7) complete the work; and 8) submit the necessary documentation to the Italian government to obtain their own SOA certifications, which would position them to bid future contracts as a stand-alone prime.

A good local partner is one that offers complimentary, not competing services. As we are, primarily an A-E firm, it made sense to seek out foreign construction companies in the countries where we were considering expansion. We also went looking for firms that had been in business at least 20 years and that did not work in the U.S. federal market. This allowed us to bring something to them, in exchange for their guiding us through the host nation business hurdles.

Of course, one will ultimately require local support. In two of our expansion efforts, though, we ended up using the same lawyers, accountants, labor and tax consul­tants that were used by our local partner.

 

CONTRACTS THE INTERNATIONAL WAY
While DOD and other federal agency competitions follow a standard template, international competitions follow a some­what different set of rules. Some of these are to comply with SoFA in place with the host nation. Others are general rules applied to all worldwide competitions.

The first thing you will learn is that competitions issued from overseas locations and commands like the U.S. Army Corps of Engineers European District or NAVFAC EURAFSWA do not take into consideration the small business rules that are applied in the United States. The fact that you may be a disadvantaged, woman-owned small business gives you no advantage in international competitions. This is because providing such credit would put local firms at a disadvantage.

U.S. government contracts in foreign countries also will have clauses regarding host nation taxes, labor, corruption, and other issues that you will be required to comply with. Visit FedBizOps, search for government contracts in a foreign coun­try, review a few request-for-proposals and examine the clauses and conditions. This will set you on the right path in your research for expanding abroad.

  


 

Michael Sedge, M.SAME, is President, Michael- Bruno LLC; +39-081-578-5281, or michaelb@ mb-global.com.