Risk…Schmisk – How Sensible International Risk Management Works

We can’t export!  That’s too risky!

Admit it…you thought it if even if you haven’t said it.

Risk...Schmisk   How Sensible International Risk Management Works image international risk management1Risk...Schmisk How Sensible International Risk Management WorksBusiness is risky.  International business isn’t more risky – but the risks may be different than those with which you are comfortably familiar.

Every once in a while it’s worth taking a quick run through the kinds of risks that worry folks as well as those that they might not consider.  And today we’ll quickly look at some of the tools available to mitigate them – in many cases very inexpensively.

Small print…this isn’t an exhaustive list, and this isn’t consulting.  It’s simply a heads up basis for a discussion.

You

Let’s start with the biggest risk – and one which is clearly uninsurable.

For this program to grow and flourish you must be committed to the long term.  You also have to be willing to accept that there are things you don’t know you don’t know.

When the commitment waivers, or you become confident that after some transactions your international knowledge is complete (or by attending an Export.gov or state seminar you grasp the important details), huge risk creeps in.  Are you open to advice?  Do you know how to find the right advice?  Your general corporate attorney, regular accountant, standard freight carrier, etc  may all be wonderful sources for routine, day-to-day domestic information.  But they may be profoundly ignorant of corresponding international considerations.

And many of the risks can only be mitigated with prudent policies and common sense.  So this risk is not only you personally, but your management of the company and creation of policies which guide all employees.

Logistics

Do you understand – I mean really understand INCOTERMS 2010?

Very, very few do.  Seemingly insignificant details in the terminology can make a huge difference.  And clarity on risk of loss is unrelated to insurance coverage.

The reality is that even if you use a term which assigns risk of loss to your customer, if they experience an uninsured loss, you will likely not be paid.  That’s a risk that your business insurance agent should be able to advise on.  You can retain ownership until delivery yet pass the burden for transit to your customer (and carry adequate property in international transit coverage for your company) or purchase shipment specific insurance as possible solutions.

Finance

This is a series of risks upon which companies often focus.  Non-payment and foreign exchange are the most common concerns.  Many companies respond by only transacting business in USD, and often requiring full payment in advance and using Letters of Credit.

Neither of these are particularly customer friendly, and with improving products available neither are typically necessary.

Foreign exchange risk can be very easily managed (read more here) and by doing so you can elevate your business to a different level among global competitors.  You’ll be a more appealing supplier.

Non-payment can be easily and inexpensively insured with credit insurance.  Offered through the Ex/Im Bank (and other private offerings that may offer lower cost and greater flexibility and more complete features) this not only protects your foreign receivables against default,  but also secures those receivables to be used as an asset in calculating your lending base.  Properly configured this non-payment coverage would address issues of non-convertibility of currency and issues arising from political turmoil and other civil disturbance.

FCPA

Often misunderstood as only applicable to companies which sell to governments, this exposure is more profound.  Officers & directors have personal criminal exposure in addition to the company’s exposure.  (And most D&O policies will not cover defense costs for these issues.  Separate policies can be purchased – and should be seriously considered as DoJ enforcement has become increasingly aggressive.)

What’s less known is that a large percentage of FCPA enforcement actions originate in customs snafus.  Companies which assiduously avoid corrupt practices in securing transactions can often naively run amok during the customs clearance process when a local agent resolves hiccups using local “business as usual.”

The best insurance is a clear corporate policy which outlines individual conduct and outlines expectations for all associated parties.  Buttressed with periodic training which is well documented and an unwavering corporate philosophy, this will not only help prevent violations but favorably position a company in case of an issue.

Compliance

There’s obvious compliance (checking denied party lists and verifying license requirements) and there’s other compliance.  For instance if your products are export controlled, then in most cases so is the sales information you would normally use (to the extent that it provides important details.)  Put that info up on your US website, and you’re non-compliant.

Travel with samples, data sheets and other information and you may very well be in violation of compliance regulations.  Check with knowledgeable counsel on this topic.

Travel & Safety

Medical evacuation is a surprisingly common requirement that is often overlooked.  Car accidents in emerging markets are as common as the medical care is often undesirable.  Yet a medical evacuation can often cost $200,000 or more.  This is inexpensive and vital coverage.

Personal security and safety need to be built into company policies.  Monitoring travel expenses is appropriate, but in some emerging markets “luxury” happens to overlap with appropriate security in hotels.  Don’t get caught saving a few bucks like you would in a smaller US city – and for you controllers out there?  Until you have travelled in their shoes, don’t expect that of your folks that travel.

Political

This is a particularly tough area to anticipate.  You can study impending elections, but often the dramatic risk events aren’t easily anticipated.  But the government, through OPIC offers inexpensive political risk insurance to SMBs (< $35MM in this case).  Larger companies have a variety of other commercial insurance options available, but a thorough review should be conducted as the outcomes of most political events may be covered in other policies.  For instance loss due to war or terrorism is included in various riders, and non-convertibility of currency or non -payment can be covered by policies outlined above.

IP

The US Government offers a website ( www.StopFakes.gov) through multi-agency cooperation which offers prophylactic recommendations and some suggestions for actions to take if you are concerned that your IP has been stolen.

One of your best defenses is aggressive ongoing R&D.  Out engineer your competitors.  But IP theft is a real challenge, and particularly in some high profile emerging markets.

Make sure your filings are timely, correct, and strategic.  Rely on experienced international IP counsel to identify idiosyncrasies (e.g. first to invent vs. first to file patent distinctions) to preserve your competitive edge.

Monitor the market carefully to track any infringement, and recognize that it will happen.

Finally don’t just focus on patents.  Many don’t realize that failure to file trademarks (in the company name by the company) opens you up to a risk that a squatter (registering your trademark) can order customs to seize product which you have made and shipped, as counterfeit.  And then demand a payment from you to drop the claim so that customs doesn’t destroy the products.

And have clear, appropriate company policies on what information employees travel with, what is emailed and discussed in phone calls.  It is prudent to assume that anecdotes of email and voice monitoring, as well as data swipes periodically reported in emerging markets are a legitimate risk.

Employee / Contractual

Often companies are approached at a trade show by an interested rep or distributor from an overseas market.  The potential relationship seems innocuous enough – it doesn’t cost anything to try (or very little in travel and some initial training) and there’s little downside in case it doesn’t work.  And if their focus area isn’t a strategic target of yours there’s even very little opportunity cost to doing so.

Until….you decide to focus on the market, to engage a channel partner that matches your ideal profile, only to find that due to local interpretations your ad-hoc partnership is a long-term one which will require a substantial severance payment to separate.  Didn’t plan on that, did you?

In other cases representation which seems entirely independent according to our interpretations may carry substantial burden for local payroll tax payment, reporting and other regulatory obligations.  And may even open you up to exposure for warranties made by that rep without your knowledge which are nevertheless binding on your company.

It’s worth having local counsel vet standard agency, distribution and other channel partner agreements to avoid pitfalls.  (Not insurable, but inexpensively mitigated.)

The bottom line?

International risk management requires awareness, mitigation strategies and various coverages. Think that some expertise in those areas might benefit your business?   Contact Consilium Global Business Advisors today.

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