KPMG in Canada | Business Adviser

Business Adviser Bruce Willis

The global imperative and risks

By Bruce Willis
Partner, KPMG Enterprise/Regina

By Angela Mitchell
Partner, KPMG Enterprise/Toronto

By Lloyd Mills
Senior Manager, KPMG Enterprise/Toronto

Private companies across the globe increasingly regard global expansion as core business strategy. Such expansion may be driven by opportunities to take advantage of growth in emerging markets, to expand business opportunities in developed markets and/or the need to establish international locations to meet customer demands and expectations.

In the Canadian context, such expansion will most often mean doing or expanding business in the United States. However, increasingly, Canadian private companies are looking further abroad for opportunities, whether in the developed markets of Europe and Australia or in key emerging markets in Asia and South America.

To understand better this growing trend toward global expansion by Canadian private companies, KPMG Enterprise conducts annual surveys of the global activities of a wide-ranging group of Canadian private companies. Our research has provided a number of interesting findings:

Global expansion remains an area of significant focus amongst private company leadership teams who see foreign operations as key to their company’s overall growth plans and forecast continued global expansion over the next several years.
Canadian private companies are “going global” in a variety of ways. In the vast majority of cases going global involves either the exporting or importing of goods and services or non-Canadian distribution. However, an increasing number of companies are going global in more comprehensive and complex ways, for example: through partnerships, alliances and joint ventures, through investment in offices, stores and production facilities off-shore and/or through completing formal off-shore acquisitions.
The drivers for global expansion by Canadian private companies are also varied but tend to relate generally to opportunities to grow their business through exploiting untapped market opportunities or capitalizing on larger markets outside of Canada.

Global expansion provides opportunities & entails risks

There is much to be gained through global expansion. However, it is important for private company executives to recognize and remember that there are a variety of risks that are the natural by-product of global expansion.

As reflected in the KPMG Enterprise survey results noted above, global expansion can take a variety of forms. The opportunities associated with each approach to global expansion will differ and so will the associated challenges and risks. However, there are a number of risks that private company executives should always consider when assessing any potential global expansion plan:

Strategic Risks related to the economic climate of the target country or countries, in particular economic growth prospects, industry structure, competitiveness and the geopolitical risk associated with the target country or countries
Legal & Regulatory Risks related to the maturity of the target country’s legal system and compliance with both target country laws and regulations and business conduct laws and regulation with extra-territorial application [e.g., Foreign Corrupt Practices Act (US)]
Operational Risks related to transportation and distribution logistics, supply chain management, information technology and human resource
Financial Risks related to target country taxation, transfer pricing, foreign exchange and credit and capital availability
Cultural Risks related to ensuring that your business tactics, management practices and products and services are consistent with local cultural norms
Due Diligence Risks related to ensuring the quality and trustworthiness of any local partners or related to the assessment of any potential acquisitions in the target country

The potential complexity of the risks associated with any global expansion can be highlighted with a “simple” example. Company A has chosen to enter into a partnership with a distribution firm based in Mexico to distribute its products across the countries of Central America. The list of potential risks that Company A should consider when assessing and planning this initiative could include:

Economic – how large is the Central American market for their goods? How competitive is that market?
Geopolitical – how stable are the governments of Central America? Are there any specific socio-political risks associated with distributing goods in these countries – e.g., risks associated with the security of goods? Are there potential human rights or environmental issues in the target countries that could result in reputation risk to Company A?
Legal – how can Company A monitor the activities of its partner to ensure that its activities are consistent with both the business conduct legislation and regulations in the various target countries and more broadly applicable business conduct legislation? Are there any concerns with the enforcement of contracts either in Mexico or the various Central American countries should contractual issues arise?
Operational – is the local infrastructure sufficient to support the efficient and effective distribution of the product? Are there issues related with the supply chain – i.e., can Company A assure that it can provide its product to its partner on-time and in the necessary quantities?
Financial – can Company A ensure that it monitors and complies with relevant tax rules in both the various external locations (Mexico, Central American countries) and domestically? Are there issues related to the availability of credit arrangements in the target countries? What is the potential foreign exchange risk associated with distribution in the various countries?
Due Diligence – how can Company A ensure that the proposed Mexican partner is appropriate? How can Company A ensure that any parties with which the Mexican partner transacts in the various Central American countries are appropriate?

These and likely a host of other risks would need to be considered by Company A executives before proceeding with their proposed initiative and must be managed as the initiative is rolled out. Our “simple” example, therefore, highlights the variety of risks that must be identified, assessed and managed to ensure the success of any global expansion.

A key mechanism for ensuring that the risks associated with any global expansion plans are assessed and managed and monitored on an ongoing basis is through the use of an enterprise risk management (ERM) program. While a robust ERM Program, such as those employed at larger companies in Canada and across the globe, may not be appropriate for smaller, middle market or private companies, they can usefully adopt ERM practices to help identify, assess, manage, monitor and report on the risks associated with their global expansion.

The evolution of ERM to private companies

Increased global risks combined with rapidly evolving business conditions are prompting more private companies to turn to ERM. While private companies’ needs differ from those of large corporations, these companies can still realize significant benefits, especially since ERM practices have also been evolving to become much more flexible and scalable to all types of businesses.

Some private companies may not be at the point where their size, operations, structural complexity, or stakeholder expectations dictate the need to employ all aspects of a robust ERM process. However, many private companies are facing increased complexity in their business operations and have successfully applied ERM practices to manage this complexity including key globalization risks.

Too often, organizations move forward on initiatives with a focus only on the upside, or because they feel they have no alternative if they want to keep up with competitors. An ERM program can prompt private companies to pause and consider what may go wrong and prevent them from meeting the objectives of their initiatives.

Scaling ERM

In addition to helping to drive ownership of risk, ERM can help bring risk awareness, consensus on priorities, and collaboration on addressing issues. A vehicle increasingly used by larger organizations to create this environment is a risk committee or risk council. Private companies could use a similar approach to create a risk-aware, collaborative management team that has consensus on priorities without formally establishing a risk committee. For instance, by simply including a standing agenda item at monthly or quarterly meetings of the direct reports to the CEO, a company could discuss the top 10 to 15 risks and challenges it faces as it develops its globalization strategy. Topics could include the following:

Have any of our risks increased beyond an acceptable level since we last met? If so, what is causing the increase? What do we need to do in order to respond to or mange the consequence of the increase? Is there anything we can do to prevent this from happening again?
Are the actions we agreed to take to lower the risk on track? If not, do we need to allocate more resources or try an alternative approach?
Are there any emerging issues or risks that we should add to our top risk list? If so, what do we need to do to either prevent the risk from occurring or respond to and/or mange the consequences if the risk is beyond our control?

By focusing on the top 10 to 15 risks, management can create an ongoing risk assessment and management process that is not an administrative burden to maintain and still realize significant benefits.

Going forward

Private companies are expected to continue moving forward with globalization, but recent market conditions coupled with the business’ previous performance in achieving its global expansion goals will likely be mixed expectations. However, private companies that leverage ERM techniques to identify key risk and issues to create a risk-aware culture will be in a better position to succeed. Regardless of size and ownership structure, companies that take a proactive, strategic approach to risks can potentially stay a step ahead of their competitors.

Business Adviser is published by KPMG Enterprise™ specifically for owners and executives of private companies. KPMG Enterprise is devoted exclusively to helping business owners and entrepreneurs build thriving enterprises. For further information about how KPMG Enterprise can help private companies, visit www.kpmg.ca/enterprise.