In my previous blog, I explained why US tech companies should move to London as opposed to other markets. In this article, I investigate the opportunities and challenges of moving to London. Many of the suggestions below are also applicable to opening an International office in other cities of the world.
While it is logical, opening an office in London is not an easy exercise. In fact, more often than not, companies fail to identify the difficulties of doing business in London, assuming its similarity with the US justifies adopting an American approach to the market. Through speaking to investors and business executives and on the basis of my experience across the UK and US, I identified the following five recommendations for US companies trying to establish a presence in London.
1. Invest significant time and resources in hiring top local talent. You should prioritize hiring locals. First, locals are more likely to understand local consumers, work with local partners and attract more local talent. Second, relocating employees is very expensive and distracting; US employees have to find a house, find schools for their children, et cetera which makes them less efficient in the job. If you decide to relocate US employees, limit your candidates to those who expect to succeed long term in the company. Also consider temporary relocation, when possible, to enable US employee to share knowledge and culture from headquarter with the new International office.
Assuming you decide to hire local, hire top talent and pay generously. A senior executive in the London office of a major tech company told me that the key to succeed is the first hire, making sure he or she is the very best and is rewarded generously. That same great executive will be a ‘magnet’ and bring with him or her the other best talent in the area. What you want to avoid is attracting the lowest performers at a competitors’ company that are willing to quickly move to the new firm. Given the critical role of the first hire, managers should invest significant time and resources in ensuring the decision is right. Generally, the first people to be hired are sales people and, only later, an engineering team. For example, Facebook hired the first engineer team in London only in 2012 while the sales team opened an office there in 2008.
Last but not least, hiring in the UK is different. First, CVs are different; the universities and work places may be unfamiliar to US-based managers. Second, compensation packages are also different. In the UK, there is less focus on equity since the financial market for startups has generally been less liquid than in the US; the health insurance is not a component of many contracts since there is free state health service; finally, the US companies also need to adjust their views on vacation to match the local norms (approximately 25 days). An additional challenge specific to London is that services jobs (consulting and finance) are generous in their pay thus pushing up salary expectations for talented individuals.
2. You will be busy, but prioritize organizational culture and structure.Organizational culture is critical to ensure success in an international office. However, one of the most common mistakes is to de-prioritize the culture in a newly founded office. After all, the sales from the new office will be small as a percentage of the total. But this is a dangerous approach.
The challenge is to spend time with the local market but at the same time give autonomy. The local market will feel pressure from the US to perform and to ‘copy cat’ the same solution. After all, it is easier to justify failure of a proven US solution than failure of a new solution. This is where a winning organizational culture that tolerates failure is critical to ensure local adaptation. Executives need to significantly invest in the London office culture to be able to replicate the success they achieved in the US. And when they succeed in their objective, they are also able to bring learnings from local offices back to headquarters.
A common mistake is to have a fixed organization structure. As the company office grows, the organizational structure changes as well. For example, a company may hire product evangelists as soon as it expands to the local market as it attempts to raise awareness of its products in the market place. Subsequently, the need to hire more specialized marketing employees increases. Another mistake is to have a siloed organization by country reporting directly to the executives. However, a siloed organization is at a disadvantage because it loses the benefits from knowledge transfer among the offices.
3. Understand customer behavior and how it differs across geographies.Customers have similar characteristics, starting from the same language. There are also other cultural similarities. For example, customers have similar behavioral and purchasing trends, both spending significant amount of time on the Internet and mobile and using similar digital channels to make purchase decisions. But there are differences across industries both in the consumer space and B2B space. US companies need to understand those differences to be able to replicate the success they had at home. For example, from a consumer perspective, in the UK it is very common to pay with debit cards more frequently than credit cards. As a result, consumer subscription services would benefit from providing this additional payment method in order to make consumer feel safe and to promote use of the service. Another key difference is the size of the goods being bought in both markets. Given the closer proximity to retailers, in the UK, there is the tendency to buy much smaller items more frequently. And differences do not apply only to the consumer side. On the B2B ads buying market, the use of third party or agencies is much more widespread than it is in the US, where sometimes tech companies liaise directly with the corporates marketing departments. In a nutshell, customers look similar, but in fact they are not. It is important to identify those differences to make sure to succeed in the marketplace.
4. Invest in partnerships if you can, but opportunities are limited. When thinking of international expansion, my first thought was that the easiest way to grow would be to partner with existing companies that would enable consumer acquisition and growth in the market. However, successful partnerships are rare. In fact, it is difficult for a partner to work with a small office. Partners often prefer to wait for the office to be established and for the business to be more mature. Like any startup, a small office is unable to dedicate much time to partner relationships. And investing in partners requires time. As a venture capitalist once described it to me, partners are like virtual employees. They require training and attention. The problem is that partners that are small are considered too small to help. And partners that are big are not always as entrepreneurial as the new office. So finding a partner with a similar culture restricts the availability of prospects. If a partner is found, investment in the relationship is often neglected but it is equally important as choosing the partner in the first place. A leading venture capitalist doing business across the US and London told me that on the basis of his experience partnerships are more common in the enterprise than in the consumer space, and they are even more common in specific industries such as telecoms. However, the US Patriot Act (which enables the US government to access data on US servers) creates concerns of privacy among European players, limiting partnership potential of US based companies.
5. Consult financing partners; many have seen this movie before. Venture capitalists have had significant experience in helping companies scale and expand Internationally. The US invested approximately $800 million in the London technology sector in 2014. When considering expanding internationally, venture capitalist bring expertise and relationships. Many of the challenges described above still remain but can be helped by carefully leveraging investors. Investors have seen relocated employees fail, US companies that didn’t appeal to UK consumers, and partnerships that broke. Leveraging investors’ knowledge and listening carefully to their advice is critical. Some money is worth more than others, especially money coming from seasoned investors who have worked both in the US and Internationally.
In summary, there are many challenges US companies face when expanding to London. What prompted a company’s success in the US will not necessarily guarantee success in abroad. With a desire to win, openness to learn and willingness to adapt to the new and different environment, the UK can serve as a great stepping stone to the rest of the world though.
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