To set the stage for an emerging markets deal, there is a lot of work that has to be done:

Understanding the market by analyzing data, arranging for focus groups and surveys, or working with an expert who understands industry dynamics. Assessing the regulatory climate and macroeconomic conditions. Defining a clear value proposition as well as a viable pricing strategy.

Even if all of these details are well-thought out and meticulously planned, signing a deal with the wrong partner can lead to spectacular failure.

Working with a partner translates to a loss of control, as all decision-making power is not housed under the same corporate structure. Incentives, however carefully aligned, can diverge, leading to friction and loss of profitability.

These issues arise in all business, but are dramatically exacerbated in the emerging markets environment, which is often defined by a weaker rule of law.

While the contract is the first and last step in maintaining a partner relationship in a developed nation, in the emerging markets context, the contract is just one piece of the puzzle. In this context, contracts should not be used as the sole point of compliance leverage, and very careful relationship management needs to be active, ongoing, and taken seriously.

Signing the deal with the right partner can lead to spectacular profits. The emerging markets partner has a lot to offer, including on-the-ground intelligence on the constantly shifting market, regulatory, and macroeconomic landscape of an emerging market.

They can leverage their local resources and relationships on your behalf, allowing you to maintain a leaner, more efficient operation at home.

So how can you find the right partner and make sure that the relationship functions profitably and smoothly?

1. Identify potential partners

Consider how your domestic networks translate into foreign networks – college alumni groups, World Trade Centers, Rotary Clubs, and various U.S. government resources are great places to start. Also consider engaging outside expertise that can bring their networks to your table- one of the main benefits of working with SH International is the access that we give our clients to our emerging markets’ networks.

Meet as many people as possible. For a recent deal we put together for one of our clients, we arranged for two weeks of meetings with various foreign companies. We came to our last meeting extremely frustrated, as we had not yet identified the right partner for our client. We were not even going to share this particular deal with the gentleman we met that day, since he was from a different industry.

However, at the last minute, we did, and he referred us to some connections of his. We ultimately inked the deal with this party that was not even on our initial radar.

2. Understand that face-time is critical

It is critical in emerging markets to meet people in person. It is entirely normal to see absolutely no interest or progress in any commercial transaction or relationship except when you are in the emerging market country itself.

As shared in our last FITT article, make sure to visit people with whom you have key business relationships in person at least once a year, and preferably more frequently. When your international trading partners have not seen you, they may start making business decisions without taking you into account. They may simply forget about you, or, more insidiously, figure that you will never find out about some of their decisions.

3. Conduct upfront due diligence on the partner

There are various services that can help you ensure that you know who you are doing business with, from services provided by the U.S. Commercial Service to private investigators. You can also ask the partner for references from clients, suppliers, or other third parties.

Finally, do not underestimate the power of a solid internet search. This due diligence is critical – you do not want to find out that you ended up doing business with a known thief, money launderer, or terrorist.

Your company may not recover from the reputation damage or associated liability.

4. Make compliance natural

While investing in top-notch local legal counsel will help mitigate the risk of unenforceability, it is critical to, as much as possible, provide the distributor with natural incentives to maintain compliance with the contract.

A simple, yet powerful strategy that we use on behalf of our clients is to build relationships slowly over time, and to consistently bring new value to the relationship.

For instance, we have promised to help the foreign partner with their own growth objectives in other countries where we have relationships. This reminds them that keeping the deal running smoothly can have benefits outside of the currently contracted relationship.

5. Look for early warning signs of trouble

We have seen great partnerships fail because the foreign partner has problems in their other business dealings that cripple their ability to effectively fulfill their contractual responsibilities. Some of the strongest early warning signals can be related to the foreign partner’s financial solvency.

Be aware of and monitor any such indications, such as increasing demands for more lenient payment terms.

Signing a contract is only the first step of a successful emerging markets deal. To ensure a functioning and profitable partnership, it is necessary to be active, dynamic, flexible and creative.

Emerging markets are constantly changing, so if you want to profit from the rise in emerging markets’ spending power, it is necessary to stay on your toes.

What’s your next step in finding or building successful emerging market partnerships?

This is due in great part to the weaker rule of law in emerging markets. Where commerce does not have as strong of a legal system to lean upon in managing disputes, companies must depend on other mechanisms to enable a productive environment for commerce and trade.

So they do business with those they know and trust, not simply as a matter of preference, but as a matter of survival.

This post looks specifically at how to manage commercial relationships in emerging markets, even through difficult waters.

1. An ounce of prevention beats a pound of cure.

Investing in healthy, strong commercial relationships is the best way to avoid having to manage difficult situations later. Be conscientious to always communicate respect for local culture and the company. Make sure to visit people with whom you have key business relationships in person at least once a year, and preferably more frequently.

When your international trading partners have not seen you, they may start making business decisions without taking you into account. They may simply forget about you, or more insidiously, figure that you will never find out about some of their decisions.

Sometimes even the most proactive, positive relationship management does not result in harmonious relationships. However, that does not mean that you cannot work towards a turnaround.

I will illustrate these tips with a recent experience at SH International LLC.

A few months ago, a Middle Eastern health and wellness distributor asked us to provide relationship management services with a North American supplier—specifically, relationship intervention in a troubled situation. Essentially, a North American company which owed them a large shipment of goods had been acquired by another North American company.

The acquiring company denied any claim that the Middle Eastern distributor had relating to the paid for and not received goods, stating that they had not acquired the liabilities of the acquired company. The situation was set to escalate in a very negative fashion.

2. Do not ‘evergreen’.

Evergreening in this context means spending money in an attempt to hide or ineffectually fix the problems of a troubled investment that has already been made. This is also known colloquially as ‘throwing good money after bad’.

Don’t invest more resources to fix a problem unless you’re sure the benefits will exceed the costs.

For instance, before bringing in lawyers, consider whether the time and legal expenses will be worth the likely recovery.

Cross-border ligation procedures can be very lengthy, cumbersome, and ineffective, especially in the emerging markets context.

The Middle Eastern distributor was extremely upset, wanting either the original paid-for shipment, or the money they had sent. They understood from our earlier counseling that, in their specific circumstances, the recovery from entering cross-border legal proceedings would likely exceed the costs involved. They needed to take an alternative recovery strategy.  

3. Always point to the common benefit in moving forward.

Anyone who has been in international trade long enough has been in situations that are not going smoothly or even in accordance to contracts. In such a situation, it is better to focus on future positive outcomes of turning around the situation rather than taking a threatening or adversarial tone. This could be as simple as pointing out that a smooth working relationship will lead to an expanded trading relationship in the future from which both companies will greatly benefit.

I contacted the North American supplier. I relayed my understanding of the situation to the representative managing the issue, making it clear that I was not making a judgment on which company was in the right and that my involvement would be limited to seeing if I could provide them with a solution to move forward on a positive note.

I told him this was an incredible opportunity to work with one of the premier distributors in this international region, and that I knew several North American companies dreaming about such a chance. Instead of viewing this as an adversarial situation, I suggested he take advantage of the opportunity to establish incredible sales volumes in the region without having to invest the vast resources that other companies have had to in order to snag such opportunities.

4. Take a long-term view and keep things positive.

Avoid taking a narrow transaction perspective in any relationship.

Understand that the potential value creation is not limited to the transaction at hand, but is also in the ten or one hundred transactions that can follow if a great relationship is put in place.

One specific suggestion I gave the North American supplier was that he could put a distributor agreement in place with the Middle Eastern company and not charge for the first shipment of goods as a gesture of goodwill. By doing so, he could establish a very profitable distribution channel.

I opened his eyes to the fact that turning around this relationship could mean dollar signs for his company, and he needed to think beyond the contentious small shipment of goods to see the bigger picture.

5. Bring in an external perspective.

Sometimes, outsiders can broaden your perspective about the issue at hand, and find outside-of-the-box solutions that can solve your problems. They can also intervene in situations where the two parties are no longer able to have a conversation together without further disintegration of the situation.

When we initiated the conversation, the supplier was ready for a battle, and when we ended it, he was eager to engage and profit from a positive, mutually-beneficial relationship with the Middle Eastern distributor. He even wanted to learn more about how he could work with SH International, moving this beyond a win-win situation to a triple win!

Do you have other examples of how positive relationship management decisions can result in profits and growth opportunities in international trade? Share them with us!