Why understanding risk is key to exporting

There is a wealth of information available to companies looking to expand abroad, but it takes a unique skill set to interpret the data and identify the interconnected risks in export markets

Senior decision-makers at small and medium-size enterprises (SMEs) and mid-market companies (MMs) polled in a recent Bloomberg Audience Insights survey strongly indicated that they would like more information about risks associated with countries they might target as destinations for export.

John Scott, Chief Risk Officer for Global Corporate, Zurich Insurance Group, believes there’s no shortage of such information. The question, rather, is what to do with it.

“You can pile up a desk full of reports on country risk, from all sorts of good sources,” says Scott. “The challenge is, how do you aggregate all that information and make sense of it as a small business?”

A Sophisticated Way To Understand Interconnected Risks

Scott recalls the recent case of a Poland-based retailer of consumer DIY products. The company’s domestic customers became more affluent and started hiring contractors to do home repairs rather than handling such projects on their own. Seeing its domestic market shift from a retail to a wholesale model, the company decided to look at macroeconomic and societal issues in Turkey and Russia to see if it should consider changing its store profiles there.

To help with its decision-making process, the Polish company used Zurich’s Risk Room, a unique, proprietary risk-analysis tool. The Risk Room sources data from three dozen organizations, including the IMF, World Bank and WTO, and translates it into 88 distinct risks—69 concentrated in business, geopolitical and economic areas, with the remaining risks divided between environmental, social and technological risks—across 157 countries. Anyone looking to discern the relative risk of Country A vs. Country B when it comes to infrastructure risk can see the case clearly made onscreen.

“You need a sophisticated tool to help you see how these risks are interconnected, and how relevant they are in a global context. The Risk Room does this in a way that’s simple in terms of visualization,” says Scott. “If you’re an SME and you decide to expand into South America, you kind of know that some countries have more risk than others, but you may not understand what the relative nature of that risk is. Having a tool that makes that obvious is quite helpful.”

Assessing Risks In Context

That snapshot of risk is helpful in making decisions, but it needs to be seen in context. Consider a potential investor in a company who looks only at its balance sheet, which is really just a snapshot in time. For the kind of context that informs more thorough, nuanced decision-making, the investor also needs to understand the composition of the management team, P&L history and the like.

The evolutionary context of country risk is no less challenging. “If you see a pattern of risk for a certain country, how do you then understand that in the context of its history?” asks Scott. “How has that country developed, and what’s changing it? What’s the political situation that might make a change in its legislation or regulation more or less likely, which might make your business model more successful, or unsuccessful?”

Gaining Knowledge On The Ground

A firm can do all the desktop analysis in the world before entering a new country, but the reality is often different in the field—it’s the difference between building a business model and actually building a business.

For example, in undeveloped countries it’s often essential to know the right people to help overcome red tape—getting the appropriate licenses, recruiting staff, and so on. Without people on the ground, this can be extraordinarily difficult. Finding the best local cooperation partner to help navigate these issues is often a critical factor in determining success or failure, particularly for SMEs and MMs.

Consider, for example, China in the 1980s and ’90s, where the standard wisdom was that developing joint ventures with a state-owned or state-affiliated company was the smoothest path to success.

“It turned out that, by buying into that model, you were buying into a whole bunch of constrained businesses that had very old assets and staff that weren’t the most agile, with a mindset that often wasn’t very modern or forward-thinking,” Scott says. “The better people to engage with turned out to be young entrepreneurs. You could only find that out by being on the ground.”

To form a complete picture of country risks, Scott suggests that SMEs and MMs take a team approach to gain the necessary insights into interconnected risks and develop solutions to mitigate them. “Your insurance broker, your insurer and your banking advisors who support you in your existing business are all great resources for knowledge and information about the risks you might face while growing your business in a new country.”

Published in collaboration with Zurich.

Author: Evan Rothman is an independent writer.

Image: A Businessman is silhouetted as he stands under the Arche de la Defense, in the financial district west of Paris, November 20, 2012. REUTERS/Christian Hartmann.