December 12, 2012
While a relationship with a foreign sales representative can be an easy and cost-effective method for penetrating a new foreign market, the distance between the parties and numerous opportunities for misunderstanding, as well as the potential liabilities created by local laws, make it essential that companies establish and follow guidelines for successfully managing the relationship. This issue of the Business Counselor Advisor addresses several areas that should be carefully evaluated by every company before entering into a formal arrangement with a new foreign sales representative.
1. Selecting the Most Qualified Local Representative
Locating and selecting the local representative is a time-consuming, and often frustrating task; however, it is clear that time spent at the beginning of the arrangement can pay dividends as business continues to develop. When selecting the local representative, emphasis should be placed on making sure the representative is qualified to deliver the performance that is expected by the company. For example, while the company may take comfort in the ability of a prospective representative to communicate in English, these skills may be of limited value in countries where the customers speak and conduct business in other languages. Similarly, while technical skills and the ability to understand how the company’s products work and perform are clearly valuable, they are no substitutes for strong relationships and a good reputation in the local market. If the representative is able to get the company and its products in front of the right people, the company can then bring its own technical experts in to explain the products in detail and work with local customers to adapt the products to their needs.
Companies must be prepared to allocate sufficient time and other resources to educate and train their foreign sales representatives. Not only does this make the local representative more knowledgeable about the company’s products, it builds a sense of trust between the parties and also provides the representative with greater motivation to spend additional time and efforts on promoting the company’s products. If the local representative is uncertain about the specifications of the products, he or she may be uneasy about discussing the products with customers out of fear that he or she may not be able to adequately answer basic questions. Of course, training is never sufficient to tell the representative all that he or she needs to know about the products. Accordingly, it is important for companies to establish and maintain support procedures that can be accessed at all times in order for the representative to obtain information needed to answer specific questions raised by prospects.
Compensation is an important element of formal agreement with the representative, and the parties will generally devote a significant amount of time to negotiations on this point. While the company obviously wants to minimize its selling expenses, caution should be used when trying to reduce the commission rate to a point that is well below what is generally accepted in the local industry. Absent some form of exclusive relationship, representatives typically handle a number of different products and must allocate their time and resources among several different vendors. If the negotiated commission rate is too low, the company may find that sales do not meet expectations simply because the representative decides to spend his or her efforts on other products that will generate higher commission revenues. For the highest quality local representatives, the company may be better off adjusting the price upward to absorb a portion of the “higher” compensation to the representative. Upon closer analysis, the company may conclude that using the representative, even at the higher commission rate, is more cost effective than setting up a local sales branch and that the representative is far more likely to generate sales than if the company attempted to do it on its own.
One of the potential, albeit inevitable, disadvantages of using a foreign sales representative is the difficulties associated with communicating with the representative. Language problems, as well as different time zones and communications technologies, have often led to unhappy relationships and difficult terminations. Accordingly, companies must be prepared to take the time required to stay in constant touch with the representative. This should include a regular schedule of personal meetings between the representative and appropriate company officials and a constant flow of information exchange in the form of telephone calls, faxes, and e-mail messages. The local representative should receive new product announcements as quickly as possible. In turn, the representative should be required to promptly deliver reports regarding his or her sales activities and breaking developments in the local market. This type of communication is so important that the due diligence process before the relationship commences should include an assessment of the tools that the representative has available to keep in touch with the company.
In order to get you started in this area, please see the additional commentary on foreign sales representatives and the extensive library of forms relating to such arrangements in Going Global: A Guide to Building an International Business (Ch 22), which is available on the West Web site and through Westlaw Next at Business Counselor.