Case Study: Analytics Software Company Goes It Alone In China

By Tim Lindeman

Summary

Dimensional Insight (DI), an American data analytics software and services firm, entered the China market with limited resources and relatively inexperienced staff. After originally hoping to be profitable in year one, they quickly found out how difficult the market was, and began planning for the long-term. Although DI faced many challenges, including a low market price, relatively high costs of doing business, and relentless competition, they succeeded in building a nationally recognized healthcare analytics brand.

Takeaways

Prioritize Localization
The China enterprise software market is completely different from developed markets. In order to succeed, a foreign business not only needs to localize its products but also its business model and management style.

Plan for Long-Term Investment
Building a localized market presence takes time. Foreign technology firms should plan for a long-term investment.

Invest with Adequate Resources
China is a geographically diverse market, requiring significant mass to achieve even limited geographic coverage in a target industry.

Background

In 2005, DI was growing fast. The company was one of the early players in the business intelligence (BI) software field. And although co-founders Fred Powers and Stan Zanarotti chose the path of organic growth, without taking on debt or outside investment, the company was growing. An important reason for this growth was DI’s expansion to international markets.

After early successes building a distribution network in Europe and Latin America, the company turned its attention to the Asia Pacific. The Massachusetts Export Center introduced DI to Tim Lindeman who was responsible for business development at Yonyou Healthcare, a subsidiary of the Chinese ERP giant Yonyou. DI’s founders visited Beijing, and Fred Powers and Tim, who are both originally from the upper Midwest, established a strong personal connection. Not long after, Tim left Yonyou to take a job with Dimensional Insight to run the China business.

Market Research

DI did not do much planning before setting up shop in China. The only market research they did was to purchase a CCID report on the China BI market. This report provided big enough industry sales figures to entice DI into establishing a representative office in Beijing. This approach was fast and cost-effective and enabled DI to collect its own market intelligence.

Expectations Going In

Fred Powers gave Tim the goal of being profitable in year one. Although he later explained that he didn’t expect this to happen, he wanted to set the bar high to motivate the team. Other than this short-term goal, there weren’t any clear long-term expectations. China was growing very rapidly at the time, and the company didn’t anticipate how challenging the market would prove to be.

Product-Market Fit

Tim believed that Dimensional Insight’s BI technology was a great match for the China market for a number of reasons:

• China had a wealth of data, and information system adoption was growing fast.
• Local software companies still hadn’t developed their own BI technology and were relying on foreign tools such as Crystal Reports, Cognos, and SAS.
• It would be very expensive and time consuming for Chinese software companies to develop competing BI products.
• BI is an industry and workflow agnostic tool, so it would not require significant localization of the technology for the China market.

Initial Market Efforts

After Tim Lindeman was hired as the China general manager, Dimensional Insight China opened as a representative office in Beijing. Tim hired three local staff to start the channel recruitment effort, one salesperson, one consultant, and one marketer. The small team first worked to localize the product and barebones collateral, and then recruited potential distributors to attend free training events. At the end of the first year, they had several distributors and a first customer.

As a representative office, DI China was unable to invoice in RMB or deliver services on the ground. After a good beginning, the company agreed to make a more significant investment in the market and opened a wholly foreign-owned subsidiary in Guangzhou. Tim and two team members relocated to Guangzhou to establish the new home base, while one staff stayed in Beijing and expanded the staff there and continued to function as a secondary base.

Guangzhou was a strategic selection for a number of reasons:

• China is a large and geographically dispersed market. It is very difficult to cover territory from one physical location. Having staff in both Beijing and Guangzhou increased geographical coverage.
• DI China’s focus industry was healthcare, and Guangzhou is one of the country’s leading centers for healthcare.
• Most foreign tech companies choose Beijing as their headquarters, since Beijing is China’s tech hub, and its Zhongguancun district is the “Silicon Valley of China.” Being a small company, DI China believed it could benefit from isolation from its competitors, and be a small fish in a relatively small pond.

Figure 1: Dimensional Insight China Expansion Timeline

Biggest Successes

While the China market was a much bigger challenge than DI anticipated, the company was able to achieve a degree of success and remains in operation today. Some of DI China’s biggest successes include:

• Setting up a national distribution network, with distributors in Beijing, Shanghai, Guangdong, and central China.
• Establishing large and successful reference sites throughout China, and using these sites as a catalyst to find distributors and sell to new customers.
• Hiring and maintaining a loyal team of Chinese employees, including both consulting and channel sales staff. The average tenure at the company is currently 7 years, which is much higher than the industry average. This is critical because DI uses proprietary technology, and it takes years to bring new consultants up to speed.
• Building a nationally recognized healthcare analytics brand. Through years of participation in leading industry conferences and expos, and working with reference site customers as partners, many hospitals in China are familiar with the DI China brand.

Challenges

Low Price

DI China found out very quickly that the price for analytics software in China was much less than in other markets. Tim Lindeman estimates that when they started in the market, the price was about one-sixth of the price in the United States. With the exchange rate, that meant that the equivalent of a $100k deal in the US would be only ¥100k RMB in China. This turned out to be a big problem because DI China’s cost structure was significantly higher than one-sixth of the cost of doing business in the US.

Limited Maintenance

To make matters worse, Chinese customers were not accustomed to paying maintenance. DI China provided the first year of maintenance for free and then attempted to collect 10% of the initial software price annually (20% is the standard maintenance rate in the US). Collecting this 10% involved a lot of legwork for DI China’s small sales team, and also usually required additional consulting hours. Because of the difficulty to sell maintenance, DI China has not been able to establish a strong stream of recurring revenue.

996 Culture

The software services culture in China can be brutal, with local competitors accustomed to working very long hours. This “996 culture” of working from 9 am to 9 pm six days a week allows local service companies to squeeze more productivity out of their consulting staff to maintain narrow profit margins.

DI entered China believing that culture would be a very important part of the company’s success as it has been in other markets. One of the reasons co-founders Fred Powers and Stan Zanarotti chose Tim Lindeman to be the general manager, was that they felt Tim was a good match for the company culture. As Tim hired staff in China, he also chose individuals that he believed were a good match for this culture.

The DI culture centers around the philosophy that to be successful, the company needs to take care of the customer and employee and that by doing so, the customer and the employee will take care of Dimensional Insight. DI China encouraged employees to have a more balanced work and family life and didn’t demand excessive overtime. This helped both in attracting and retaining talent. But at the same time, it put DI China at a relative disadvantage to local competitors with their 996 culture.

Recommendations

Prioritize Localization

The concept of localization is much broader than translating text in a software GUI from English to Chinese. Localization also includes adapting the business model, pricing, and management style. For DI China, localization eventually meant hiring a Chinese general manager to take over after the initial stage of market entry, when Tim Lindeman returned to work at DI’s headquarters in the US.

Tim explains: “China is a completely different market than the US or Europe and is best left managed by Chinese managers you can trust. And it is not easy to find Chinese managers you can trust, not because they are not trustworthy, but because of cultural differences. There are different standards of what trust even means. This is why it is important to spend a lot of time in China to build long-term relationships.”

Plan for a Long-Term Investment

Success in China typically requires a long-term investment. Dimensional Insight went into China looking to be profitable in one year. And while this is possible to achieve, it is extremely difficult for foreign companies. It will likely take time to get bearings, localize your business, and establish credibility. It also takes time to find partners whose interests align with your own and to build lasting relationships.

Invest with Adequate Resources

Tim Lindeman advises “when you go into the China market, you need to have enough ammunition. You can’t go in with a couple of newbies and a little money. To an extent, this is what we tried to do, and it ended up taking us much more time than it would have if we were better prepared and better funded.”

China is an expensive market, and software prices are relatively low. It takes sufficient mass to deal with the challenges and scale of the China market. Dimensional Insight entered the market with just four people, which was adequate for the early startup stage, but they had to expand the team to ten people to service just one target industry with limited geographic coverage.