By Tim Lindeman
Software Productivity Research (SPR), an American software and consulting firm, came to China looking to establish a foothold in the defense sector. After a successful presentation at a Chinese industry event, the company opened up a small office in Beijing. SPR found a Chinese partner that helped them organize training events for potential customers and succeeded in generating considerable interest in their offerings. Unfortunately, after operating for three years, SPR lacked significant sales and exited the market.
In this case study, general manager Michael Bragen shares details about SPR’s efforts in China as well as some insights learned from this experience.
Chinese Businesses are Interested in Learning Global Best Practices
Chinese software management professionals were very interested in learning about the processes and tools used by firms in developed markets. They were also interested in adopting similar solutions in their companies.
Chinese Decision Makers Look for Clear Financial Benefits
SPR had a difficult time selling to decision makers who were focused on direct financial results much more than improving management efficiency.
Getting Initial Traction Requires Time and Money
SPR failed to foresee the amount of time and money required to get initial traction for their services. They were forced to exit the market due to lack of sales and insufficient investment.
Software Productivity Research was a specialty firm that offered tools and services to manage complex software development projects. SPR offered unique capabilities originating from the research and theories of its founder, Capers Jones, a respected author, and former IBM researcher. SPR’s tool collected data from complex software development projects and made accurate estimates of quality, productivity rates, defects, and time. Using this tool, SPR helped its customers improve project efficiency and decrease costs.
After successfully establishing its business in North America and Europe, the company looked to expand into the Asia Pacific region. Michael Bragen, one of the company’s directors, led the Asia expansion effort.
Interest in China
In 2006, Michael was well aware of the growing opportunities in the China market. He wanted to get a sense for how potential customers would react to SPR’s offerings, so he decided to attend a software metrics conference in Beijing. Michael presented to a crowded room of several hundred project managers and technical staff. The response was overwhelming. The audience was clearly excited by the presentation and asked many questions. Afterward, several people approached Michael to discuss potential deals.
Coming out of this experience, Michael had a sense that the market was ready for SPR’s offerings. He felt that while China was a few years behind developed markets in the use of project management metrics, there was a strong interest in process improvement. Local firms were beginning to respond to this by developing basic capabilities, but they needed help with training and consulting. Therefore, Michael reasoned that the timing for SPR to enter the market was right, and he persuaded the company’s directors to open a Beijing subsidiary.
Expectations Entering Market
When SPR decided to open its Beijing office, Michael Bragen knew very little about the market. While he gained some first impressions from the event he attended, he was unprepared for the cultural and economic challenges involved in establishing a foreign-owned consulting company in China. Michael initially thought that it might take 18 months to secure a couple of large customers in the defense industry (which SPR targeted due to its large and complex projects). In hindsight, these expectations were overly optimistic. Opening a business in China turned out to be much more difficult than in the other markets SPR previously entered.
The Necessity of a Physical Presence
Michael believes a physical presence in the country was an essential commitment. SPR’s business was fairly sophisticated, and they required a local presence to educate the market and deliver initial services to reference customers. Michael explains: “having Chinese staff on the ground working with colleagues in the US, both on the technology and the marketing, was very important in terms of how we portrayed ourselves to prospects. Without that, we would have had no success.”
There was a period in time when “parachute companies” offered technical consulting services to Chinese companies. However, by 2007, the success of China’s economy led to a growing nationalistic view that Chinese businesses should be able to service each other without seeking help abroad. SPR, therefore, needed to establish its own “Chinese business,” which meant setting up an office.
SPR made the investment and opened an office in Beijing. Michael Bragen took on the role as general manager and hired twelve full-time staff. The team consisted of approximately one-third developers, one-third consultants focused on evaluating the capabilities of prospects, and one-third sales staff.
Figure 1 – SPR China Organization
Getting the team up to speed was a challenge. In particular, sales had no knowledge of the details of the product, or the sophistication necessary to sell educational services.
Product and Localization
The China team localized as much descriptive and educational materials as possible. They also had plans to localize the product, but initially relied on the English language version of the software.
While SPR hired Chinese developers to work on the product, they were primarily responsible for testing new software enhancements, not adding Chinese-specific features. All of the software’s core functionality, including predictive algorithms, were developed in the US. Customers understood the product as being US-based and were quick to point out that it didn’t address all the problems common in Chinese software development projects.
The company website was another localization challenge. At the time, Chinese websites had a very different look and feel from American websites. Therefore, simply translating SPR’s website wasn’t effective at communicating that their software and services were appropriate for the market.
Choice of Partner
Michael understood that to be successful in China, SPR needed a local partner, who could serve as a guide in the market. They found a small consulting firm that specialized in software project management. This firm had its own platform tool that supported managers to monitor the status of ongoing projects. The partner had clients in the public sector. They also had close associations with the military and the defense industry.
SPR’s partner understood its technology and had a fairly comprehensive worldview. They also turned out to be an excellent commercial partner, making introductions to potentially interested organizations.
Marketing and Sales Approach
SPR targeted Chinese organizations who had significant problems in their software development process. Ideal prospects had issues with failed projects, controlling their budgets, or managing staff. SPR arranged to pay its partner a commission on sales, but closing the business was up to SPR sales staff.
SPR’s partner recruited managers from target customers to day-long seminars about engineering process and optimization. The partner was able to fill the seats and bring in enough revenue to cover event costs. The classes elevated SPR’s brand recognition as well as garnered attention from competitors looking to develop competing products.
Slow Market Traction
SPR’s marketing approach proved very successful in establishing relationships with software development staff. The individuals who attended training events understood the need and wanted the solution. However, they were not at the right level in the organization to make purchasing decisions themselves.
When SPR sales staff had the opportunity to meet with decision makers, they had a hard time convincing them that there was enough financial incentive to invest in their services. Unfortunately, they made few sales.
The Decision to Pull Out
After three years, SPR leaders decided to close the China business. Michael explains that it ended up being a pretty simple decision. They hoped to make a certain level of sales volume and supplement that with external investment from the US and perhaps investors in China. But the external funding never materialized because of the state of the economy, which was in the midst of the 2009-2010 financial crisis. To make matters worse, costs in China were rising quite fast. Therefore, they really had no choice but to close the business.
In retrospect, Michael believes that with a little more time, his team might have been successful. He reflects: “Critical mass going into China is very important. We launched our company with what we thought was a substantial investment. But it turned out not to be sufficient.”
Ideas for Different Approaches
Other than going into the market with a longer-term plan and additional money, Michael thinks the overall approach was largely correct. Although, if he had the opportunity to attempt the business again, there are a couple of things he might try differently.
Selecting a Larger Partner
While SPR’s business partner had many advantages, it was not a large volume consulting firm. It had limited geographic coverage and therefore could introduce only limited clientele. A larger partner, with national coverage, would have been more likely to have customers willing to invest in SPR’s offerings.
The challenge with this approach is that large consulting firms are usually only interested in partnering with large technology firms. It would have been challenging for SPR to win the confidence of a large player. Even if they were able to do so, they would have had difficulties negotiating a fair deal.
Associating with Industry Institutions
Associating with well-known Chinese institutions focused on software project management is another approach. These platforms provide opportunities that could have made it easier for SPR to attract larger partners and customers. Unfortunately, Michael didn’t have the necessary contacts at the time to make this happen.
Attending an industry event is a relatively economical way to get your product and services in front of Chinese customers. Spending a couple of days at a conference helps to get a sense of the market interest. There might also be government export grants to cover a portion of the expenses. (see endnote 1)
Plan Ahead for Potential Risks
Draft a business plan that addresses potential risks and explores unfortunate business scenarios. Get expert advice on what those risks might be. Before entering the market, think through the possible outcomes carefully, and make sure to invest adequate resources to manage the risks. At the same time, define clear success criteria, and be prepared to leave the market if you do not succeed within a reasonable time frame.
Invest in Localization
It is not enough to have a successful product that has done well outside of China. Chinese businesses expect technology that is fine-tuned to their needs. Localization requires both time and money and may involve changing the business model as well as technology and services.
Find a Partner Familiar with the Target Market
Having a partner who is familiar with the market can be very helpful. In addition to making introductions, partners can offer advice on business culture and how to portray your company in a positive light. You will benefit by associating with a partner who has a degree of market success and a strong reputation. This is especially the case if you are a small company that nobody has heard of.
- STEP Grant funding is available in many U.S. states. Source: “State Trade and Export Promotion (STEP) Grant Initiative,” U.S. Small Business Administration, January 27, 2019 (https://www.sba.gov/content/state-trade-and-export-promotion-step-pilot-grant-initiative-cfda-59061-1).
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