My last LinkedIn® post addressd issues of overt corruption. Here, I address issues of conduct and human behavior that can engulf you like quicksand and hamper your ability to do business in a foreign country. I am talking about malaise, self-interest, fear, greed and jealousy, to name just a few of the obstacles. Unless you thoroughly understand the issues and characters behind particular transactions, markets and business dealings, you will have an extremely tough time doing business abroad. Things that make perfect business and social sense on the surface will not get done. Your offers of lowering prices, increasing efficiency, bringing prosperity to the population in your chosen market will be enthusiastically received at the top, even announced to the world, and then fizzle in the execution and die a slow death.
Several years ago, a major international financial institution approved a sizeable loan to partially rehabilitate a badly deteriorated municipal water system in the Ukrainian city of Dnipropetrovsk. Given the tremendous difficulties municipalities in emerging countries face in obtaining financing, an announcement like this should have brought joy to the people everywhere in the city and in the water utility authority itself. Instead it brought fear, intrigue, resistance and sabotage.
The Bank put out a tender for a project management company to implement the financing, for which our firm co-bid with one of the world’s leading Dutch engineering consortiums. We were unsuccessful, but in the process we uncovered a fascinating textbook case on how a dark flip side can seriously interfere with what on its face appears to be a win-win situation.
As we started to interact with the officials from the water utility authority and the municipality, it became clear that most of the senior officials and most of the 3,200 employees were opposed to the project. On the surface it made absolutely no sense, as the project promised to improve the quality of the city’s drinking water, improve sewer cleaning facilities, improve the water pressure of the residents, conserve water, and reduce water main ruptures. Ostensibly, the reason for the resistance was a fear that the municipality would not be able to repay its debt obligations without impacting its financial condition. Although a fairly valid reason, it did not seem sufficiently compelling to justify all the intrigue and stall tactics that plagued the project.
What was going on? Well, as part of the conditions for extending an economically viable loan, the bank required that the debts be cleared from the balance sheet, the tariffs subsidies removed, that international financial accounting standards be applied, and that periodic audits would take place. This threatened to uncover a number of financial irregularities. Further, the accounting department would have to be reduced from 50 employees to four and the entire staff would have to be pared down to 800 from 3,200 as part of transforming the utility from a bloated and inefficient Soviet-style organization to a modern well functioning profitable enterprise.
But the project was still good and well-intentioned, right? Wrong! The municipal politicians did not want to raise the water and sewer tariffs, because it would hurt them in the upcoming election. Many workers were afraid of losing their jobs and illegal side businesses, and of having to work harder in a leaner, high-pressure environment. And they were doing everything in their power to stall or kill the deal. Their pay was low and the working conditions poor, but the workers in this case preferred the status quo. This is a very important lesson when working on the side of radical organizational change.
The Deputy Director who had championed the deal and was primarily responsible for arranging the loan was now faced with significant and unexpected resistance from a number of directions. As the financing process began, he eventually lost his job and implementation of the loan sputtered.
Although our firm ended up not participating, we identified some critical concerns: (i) the need to communicate and win support of the key project participants and constituents prior to commencing a project, (ii) the need to examine in advance the organizational dynamics of the enterprise set to undergo significant changes, and (iii) the need to extensively shape and counsel the organization to maximize the project’s chances for success.
LEARN WHAT TRULY STANDS BEHIND EVERY DEAL – from motivations of the parties, to ultimate beneficiaries, to whose interests will the deal cross to why are you being selected, or you will fail.
Here’s an example. A U.S. company proposed that a large bakery in Russia buy its baking mix for its products to simplify the production process and make it more cost effective. The U.S. executives were baffled when their offer was rejected. It turned out that the plant manager was systematically stealing eggs that were earmarked for baking from scratch. For her to switch to a ready-made mix would have meant the loss of side income (and it is hard to sell eggs as part of the bake mix on the black market).
Working on a large feasibility project, the project team initially encountered very strong resistance from local employees charged with providing assistance and information. We learned later that several other studies sponsored by various international financial institutions were performed earlier and none yielded in any measurable results, thus local employees had lost faith. But instead of open hostility the employees had adopted a passive-aggressive approach to solving what they saw as a major problem. Although on the surface they acted compliantly enough to appease their superiors, in reality they were not performing and were placing the entire project in jeopardy.
In some countries, politicians will often reject opportunities that would mean long-term prosperity for their constituents, such as infrastructure improvement or increased energy efficiency because the political system does not reward long-term decision making as much as it does short-term action that avoids unpopular measures against the electorate. Thus, short-term result harvesting behavior is rewarded instead of investment that can produce long-term benefits.
In every foreign country, every opportunity has a flip side. Of course, many situations back home are also complex and nuanced and have underlying currents and flip side issues. But in foreign countries, the political uncertainties, organizational dynamics, local culture, and socioeconomic standing of the country magnify the subtleties and intensify the consequences.
Effectively combating or sidestepping flip side issues requires a thorough understanding of the situation. You need to earn the respect of the folks whose help you will want to enlist in resolving the underlying issues. Credibility, clearly defined issues, and open and ongoing communication are essential. Both positive and negative information needs to be communicated promptly, overtly, and without any bias. And try to break down the problem into small incremental challenges so that you can work diligently to achieve defined milestones.
People in countries where difficult and tumultuous conditions are a way of life tend to be jaded when it comes to promises of a better life and are generally much more cynical than people in developed countries.
People in developed countries also have a completely different frame of reference and values set. For instance, no one in the U.S. would think of bringing burned-out light bulbs from home and replacing them for good light bulbs from the office. But this kind of thing used to happen all the time in the former Soviet Union. Not many people in the U.S. would think of stealing flowers placed on a grave and reselling them, but it happens to this day in countries like Moldova where, to prevent flower theft, people break stems in half before placing them on graves.
When a country is converting from a state run economy to a free market, there are always members of the working population that are pathologically afraid of losing their jobs. Very often, fundamental organizational dynamics and culture are overlooked and overshadowed by the commercial issues such as sales and financing. So it is critically important to address the organizational culture if you are trying to acquire, privatize, or rehabilitate an existing business that has its roots in state or municipal ownership.
When trying to sign contracts that were endorsed or approved by top government officials, don’t be surprised if you and your company find yourselves hitting the proverbial glass ceiling when you try to move the project towards its conclusion. Once again, it is important to really understand why.
An obvious answer is that bureaucrats may be looking for payoffs or favors, both serious no-nos, but more often than not these contracts are directly opposed to someone else’s interest and unless you figure out how to align the various interests, the project will not go anywhere because these forces and motivations are more potent than a simple corrupt payoff.
Other, sometimes less obvious, factors involve political, nationalistic and anti-U.S. sentiment. Here, you need to pay attention to external considerations, which may affect your business dealings and which, if not handled properly, may result in frustrating delays, wasted money, and lost opportunities.
Many emerging markets have created alliances with countries whose influence disproportionately affects the balance of economic power. For instance, China has successfully taken several African and Asian countries into its fold. Russia, in an attempt to regain some of the economic influence it lost in post-Soviet days, created a Customs Union with Belarus and Kazakhstan and renewed its Sevastopol naval base lease in Ukraine. These are alliances that provide natural advantages for their participants to the detriment of just about everyone else.
Nationalistic considerations are often of a protectionist nature and are designed to help emerging markets develop their internal manufacturing bases by favoring bids for products and services produced locally. Oftentimes, however, powerful local politicians or businessmen are behind the implementation of these tactics simply to keep out competition, gauge prices in the market, and enrich themselves through unfair procurement practices while wrapped in a national flag. China and India are both shining examples of strong nationalistic tendencies in some of the hottest manufacturing sectors. You can applaud their desire to advance their economies by creating their own technology and manufacturing bases, but to ignore the interests of the “darker” local forces behind such initiatives would be simply naïve.
Anti-U.S. sentiment also must be considered when doing business in a foreign country. Although it is not nearly as pervasive as the political or nationalistic sentiment, anti-U.S. sentiment is a dirty little secret in some very surprising places. Some multilateral financial organizations in which the U.S. is a prominent member have demonstrated clear anti-U.S. bias over the years by not awarding contracts and senior positions to Americans. I came face to face with it over years of representing Motorola in the former Soviet Union. And while this now global company has been identified as “born in the USA,” I have personally observed numerous cases of Russian decision makers and procurement officials handicapping the company’s offerings simply because of its American origins.
As you may infer, having reliable information gathering mechanisms in place is critical to understanding the flip side issues and the players involved. Make lots of friends and acquaintances in the rank and file, such as the clerical and administrative staff of the ministries and municipalities, hotel concierges, drivers, and middle managers of organizations with which your company intends to do business.
As discussed in Chapter 24 of my book “Fluent In Foreign Business”, treating people well, being polite, attentive and honest goes a long way everywhere. Write a thank you card to a secretary in a ministry, call a local department supervisor on his or her birthday, and remember the name of the janitor or security guard. You will be surprised at how much information will eventually start flowing your way. Always consider the source, but as you piece information together from various sources, an accurate picture will usually start to emerge and the dark flip side will slowly, but clearly, reveal itself.
Reprinted from Fluent In Foreign Business. Edited by the author. All rights reserved