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MIT 1 463J - Establishing a Foreign Office

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C:\Documents and Settings\MStern1\Desktop\Session 10 11-16-06.doc 1 Session 10: Establishing a Foreign Office 1. Discussion of the VMS Asset Management Contract for Virginia’s Highways 2. Is the International Market for You? 3. Targeting an Appropriate Country, Countries or Region 4. Knowing the Target Market 5. Selecting a Local Partner 6. Operating in the Country, Countries or Region of Your Choice 7. Why A Local Office? 8. Opening a Foreign Office a. Outline b. A Full Service Design or Construction Office? c. Critical Decisions d. Increasing Your Chances for Success 9. Risks and Opportunities 10. Specific Guidelines for your Reports e. Business Plan f. Target Country or Region g. Initial Entry Strategy h. Budget i. 3-5 Year Forecast of Profit and Loss j. Future Plans Following Initial Success k. Impact of the Initiative l. Risk Analysis m. Exit Strategy 11. Guidelines for Pro Forma Forecasts of Office, Concession or Initiative Costs 12. Class Discussion – “ENRON’s Eight-Year Power Struggle in India”; Readings from Thomas L. Friedman, “The Lexus and the Olive Tree”C:\Documents and Settings\MStern1\Desktop\Session 10 11-16-06.doc 2 SESSION 10: Establishing a Foreign Office This session addresses a number of the key issues and concerns in establishing a foreign office and/or developing an international practice or investment. 1. Class Discussion of VMS Asset Management Contract for Virginia’s Highways During Session 8, we did not have sufficient time to discuss the article, VMS Asset Management Contract for Virginia’s Interstate Highways. This article offers us insight into a number of risk management issues and opportunities, including: • Privatization • Outsourcing, and • Risk Management and Risk Transfer The VMS initiative involved: • Identifying and marketing a need in the marketplace – asset management. • Outsourcing the maintenance of 250 miles of Interstate highways in Virginia. • Virginia Department of Transportation was already a client of the two VMS sponsors – Sverdrup Engineering (now Jacobs) and The Louis Berger Group. • It was an unsolicited proposal with significant risks. The bid, once submitted, was open to competition for 30 days. For the new International Terminal Concession at Manila International Airport, where the waiting period was 90 days, a second firm won the project. • The cost of preparing the unsolicited proposal was almost $2 million. • Local Virginia contractors fought it.C:\Documents and Settings\MStern1\Desktop\Session 10 11-16-06.doc 3 • The contract pioneered a new concept, asset management. What is it? • The roads had to be returned to the state in their original condition (subject to independent condition audits). • No “Acts of God”, e.g., force majeure or wiggle room, hurricanes, excessive snow claims could be made and it was performance based. • It was a new business for Virginia and became one of the 10 fastest growing companies in the U.S. according to “Inc.” Magazine. Critical Issues • Prior state record keeping, including lack of detailed costs, e.g., only budgets which did not include state management or state police costs; inaccuracies, e.g., traffic; incidents under-counted. • Testing new approaches. • Essential Software/database support, and • Innovative management practices and opportunities. 2. Is the International Market for You? As we discussed in earlier sessions, many AEC firms, even outstanding ones, are often ill-prepared or equipped to work in international markets. The work is expensive and time-consuming to promote, margins are lower and the practice differs significantly from typical home market work. Planning or project definition is far more demanding; design commissions and construction projects are often price-sensitive; variants of turnkey or design/build are typically more common; and in the non-OECD world, public sector work still tends to predominate. In addition, U.S. engineers and contractors have to compete with firms from Europe and Asia that, as noted in previous sessions, may be more vertically integrated, offer a broader range of expertise and are better funded, with stronger partners and/or are affiliated to, part of, or supported by, conglomerates (Korea, Japan and Italy), universal banks (Germany), state pension funds (France, Italy, Quebec), etc. If, despite these admonitions, you think you do want to go abroad, you must be prepared to bring considerable flexibility to the effort. • If you are not comfortable with design/build, don't go. • If you are not prepared to accept a higher degree of uncertainty, don't go.C:\Documents and Settings\MStern1\Desktop\Session 10 11-16-06.doc 4 • If you don't like to travel or enjoy different cultures, don't go. 3. Targeting an Appropriate Country, Countries or Region If you decide to proceed, you must carefully evaluate your own firm’s strengths and weaknesses, and focus your effort on your strongest assets. Recognize, as we discussed in Session 4, who you are. • Do you offer unique services or a service in growing global demand? • Do you have a proven “in-house” champion to pursue overseas work? • Are there demands for your services (e.g., are you already receiving overseas inquiries)? • Do you have staff interested in and able (multi-lingual, etc.) to work abroad? • Do you have sufficient financial resources for the effort? • Do you have throw-weight in your domestic markets and are they transferable to international markets? What unique or outstanding expertise and experience do you have that will attract a foreign client, add value to a prospective host country partner or increase a team's chances of winning a project? Develop a clear strategy and decide whether: • You will market a narrow technical skill or a single client, • Target a specific geographic area, or • Undertake a broad-scale marketing or investment effort, then • Decide on the sector, project or program you propose to pursue. Once you decide on a field, pick a promising country, countries or region and ensure the target: • Has a tradition of employing foreign AEC firms? • Has a stable government(s) and attractive economy?C:\Documents and Settings\MStern1\Desktop\Session 10 11-16-06.doc 5 • Has predictable legal, contract and

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