In a time when agile operations and cost-effectiveness are vital to businesses around the world, the as-a-service (aaS) model has become incredibly useful for numerous elements of a growing company.
The aaS strategy has always been well-suited to technology. With SaaS (Software-as-a-Service) and IaaS (Infrastructure-as-a-Service) becoming commonplace in the corporate world. Organizations flock to these models as they offer flexibility, scalability, and minimal upfront costs, as businesses only pay for what they use.
All this suffices to say that the aaS model is game-changing for modern businesses, so why think that it only applies to technology?
Other Industries, such as Manufacturing, have been leveraging most of the characteristics of this model under another name, like the Shelter Model. The Shelter Model, provides foreign companies the option of paying only for what they are using when opening operations in the new country. Their infrastructure and resources are shared between different customers, that can scale and add functionality when needed.
This concept, in the IT Industry, is known as a Virtual Subsidiary or Subsidiary-as-a-Service (SUBaaS), which has more flexibility than the Shelter Model and the additional advantage of being able to start small or with a temporary operation, before scaling. Similar to the aaS model.
When applied to geographical expansion, this is an operational framework that provides a safe path for companies entering new territories, giving small- and medium-sized businesses access to the same expansion benefits that large corporations have. Just like SaaS, companies can leverage SUBaaS to start operations immediately, without any of the upfront investment or risks associated with full foreign incorporation.
We’ve found that companies can sometimes misunderstand the concept, even comparing it to a local payroll service, when, let’s face it, a Subsidiary does more than just Payroll. During its day-to-day operation, It will need staff with local knowledge of Procurement, Recruiting, Human Resources, Facilities Management, Legal, and further down the road, Accounting, Relocation, and many more.
Now a household name, Salesforce launched its CRM Software service in a market that was dominated by legacy on-premise solutions that took months to implement, train, and adapt to the business.
Salesforce was designed for small- to medium-sized companies that couldn’t afford traditional business software solutions and didn’t have the resources to support in-house the solutions.
Salesforce enabled businesses to scale as needed, instead of being forced to purchase most of the capabilities upfront without knowing what level of usage they would actually need. SME companies could now start using the chosen capabilities from a menu in a matter of weeks—not months—while adding new functionalities as needed.
Salesforce lowered the barrier to entry by eliminating the setup costs and moving from Capital expenditure (CAPEX) to operating expense (OPEX) and a cash-flow-friendly monthly bill. It seems so obvious now, but that was how the SaaS revolution first began.
With the Salesforce story in mind, let’s now look at how companies can obtain similar benefits when establishing an overseas subsidiary.
Lowering the Barrier for Market Entry
Subsidiary-as-a-Service works the same way as SaaS; it’s simple to use and a lot less expensive than the traditional alternatives like joint ventures, acquisitions, or direct incorporation.
With SUBaaS, companies can pay a monthly fee (per user) for the services they use—no more, no less. Most notably, SUBaaS provides full subsidiary capabilities for operations and local presence, but there are no fixed costs and liabilities to worry about, as the service provider owns and manages the infrastructure as part of the service.
Subsidiary-as-a-service providers like Everscale Group manage multiple assets that are shared among customers, including human resources, procurement, recruiting and payroll, legal, tax and accounting, and physical infrastructure. It’s somewhat comparable to Amazon’s management of multiple servers, software, and appliances, where companies rent a percentage of that infrastructure through AWS. In our case, we provide economies of scale benefits that our large-scale sister companies bring to the table, as well as their 30 years of experience supporting foreign companies as they enter the region.
For most companies, the costs and time associated with setting up an office, finding and hiring staff, and navigating local laws and regulations outside their borders are incredibly high. With the SUBaaS model, your startup costs are minimized by sharing common resources when needed, such as local specialists or physical presence. On top of that, SUBaaS allows businesses to scale as and when they need to, with the flexibility to expand rapidly, wind down parts of the operation immediately, or work with talent on a temporary basis for specific projects.
New geographies pose new risks for businesses, so mitigating those risks is a high priority. With SUBaaS, companies can pilot a region without investing in a large expansion budget, which is highly beneficial for those not ready to commit to a market for more than a few years
Let’s go back to the Salesforce example. In order to provide real value to the customer, the company still needed to deliver functionality and capabilities to a specific business area, allowing the customer to benefit from their experience in that area—in Salesforce’s case, this meant best practices for managing sales processes effectively.
Subsidiary-as-a-Service providers have capabilities that their customers can benefit from, as well as the valuable experience that comes with their solution. In order to do that, you have to be specialized. To maximize value for our customers, our niche is the Enterprise Software Ecosystem, from Independent Software Providers (ISVs) and Value-Added Resellers (VARs) to IT Solution Providers. Our turnkey capabilities in Mexico have prepackaged expertise from this industry.
Our customers select from different configurations with built-in local best practices that avoid the learning curve for new entrants. Some examples are:
- SUBaaS with a configuration for delivering services to North America (Nearshore). The Subsidiary is built with a focus on having experienced teams and processes for implementing IT solutions like SAP, using a packaged scope, and delivering the services with a mix of remote and onsite activities (the team traveling onsite for key meetings).
- SUBaaS with the objective of using Mexico as their Latin American point of entry. The goal is to start signing customers as soon as possible, so a proven sales team is put in place with campaigns focused on pipeline development and solution validation. Local Incorporation can be added after building enough pipeline, to be ready to sign local customers, while still benefiting from the economies of scale savings of the SUBaaS.
- SUBaaS for supporting Project Rollouts in LatAm. The subsidiary is active while they are implementing a solution in a new region, requiring local teams that are experts in localization and compliance. After the project ends, the subsidiary may be kept active with a small team to support local tickets from the region
In summary, your SUBaaS partner should provide the local know-how and the benefits of acquiring a local company from your target industry.
Convergence of Trends
In the last five years, the main trend for business was to evolve into agile organizations, which means becoming adaptive and fluid with the flexibility to scale up and down accordingly, along with the ability to add or switch capabilities on-demand.
Now with COVID-19, the agile business trend has accelerated. Companies need to develop resilient organization attributes, such as revenue diversification and flexible expenses over fixed costs, as well as leveraging the advantages of the new normal, such as a hybrid workforce.
Against that backdrop, Subsidiary-as-a-Service represents a nimble, low-risk, and cost-beneficial alternative to other global expansion models that look to access new customers. It is also a versatile option for SMBs that need to operate in other regions and gain additional capabilities in a flexible way.
From our perspective and following recent trends closely, we expect SUBaaS to become a critical ingredient in new business operation models.
If you are interested in learning more about this framework you can contact Everscale Group here.
“Behind the Cloud: The untold story of how Salesforce went from idea to billion-dollar company”
By Marc Benioff, available at Amazon
“Why Traditional M&A Is Becoming Less Important”
Harvard Business Review
“Building scalable Business Models”
MIT Sloan, December 201