Letter to Ivan McKee MSP – Minister for Trade, Investment and Innovation GlobalScot Network – Recommendations to the Minister “A Trading Nation” Export/Internationalisation Strategy Bridgehead Cluster Ventures

I am writing to you in response to your letter of 20 January 2020 when you asked for feedback and recommendations from the GlobalScot Network in relation to your roll out of the “A Trading Nation” strategic initiative.

Can I endorse fully the objectives of the initiative and extend my support to the Scottish Government’s efforts to promote the development of our economy through this strategic exporting and internationalisation initiative, especially given the new challenges arising from the COVID-19 pandemic.

By way of background, I have been focusing on supporting the internationalisation of North Sea oil and gas industry advanced technology and know-how businesses to the Middle East as a lawyer and business adviser since 1995. This was initially, as Group Head of Legal of John Wood Group PLC, then as the founder and principal of HFI Legal Consultancy, and further on as the Middle East Managing Partner of Andrews Kurth Kenyon (a large Houston based law firm now merged as Hunton Andrews Kurth), and lately, during the last three years, as founder/principal of HFI Consulting International (www.hfi-consulting.com).

Over this period I have represented many clients comprising listed companies, private equity backed companies and owner-managed companies in their efforts to enter and/or grow in the Middle East/North Africa energy markets. Following my appointment to the GlobalScot Network in February 2017, which coincided with my launching of HFI Consulting International in August 2017 by acquisition of the HFI Legal Consultancy practice from Andrews Kurth Kenyon, I have sought to map out the reasons why there was a relatively high failure rate in attempts to establish and grow businesses in the MENA region and to track the causes why, especially in the case of SMEs. The objective was then to reset and establish one or more business models which could be used to focus

on the reasons why businesses have succeeded, increasing the prospects of success and reducing the rates of failure or under-performance to expectation.

The MENA region, due to its high oil and gas reserves and low production costs, remains the best opportunity for Scottish oil and gas companies to achieve revenues, profits and cashflow in the next 5 to 10 years, especially in the context of the recovery from the COVID-19 and latest oil price collapse, allowing our companies the opportunity to develop and promote parallel strategic initiatives to adapt and adjust to the energy transition which is well under way. At the same time, MENA is a tough, competitive market characterised by long high-cost start up processes, low margins and high payment/credit risks. These factors make it hard enough for listed companies and private equity backed companies to succeed, let alone SMEs.

I have also had the opportunity to closely monitor the SDI promotional and business development activities with particular reference to the ADIPEC and EGYPS conference focal points and, so I would like to offer my analysis which extends as to how I feel SDI can also assist to address the challenges and promote the recommended solutions.

In my experience the main reasons why business ventures in the region, especially by SMEs, fail or under-perform are:-

    1. Failure to Connect with the target Market – It is rare that failure arises because of lack of market opportunity for an advanced technology or know-how business but more common for failure to arise because the business cannot get connected into sustainable revenues before available investment and cash flow gives way. This is caused by the extended regional timelines needed to build relationships, undergo technology trails, undergo vendor registration processes, undergo legal registration processes, run through bidding and tender processes, negotiate and sign up to contracts, reach let along invoicing milestones and collect payments.
    2. Failure to establish and maintain effective Local Partner relationships – Over the years I have been convinced that a keystone to a successful business in the region is to establish and maintain effective local partners in the region on a territory-by-territory basis. An effective local partner can assist with front end market intelligence, market connectivity, compliance with local shareholder/agent/sponsor legal or procurement policy requirements, compliance with localisation and in-country value rules, provision of local logistics support and trouble-shooting with customers and government agencies. However, in many cases local partner relationships in many cases fail to operate effectively and can result on “living dead” agreements or contentious exit arrangements.
    3. Failures of In-Country Managers – The capabilities of the local manager of the business is critical to the success of the ventures and in many cases inadequate management has been the primary cause of failure. In my experience businesses face two major problem issues. If the option is taken to recruit from resources already based in the region this can often result in poor recruitment decisions through lack of knowledge or due diligence in the process and/or the ability of a new manager to integrate and acclimatise to his or her new business. The alternative route taken is to relocate a tried and trusted manager from within the business. However, this can result in long lead times for the manager to build up market conditions and general commercial awareness of the region. It may also leave a significant hole to be filled in the management team back home.

These challenges are often exacerbated by unreasonable expectations back home as to how quickly sales and cashflow can be generated.

  1. Inadequate Local Presence – The MENA region is well recognised as a relationships-driven business environment and it often not well understood how important local presence is to success. Reliance on strategies built on direct export sales or a network of agents or distributors without “boots on the ground” is increasingly unworkable, especially as localisation policy initiatives bite deeper. This means that SMEs face a steep ramp of costs as establishing a local presence entails registering a local licensed entity, hiring local management, renting local premises and all other associated costs associated with an in-country business establishment. This investment is typically required before revenues streams are in train to underpin the cashflow impacts.
  2. Extent of Time and Money investment needed to succeed – The combination of the above factors means that time and money needed to establish and build a business in the region is almost always under-estimated. It is rare for a business to generate positive cashflow in the first year of the initiative and not unusual to have zero or minimal revenues while the cost base goes into place. It is frequently the case that it can take three or more years for sustainable levels of revenues to be achieved and this can be a huge challenge for SMEs to surmount. This point again emphasises the key point that businesses face a major step change in costs and risks as they move from relatively the low risk business models of direct export to in-country business establishments which they are increasing have to do to succeed.

Based on the above analysis, during the last 24 months I have developed a new business model, Bridgehead Cluster Ventures, which is designed to address the five key challenges set out above. In summary the BCV model entails the following key components:-

  1. The formation of a cluster of 5-10 synergetic and non-competitive SME companies who wish to grow into a specific MENA territory;
  2. The appointment of a tried and trusted effective local partner to work with and support the cluster participants in the territory;
  3. The appointment of tried and tested full-time management on the ground in-country to represent the marketing, sales and operations of the participants in the territory;
  4. The “piggybacking” on the local partner’s infrastructure including trade licences, vendor registrations and in-country value scoring certificates during an interim bridgehead period of 12 to 24 months allowing initial sustainable revenues on a shared costs basis;
  5. The provision of an over-arching supervisory specialist consultancy to assist with the formation and operation of the cluster and to address inter-participants issues arising and issues arising with the local partner and management; and
  6. The evolution of participants from the cluster into their own full owned in-country registered business with sustainable revenues having been achieved through the cluster arrangements (or alternatively their withdrawal from the market on a loss constrained basis if they are unable to succeed).

I can confirm that introductory consultations with clients and connections in the North Sea oil and gas industry took place during Q2 of 2018 and subsequently in Q2 of 2019 (the latter in relation to a revised model in the light of findings from the previous year). The positive feedback was received in principle with the majority of contacts expressing the view that the model could significantly reduce their costs and risks and materially increase their prospects of success. However, it became obvious that the greatest challenge the BCV business model faced was an absence of a central authority which had the gravitational influence to pull the participants into a cluster.

I believe this is the key point whether Scottish Enterprise/Scottish Development International could play a pivotal role. I understand that SE has account management arrangements in place with over 500 businesses in the energy sector, including 300 within the top 1200 exporters, and that it provides various consultancy, mentoring and funding support incentives to support the international growth of these businesses. This in my view puts SE/SDI in a unique position to promote and sponsor Bridgehead Ventures Clusters.

My own view is that, although individual circumstances will differ case by case, a participant in a BCV should be aiming to secure initial revenues of £1.0 to £1.5m within 12 – 24 months from the initial cluster arrangements but with the prospect of rising and sustainable sales in the territory of a minimum of £2.5m to £5.0m per annum. Overall, an individual ventures cluster should therefore be aiming at a minimum £25 million sales revenues per annum. A series of successful BCVs could therefore add significant contribution to the internationalisation objective of The Trading Nation initiative.

This letter can, by definition, only provide a summary and overall view of the BVC model proposals and so I have pulled together a website – www.bridgehead-ventures.com – which provides more details and insight. This specialist focus is now being established as a new division within my existing business to give it more dedicated effort and direction as a specific post-COVID recovery and growth initiative.

My recommendation is that a plan should be rolled out to establish four pilot BCVs in key MENA territories each with the objective of securing £25 million of aggregated gross revenues within 36 months of establishment, and collectively generating £100 million of gross revenues across the four territories to the collective participants. This would “move the needle” and offer a major stepchange forwards from the current experience.

I hope these recommendations may be of value to you in your role and I would be very pleased to engage further on the subject matter.