Mid-market exporters could face significant regulatory challenges.
By Eric Johnson
In June, American Shipper
chronicled the moves the global trade management software and data provider Amber Road was making to tap into growing mid-market demand for export compliance systems.
The issue pointed to a survey done this year by Amber Road examining how mid-market exporters were far more likely to be at risk of export non-compliance, often due to a basic ignorance of their compliance responsibilities.
The bulk of these mid-market exporters, defined as having annual revenue greater than $50 million but less than $750 million, ship to between six and 20 countries, and two-thirds send 5,000 shipments or less per year.
Among the intriguing insights to emerge from the study was this: 84 percent of companies employ five or fewer people to handle compliance, and a quarter employ one person or no one at all.
“The regulatory burden on compliance is not a household commodity,” said Scott Byrnes, vice president of marketing for Amber Road. “Executives don’t understand the implications. A lot of people that are asked to spearhead initiatives in mid-market to small companies are usually holding down a couple of jobs. So they are tasked with compliance in addition to being the director of logistics, or someone in general counsel.”
The idea that compliance or logistics managers have to wear many hats is borne out in benchmark research by American Shipper
, which has found that supply chain departments saw staff sizes reduced during 2009 when demand faltered. Yet even as demand recovered, head counts did not increase in a parallel fashion.
That places a strain on companies in terms of their ability to meet arduous export compliance demands. But Byrnes’ first recommendation for mid-market exporters is to get an outside perspective of their processes.
“First and foremost, hire a global trade consultant,” he said. “There are plenty of niche trade regulatory consultants to assess their operations, risks, and put processes in place to address this stuff.
“And by the way, it helps when the person in charge of global trade compliance is trying to justify some funds to have a qualified professional highlight risks and what could happen if you were caught. And I think what a lot of senior execs fail to realize is that it’s not just the company that’s liable, it’s the officer in the company liable for operations.”
The other factor to consider in mid-market companies is that they are likely to want to expand, a dynamic highlighted in American Shipper
’s Export Operations & Compliance Benchmark Study: The Exporter’s Balancing Act
“As a company gets bigger, everything about that company has got to mature and governance is one of those things,” Byrnes said. “Smaller companies generally don’t have general counsel. That’s an example. Their risks increase and this whole trade compliance is part of it. The other half is as companies grow, they generally start to do business with more countries. And complexity increases and they recognize the need to get more serious and automate it, because they can’t do it manually anymore.
“Staying abreast of documents, restricted party lists, duty rates (is difficult). And then if you add one country (it has a) multiplicative effect. They don’t even know what they don’t know.”
Byrnes said Amber Road’s ambition is to grow along with its mid-market customers, calling this class of exporters a “green field” market.
“The challenge small- to mid-market companies have historically faced is enterprise-class solutions, which has been our heritage,” he said. “Some of the largest companies in the world use our solutions globally, which is a different solution than what we’ve developed for the mid-market company. Before that, people had to go with a very small point solution to automate this stuff or step up to a very comprehensive enterprise class solution, which was overkill.
“Our hope is as we land these mid-market companies they will grow into our solutions as they grow. Our mid-market solutions are easier to deploy and use, and when they add five countries and grow $200 million they can then move to enterprise-class very easily.”
Byrnes said a misconception of mid-market exporters is that their compliance responsibility is transferred to a service provider.
“A lot of mid-market companies are under the false assumption that because they use a forwarder, the liability falls to the forwarder, which is not the case at all,” he said. “If the logistics company does anything wrong, it falls to the importer or exporter of record. Anecdotally, that misconception is widely held.”
Smaller companies that are ill-equipped to handle compliance functions, however, have some options.
“You can hire it out to someone as a managed service to someone like Sandler & Travis,” he said. “But even if you use a forwarder to do those functions, you’re still well served to bring in a consultant and do a risk analysis of that interaction with the forwarder.”
But doing nothing isn’t an option.
“When the enforcement agencies come knocking, the first thing they look at is a company’s effort,” he said. “Have they deployed the proper processes? If all the boxes are checked, they’re more lenient than if there was gross negligence.
“Certainly, a fine to a smaller company is going to hurt more than a fine to a larger company. It depends on the company themselves. If (exports are) 5 percent of revenue to one country, their risk is going to be less than a company with 40 percent of revenue to five countries. But all it takes is one violation to get caught,” Byrnes said.