The allure of global trade is difficult to resist--what company doesn't want to tap vast new markets? Many of its complexities are obvious: foreign markets can be difficult to understand; there are logistical problems galore; and regulations, from taxes and tariffs to restrictions on what can and can't be shipped to a given locale, are daunting. They are also expensive: creating and processing the paperwork that typically accompanies an international shipment adds 7 percent--a whopping $420 billion per year in aggregate--to the cost of global trade.
That much red tape can put many off the chase altogether. An oft- cited 1999 report by Forrester Research found that 85 percent of companies surveyed could not fill some international orders because of the complexity of the paperwork involved. While certain efforts to streamline the process, most notably in the European Union, should help, new regulations crop up constantly, making it difficult to even know what to do, let alone do it. Take the suddenly ubiquitous need for materials safety data sheets (MSDSs). These multilingual documents detail the correct usage, handling, and transportation of chemicals and hazardous materials. Two years ago, they had to accompany shipments of related goods to the EU, North America, and Australia. Today, a local-language version of an MSDS is a legal requirement throughout Eastern Europe, Russia, and other developing countries as well.
So what can companies do, apart from dispatching an army of free- trade lobbyists to national capitals to plead for simplification and standardization? The first thing CFOs should do, says Bruce Johnson, president and CEO of software company ClearCross, is shine some light on the cost of compliance, which for most firms is a murky corner of the budget. He claims that few companies separate out those costs of trade from direct costs such as freight charges, despite the fact that the indirect cost of complying with myriad laws and regulations can reach $900 for a standard transaction. Johnson says it is not atypical for companies to set aside an amount in the budget--up to $100 million--and simply hope it will be enough to cover these hidden costs over a year.
There is now a more rational way of dealing with the growing complexity of cross-border trade. ClearCross and two other U.S.-based software developers, Vastera and NextLinx, sell trade management software that promises to lower the cost of compliance at every stage of the production process, from design through final delivery. Web-based and constantly updated with new regulatory content, their products are a leap forward from earlier generations of stand- alone PC-based trade management software.
Just ask Cliff Betton, environmental health and safety manager at Castrol. His job is to ensure the U.K.-based manufacturer does not transgress any local laws or regulations in the 132 countries to which it exports motor oil. A year ago, the company was using some 17 different software programs to produce MSDSs and other trade documents. Sitting on a single PC in a remote office, they acted as little more than a collection of glorified databases. Staff had to key in regulatory information manually, and had no way of pooling their research. Duplication between different parts of the group was rife. As a result, it took an average of half a day to create an MSDS from scratch.
Now the chore takes about 20 minutes. Castrol opted for ClearCross's suite of application tools and global regulatory content, which covers 26 of the 37 languages in which Castrol must produce labels and other documentation. Because it is hosted on a single computer server in Swindon, England, updates and regulatory content added by local staff covering the other 11 languages are available immediately via the Internet to offices all over the world.
Tracking the ever-moving target of local laws and regulations is painstaking and expensive, and ClearCross charges its customers accordingly. But with an estimated payback period of only four months in Castrol's case, the $2.5 million it paid for the software looks like a good investment, especially when factoring in other benefits. Betton says the software provides a way to incorporate regulatory considerations at the product design stage. "It allows chemists, for example, to run 'what-if' scenarios to find out how adding a particular compound affects where it can be sold," he says. This should translate into shorter product cycles and increased sales.
Castrol's positive experience with this new generation of trade management software has not gone unnoticed at parent company BP. The U.K.-based oil giant, which acquired Castrol in February 2000, recently signed a $9 million deal with ClearCross to bring similar efficiencies to cross-border trading in the 150 countries in which it operates. Such a move will certainly be watched closely by other companies. Stephens, an American investment bank, expects worldwide spending in cross-border logistics technologies to reach $1 trillion a year by 2005. --Anthony Sibillin