Part 2 – Problems, Pitfalls and Traps to avoid when hiring consultants and service providers in China.

• Fraud and Theft
• Incompetence and Inexperience
• Inappropriate Standards and Quality
• Differing Agendas
• Irrelevant Experience

What is the purpose of performing Due Diligence on service providers and consultants when entering the China market? Common sense would dictate that the main danger we want to avoid is fraud and theft. That is, after all, one to the main reasons for traditional due diligence. In China , however, we have an additional set of concerns. We are also trying to protect ourselves from incompetence, inexperience and inefficiency. Although it sounds more like a minor annoyance than a potential business crisis, experienced overseas managers will tell you that they have lost far more to incompetence and miscommunication than they have to fraud or theft.

Whether your losses are the result of dishonesty or incompetence, it does not really alter the fact that your bottom line will suffer. Let's start by taking a look at what potential pitfalls and traps await you in the China services market.

1) Fraud

Traditional fraud abounds, and we should be on the lookout. A contractor or service provider promises to perform a service, takes your money, and then doesn't meet the terms of the contract. Simple. While this is as common in China as it is anywhere else, you have to be aware of a few local characteristics that may complicate your life.

Swiping the Cab Fare. You have been having long-distance negotiations with a potential service provider, partner or consultant, and now you are ready to move forward. You structure payment terms that give each of you maximum protection and incentive. You will advance him a small amount to get the deal started, with the bulk of the funds to be released only after certain targets are hit. But after the up-front money is transferred, the other party stops returning phone calls. You are not out much money, but the wasted time, effort, and opportunity are terrible. What happened?

Many expats and overseas managers have learned the hard way that the stakes can be pretty low here. Many potentially profitable deals have been wrecked for sums of money that you may consider ridiculously low. Big money at the end of the deal doesn't always keep everyone honest here.

Brands, IP and Reputation . Not all fraud is about currency. Your logos, trademarks, product designs - even your printed sales material and brochures – are all valuable, and therefore at risk. In China you may sometimes have an additional risk – your reputation and image. Many overseas businesses have been surprised to see themselves profiled in someone's advertising material or online directory as a satisfied, long-term customer, when in fact they have never transacted business with the company. More than a few western businessmen have found their own photograph on another company's website or advertising material – with a caption describing them as a partner, supplier or even staff member.

Also be sensitive about attending off-site meetings with other companies – particularly if you have never heard of the new participant. There is an excellent chance that your potential supplier is using you to sell something else entirely. By representing you as an important international partner – or investor, or parent company, or buyer – a dishonest potential counterparty can make you an unwitting accomplice in his misrepresentation.

Time . Time is not money for everyone, though it probably is for you. That's especially true if you come all the way to China to meet with a potential partner only to find that the counterparty is completely unprepared or inappropriate. A common complaint of overseas businessmen is that the endless cycle of ‘relationship building' meetings will continue long after the other side knows there is no chance of completing the transaction. We know of one US based business owner who schedules all of his Shanghai meetings with new suppliers or service providers at a busy downtown coffee-shop. “I can usually tell in the first 5 minutes if the meeting will be a waste of time or not, and then I can excuse myself and use the time productively. Avoid devoting half a day to a meet unless you know it will be productive.”

2) Incompetence and Inexperience

In China , these are definitely Due Diligence issues. You should always find out about your counterparty has done business with before, and in what capacity.

While there is nothing wrong with taking a chance on a bright, eager newcomer, you should always know in advance who you are dealing with.

DiligenceChina has a strong bias against being anyone's first international client. (And local branches of multinationals shouldn't necessarily count as being international deals.) Just because your counterparty is wearing a nice suit and has a fancy office doesn't mean you two are on the same page as far as schedules, timetables, standards, quality, etc.

Business entry consulting is a booming industry in China , and that means it looks like easy money to lots of young graduates and MNC managers with 6 months of experience. Don't take anything for granted when looking for basic services. Find out if they can actually do the jobs that you need them to do, as opposed to some reasonable approximation that they believe will be almost as good.

3) Standards and Quality

Beware of getting exactly what you ask for, because that is a huge challenge in China . There are times when "75% as good" is simply useless to you. If you are working with low-cost suppliers of services, you will probably get exactly what you pay for.

A great due diligence check is to find if your potential service provider feels your goals and standards are reasonable and possible. Don't assume they will tell you at the outset if it isn't possible. Many overseas businessmen have been driven to distraction by service providers who deliver a completely different kind of service than the one agreed to because they didn't understand the original specification or weren't able to provide it. In the US and Europe , the contractor will inform you and offer an alternate method. In China , you shouldn't assume that will happen.

Many inexperienced local service suppliers will not understand your quality requirements, and offer something that they feel is “just as good”. If a simple job requires 3 or 4 attempts, you are losing a lot of time, effort…and sanity.

4) Differing Agendas

You would never take a big job with an important overseas client just to gain business experience or practice your language skills, would you? Well, there's a good chance you may be negotiating with someone who is doing just that. Be very clear about references and work history. Did they actually DO this work for someone else, or did they once work in a company where that kind of transaction was discussed over lunch one day. Are they using you to build their resume, teach them the business, or help them to find a “real job”? Beware of consultants or service providers who are priced below the market – they may not be a true bargain.

Being an unwilling teacher or mentor is bad, but being a patsy is worse. Many “business entry consultants” are really nothing more than shills for their friends and connections that have expensive services and solutions to sell you. Consultants are expected to have industry and commercial connections – but that doesn't mean you have to buy what their friends are selling. Your consultant works for you, and should be providing value-added advice and planning assistance. Don't get pushed into tailoring your plans to fit his agenda.

5) Great Experience – but in what?

This is one thing you may not believe until you've been around the track a few times. You will meet plenty of engineers who tell you they are experienced project managers, English teachers representing themselves as management consultants, and former office managers handing out cards with “Business Entry Consultant” on them. Related experience may sometimes be useful in particular kinds of circumstances -- BUT a graphic designer doesn't necessarily know the first things about market research, even though she has worked in the same office where it was being done. Get VERY specific about people's competencies, histories and experiences. Service providers here love rattling off lists of famous multinationals they have worked with, but that doesn't really tell you anything. If they can't get specific and detailed, they should get lost.

Due Diligence in China includes all the same procedures as in other economies, plus a few new ones. This is particularly true when deciding on service providers, consultants and potential partners.

In general, you are looking for someone with a solid track record of international experience in the kinds of transactions you need done. No experience, the wrong experience, no international experience or irrelevant experience should all be deal-killers.

General rule of thumb for China Due Diligence – If it is too complicated to explain, it means NO.

One final Due Diligence note. You might be tempted to hire that earnest, hard-working young graduate with enthusiasm and good intentions, thinking that honesty and attitude will make up for lack of skills or experience. Don't. In China , the road to bankruptcy and regulatory entanglements are paved with good intentions. Pay what you have to for the skills and experience you need.

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