South Africa: Risk Management: Evaluation Of Country Risk

Last Updated: 19 March 2012
Article by Vivian A. Maese and Daniel B. Epstein

Having attended a number of Outsourcing and Offshoring conferences lately, the most frequently asked question we hear is, "What is the next strategic location?" Someone will offer "Costa Rica," another chimes in "South Africa." Stepping back for a moment, it is important to appreciate how remarkable it is that we can even ask this question. Stunning advances in telecommunications and technology have enabled all of us to view the world as our oyster.

We live in a truly interconnected world. Often that interconnectedness is a good thing. Other times, it is not so good, and we are grateful for some physical separation.

Legal systems around the world reflect their individual country's culture. They are each as different as people are diverse, and every country has the local view: "They can't possibly do it differently than we do." But in fact "they" can, and "they" do! It is important to appreciate these differences before answering the next location question and investing a significant amount of capital based upon labor pools, time zones, infrastructure and cost. It is also important to: (i) understand the functions that your company is evaluating for a potential relocation; (ii) know in detail how those functions are currently performed; (iii) have an appreciation of how important the functions are to the operation of your company; and (iv) know whether and by whom the functions are regulated. With this level of understanding, a company can begin to assess risk in the context of a strategic location in a different country.

The second part of the evaluation process is to assess the operating environment in a particular location. The company should know whether the laws of the country you have selected as a strategic location are hospitable to the functions that you want to relocate.

Due diligence should include a reasonable picture of what it is like to operate a business on the ground. While it is not possible to eliminate all risks, it is possible to assess risk before investing in a new location, and to use procedures and tools to assist the company in its ongoing risk management obligations once you are there. Although the world is uncertain and changeable, with a well-focused effort, a company can reduce the probability of risk and the possibility of a bad or costly outcome.

Another important consideration for companies in the United States is the current and aggressive enforcement of the Foreign Corrupt Practices Act by the Securities and Exchange Commission and the Department of Justice. When evaluating locations, you add more risk and cost to your operation when the country has a reputation for corruption.

The following list of questions is a useful framework to begin an evaluation of operating risk in a country.

  • What is the form of government?
  • Is the government politically stable?
  • Is the government transparent or corrupt?
  • Is there government control over speech?
  • Is there freedom of association?
  • Is there a digital community?
  • What is the legal environment? Are there consistent results on the same set of facts?
  • What are the rules that relate to ownership of real estate? Contract formation? Enforcement of contracts? Hiring and firing of personnel?
  • Where is the financial system on a scale from free market to state owned?
  • What is the tax environment? Are there taxes on the transfers of technology or intellectual property?
  • Can the backgrounds of locally hired people be validated?
  • Is there legal framework for the protection of intellectual property, and is there an enforcement remedy in the event of a theft?
  • Are there data protection rules? If data, intellectual property or money go into a country, can the company get it out?
  • Is there a consistent infrastructure (electricity, telephones, etc.) to support operations? Can a plan be made to support operations in the event of a break in the continuity of business operations?
  • Are there confidentiality, bank secrecy, state secrecy or information security rules? Are those rules consistently applied in ways not inimical to your business or that of your outsourcing provider?
  • What are the rules concerning the import or export of technology? The import or export of data via telecommunications?
  • What are the rules concerning visas and immigration?
  • Is the local culture consistent with innovation or misappropriation?

There is no one right answer to any of these questions. Although the company's goal is to achieve the uninterrupted benefits and expectations of its initial investment analysis, all risk evaluation is contextual, and the risks need to be balanced against the goals of the company. In light of all of the risks, the rewards may make the risks acceptable, particularly when supplemented with procedures and technologies that mitigate risks. Enterprises with global operations and enterprises seeking to offshore operations need to evaluate country risk as part of the overarching enterprise risk management governance structure at the company.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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