As a Montreal firm discovered, web-based tech makes it easy to export your services internationally, but the cloud can’t fix an unstable foreign exchange rate. How to handle U.S. currency?
According to Ian Rae, a cloud computing entrepreneur based in Montreal, his company’s success came about in a somewhat unorthodox fashion. Most SMEs that export begin life by establishing a domestic presence, and then expanding into the U.S. Eventually, revenue flowing in from south of the border eclipses domestic sales.
But when Rae launched CloudOps, a private-cloud software and networking firm, most of his clients were American. Although Canada was home base, sales here were little more than a commercial footnote.
Rae’s experience was the outgrowth of an earlier business venture, Syntenic, which he launched in 2005. An all-purpose IT consulting firm, Syntenic attracted U.S. investors, and Rae ended up splitting his time between Montreal and Boston.
A few years later, Rae transformed Syntenic into CloudOps when he decided to focus on the emerging cloud computing sector, leveraging many of his contacts in San Diego and Silicon Valley to build a customer base for the new firm. U.S. customers, he adds, tend to be three or four years ahead of Canadians when it comes to technology adoption.
Since then, the cloud computing sector has become a veritable supernova. A 2013 market analysis by the technology research giant Gartner Inc. estimated that global spending on cloud computing in 2012 had topped US$110 billion, with predicted average compound annual growth rates through 2016 of nearly 18%. CloudOps ranked 148th on the PROFIT 500, with $5 million in revenues, a more than 440% increase year over year.
Over the past two years, as the U.S. market began to mature, Rae and his team realized that interest in cloud computing services in Canada had finally sparked. “We’re now able to focus on our own backyard and do so quite profitably.” The firm’s export revenues reflect the shift: from 50% in 2007 to 20% in 2012.
During those first few years, Rae had to pay particularly close attention to what turned out to be a crucial aspect of his business: the yo-yo gyrations of the exchange rate. When Rae launched Syntenic, the Canadian dollar was trading in the mid-80-cent range—attractive for an export-oriented firm with lots of U.S. business. During the following year, however, the loonie soared to well past par, collapsed during the 2008-2009 recession, then recovered to the $1 range where it remains today.
Early customers wired relatively small payments in Canadian dollars, in the $15,000-$20,000 range. Rae soon realized that the company was losing money on every transaction to bank fees. More problematically, his clients didn’t want to have to worry about the exchange rate.
CloudOps made a critical decision: it would price its services in U.S. dollars. “We would take the risk of the currency fluctuation and we would take the cost of the currency conversion.” In effect, they’d begun doing their own currency hedging.
It turned out that the cost of making life easier for CloudOps’ U.S. clients didn’t make life much more complicated for the company. The relative stability of the dollar since its recovery in 2010 has meant that the pricing strategy didn’t result in exchange rate losses. And the company managed to negotiate preferential currency rates with its bank if it batched smaller payments and only converted sums in excess of $250,000.
That cash management strategy has paid off in another way. As the business grew, CloudOps established new supplier relations with U.S. firms, which can be paid from CloudOps’ U.S. dollar accounts. “We tend to keep a certain amount of American dollars around,” says Rae. “We watch the market and adjust our holdings based on where we see things going.”
Recently, the Canadian dollar has fallen slightly to the 96-cent range, vindicating the company’s currency management strategy. “We price our services at par in U.S. funds,” Rae says, “therefore it also means the U.S. customers are paying us more.”
These days, the company’s Canadian customers account for almost three-quarters of its revenues. The business, moreover, is a bit different because the client companies are not the hard-driving early adopters of CloudOps nascent period. “While the U.S. funded our very early growth, for a variety of reasons at this phase, we get better ROI with Canadian customers.”
Having developed more technologically sophisticated services, CloudOps now sees the Canadian marketplace as a platform for validating its latest refinements. By next year, it will be prepared to make a second major push into the U.S., setting up an office that will probably be in Boston, New York or Silicon Valley. “We’re preparing to compete in a globalized cloud computing industry,” says Rae, who will travel to a major trade show in Amsterdam in the fall to drum up customers in Europe and other regions outside North America. “We’ll probably start exporting more and more in 2014.”
Originally published by PROFITguide.com, August 20, 2013. Download the Trade Tipsheet that accompanies this story at http://www.profitguide.com/trade-tipsheets