Every successful CEO of a U.S. software company wants to grow beyond North America. Europe, the world's second largest economy, looms large as the logical choice to pursue international growth.

Now that growth has returned to the IT industry in Europe, and the Euro to Dollar exchange rate is favorable to U.S. firms, you can't afford to sit on the sidelines while competitors gobble up market share.

With the tough macro-economic conditions of the past few years behind us, it once again makes sense for U.S. software CEOs to initiate or reinvigorate their European expansion plans.

But many U.S. software companies take a wrong turn early in their European expansion that can lead to more problems down the road, according to two experts on the subject, Scott Frandsen and Tom Grubb of Task Ventures.

"If you know how to accurately interpret the first signs of overseas demand and understand how to capitalize on them, you'll greatly increase your chances of growing a profitable European customer base," says Frandsen

Frandsen cites "seven deadly sins" that U.S. software companies most often make in their pursuit of European expansion:

Sin #1: You misread the reason why more leads are coming from the U.K. than Continental Europe.

Frandsen says that software companies are most prone to make mistakes when leads start coming in from the U.K. "without even trying."

"To software CEOs, it only seems natural to follow demand," he says, "so they start looking for ways to grab what they perceive as low-hanging fruit from the U.K."

It's true; most U.S. software company's first customers outside of North America come from the United Kingdom. The leads arrive as a result of U.S. marketing efforts that spillover to the U.K., thanks largely to English being the dominant language on the Internet.

However, language barriers in Continental Europe prevent this "halo effect" from influencing them with nearly the same intensity. This creates the false impression of a demand disparity between the U.K. and Continental Europe.

"Software CEOs who misread the halo effect wrongly conclude that U.K. demand for their product must be strong because they're getting leads without doing any marketing in the U.K.," Frandsen says. "And they assume Continental Europe demand must be weak, because leads are coming in at a slow trickle compared with the U.K."

Both conclusions reinforce a stereotype that the U.K. and Continental Europe are independent markets, when in fact their economies are tightly integrated.

"The problem is," Frandsen says, "software CEOs wind up directing their expansion investments to the U.K., leaving Continental Europe for another day." But savvy software CEOs who understand that Continental Europe is an attractive market with both a population and a GDP five times greater than the U.K. aren't as likely to wait.

Frandsen advises software companies not to use initial lead volumes from the U.K. or Europe as predictors for broad market demand. Instead, he suggests they give equal consideration to the U.K. and Europe.

Research markets by region and country to determine where to start, and test marketing before making big investments. "And keep in mind," says Frandsen, "that while your cost to enter European markets will be higher due to language localization requirements, the size of the market makes the payback potential much higher than the U.K. alone."

The prevailing view held by most U.S. software CEOs is that the U.K. is a standalone market. But Europe and the U.K. are in fact an integrated market.

"This underscores the need to successfully compete in both," says Frandsen. "If you make plans to enter the U.K. that exclude Continental Europe, you limit your U.K. operation from the start by putting them in a defensive competitive position, unable to fully meet the requirements of the market."

Sin #2: You establish an office in the U.K without a plan for Continental Europe.

Frandsen recommends that software CEOs resist the temptation to open a direct office in the U.K. without a plan for Continental Europe.

"If you don't have a plan for Continental Europe, then consider starting with a reseller in the U.K. as a first step that will lower your risk," he says. Starting with a reseller channel provides for more flexibility in the future to evolve into a direct sales model.

Companies that already have an office in the U.K. or are committed to establishing one can increase their effectiveness by establishing a reseller network in Continental Europe.

Frandsen points out that a reseller channel in Continental Europe can substantially improve a company's competitive position in the U.K. and also provide access to a much larger market.

Sin #3: You set profit and growth goals for the U.K. that are too high.

Most software companies don't meet their profit and growth goals in the U.K for two reasons:

		It is one of the most competitive markets in the world; and
		Large multinational companies in the U.K. require installations in Continental Europe with localized product and local support

According to Frandsen, the competitive landscape in the U.K. is tough because it attracts so many U.S. competitors from the U.S.---they come for the language and low entry barriers---as well as software companies from Continental Europe and the U.K. Commonwealth.

"To compete effectively,", he says, "you must meet the demands of customers that span multiple time zones, languages, and region-specific needs."

A winning strategy is to use conservative estimates for your U.K. operation, Franzen says. If large multinational customers require your presence on the Continent and a localized version of your software, you should be extra conservative in your estimates; you can afford to be bit more aggressive if you're targeting mid-sized companies.

"The key point here," he says, "is that you're better off meeting or beating U.K. expectations so stakeholders won't retreat at the earliest sign of underperformance."

Sin #4: You delay entrance into Continental Europe based upon disappointing results in the U.K.

Any software CEO whose company has underperformed in the U.K. and tried to use the U.K. as a stepping-stone to Europe quickly learns that stakeholders will apply pressure to hold back on European expansion until the U.K. improves.

But, Frandsen says, the problem may not be with the U.K. operation; rather, it may be rooted in the plan.

"The U.K. isn't the right yardstick to measure Europe's potential," he says. "A plan that ties Continental Europe's potential to success in the U.K. doesn't account for the true market dynamics."

You should not make your expansion into Continental Europe dependent on results from the U.K., Frandsen says. "It's hard to be successful in one without the other; adopt an integrated view early, and adhere to it."

Usually, an ISV's U.K. strategy is dependent on Continental Europe rather than the other way around. Frandsen says that it helps to "keep an eye on the real prize---Continental Europe---which exceeds the market opportunity in the U.K by nearly a factor of five."

While the barriers to entry in Europe are higher than the U.K., U.S. software companies benefit from a reduction in the number of competitors.

Sin #5: You don't take product localization seriously.

"The vast majority of customers in Europe prefer to use software that supports their language," says Tom Grubb. He emphasizes that those who require localized software weigh quality, timeliness, and completeness heavily in their buying decisions.

Grubb says that as obvious as this seems, U.S. software companies have a poor track record when it comes to taking product localization seriously.

"While some customers in Continental Europe will purchase English-only products, they number far fewer than language-specific customers," says Grubb. "Plus, they are likely to be your 'early adopters'---the first customers you acquire."

Too often, this early adoption breeds complacency, Grubb says; the ISV misreads it as market acceptance, which leads to delayed, or poorly localized software. The end-result is lost market share that's nearly impossible to regain.
Grubb points to two primary benefits that quality localized software products bring:

		The ability to compete for U.S. large multinational customers that require installations in Europe. Keep in mind, one large customer could pay for the entire cost of localization
		A better profile with partners and resellers. "Localization enables you to recruit European resellers and partners of a higher caliber," Grubb says, "who are more likely to produce more revenue."

You should prepare to fully localize your software---and that includes getting it out the door in a timely fashion, says Grubb.

"CEOs need to play a leadership role in making localization a top priority with responsible parties across the functional areas, and then stay on top of it," he says.

"The result will be localized products that provide numerous advantages to your business even before you set foot in Europe."

Sin #6: You underestimate the cost of marketing in Continental Europe.

It should be no surprise that marketing in Continental Europe costs more than in the U.K. or U.S. Still, most software companies don't budget adequately for marketing, Grubb says.

The result? They don't achieve the level of awareness and market share that's available to them. "Marketing costs more in Europe because marketing collateral must be translated and localized," he says.

"Continental Europe requires a bigger marketing investment than the U.K. to achieve the same results. The halo effect from U.S. marketing has a multiplier effect on U.K. marketing, but no such multiplier exists in Continental Europe."
A good way to reduce the cost of marketing overseas is to base your marketing in Continental Europe, Grubb says.

"Whether you employ your own in-house European marketing, or use an agency, you'll find more and better resources in Continental Europe than in the U.K. They're familiar with the nuances of European marketing and the techniques for controlling costs and maximizing results.

"The Netherlands, in particular, combines the highest level of English literacy in Continental Europe, with easy access to expertise that's fluent in Dutch, German, and French."

Sin #7: You build a reseller channel that underperforms.

When revenue from resellers falls short of expectations, the risk of pulling back on European expansion goes way up. One of the most common reasons for underperformance of indirect sales channels is that U.S. software companies fail to recognize what motivates their resellers, Frandsen says.

"Because resellers absorb the majority of sales and marketing expenses, it's the responsibility of the U.S. software company to create financial incentives that encourage their resellers to invest in sales and marketing," he says. "Too many U.S. software companies try to manage resellers in a way that discourages investment."

Compared to a direct sales force, Frandsen says that an indirect sales channel requires substantially less investment up front and carries less risk. "For this reason, indirect sales channels underperform a direct sales force," he says. "But the low cost structure make an indirect sales channel the preferred model for smaller software firms."

Frandsen says that when it comes to recruiting the very best resellers in Europe, "the carrot works better than the stick." He recommends these best practices to encourage resellers to invest in sales and marketing of your products:

		Don't flood a market or region with too many partners. "Too many resellers in the same market discourages all of them from investing," says Frandsen. "After all, who wants to compete against the same product?"
		Make your initial contract period at least one year, and consider two. Short-term or easily cancelable contracts assure that your resellers will only make short-term investments.
		Encourage investment in sales and marketing by budgeting some co-marketing funds.
		Don't require a large fee upfront as part of the contract; you'll get better results for your money by funding co-marketing initiatives.
		Use a generous commission structure to encourage investments by shortening the payback period.ost: Development and lifetime cost

Frandsen reminds software CEOs that their company and your resellers have common, but not identical objectives. "Understanding where those objectives diverge is just as important as knowing where they are aligned," he says.

The bottom line on staying sin-free

Don't view the U.K. and Europe as entirely separate markets, say Frandsen and Grubb; you should plan to enter and win both at the first sign of U.K. customers.

The keys to winning? "Speak to customers as they desire to be spoken to," says Grubb. "That includes doing it right when it comes to product localization, as well as sales and marketing."

"And, work to improve the performance of your resellers by sharing the risk and encouraging them to invest in sales and marketing," Frandsen says.

"The tremendous pressure on software companies to grow quickly should put Europe in the cross-hairs of every U.S. software CEO," says Frandsen. "The question isn't whether or when to pursue European growth; the time to plan is now, and the only question is how."