Clever Geek Handbook
9 February 2026

Analysis for Improving Performance

Recommendation

Hats off to author Richard A. Swanson for writing clearly, interestingly and compellingly on the subject of creating effective programs to improve workplace performance. He champions approaching this task with up-front analysis based on systems theory. Since he criticizes ordinary management for not understanding this problem and for not knowing the methods that can be used to resolve it, BooksInShort recommends this book not only to Human Resources professionals, but also to managers and executives in all industries. If you want employee performance to improve, upgrade your understanding of how to make it so.

Take-Aways

  • Up-front analysis is critical to the success of any performance improvement effort.
  • Up-front analysis is rarely done properly.
  • The standard performance improvement model has five phases: analysis, design, development, implementation and evaluation.
  • When creating a program, use the all-inclusive systems theory.
  • Execution of the analysis phase determines whether performance improvement succeeds.
  • Analyses should be performed in a standardized meaningful manner.
  • One person’s analysis is intense investigation, while another’s is a shallow glance.
  • Preliminary analysis must diagnose performance and document expertise.
  • Performance improvement efforts only work when you specify a variable, a goal and the expertise the goal requires.
  • Every organization has an environment with particular paths for incoming information, internal processing and outgoing information.

Summary

Performance Improvement

The success of any performance improvement effort depends on a critical - but often neglected - up-front analysis, which itself depends on having the proper tools. Program developers and managers must:

  • Assess an organization’s real business needs and the status of its supporting systems;
  • Analyze necessary worker skills, knowledge and attitudes;
  • Specify performance requirements and evaluation standards;
  • Produce a viable, comprehensive performance improvement design.
“Performance improvement professionals often find themselves in awkward positions. They face many conflicting demands on their services. Everyone seems to have an opinion about the organization’s development priorities.”

This up-front analysis is, in essence, a diagnosis. As in medicine, you can’t determine proper treatment to achieve employee improvement if you don’t have a proper diagnosis. Yet, companies and organizations worldwide try to do just that every day.

Organizational efforts at performance improvement have included human resource development, quality improvement programs, reengineering and performance technology. These programs are used to identify an organization’s major business processes and how they connect to basic inputs and outputs. The goal is to add value. Unfortunately, organizations often don’t bother looking at these processes and their connections. Instead, performance improvement efforts simply become independent activities "taking place apart from the core organizational inputs and outputs and having no direct connection to business performance measures."

“It is discouraging to discover how rarely managers know about sound performance improvement practices, and yet they strongly attempt to control new efforts and processes.”

No matter which approach is used, the standard performance improvement model includes five phases: analysis, design, development, implementation and evaluation. The way you carry out the analysis phase determines whether your performance improvement efforts actually support major business processes or simply devolve into a series of activities that ultimately have little if any effect on the business.

“In the performance improvements field, professionals place too much emphasis on creating new tools, methods and techniques and not enough on the importance of integrating their use with the nature of the systems they are trying to improve.”

Although everyone agrees that an up-front analysis is essential, the problem is that such analyses usually are not performed according to some standardized, meaningful method. One person’s idea of analysis is intense investigation, while another person’s is a shallow, simple routine glance. Research and experience show that the analysis phase - with organizational diagnosis and expertise documentation at its core - is the most critical part of the performance improvement process. Without it, the rest is essentially meaningless. Yet, this phase is also the most poorly understood and poorly managed.

Diagnosis and Documentation

Many performance programs are driven by compliance concerns, not by concerns about performance. Organizations allow a trainer to deliver programs without regard to their effectiveness. This activity-based view of analysis - a series of program activities thrown together without any true analysis of what the needs are and which programs will meet them - usually consists of superficial opinion surveys that result in program popularity ratings, crude job descriptions and inaccurate task inventories. So if that is what you’ve seen so far, you’re not alone. To make a performance improvement effort valuable to your organization, you must emphasize the preliminary analysis phase in two major areas, both involving tools that are easy to learn and highly effective:

  1. Diagnosis of performance - This analyzes the performance variables, including mission and goals, processes, motivation, capacity and expertise - at the organizational, process, and individual performance levels.
  2. Documentation of expertise - This requires analysis of the work expertise employees need to achieve optimal work performance. This analysis includes job description, task inventories and task analysis: procedural, systems and knowledge work tasks.

Use Information to Set a Standard

Careful analysis will give you the critical information you need to define, frame and guide effective performance improvement. To make an improvement program radically better, ask these three basic questions when you begin planning the program:

  1. Will individuals perform better on the job after the intervention?
  2. Will the process perform better after the intervention?
  3. Will the organization perform better after the intervention?
“Wanting others to do things the right way and wanting them to get it right the first time is a perspective on work held by most work-performance analysts. They should expect no less of themselves.”

It sounds obvious, but most organizations don’t even ask if their performance improvement interventions meet these criteria. Yet you can only improve performance through an orderly process starting with:

  1. Specifying an important performance goal.
  2. Specifying the underlying performance variables.
  3. Documenting the workplace expertise that this performance goal requires.

The Four Single-Dimension Views

Systems thinking is the perception that organizations are complex, open systems. Unfortunately, most managers and executives are blind to this fact of nature (the whole world is naturally and inherently just a bunch of complex, open systems) and prefer to isolate their views into single dimensions. The four most common single-dimension views are:

  1. The power-oriented view - The organization views powerful leaders as the sole instruments for change, so employees set satisfying managers as their primary goal. Everyone serves "at the beck and call of powerful... leaders and decision makers."
  2. The economic view - Insiders see the organizations solely as an instrument for increasing shareholder wealth. Managers believe that their jobs are simply to ensure high returns. Any intervention that can aid employees in meeting that goal is seen as performance improvement. Employee evaluations center on high returns alone.
  3. The mechanistic view - The organization is seen as a machine. The goal is to get the most quantity and quality possible by using a smoothly running, maximally efficient organizational process. Managers believe that their jobs are to ensure the efficiency of organizational processes, and that this should be the sole goal of employee performance improvement programs.
  4. The humanistic view - Organizations are social entities where a high quality of work life guarantees high worker morale, which will logically lead to high performance, high quality and high output from workers.
“Knowledge work has become the most critical work in today’s economy.”

All performance improvement programs and interventions share these goals. Yet, single-dimension organizational views - whether applied singly or in combination - don’t provide an adequate foundation for organizational problem solving and performance improvement. Those with these limited views tend to restrict themselves to a narrow set of problem situations and an equally narrow set of myopic solutions. Those in charge of planning and implementing performance improvement programs and solutions, and those who have the single-dimension view, will limit what they see or do as they work with managers and others on organizational change and performance improvement:

  • The power-oriented analyst focuses on political strategies, on pleasing top managers.
  • The economically oriented analyst focuses on strategies for optimized financial return.
  • The mechanistically oriented analyst focuses on getting more output per process.
  • The humanistically oriented analyst focuses on creating harmony in the workplace and on making work life more pleasant.

The Inclusive View

Instead of four single-dimension views of organizational life, you should advocate the inclusive systems view. Many organizational development and performance improvement specialists already have accepted this view of organizations as complex, open systems. Systems-oriented analysts believe in designing and creating performance programs in which all the parts, or subsystems, work together to achieve the whole organization’s purpose. These analysts work with managers to apply systems principles to the organization’s problems. This systems approach uses many different tools to intervene at three levels: organizational mission, processes and job performance. Systems thinkers never focus on just one area. The systems thinker "achieves strategic benefits by applying systems solutions to systems problems," focusing on:

  • Defining the organization broadly enough to include the root causes of performance issues.
  • Identifying the primary source of power that can take advantage of a performance opportunity.
  • The systems thinker leaves nothing out, concurrently embracing power-based, economic, mechanistic and humanistic contributions to the performance problems.

The Core of Systems Thinking

In 1968, Ludwig von Bertalanffy first applied systems theory to the field of biology. This approach has spread to influence many other fields. Systems theorists believe:

  • All configurations of things in the world should be viewed as wholes, rather than being taken apart and examined piece by piece.
  • In systems such as the human mind, the human body or the human organization, all the parts affect each other in complicated ways that are not obvious.
  • Studying a part individually can disrupt systems interactions so severely that it makes the isolated part look and act very differently from its normal pattern in its normal context.
  • For these reasons, study the whole system whenever you study any part of it.
“Too many people in the consulting and performance improvement business want to hold onto their secrets of success and, therefore, restrict participation in their realm of activity.”

All complex systems have certain things in common:

  • Systems are assemblies of parts or elements connected in an organized way.
  • Focusing on a single element and blaming it for systems failure is counter-productive, since all the elements in a system interact.
  • Systems can be identified by their purpose.
  • Being in a system - or being taken out of it - affects the behavior of its elements. When you remove them, they stop doing what they are meant to do in the system.
  • Systems do work - They exist to carry out a process of transforming inputs into outputs.
  • Systems have foundries - You can set lines of demarcation that determine which elements of a system are included or excluded.
  • Complex systems are open systems - They are permeable, so forces in their environments affect what goes on within the systems.
  • Open systems affect their environments by exchanging energy, materials and/or data with the environment.
“Never conduct a performance diagnosis by yourself.”

Every organization has an environment with inputs, processes and outputs. Systems thinking "demands that analysts understand the powerful influences" that the driving forces in the environment have on the organization as a system.

About the Author

Richard A. Swanson is a professor and director of the Human Resource Development Research Center at the University of Minnesota, and founding editor of Human Resource Development Quarterly.

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Analysis for Improving Performance

Book Analysis for Improving Performance

Tools for Diagnosing Organizations & Documenting Workplace Expertise

Berrett-Koehler,
 


9 February 2026

Rain Making

Recommendation

Professionals are highly educated individuals who deal with consequential matters: Attorneys present life-and-death cases in court. Architects design graceful buildings. Engineers turn designs into stone and steel realities. Accountants decipher complex tax rules. But while these and other professionals are often remarkably able in their fields, many have no idea how to market themselves or their services. This manual by professional-services marketing expert Ford Harding covers all the marketing techniques you will ever need to know. The sales tactics section alone is worth the purchase price. BooksInShort considers Harding’s comprehensive book a refresher for salespeople and required reading for professionals who think sales was someone else’s job.

Take-Aways

  • Most professionals prefer to leave marketing their services to someone else.
  • That’s not possible when you’re first building a practice, and it’s not practical when you’re enhancing an established practice.
  • To bring in new clients, keep a steady stream of prospects on tap.
  • Bylined articles are a classic way to showcase your professional expertise.
  • Speeches and seminars can spotlight your capabilities and talents.
  • To gain valuable publicity, become a trusted expert source for print, broadcast and Internet reporters.
  • Professionals (and everyone else) dislike cold calls – but they work.
  • If you do enough networking, you may never have to make cold calls.
  • During sales calls, focus on the prospect, not on yourself.
  • The purpose of a sales call is to get the prospect talking.

Summary

Gaining Exposure

Professionals did not enter their fields to sell. Most have no sales or marketing training. Few want to take time from their practices for these kinds of activities. Unfortunately, clients do not fall out of the sky. Whether you work at a large firm or as a solo practitioner, you must sell your professional services to survive. Only by contacting numerous prospects, most of whom will never become clients, will you generate new business. The fewer prospects you have, the fewer clients you will secure.

“Marketing is a numbers game.”

One way to showcase yourself is with bylined articles that position you as a respected and available expert in your field. Find a topic that is timely, that you can write about authoritatively and on which you have a unique perspective. Find out which publications your potential clients read: trade journals are often good targets. Pitch your idea to the editor. Then develop and submit your article according to the magazine’s specifications. Most bylined features are eight to twelve double-spaced pages in length. Be sure to include a brief biography (only a few words) and your contact information.

“Selling is more listening than talking.”

Create positive publicity about yourself and your firm – but indirectly. Never contact a reporter to talk to him or her about your firm. Instead, make yourself available to reporters as a source of expert information. Reporters need to understand the details of their stories. As a professional, you can help them, while gaining valuable publicity for yourself in the process.

“You must sell yourself to sell your firm.”

Speeches or seminars are good ways to market yourself. If your seminars become popular events, extend them into all-day or two-day affairs and charge for attendance.

Direct mail, including e-mail, is a classic way to market your services. In fact, e-mail is the text-communication vehicle of choice for people under 50. So, e-mail should be the main way you communicate with prospects. Not only is it efficient, it is also cheaper than printing and mailing your material. However, whether you choose e-mail or regular mail, plan a marketing campaign that involves numerous mailings. As much as possible, personalize each letter or note. Make sure e-mail subject lines are direct, clear and interesting.

“Even if it is not stated, the professional within a firm who does not market and sell has a far higher probability of seeing his career plateau than one who brings in new business.”

Create a user-friendly Web site. People who are browsing the Internet have no patience with Web sites that take more than a few seconds to open. Avoid animation elements that slow things down. Make your Web site easy to find.

Cold Calling

All professionals loathe cold calling, and many refuse to do it. They claim cold calls are not effective. However, the facts prove otherwise. Cold calling works for all types of selling, including the marketing of professional services.

“You need to get face to face with a prospect to make a sale.”

The cold call process is straightforward. Generate a lead, probably through e-mail. Keep the e-mail brief. Its purpose is to persuade the prospect to take your call. Phone the prospect and request a meeting. One good way to insure an affirmative response is to tell the prospect you’d like to share inside information or something else of value. This works much better than merely asking to come by and introduce yourself.

The Purpose of the Sales Call

You’ll never benefit yourself by a sales call if you do not understand what the meeting is about. All sales calls are about the prospect. They are never about you. Many professionals do not grasp this basic fact. Instead, during sales calls they promote their own brilliance, accomplishments and expertise. They focus on themselves. This is exactly the reverse of what they should be doing. On a sales call, you want the prospect to do four things:

  1. “Open up” – The prospect should do the talking, not you.
  2. “Trust you” – Prospects will never share important or confidential information if they don’t trust you.
  3. “Be clear” – Prospects should explain their problems and how you can help.
  4. “Set a goal” – Reveal their primary objectives.

The First Five Minutes

The opening minutes of the sales call are crucial. They set the tone for the meeting to follow. Therefore, always start your sales call in a positive manner. Use the initial period – which should take no longer than five minutes – to establish rapport. Follow this five-part script:

  1. “Personal link” – Immediately getting down to business is counterproductive. First, establish an emotional connection, to make the prospect feel comfortable about doing business with you rather than someone else. Comment on something in the prospect’s office. Mention a shared interest, experience or friend. But keep your comments brief. And if the prospect reacts negatively, quickly become more business-like.
  2. “Agenda statement” – Explain what you hope to accomplish during the meeting. Get the prospect to agree to your agenda. For example, say, “I would like to describe my firm so you know what we are all about. I would then like to discuss [the special information you referenced in the phone call], and any issues relating to it from your company’s perspective. Is this OK with you?”
  3. “Positioning statement” – Explain why you can speak credibly about the issues in your agenda. However, do not provide a minihistory of your firm or a summary of its services. Be brief. The whole idea of the sales meeting is that the prospect talks, not you.
  4. “Stage-setting anecdotes” – Provide an anecdote or two about issues that are relevant to the prospect. Keep the details about yourself and your firm to an absolute minimum.
  5. “The Big Question” – Now that you’ve set the stage, the Big Question moves the meeting into the “Production Zone,” where both you and the prospect benefit. A good Big Question gets the prospect talking about a business problem his or her company has that you may be able to solve. If the prospect initiated the meeting, asking the right Big Question is easy. You can simply say, “Why did you contact us?” But if you initiated the call, the right Big Question is tougher to nail down. Choose your words carefully. For example, say, “You agreed to this meeting to talk about [...]. Are there any aspects of this process you would like to focus on today?” Or, try this approach: “Please tell me about your company and why the information I described over the phone may be useful to you.” This informs you about how your services may complement the prospect’s needs. However you phrase it, the point of the Big Question is to move quickly out of “Me Zone” (discussion about you and your firm) and into the Production Zone. Get the prospect to talk about a subject of interest to him or her – something where you may be able to assist professionally.

The Production Zone

The Production Zone is the all-important period during which the prospect speaks and you listen, take notes and ask occasional questions. Use open ended questions, such as “Why is this issue important to you?”, to elicit the prospect’s “needs, opinions, values, priorities and sensitivities.” Use closed questions, which require only yes-or-no answers, to determine the facts or confirm your understanding of something the prospect said. By the time you reach the end of the Production Zone, you should have a thorough knowledge of the prospect’s concerns and how you can help. If you don’t, continue to probe with additional questions to nail down exactly what the prospect wants to achieve.

“Speeches are articles with faces.”

Finally, offer your solution to the prospect’s problem. Never forget that during this portion of the sales call, the first sentence will stick more than the rest. Make it count. Briefly summarize the prospect’s concerns. Credibly differentiate yourself from other professionals. Link your services to the prospect’s goals. Focus on the benefits you will provide.

“People attend seminars and conferences not only to hear the speakers but to talk to their peers at other companies.”

Don’t be the only one asking questions during a sales call. Always welcome questions from prospects. Ask for clarification of those you do not understand. Answer every question directly and concisely.

Get the Prospect to Commit to Something

During the sales meeting, do your best to secure some form of commitment from the prospect, either to hire you or to meet with you again. Don’t hesitate to ask for leads during the meeting. Always send a thank-you note afterward. Work hard to secure additional meetings until you convert the prospect into a client.

“If a prospect has read about you in the papers or heard you quoted on the radio or television, his willingness to give you a meeting or include you among the firms being considered for a project increases.”

Making cold calls and sales presentations is never easy. You’ll need to develop a tough hide to deal with the many rejections you’re bound to receive. However, they are powerful marketing tools. They enable you to meet potential clients face to face. Indeed, the more cold calls and sales presentations you make, the more new clients you will secure.

Networking

The antidote to cold calls and sales presentations in front of strangers is networking. Knowing people who know people is often the best way to get your foot in the door of a potential client’s office. And because you and the prospect belong to the same network, you automatically have credibility. The best networkers are those who help others. This only makes sense. A prospect or referral source will feel more inclined to meet with you or refer you to others if you do something nice for that person. Certainly, this approach is much better than shoving your business card under his or her door.

“Your Web site is treated the same way you might be judged in a singles bar – a very rude and busy singles bar, where everyone is impatient and always looking.”

Effective ways to network include learning all that you can about everyone at client meetings, attending trade or association events, delivering speeches, asking for referrals and being friendly to the people you meet on business trips. Joining groups is also a good networking technique. Members of groups help and look out for each other. Many people join groups to network. Thus, they will not object to putting you in touch with their contacts.

“The underlying logic of networking is simple and the same for all networks: Identify the right people to know.”

Aim to develop a network of 200 to 300 people. A group of this size provides an adequate flow of leads. The quality of your network is just as important as its size. In most cases, you will do much better developing clients if your network includes CEOs and other senior executives rather than junior managers or nonprofessionals, since CEOs and senior executives are the ones who can make the decision to hire you or to refer you to business associates who are looking for professional assistance.

“Many professionals lose opportunities strictly as a result of poor selling skills.”

Sometimes you must go out of your way to network. One business consultant moved into a Chicago apartment building solely to become friends with a resident whom he wanted as a client. Some professionals move to Greenwich, Connecticut, a New York City bedroom community, because they know it is the home of many CEOs and Wall Street executives. Others join philanthropic organizations because they know that the people with whom they want to network are active members.

“Eliciting information on a prospect’s needs requires good questioning and listening technique because prospects don’t talk freely.”

The professionals who benefit most from networking are those who are willing to spend the time to cultivate their contacts. You won’t gain clients through contacts during your first week or month or even year of networking. Networking that pays off almost always takes time and effort. Attend events, participate in group activities and be solicitous to the people in your network at all times. You never know who will deliver the most helpful leads.

You Won’t Get If You Don’t Ask

The most direct way to develop leads from networking sources is to ask for them. People in your network will not automatically supply you with referrals or ask to become your clients. Unless you request referrals they may not even know that you want new clients. However, don’t be pushy. You may wish to ask for referrals or new clients indirectly. For example, you could say, “The last time we spoke, you were worried about [...] How is that situation going today?” Of course, just because a contact mentions a business problem does not mean that he or she wants a sales pitch from you. Handle this type of conversation gracefully.

To enhance your practice and make it exactly what you want it to be, think and act strategically. Choose the mix of marketing techniques that will get you what you want. Use your time wisely – it’s your most precious resource. Study your market and understand your most compelling professional capabilities.

About the Author

Ford Harding heads a firm that trains professionals to secure new engagements. His articles have been published in The Harvard Business Review, The Wall Street Journal and other magazines and newspapers.

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Rain Making

Book Rain Making

Attract New Clients No Matter What Your Field

Adams Media ,
First Edition:1994
 


9 February 2026

The Handbook of International Trade and Finance

Recommendation

International trade and trade finance are specialized sectors of business and banking, requiring particular knowledge and expertise. Here, trade expert Anders Grath provides a compact, complete guide to the fundamentals of this crucial aspect of global commerce. Grath walks you through the basics of risk management, financing techniques and payment methods that ensure safe and profitable import and export transactions. Though somewhat dry, his clear information is crucial for any firm buying and selling internationally. BooksInShort recommends Grath’s guidance to bankers, entrepreneurs or executives involved in overseas trade.

Take-Aways

  • Buying and selling across national borders adds layers of new risks to business.
  • The hazards in international trade transactions include “product, commercial, adverse business, political, currency” and “financial” risks.
  • Any exporter’s goal is swift and safe payment.
  • Buyers must make sure their suppliers are reliable.
  • The International Chamber of Commerce sets international trade rules and standards.
  • Depending on the transaction, international trade uses one of four payment methods: “bank transfer, check payment, documentary collection and letter of credit” (L/C).
  • “Bonds, guarantees and standby L/Cs” commit banks to pay based on a sales contract.
  • Firms working overseas must manage their foreign currency exchange exposure.
  • When the risk is too great for standard terms, importers and exporters turn to the export credit insurance market.
  • International banks or trade organizations can assist clients in structuring trade deals.

Summary

International Trade

Buying and selling beyond your national borders add a layer of new risks to those of day-to-day domestic business. For all the technological advances that seemingly shrink the globe, transacting from a distance with an unknown customer or supplier still presents major headaches, and even potential losses. You must identify and plan for anything that could go wrong.

“Sell more – win market share – enter new markets...the problem is often not making the sale but ensuring that you get paid.”

This risk-identification process begins with your first business negotiation with a counter party. If you’re the vendor, you want to get terms that maximize your profits while curtailing your risks. You might have to compromise if you’re competing with others for a sale. As a buyer, you want to ensure that you’re dealing with a reputable and reliable supplier who will deliver the products you want in a timely fashion.

“Each area of international trade requires its own knowledge...from the first contacts between buyer and seller to final payment.”

To provide common standards for trade in the cross-border market – beyond the reach of national laws and regulations – the International Chamber of Commerce (ICC) establishes the rules of global trade and investment. Its members include firms of all sizes in various industries and fields in more than 130 countries. As “the world’s only truly global business organization and...the voice of international business,” the ICC sets procedures and policies governing delivery, financing and payments, and establishes nomenclature for common trade terms that define delivery and payment conditions. It issues International Commercial Terms (“Incoterms”) that guide all parties in interpreting expressions found in trade contracts, such as “delivered duty paid” (DDP), “cost, insurance and freight” (CIF), and “free on board” (FOB). In addition to defining the terms of delivery and the terms of payment, any cross-border agreement should account for the “commercial documentation and official requirements” necessary to effect a smooth sale.

Trade Risks

While different kinds of business dealings present different types of complexity, several distinct categories of risk can arise in an international trading transaction:

  • “Product, production and transport risks” – These risks concern the proper operation and performance of a product and its delivery, as well as its maintenance and warranties. Large projects or an ongoing series of transactions amplify these risks, as does the customization of an order for a particular client: If the buyer reneges, the seller may not find alternate buyers for the special order. The conveyance of goods should be clear from the contract; for instance, both buyer and seller must explicitly state at which point cargo insurance takes effect to avoid a scenario where, say, cargo gets damaged in transit but insurance coverage doesn’t kick in until delivery.
  • “Commercial risks” – As a seller, you assume the risk of a client failing to execute the trade contract due to bankruptcy or other failings. Thus, you should obtain and analyze credit information about your buyers. A number of internationally recognized firms, such as Coface, D&B and Experian, provide exporters with commercial and financial data on importers.
  • “Adverse business risks” – Bribery, money laundering and “facilitation payments” present challenges to firms that may be unfamiliar with local practices or criminal activity in overseas markets. Companies should watch for suspicious transactions when dealing with new clients or with existing customers who alter their usual ways of doing business. Among the variety of giveaways that signal potentially shady practices, look for “unusual payment settlements,” “secretiveness” and “complicated accounts structures.”
  • “Political risks” – Unexpected governmental actions “along the route of transport” can present sellers with extraordinary risk. Revisions in taxes, import levies or currency movements can render a sales contract inoperable, as can new trade barriers, environmental clauses and product criteria. Reports on a country’s political, social and economic situation from third-party providers can give exporters advanced knowledge about the market they’re entering.
  • “Currency risks” – When an exporting company sells in a foreign currency, it faces a currency exchange risk. Fluctuations in the value of the buyer’s currency relative to the sellers’ could endanger the transaction’s profitability. With globalization, much of the world’s trade now takes place using the US dollar and the euro, as well as other “strong currencies,” such as the Japanese yen and the Swiss franc.
  • “Financial risks” – Every aspect of a business transaction involves financing risks, which increase “in line with the prolonged commercial and/or political risk.” Trade parties should clearly express the terms of payment and time frames in their sales contracts so they don’t incur liquidity problems or capital losses.

Show Me the Money

The end goal for any exporter is swift and safe payment. Ideally, notwithstanding competitive pressures, a seller generally prefers payment – in order of security – first, by “cash in advance before delivery”; second, through a “documentary letter of credit”; third, via a “documentary collection”; fourth, by a “bank transfer (based on open account trading terms)”; and fifth, through “other payment or settlement procedures, such as barter or countertrade.” In reality, four “methods of payment” are most common, based on a transaction’s characteristics:

  1. “Bank transfer” – In most trading transactions, a seller advances goods to the buyer, who instructs a bank to pay the seller. This “open account” method is based on a pre-existing sales contract between the two parties, and the seller sends an invoice after shipping the product. These “clean payments” constitute “more than 80% of all commercial international payments.” Most cross-border trade happens regionally, so proximity allows for this relatively unsecured selling practice to dominate.
  2. “Check payment” – Though electronic payments have all but eclipsed the use of checks in international trade, a small percentage of firms still use them. Risks include postal and funds availability delays. Sellers and buyers should agree in their contracts on whether they’ll use bank or corporate checks.
  3. “Documentary collection” – In this payment, banks act as intermediaries and present the seller’s shipping documents to the buyer as proof of merchandise transfer. The buyer pays based on the documents, not necessarily on verification of the goods themselves. To mitigate risk, buyers can contract for an inspection prior to payment.
  4. “Letter of credit (L/C)” – In a documentary credit, a buyer asks a bank to issue an L/C in favor of a seller. The issuing bank must pay the seller once it receives and verifies the proper “complying presentation” of documents underlying the trade. Though an additional expense for the buyer, the L/C gives the buyer assurance that the seller has fulfilled the contract. Similarly, the seller no longer bears the risk of the buyer not paying, because the bank has a binding obligation to pay. The bank must pay based only on documents, not physical goods. All parties need to be vigilant against fraud. The L/C must specify a “period of validity,” a “time for payment” and a “place of presentation of documents.” If the selling company doesn’t know the issuing bank, it can request that its own bank add its confirmation to the L/C. The confirming bank takes on the risk of the issuing bank.
“An international trade transaction...is not completed until delivery has taken place, any other obligations have been fulfilled and the seller has received payment.”

“Bonds, guarantees and standby L/Cs” are forms of surety in multipart deals that counter parties usually can assume will cover “installation, future performance, warranty periods” and long-term projects. These undertakings – the three are essentially the same, though US regulations preclude American banks from issuing guarantees, so they issue standby L/Cs instead – commit a bank to pay according to the terms of a contract. Companies vying for big contracts usually need to present “bid bonds” to demonstrate their ability to execute should they win. “Performance guarantees” assure a buyer that a seller will act as the sales contract demands.

“Currency Risk Management”

Corporations that do business overseas need to manage their currency exposure. They buy and sell currencies in the foreign exchange market, usually through a bank, to settle their trade transactions. A “spot trade” means you can buy or sell a currency against another currency at the current price; payment and delivery of the money happens two days after the trade. To lock in a price on a currency for a future need, as most international trade deals require, you can get a “forward contract” that specifies how much of the currency you need and on what date. That contract gives you a price today for your future receipt or delivery of the currency.

“All forms of business contain elements of risk, but when it comes to international trade, the risk profile enters a new dimension.”

Consider various factors when determining which currency to invoice. Unless your deal is in US dollars or euros, think about whether the currency is stable, “freely convertible and actively traded.” Those criteria make it easier to get the amounts you’ll need when you need them, and at the right prices.

“Documentary payment through banks is a matter of dealing in documents and not in goods or services.”

Different firms handle currency exposures in different ways: Some attempt to lessen their exposure at all times. Others have preset limits on how much risk they’ll take and hold in each of the currencies they use for transactions. Companies can hedge their foreign exchange exposures by using forward contracts, currency options and currency swaps.

Export Credit Insurance

When the risk is too great for standard terms of trade and payment, importers and exporters turn to the export credit insurance market. Both parties can approach either private insurance companies, which will indemnify against political risk in short-term deals, or government-sponsored “export credit agencies” (ECAs) for more extended transactions.

“Ask for help or assistance from your bank or the domestic trade organization when it comes to detailed terms of payment.”

These official entities encourage national exports. Most developed and developing countries maintain ECAs – for instance, the United States’ Exim Bank and Switzerland’s Swiss Export Risk Insurance SERV – that are responsible for handling projects and transactions that the private market may be unwilling to insure. To prevent ECAs from undercutting one another in a race to the bottom, the Organization for Economic Co-operation and Development (OECD) regulates the types and tenors of export credit under the “Consensus” agreement. ECAs offer many financing options, including pre-export guarantees, foreign currency insurance and supplier credits.

Standard and Structured Trade Finance

Companies finance trade deals in various ways. Banks normally extend credit lines for trade transactions for up to 180 days. Long-term financing is also available. Banks regard trade finance as a more secure loan, because the extension of credit is “self-liquidating” – that is, the cash flows of the deals themselves repay the loans. To finance trade-related operations, sellers can secure “pre-shipment finance” or “working capital insurance and guarantees.” For the same purpose, buyers can obtain short- and long-term credits. Financial institutions also extend credit in exchange for other kinds of security, such as invoices, short-term receivables, “factoring,” and discount trade bills.

“In every new transaction, one has to take it for granted that, from the outset, the parties will have different views about the various aspects of the terms of payment.”

Structured trade finance underwrites complex cross-border operations. International leasing requires specialized financing with particular legal, tax and documentary aspects. Project finance develops long-term infrastructure programs and physical plants overseas. These undertakings can last 20 years, with repayment coming from the proceeds of the project itself. Multilateral development banks, such as the World Bank’s International Bank for Reconstruction and Development (IBRD), either directly finance or act as credit conduits for developing countries’ investments in education, health, telecommunications and infrastructure. Many regions have set up their own development banks, such as the African Development Bank, the Islamic Development Bank and the Nordic Investment Bank. The European Bank for Reconstruction and Development (EBRD) sponsors projects to benefit small businesses in Central Europe and Central Asia, providing guarantees and credit for deals that bolster the local private sector.

Don’t Go It Alone

Global trade generally operates with precisely defined terms and rules promulgated by supranational organizations. Complicated deals, long-term projects and unfamiliar countries can challenge any exporter. Consult with banks that operate internationally or with your local trade organization for information and counsel on how to conduct your international trade transactions securely and profitably.

“Bribery, money laundering and any other form of corrupt behavior is bad for business; it distorts the normal trade patterns and gives unfair advantages to those involved in it.”

 

 

About the Author

Anders Grath, a banker and trade finance specialist, is a consultant to banks and trade councils in Europe.

Read summary...
The Handbook of International Trade and Finance

Book The Handbook of International Trade and Finance

The Complete Guide to Risk Management, International Payments and Currency Management, Bonds and Guarantees, Credit Insurance and Trade Finance

Kogan Page,
First Edition:2005
 



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