“Strategic” is a much misused word – and in 2007 some genuine strategic trends played out in compliance markets:
1. The HR & payroll software developers finally cottoned on to the employee relations compliance sector - with Northgate leading the dance in buying HLR and First Business Support.
2. The mid-market HR & Payroll software market continued to consolidate – but rather than VCs building a strong federation, it was Sage who ploughed back in to build a strong defensive position - defending mid-market enterprise territory predominantly - and sticking to code not service as their driver.
3. The safety compliance market began its consolidation in earnest with National Britannia transforming from a £25m blue chip specialist to a £50m compliance generalist. Early days yet though - more to come.
4. The traditional leaders of the complaince markets - publishers, are being forced to consolidate, and Thomson’s exit in selling Gee confirms a market in relative decline. While Croner being the buyer was predictable, it does effectively nail them to the publishing mast whereas they should be leading the consulting dance – good news for the vibrant consultancy mid-market.
5. VC’s broke the stagnation of deals in the early noughties with a vengeance, and in many cases were able to outbid trade players. The credit squeeze has not shut off deal flows altogether – the compliance market is one of the few were deals will still be seen as attractive and recession resistant – but trade players increasingly lead the dance where they are cash rich and not dependent on debt funding.
At ARK we’ve never been a fan of “group think”. In economic terms it is usually a sign of a lack of differentiation in the market. We expect to see the following key trends play out in the compliance markets from now to 2010 (no doubt others will disagree):
Regulatory Consultancies:
Increasingly the payroll service companies will look for acquisitions and partners – deals are still held up by the old tendency for suppliers to play games with revenue recognition which are simply no longer justified or necessary. Those who can show a 1:1 profit to cash conversion ratio with the cash in the balance sheet will sell well ahead of larger more financially engineered players. Keep it simple.
Safety compliance:
The avalanche of occupational health niche suppliers will continue, but increasingly networks or partnerships of groups will emerge as national coverage is required by larger clients. Capita will find that their two operations deliver a defensive position only (all they need though) while the entrepreneurs move the market away from the insurance business model.
Legal Services:
Lawyers increasingly understand the nature of fixed fee compliance – even for SMEs and medium sized companies. They will muddy the waters with new promotional efforts for a year or two, but predominantly still fail to build long term discrete businesses which can extend their brands to the detriment of independent suppliers.
HR & Payroll suppliers:
They have to take one of two paths. If they see themselves as a technology competence primarily, they should aim to be swallowed up by Sage or even mid-market enterprise developers and be prepared for the traumas of quick integration and client migrations – cost reduction and client scale is the name of the game. If they see themselves as a client service provider – they will experiment with bridging the gap between administration solutions and compliance ones and punch through the £1 per employee per month barrier.
Publishers will still struggle to find significant growth (ie 5%+) as clients increasingly move towards outsourcing style solutions. It seems to be taking an inordinate amount of time for the penny to drop – clients do not want to build libraries – they want to make back office staff (and fewer of them) more efficient – publishers still struggle with moving from “describing it” to “doing it” – but getting business critical is ever more vital. The alternative of repositioning to meet the Web2 transition doesn’t bear thinking about – a Wiki future is a bigger challenge to the traditional publishing business model than the "free" web of the late 90s was – long term they will survive, but they look more like blacksmiths than car salesrooms every day.
Trainers who are not qualification programme specialists will find filling seats increasingly precarious and the claimed benefits of e-learning increasingly precarious. E-learning is a significant contributor to the delivery of training systems, but it will be dominated by other compliance solutions providers and only rarely by training specialists (and hardly ever by technology specialists). The training market will continue to decline in relative terms against consultancy practices only – compared to technology and publishing businesses they will show stronger growth and profitability increasingly.
Says who? Well this anniversary makes ARK 8 years old – and we now track over 800 firms in the UK in compliance services with data from 1995 to date and projected firm by firm to 2010.
The biggest threat?
A change in administration in 2010 is likely – always good news for compliance driven businesses. When the capacity of government to regulate hit over £1bn of regulatory impacts per year – this burden simply proved too much for publishing solutions and pushed businesses to build internal teams and use consultants a lot. A new administration is likely to exempt most smaller SMEs (ie regulations do not apply to those with less than 10/20/50 employees) so firms with a reliance on this sector need to diversify – and soon. Any reduction in the volume of regulation is, however, likely to be offset in an increase in the shock tactics of enforcers with the HSE style prevailing over that of certifiers and local authorities.
May you live in intereting times...
