Being a compliance solutions supplier is one of the safest places to be in a recession. Look what happened last time. Recession means the national economy is going backwards; but between 1999 and 2002:
- the safety specialists market grew by 16 - 18% pa or added in effect between £33m and £54m net new business each year;
- HR & Payroll services grew by 8% - 13% or added £37-66m net new business each year;
- SME regulatory and HR consultancies grew by between 22 - 24% or added between £21m -£41m net new business each year.
Why? Because in hard times the shakeout from internal rationalisations speeds up.
Yes – some regulatory impacts, notably Y2K, Coshh and Asbestos regulations in ‘99-‘02 helped buck the national trends, but not always positively. Y2K, for example, sucked resources from other IT issues significantly. Ultimately businesses of all sizes had to focus on “their knitting” and this meant getting specialists in to do the compliance thing.
Small businesses especially cannot spare the time, and the vast majority have now signed up with one of the regulatory consultancies. For some reason institutes and lawyers are beginning to worry about whether they have missed the boat here. The short answer is that they have. Government keeps sending out research teams to see what sources of advice or web help small businesses want. But would you really take their advice on touchy subjects like salaries and dividends balancing from people who’ve been in the public sector all their life?
Frankly I’m tired of hearing how government departments and, indeed, private practice accountants should be the first source of business advice. Each to their own – I would ask an accountant about a tax rate – not how to get CHAS or NICEIC certification. I would ask the government if any EU grants are available – not whether contract staff on piece work are contravening the minimum wage.
Institutes and lawyers have equally missed the boat. As a reselling channel for insurers, some institutes are better than others, and when it comes to bespoke work, lawyers are simply seen as too expensive and, frankly, not that expert anymore. Will more spend on government web sites, outreach grants for regional quangos or VC funding for mid-market lawyers make any difference? No. But they’ll do it anyway, no doubt.
The driver in the market is fairly priced “bespoke” compliance services.
The best firms at knowing not only when clients need professional compliance - but also when they need to outsource it - are the compliance consultancies. They have two tricks which are singularly hard for other specialist rivals to master. First - they have the same level of trust as professional trainers, the credibility of accreditation suppliers, the solution mentality of software teams, the knowledge of the publishers and the fail-safe long stop of the insurers. Secondly, they are able to reinforce this with a management system which confers compliance on the client while allowing the consultancy to manage its footfall proactively rather than reactively.
These simple benefits are the difference between closing rates of 1:4 instead of 1:7 on tenders, and 65% and 85% utilisation rates – it’s worth 10%-15% on most gross margins, more if managed well. Some will say it’s just cross-selling; some say it’s shrewd marketing – but the fact is – those firms with real insights into client processes will find more business now more than ever.
This is the only way you can explain how regulatory compliance services profitability (not just sales) increased during the last recession by 300% - yup trebled. Economics is hard to argue with (although we keep trying), but the fact is - the compliance services market should continue to grow strongly between now and 2010. It’s likely to see a drop in growth rates from 2010 to 2012 if the ‘87 and ‘99 recessions are anything to go by – but this is still going to be a period of well above inflationary growth.
Some sectors are flying on their own merits. Just as in 02 the asbestos boom was just kicking off, current spend on IT budgets for larger firms is typically twice the rate of inflation. Construction and compliance are the most likely enterprise IT sectors to continue seeing growth. Construction overall is fairly robust, as is fire safety, and public sector spend in social housing, the health service and particular issues such as occupational health within government departments should stay strong. Employment dispute resolution procedures are also getting an overhaul this year and confusion is always good for compliance demand.
So will more free advice, web services or grants to business links etc from the government make any difference? Nope.
Will the EU shutting up shop and forgetting to push through more regulations for a while make a big difference? Nope (but hell will freeze over before...)
How about accountants and lawyers getting in on the act as their other consultancy and M&A work dries up? Nope. When Grosvenor loses a compliance deal to KPMG I’ll eat my hat.
What if all the various business institutes pitch in with compliance solutions too? Bring it on – they usually help open up markets as much as close them off, and teams such as the EEF actually help set standards in consulting compliance in the long term.
Will lawyers backed by VCs transform this compliance market? Nope. Too little too late.
Will insurers finally get it right and learn how to manage large teams of consultants so that they are cost effective? Nope. Their business development budgets are simply not run that tightly.
Will even big conscientious firms still manage to drop the ball every now and then? Yup. In-house is not always a guarantee of “better” when actually at a very basic level simply spreading the PI risk can be more effective.
Will all firms have to stick to their commercial knitting and outsource more and more compliance processes?
You bet.
Wednesday, March 12, 2008
Friday, January 11, 2008
The R Word - Recession? Don't Panic
If you are a supplier in compliance services - Recession is nothing to fear.
But don’t underestimate the upheaval in handling it. Back in the early 90s – now that was a proper Recession with a capital “R”– yours truly was able to increase sales significantly, double profitability and comprehensively stomp on the competition year after year with compliance services used by over 150k clients – it can be done. But it’s not easy.
Technically recession is 6 consecutive quarters of “negative growth”. But let’s face it – who’s going to argue that because we had one quarter of flat performance in the 6 we’ll wait and see how it pans out. It’s academic - only ivory tower economists can wait for two years and be able to tell us officially in 2010 that we’re in recession now. The rest of us have to deal with now – and it feels damned cold out there for most clients.
Recessions are different now, though. UK wide ones are rare, and even the current one may not trip all the buttons required by the old economist measures. Recessions are typically now industry specific and international in context. The UK can survive a series of “niche” recessions, such as the ones we’ve had in agriculture, manufacturing, mechanical engineering, etc as long as financial services, retail etc remain robust. The difference currently is that we’ve not been led into recession by the banks for centuries. This could be different, not just as it’s a disproportionately big part of the economy now, but also because the property and retail sectors are also sitting on their hands and that in itself can be enough to slide further. Those niche suppliers who've faced industry specific recessions know this - the point is that now the two biggest markets for compliance services - financial services and retail - are teetering on the brink.
So why is compliance different? Why when shops or banks lose growth and profitability will the guys who check their fire extinguishers be all right?
It’s important to know how Big Business panics to understand just how safe you can be. Big Business panics tend to run like this:
“Need to cut costs” leads to “Round 1”. This hits the soft targets, namely PR, recruitment, entertainment, libraries, training, and hammers down on expenses management (typically just when you actually need to reduce the hassle of doing business, rather than increasing it – but that’s FD logic, not normality).
Round 2 follows with “it’s gonna have to be heads rolling” (but not mine) – therefore start the musical chairs. Cut the HR guys? Nope – need them to do the cutting. Cut the finance guys? Nope – you need more actually as declining numbers are harder to watch than rising ones (and everyone is continually digging up the dying plants to see the roots and measure them, again – busy, busy, busy).
It’s never enough – the Bears are in charge now playing “who’s the daddy” - so sooner or later Round 3 comes. This is even more staff cuts – but this time, even the guys we like, as well as some of the Quasimodos in the back office.
The end result is usually too little too late. What’s left? Usually the stuff that’s actually really hard to deal with is still there – oversized or overpriced premises, under-depreciated cars and “stuff”, and of course, service level agreements with clients which were tight even when you had the staff to do them.
Buried deep within the pile of detritus and humiliation is typically also the compliance “long stop”. Finance people hate to cancel these (they are risk averse by nature) even though they will have been complicit in removing those who commissioned or ran them. The firms are actually more reliant on compliance issues than ever before and will have removed many of the specialists who know how to negotiate them properly.
Employee relations issues move from recruitment hassles to redundancy calculations. Safety issues shift from training to stress management and occupational health, surveying now has to include project management, etc. The likelihood of a compliance event in periods of turmoil is much higher than normal so while the shape of the service changes significantly, the client is more reliant on you than ever.
Don’t be afraid of it, don’t “gouge” (ie over exploit it), but do flex your service quickly and sensitively.
Weak staff will feed back that “XYZplc is cutting back and making redundancies, therefore we have to discount the service to secure the renewal at all”.
Good staff will say “we need to stop X, add more Y and up the contact rate with their new guy significantly to pitch for the 25% price rise now we’re doing much more for them and the client’s in-house team has halved – and PS - I can remove the discount Norman haggled out of us last year as he’s gone now”.
It takes balls, but that’s why recession is an opportunity. Like technology and innovation in a period of war – everything is accelerated and stress tested much quicker. It puts you on your mettle – just how good at flexing solutions specification and pricing are your team? Clients will pay more, but the service must be much more relevant.
If you can stand the pace – great, many won’t.
Now is the time to take market share.
But don’t underestimate the upheaval in handling it. Back in the early 90s – now that was a proper Recession with a capital “R”– yours truly was able to increase sales significantly, double profitability and comprehensively stomp on the competition year after year with compliance services used by over 150k clients – it can be done. But it’s not easy.
Technically recession is 6 consecutive quarters of “negative growth”. But let’s face it – who’s going to argue that because we had one quarter of flat performance in the 6 we’ll wait and see how it pans out. It’s academic - only ivory tower economists can wait for two years and be able to tell us officially in 2010 that we’re in recession now. The rest of us have to deal with now – and it feels damned cold out there for most clients.
Recessions are different now, though. UK wide ones are rare, and even the current one may not trip all the buttons required by the old economist measures. Recessions are typically now industry specific and international in context. The UK can survive a series of “niche” recessions, such as the ones we’ve had in agriculture, manufacturing, mechanical engineering, etc as long as financial services, retail etc remain robust. The difference currently is that we’ve not been led into recession by the banks for centuries. This could be different, not just as it’s a disproportionately big part of the economy now, but also because the property and retail sectors are also sitting on their hands and that in itself can be enough to slide further. Those niche suppliers who've faced industry specific recessions know this - the point is that now the two biggest markets for compliance services - financial services and retail - are teetering on the brink.
So why is compliance different? Why when shops or banks lose growth and profitability will the guys who check their fire extinguishers be all right?
It’s important to know how Big Business panics to understand just how safe you can be. Big Business panics tend to run like this:
“Need to cut costs” leads to “Round 1”. This hits the soft targets, namely PR, recruitment, entertainment, libraries, training, and hammers down on expenses management (typically just when you actually need to reduce the hassle of doing business, rather than increasing it – but that’s FD logic, not normality).
Round 2 follows with “it’s gonna have to be heads rolling” (but not mine) – therefore start the musical chairs. Cut the HR guys? Nope – need them to do the cutting. Cut the finance guys? Nope – you need more actually as declining numbers are harder to watch than rising ones (and everyone is continually digging up the dying plants to see the roots and measure them, again – busy, busy, busy).
It’s never enough – the Bears are in charge now playing “who’s the daddy” - so sooner or later Round 3 comes. This is even more staff cuts – but this time, even the guys we like, as well as some of the Quasimodos in the back office.
The end result is usually too little too late. What’s left? Usually the stuff that’s actually really hard to deal with is still there – oversized or overpriced premises, under-depreciated cars and “stuff”, and of course, service level agreements with clients which were tight even when you had the staff to do them.
Buried deep within the pile of detritus and humiliation is typically also the compliance “long stop”. Finance people hate to cancel these (they are risk averse by nature) even though they will have been complicit in removing those who commissioned or ran them. The firms are actually more reliant on compliance issues than ever before and will have removed many of the specialists who know how to negotiate them properly.
Employee relations issues move from recruitment hassles to redundancy calculations. Safety issues shift from training to stress management and occupational health, surveying now has to include project management, etc. The likelihood of a compliance event in periods of turmoil is much higher than normal so while the shape of the service changes significantly, the client is more reliant on you than ever.
Don’t be afraid of it, don’t “gouge” (ie over exploit it), but do flex your service quickly and sensitively.
Weak staff will feed back that “XYZplc is cutting back and making redundancies, therefore we have to discount the service to secure the renewal at all”.
Good staff will say “we need to stop X, add more Y and up the contact rate with their new guy significantly to pitch for the 25% price rise now we’re doing much more for them and the client’s in-house team has halved – and PS - I can remove the discount Norman haggled out of us last year as he’s gone now”.
It takes balls, but that’s why recession is an opportunity. Like technology and innovation in a period of war – everything is accelerated and stress tested much quicker. It puts you on your mettle – just how good at flexing solutions specification and pricing are your team? Clients will pay more, but the service must be much more relevant.
If you can stand the pace – great, many won’t.
Now is the time to take market share.
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