Peninsula and Particle Physics

A strangely dressed chap turned up recently outside the Hadron collider claiming he'd come back from the future to stop us making the mistake of firing the thing up. I think they treated him as just "a very naughty boy". The Hadron collider is aiming to see if the Higgs Boson theoretical mechanism can be observed in reality - not that I really know much about quarks and high energy particle physics. The problem is - "they" don't really know what else it might reveal either. My personal favourite hunch is that when it does work, a large neon sign will automatically materialise in the skies over Switzerland in letters one mile high saying "LEVEL 2" - but who knows...

Recent results from Peninsula Business Services, Northgate's First Business Support, Citation, Ellis Whittam and Drury PSM suggest something is up. Or to put it another way - not up. There will be a lot of shadenfreude among Peninsula's many detractors at sales dropping in their latest accounts - all well and good - but at group level they grew slightly and achieved something really quite special in the tax fee business. Northgate's results for First Business Support are unusually flat, as are Citation's, and even Drury is not it's usual ebullient self.

So what is going on? Well sadly, its quite simple. Maths. Not everyone's favourite at school, and downright baffling when you get to the particle physics level of it. But essentially the regulatory consulting market is finally reaching "LEVEL2". Peninsula's sales drop in the employment and safety business has more to do with their size, than the market. The maths is simple. Increasing the size of a sales force continually eventually reaches a point of diminishing returns. In Level One you can play the game by simply adding more and more sales staff - "piling it high". Even with an addressable market of 800k businesses, however, 100 teleappointers ringing 100 firms a day will cycle through that 3 times a year or more. Small firm clients annoyingly also go bust and cancel, so the gap to fill each year before achieving growth simply gets bigger.

So IF - and its a big "if" - clients renew at, say an annualised 86%, and new sales staff generate, say £75k each pa, it takes 122 front line sales staff at full tilt for a £65m business just to break even. A 1% increase in cancellations means a £5-600k drop in turnover even with the team at full tilt. It's maths - not five year contracts, recessions or quality of service that is the main driver here. The market is now over half a billion in sales pa, it reached Level 2 in the late noughties and the rules are changing.

Peninsula have dabbled with the new rules, and growth in Ireland and Taxwise have kept them growing at the top group level. Ellis Whittam are growing and we expect other mid-market differentiated players to continue their growth too. But what worked in Level 1 simply is not enough in Level 2. Throwing sales staff at growth will only get you so far. Taking cancellations on the chin will no longer be an option. Price dumping hurts no-one more than the main dumper. Throwing ever more qualified management bodies at problems is also usually a fast track to complexity instead of growth - a bad thing. Growth is important - it is one of the key determinants of enterprise value, so only a very brave few will give up on it. To sustain it in the Level 2 environment, however requires new thinking.

New significant service lines are required - and if there is any criticism of this market that really hurts, it is that an insurance mentality doesn't go far enough. More bells and whistles for the sales team is fine as far as it goes - what's needed are complementary service lines with real grunt.

For a profile of Peninsula based on the latest accounts for the group, see www.rbponline.co.uk