How to compete with £3billion? Easy…

It sometimes helps if you really don’t know that you’re up against billionaires. But having done it both ways – knowingly and blindly – you’re better off knowing them, and then ignoring them.

Tanks and lawns

When managing a small P&L of some £4m and up against Reed Elsevier’s billions, let alone Thomson Reuter’s similar reach, it never occurred to me not to try. Here’s how it breaks down, you see.

The Reed Elsevier team was several billion worldwide. In the UK, however, while over 40% of the whole only half of that was in comparable ‘black letter’ legal and regulatory publishing. The division with exhibitions and magazines was high profile, but in effect an entirely different market. The core of the rest was some £200m in ‘black letter law’, choc full of epic tomes written by senior judges and barristers. The law-for-business part of their business was in fact largely under the (acquired) Tolley brand and so (a) a step-sister at best, and (b) a poor relation even for Tolley to their core accountancy books business. So when you boiled it down, yes the billion pound ogre, was in fact presenting me with only a rather distracted, under-resourced, after-thought that might complement one of their payroll books; while we had in fact a cohesive plan to crack on. While Tolley took their brand from £8-14m, we took that £4m to £65m and then doubled that. They didn’t see it coming, and didn’t know how to react. A few years later we parked another £75m tank on their front lawn again, and they still struggled to react.

Testing times

So when I look at some of the (A)TIC – (assurance), testing, inspection and certification companies, sure it’s a big market, and they should have a vested interest in tackling GRC markets, but can they?

Intertek is one such. £3.2bn in revenues. Free cash of c14% and profitability of 16.3%, largely on subscription services. Clienteles of scientists and professional staff in technical roles. What used to be ‘standards’ is now rebranded ‘science’. They see themselves as a ‘force for good bringing quality, safety, and sustainability to life’. High ideals indeed. The strategy is based on five points (isn’t everything these days?) and essentially a promise to deliver superior ‘science-based’ customer services. Employees are highly engaged (on an 80% internally set metric) with a target of 15% churn being beaten down to 14% pa currently. Sounds unbeatable.

But wait. If the customer service is ‘superior’, and especially if it is scientifically based, ergo undeniably superior, why is the company only achieving 4.9% growth? In inflationary times, that’s actually going backwards. It’s also less than half the market potential generally, so they’re losing market share.

The employees are also a concern. Since when was losing 1 in 7 staff every year a good thing? A look at the basic metrics shows why. The average employee spend per year here is 30% below the market norm; the rhetoric about how key staff are is not reflected in their pay. This feeds straight through to levels of sales per employee; way down too.

Five Point Strategy

So let’s look at their 5 strategy points and apply some whiteboard sticky notes of our own:

‘Engaged employees’: This needs a step change; not rhetoric. 63% of the business is in old school ‘standards’ still and they’re still in that mindset. Aspiring to 90% while delivering 80% is not even enough; try 96-98%. Employees are voting with their feet.

‘Superior customer service’: superior to what? It’s not delivering above average anything, let alone top quartile or top decile results. Growth should be double what it is, no doubt through client defections holding things back. Profitability should be double also, even in the core ‘product’ part of the business.

Margin accretive growth is a strategic goal that means innovation is costed to within an inch of its life; it’s a fix-the-spreadsheet game and pick-winners approach that just breeds bureaucracy and mediocrity. This approach surrenders market leadership.

Enhance cash conversion: finance-speak for only launching subscription products, and again setting a high bar so that it’s almost impossible to encourage risk-taking. Sure, subscription products are possible, but they’ll be so close to the existing ones as to be cannibalistic, or the cost of selling them will quickly trip over the margin accretive guillotine.

Accretive capital allocation: as if the point hadn’t been rammed home already, capital investment only goes to the spreadsheet-fixing quick return projects. This army only ever digs more trenches.

They do proudly trumpet their client empathy credentials with more revelations about product development. Thousands of clients are asked what they want and need every year before launching any new service. So here’s another level of bureaucracy in the service development mindset. This is exactly the trap that even Henry Ford Snr knew. Intertek is in the faster horse business. Don’t get me wrong; they’ve got some good innovations happening, but guess what? They’re tiny, off the beaten track, underfunded, and scared stiff of appearing anywhere with brackets around a number. They’ve been making acquisitions to cover some of the more glaring omissions, but the irony of making the SAI acquisition, for example, work by taking out all of their global transfer pricing, management, and bureaucratic overhead to make it profitable will have been lost on them entirely.

To know or not to know…

What we have is the same scenario as I explained at the outset. Maybe simply knowing these beasts are so big is enough to make you give up. Or maybe when you look closely enough, you see the barnacles and the opportunities. In the UK, Intertek is only a £203m business that spends only c£20m worldwide on software each year, or c£1.3m pro rata (assuming they’ve done the spreadsheet hurdle racing well enough to fight off the big teams globally).

Head to head even small and medium-sized competitors will find this strategy easy to compete with. Despite deep pockets, where it matters the investment is small. Maybe some of the other TIC players like LRQA or BSI will tackle them head-on, but nobody else needs to. Citation, a team with equally deep pockets, and willing to pay over 3x first year cash if they see fit, has been able to build a top 3 position in food safety in a few years because they don’t agree with points 3-5 above and find them easy to trash. Any number of smaller teams paying even market norms will find they can readily compete on points 1 and 2 also.

The ‘ignore them ‘ part comes now, as there will be no, literally no benchmarks or metrics that this listed team demonstrate that any entrepreneur would consider worth following. Agility and digital innovation will be the simplest route. A poked bear can wake up and it takes real speed to avoid those claws. But it’s rare, and it’s actually the combined effect of many smaller teams that ultimately really threatens them.

The listed market analysts do not seem convinced by the rhetoric around superior science either. TQM and product certification are mature markets gradually being disintermediated by technology and supply chain changes. Putting ‘lipstick’ on an average employee salary (gross) of under £33k is not a credible ‘excellence’ strategy, scientific or otherwise. A 33% share price drop in 2 ½ years confirms that. It’s a dividend engine for the likes of BlackRock and their 6.5% with some stability, however, so it will continue to trundle on for now, but that’s all its five points really protect.