There are only three strategies to develop new business: Rainmakers, Acquisitions, and Organic Growth.
None are mutually exclusive of the others. Contractors can use some degree of all three at the same time.
Though each strategy can contribute growth, each has some baggage. Here’s a brief look at them.
Rainmakers were defined in last week’s post as hiring someone for the business theyâ€™ll bring. The rainmakers’ upside is new business comes on fast, and the ROI is clear.
New business should be almost instantaneous, at least something significant in three months. That’s what you expect. You hire a rainmaker to make rain now. Not a year down the road.
Contractors can gauge the cost of the rainmakers expenses (salary, taxes, benefits, bonus, & commissions) against the value of the expected new business. Should be an easy ROI calculation. Helpful before bringing on a rainmaker. And when they’re on board, it’ll be easy to see if its not panning out.
The downside of rainmakers is if they can bring business with them, they can also take it away when they leave.
And they will leave. Their primary worth to contractors is leveraging their relationships, past positions and notoriety. Once they’ve gotten what they can, they’ll be looking for greener pastures. Just expect it and you won’t be hurt when they leave you.
My preference is to use monies targeted for rainmakers towards building contractors’ capabilities for organic growth. But there will be the rainmakers with exceptional ROI that’ll convince any contractor to take the plunge.
Upsides can include big jumps in scale, instantly. Buy a firm as big as yours and you’ve grown 100% when it closes. Takes a lot longer to sell that much.
Overnight acquisitions give instant credibility in new geographic areas and vertical markets. Acquisitions can also bring high-caliber management, expertise, and offices.
The downside is retention of customers and that high-caliber management. Depending how or if the acquired firm is integrated into the buyer’s firm.
If nothing is changed (original contractors’ company name and customer service contacts stay the same) then retention can be high. Some Mergers & Acquisition people believe as high as 90%, which means only 10% is lost in the first year.
However, if the acquisition is integrated into the buyer’s company, retention rates plummet. Sometimes as low as 50% after only three years. That means looking back, only half the acquired customers stayed. Yikes!
Several factors affecting retention rates of acquisitions include:
Change in Brand
Is the acquired company’s name changing to the new buyer’s, or does it remain the same? Branding can spook some customers, even though operationally everything remains the same.
How many of the personnel who serve customers stay with the acquired company ? Owners may leave immediately, or stay during an earn-out period. However long an owner sticks around, customers care more about the people they deal with on a daily basis. It’s really the service reps who determine whether customers stay or leave.
Limited Options in Local Market
Customers in local markets typically want three to four viable contractors to feel they have options. Sometimes they’ll want more.
If an acquisition occurs in a market where the contractor-buyer is already strong, customers may seek other contractors because they don’t like the buyer’s firm. Or don’t like the idea of a monopoly or oligopoly.
Sometimes customers will help bring in a new contractor into the market just to ensure there’s enough competition and free choice.
The bottom line is when customers’ choices are few, they leave and contractor-buyers’ revenue seriously drops.
This means a contractor has the capabilities to bring on new customers and contracts. It’s the most valuable and effective strategy. If a contractor can bring on new business by itself, it’s protected against the downsides of acquisitions and rainmakers.
However, organic growth is also the most management intensive strategy as well. Contractors need to have a number of components in place for the entire system to work. There must be:
* Competent sales people & on-going sales training
* Proposals & presentations that win contracts
* Sales management, reporting & accountability
* Marketing to bring in leads & raise awareness
For these reasons, organic growth (healthy, successful organic growth) is the slowest to get in place compared to acquisitions and rainmakers.
From the Menu
All three strategies have their place. Rainmakers and acquisitions, if used cautiously, are steroids for any contractors growth curve. But like steroids, the constant use of them can produce deadly results. Organic growth is worth the investments, whether or not the other strategies are used.
What’s your mix of strategies?
President, Service Performance
Technorati: buying, contracts, retention