Voice from the Industry
The Value of Spending More
Kevin Custer and Rita Ferrandino, Founding Partners, ARC Capital Development — Friday, June 22, 2012
As business owners, we are always looking for ways to make our companies more efficient and cost-effective. However, as any successful owner or CEO knows, “most cost-effective” does not necessarily translate to “cheapest.” This is particularly true when thinking about the professional services that any small (or large) business needs. Certainly, you can make low rates a priority for basic tasks (data entry, bookkeeping, etc.), but it has always paid off to look for the best of the best in other areas, such as legal advice and financial consultation. Though you will pay more for the input of seasoned professionals, their expertise will often pay off through generating additional cash for your company—but only if you take the time to manage these high-priced resources effectively. Let’s take a closer look at when you should consider spending more for professional services and how you can make sure your increased investment pays off for your company.
Drive the Agenda
Many businesses would agree that investing in a good attorney can maximize value for your company in many ways. A $400/hour rate should ultimately be a better investment than someone at $150/hour, who will take longer and may not maximize your value. In our experience with transactions, for instance, we have found that a top-notch attorney will be able to generate an additional 3% to 8% of value for shareholders. Clearly, that kind of value more than pays for the increased legal fees—as long as you manage the resource wisely. With lawyers and other professionals with high hourly rates, this often means that you need to drive the agenda in meetings and calls. For instance, during a complex merger, we convened a conference call with six lawyers on the line representing the different parties. When one of the lawyers suggested introductions from everyone, we (politely) declined—at about $2,500/hour for the call. Taking even five minutes for chit-chat and pleasantries would have been a waste of time and money. Instead, we got down to business quickly and efficiently and made the most of what we paid for—the expertise of our legal advisors.
Set Parameters Up Front
It can often be a little intimidating to supervise outside talent who come with long records of success in areas you may not feel comfortable in managing, but this mindset does you no good. While you may not know the first thing about tax planning, for instance, that does not mean you should not put parameters around what you expect from your accountant or financial advisor. If you are hiring good quality people, they will absolutely have conversations about cost, hours, and other expectations up front. If you need to limit hours or costs, do this at the beginning. It will almost always be worth paying more for ten hours of work by an expert than finding a cut-rate “bargain” contractor that could take weeks to complete the same task at the level of quality you expect. You should also not hesitate to ask for weekly check-ins to avoid any surprises. And you can also see what can be done on your end to lower costs. Maybe the project involves a significant amount of data entry that you can take care of easily in-house—odds are good your consultant does not particularly want to do the grunt work anyway, and cutting those hours can save their time and your money.
Understand What You Do Best – And What You Don’t
Often companies make the mistake of looking at the high price of a technical or other specialized project and decide that they can find someone in-house who can “figure it out” or take some basic training to better understand the new system. While this may not be a bad idea for a minor project that is not time-sensitive, the opportunity cost of not having a new system up and running quickly means you should rethink the cash outlay and hire the best anyway. For example, we worked with a company that was implementing a new software product to track their call and support center. To save the $5,000 to $10,000 a contractor would have charged to customize the product, the company instead took a customer service employee interested in programming and had him learn the code. Unfortunately, it took this employee more than 120 days to complete the project, and even then, it was not customized completely to the company’s needs. Even worse, during the four months he spent struggling on this project, he also neglected his customers, losing a $25K/year client. Ultimately, if this company would have recognized at the beginning its lack of in-house technical expertise, it could have had the system up and running in much less time while keeping staff focused on what they do best—keeping customers.
Ultimately, seeking out top-of-the-line professional services is almost always worth the up-front costs. Think about the choice between an advisor who is more expensive because she has been to hundreds of trade shows and knows exactly where you should go, what you should do, and who you should meet and one who is much less expensive but advises your company to attend what turns out to be several unnecessary events. Though the second advisor might even have more years of experience than the first, what you are paying for is not merely experience but for wisdom—the people who have seen and made mistakes that they will not let your company repeat. While this wisdom—whether legal, technical, financial, or in another area—does not come cheap, working strategically and effectively with the best of the best will pay dividends for your business.
Kevin Custer and Rita Ferrandino are founding partners of ARC Capital Development, a private equity and advisory firm offering expertise in the education industry to innovative and rapidly growing businesses.
Kevin, Kevin@Arccd.com, offers over 20 years of experience in technology and the education market and is a recognized leader in launching and growing successful businesses in the online and enterprise markets. He has the unique ability to foresee market opportunities and put the right people, products, and partners together for success.
Rita, Rita@Arccd.com, offers more than 25 years of experience, building companies and delivering strong revenue in the higher education and K-12 markets. She has led company sales, acquisition, alliance, and marketing efforts for traditional print, technology, and online products for some of the industry’s largest publishers and ARC portfolio companies.