Business Temptation

November 24, 2007

Case categories include: Entrepreneurship   Leadership   Strategy & Planning   

By Robert Sher
To be an entrepreneur is to endure temptation.  I mean the temptation to start a business or division when the impulse hits you.  I call it entrepreneur-itis. It’s a disease that leads to the dissipation of profits from the established business to poorly disciplined startup efforts.  The rotting carcasses of entrepreneur-itis are strewn across the economic landscape.

The Case
Randy Wheeler of Valley Oak Systems Inc. was fighting it.  For seven years, he’d kept a clear focus on his business – software development for claims management in the insurance industry.  The result: Award winning growth and profitability.  His customers loved him, but wanted more.  They wanted a “one-system” solution that provided integrated claims and medical bill review.

What no computer could do was to review each medical bill to determine if the doctor was billing fairly.  These review services were typically supplied to the industry by third-party bill review companies, a fragmented marketplace comprised of hundreds of small providers.  Some of Valley Oak’s customers did the bill reviews themselves.  In order for Valley Oak to expand to bill review, they would have to build additional software, hire hourly employees to review the bills, and the most daunting of all, be prepared to learn a new business with all its surprises.  Most medical bill review firms promoted the idea that bill review was “difficult,” and required constant judgment by seasoned medical professionals.

Finally, one customer, who wanted to outsource the bill review function but not add another vendor, offered to partner with Valley Oak, teaching them the ropes, and investing in the software development.  As Randy pondered the risk and returns, his monthly CEO peer group (the Alliance of Chief Executives) met.  During the meeting, a new member presented some stunning technology, and then fellow CEO Tom Engdahl said, “Your technology is great, but you need to find a customer with a burning need that your technology solves.  Invest in developing a deep and lasting relationship with that customer and others like him.”  Randy’s mind flashed to his own business, and the comment hit like a ton of bricks.  He already had the customers, the deep relationships, and knew their burning, unfulfilled needs.

Valley Oak jumped on the opportunity and by June 2003, they were performing the bill review service for their partner. As a result of the success, within a few months, Valley Oak decided to offer the bill review service to all their clients.  By the end of 2004, bill review was 24% of the total revenues, had the highest growth rate, and the second best margins.  The bundled software and service package was synergistic, and offered a competitive advantage that helped close more software sales.  Valley Oak’s strategy was further validated when their primary software competitor bought a bill review firm so they could offer the same bundle.

The Analysis
Randy was right to be cautious about jumping into a new business.  Focusing on what he knew best, his strengths and his industry leadership was a great strategy.   But his dedication to customers was also a core value of his firm.  Providing solutions to their problems and listening to their needs was a key to Valley Oak’s phenomenal customer retention.  Customer relationships are a business’s greatest asset, yet strangely are never shown on the balance sheet.  The time and investment to develop new customers is huge, and those relationships must be carefully tended.

A number of factors made the bill review business an ideal opportunity.
1. Loyal customers were asking for the service.  This is huge.
2. Those customers had budgets to spend, and were willing to pay well for the service.
3. The bill review service had excellent forecast profit margins.
4. A customer was willing to train Valley Oak in the process, and invest in the development cost, so Valley Oak’s learning curve was short, resulting in low risk and a faster ROI.
5. Profitability in this sector of the industry was not dependent on market share, so there would be no distracting pressure to build bill review revenues at the expense of Valley Oak’s core business.
6. Valley Oak had a strong management team already in place capable of kickstarting bill review in its early days.
7. Building the software and infrastructure needed was well within Valley Oak’s competencies, and could be accomplished in 3 to 6 months.
8. The bill review business was synergistic with their current business.

I wish all new business opportunities had this much going for them. If you are close to your customers and listen to them, you will surely hear their pain and their needs.  Each time you hear them, ask yourself if you can figure out a way to solve their needs, then run down the list of factors above. The more that are in your favor, the more likely you should seriously consider moving forward on the opportunity.

Certainly beware of the temptation of new businesses and the damage that moving on impulse can cause.  But our world is not standing still, and businesses must evolve and change to survive. Sometimes, when it’s right, yield to temptation.

Takeaways
• Adding a new business to an existing one is a big decision.  Having the same customer for both is a big plus.
• Starting it up with a customer as a “partner” can be a great way forward.
• Be certain that the upside of the new venture is greater than the upside of putting the same energy into the core business.

Robert Sher is principal of CEO to CEO, specializing in assisting CEOs and business leaders as they navigate critical passages.  He is the author of The Feel of the Deal; How I Built a Business through Acquisitions.  He may be reached at Robert@ceotoceo.biz.

Company and Case Facts:

Company: Valley Oak Systems, Inc.
Person: Randy Wheeler, Founder and CEO
Alliance Member since: 2003
Business Founded: 1994
Annual Sales Volume: $12 million
Growth Rate: 430% total in last 5 years
Head Count: 66
Product: Claims management software, services and support for the insurance industry
Typical Customer: Private and public companies, carriers, pools, third-party administrators
Written: December, 2004