Karl Hansen

Growing through Referrals

February 23, 2006

Case categories include: Operations   Sales   

By Robert Sher
It is a favorite dream of entrepreneurs.  They write in their business plans, “We plan to deliver better quality and service than all our competitors, will charge them the same or less, and will make higher than average profits.”  Right.  Perhaps in some other dimension.

But I’ve discovered at The Vita Companies the closest living example of this dream.  This firm, led by Karl Hansen, does 401K facilitation, flex benefits administration, and they are HR benefits brokers.  They started their business in 1979 in the usual fashion:  Marketing, selling, cranking out the work, and starving all the while.  They spent most of their profits on giving great service, way beyond the norm.  It took six years to prime the pump, but by 1985, referrals became steady, and double digit growth ensued.

Then they did the “crazy” thing.  They stopped marketing and selling, and diverted all those funds into providing incredible service.  They hired programmers to automate many processes (and they still, to this day, spend about 5% on custom IT work).  They hired expensive claims processors who deliver great work and high productivity.  For example, they began processing flex benefits claims in 12 HOURS, not the typical 12 DAYS.  Truly, their clients sat back and said, “Wow.”  The referrals kept coming.

By 1990, the head count was nine.  Ten years later, it stood at 18.  The growth in head count was leveraged by their IT investment, but top line growth was kept steady so that service quality and the company service culture were maintained.

Think about all those marketing and sales dollars shifting to the bottom line – or shifting to increasing your competitive edge.  It’s exciting!  Yet only some businesses can line up the right factors and circumstances to make this work.

Would your clients and customers refer business?  In Vita’s case, HR professionals actively talk to each other, move from company to company, and typically HR is not considered a strategic weapon.  News spreads in the HR world about great work.  But many businesses sell to customers who are competitors or who do not “talk” and you can bet referrals are rare.

Have you primed the pump?  Vita worked for six years to establish foundation clients that would talk about their service quality.  A new business is in no position to under-spend on marketing and sales.  The greatest service in the world won’t bring in business if no one knows about it.

Does your client need and appreciate service and quality way above the norm, and can you deliver it over the long haul?  I’m not talking about “20% better” here.  The competition will erode “20% better” quickly and it won’t bring referrals.  You need a huge, sustainable difference.  The difference could be a one-time leap, but if you end up raising the bar for the industry, you must make regular leaps forward to stay way ahead of the norm.

Can you deliver extra, and still make a fair profit?  Vita, after priming the pump, is making normal profit levels.  They do it by diverting all the marketing and sales expenses to operations.  You could do that, or if you can charge a premium, you can divert the extra top line toward provision of service or quality. But the income statement math must work.

Are you satisfied with steady growth?  While Vita is one of the larger independent brokers of its type in the USA, it did not have explosive growth.  Their referral business powered steady, incremental growth.  Mr. Hansen and his operationally focused partner, Rae Lee Olson, are happy with this level of growth.

Vita has no salespeople, and does no traditional marketing.  However, they do hold a once a year symposium and invite clients and prospects.  Mr. Hansen admits to this being the one area that serves as marketing, and it’s a great technique.  The symposium is open to all HR professionals who want to learn and who value excellent education.  It also highlights the tremendous depth of benefits knowledge of the Vita team.  Further, Vita delivers its service with a big person-to-person component and frequent site visits.  By having lots of its people mixing with clients, Vita gives its clients a chance to fall in love with its people, a necessary precursor to falling in love with a company.  If Vita wanted more growth, an easy extension would be to start asking for and encouraging referrals.

It is not an all-or-nothing proposition.  Exceeding customer expectations is always a good plan and helps build a good reputation.  If you can do what it takes to create some referral business, then divert some marketing budget toward building a competitive advantage and you’ll be on your way.

Takeaways:
• When your clients consistently say, “Wow” because of your service or product, the effect can be incredible.
• If you “wow” them, growing your business by referral is possible if your customers will spread the word to other prospective customers.
• Outperforming your competition is great if you don’t do it by depleting your profits.  Consider diverting advertising and marketing expenses into performance enhancements.

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: The Vita Companies
Person: Karl Hansen, President
Alliance Member since: 2003
Business Founded: 1979
Annual Sales Volume: $5 million
Growth Rate: 15% (forecast)
Head Count: 31
Product: Executive and employer benefits, welfare plane compliance and administration, and personal insurance and investment planning
Typical Customer: Employer groups of all sizes
Written: February, 2006
Address: Mattson The Vita Companies, 419 North Shoreline Boulevard, Mountain View, CA 94043-4680
E-mail: info@vitamail.com
Phone: 650-968-8811