Early Findings from the Kaulkin Report

Kaulkin Ginsberg has released the sixth edition of the Kaulkin Report. Given the role that this publication serves in the accounts receivable management (ARM) industry, this is an important milestone for the firm. As the publication’s primary author, this is also an important milestone for me – in more ways than you might expect.

Let me explain. After a decade conducting research in the financial services industry, I joined Kaulkin Ginsberg in November 2004 as Director of the Research Group. I had worked for an industry-leading provider of financial research, published in the field and had experience discussing business issues with company owners and managers. Still, managing the production of the Kaulkin Report was my first major project and I took it as a real challenge.

I advanced on the learning curve with the help of my colleagues and by speaking with scores of industry owners and managers, who are quoted extensively throughout the publication. By combining their perspectives with some unique financial analysis, the Kaulkin Report emerged with a theme: the ARM industry is large, diverse, sophisticated and poised for growth.

Large
The ARM industry generated $15 billion in revenues during 2004, having grown at an average annual rate of roughly 4% over the prior four years. Small, private companies created much of this growth. While public companies, private equity-backed firms and divisions of Fortune 500 companies compete in this industry, 95% of its 6,500 companies generated less than $8 million of revenues in 2004.

Large companies do benefit from economies of scale in a number of ways in this industry, particularly related to the reduced operating costs. However, I was also impressed by how many small and medium-sized companies compete successfully in this space. The ARM industry is large enough to support both types of success.

Diverse
The ARM industry is also surprisingly diverse. When a creditor seeks help managing cash flow, it has great flexibility choosing not only among ARM providers, but also among ARM services. For example, a creditor that has traditionally sought first party services early in the receivable’s life cycle may now choose early out contingency services or even sell portfolios of fresh debt.

I was also interested to learn how many ARM companies offer many ARM services to meet the needs of creditors and to maximize their own profits. Trends such as these have made the industry increasingly diverse in recent years.

Sophisticated
Many of the owners and executives I spoke to noted that the “mom and pop shop” is increasingly a stereotype of the past. This obsolescence is taking place for many reasons, including the movement of sophisticated companies into the industry, particularly those with expertise in business process outsourcing and customer relationship management.

In order to compete with these multinational firms, many ARM companies have developed offshore resources, and the industry is becoming more and more global in scope. Debt buying has also grown rapidly in recent years, adding to the sophistication of the industry. In fact, the market capitalization of publicly traded ARM companies nearly tripled between 2000 and 2004.

The preparation of the Kaulkin Repot taught me how much success in the industry results from sophisticated business processes and practices. ARM companies now compete less on the basis of personal relationships with creditors and more on the basis of sophisticated competitive advantages.

Poised for Growth
While challenges face ARM companies of every size, I was particularly impressed by how much economic and business forces are predicting more growth for the industry.

For example, outstanding consumer, business and government debt exceeded $24 trillion at the end of 2004, having grown at an average annual rate of 7.5% between 2000 and 2004. While ARM companies will not service all of this debt, more debt implicitly leads to more delinquencies and more demand for ARM services.

Other fundamental business considerations lead to similar conclusions. ARM companies are realizing cost savings of up to 40% per seat using offshore labor. Unique technology products and services are being provided to an industry that is demanding more and more operational efficiencies. And, I would be remiss not mention that a historic level of mergers and acquisitions is taking place in the industry, with more than $1.5 billion changing hands in corporate transactions during 2004 alone.

Perhaps my greatest finding from the Kaulkin Report is how much substantive business research remains to be done on the industry. Keep an eye on Kaulkin Ginsberg’s Research Group. I believe you will be seeing some very interesting things.

In the meantime, I hope you will find as much value reading the Kaulkin Report as I found preparing the publication. An executive summary covering the publication’s major findings can be downloaded for free at http://www.kaulkin.com/research/kr/.

As Director of Research Services for Kaulkin Ginsberg Company, Paul oversees custom research projects and publications focusing on the accounts receivable management industry. Previously, Paul served as Research Manager of Thomson Financial, a leading provider of market information to the worldwide financial services industry, and as Research Manager of Term Sheet Intelligence, a provider of market research about venture capital transactions.

Paul has also served on the investment team of the venture capital firm New Vantage Group, where he reviewed business plans, interviewed business managers and performed due diligence on companies raising capital. He received his MBA from Georgetown University and an undergraduate degree from The College of William & Mary.