I received a robust and interesting response to my post on consolidation in the 3D scanning industry. I would like to follow up on that discussion by describing how I now see that consolidation eventually happening. I predict that there will be one or more companies with a national footprint able to provide high quality, value-added 3D imaging services to its customers in the next five years. Here is how it will happen.
The feedback I received generally agreed with the proposition that we are likely to see consolidation in the 3D scanning industry and that there are some strong benefits that might be derived from a company with a national footprint and a broad-based, high quality service offering. There was one note of skepticism suggesting that consolidation in the airborne lidar market had not had a positive outcome. I will be interested to learn more about that consolidation exercise in order to explore whether the failure was caused by a structural defect in the strategy or was one of execution, or possibly both. The great thing about studying things that didn't work is that it makes you smarter the next time around. Knowing nothing about the players in that effort, I would guess that it might well have been an issue with execution as execution on any consolidation effort is notoriously challenging. I plan to discuss a few of those challenges, integration and willingness/ability to change practices, in this post.
Straw man Description of a national 3D scanning company
There are basically four ways to increase a company's reach and scope in an effort to create a national footprint for a 3D scanning company:
In addition to these four strategies, one could take a hybrid approach using several strategies simultaneously or over time, which may tease out some of the benefits of a couple of these approaches. Naturally each of these strategies has some strengths and weaknesses.
Pros and Cons of Build, Buy, Partner and Franchise
I am not attempting to provide the complete analysis of each of these approaches, but offer some of the main benefits and challenges of each of the key growth strategies.
Build. One of the principal benefits of a build approach is that it permits you to adhere to a specific national strategy and create a uniformity of approach. The company can hire only who it needs. You buy only the equipment and software that you need. There is no unlearning of poor habits, no awkward name changes, just create the plan and build to the plan. The downsides include that you must break into a new market and sell potentially without existing local customers or reputation. The expenses come potentially well before income. Also, a strong local competitor may have already locked up key customers.
Buy. One reason growing companies buy local companies to fill out their national footprint is to gain access to that company's established relationships. It can provide a revenue jump start that can help to smooth out and sustain the growth strategy. [It is worth noting, however, that not all revenue is equal. The revenue that is recurring is worth far more than when a company earns its revenue predominantly through one-off jobs.] Existing companies may also bring to the national effort some unique talent or capability that can be spread across the entire enterprise. Frankly, each acquisition should at a minimum be an opportunity to evaluate the new company's practices and the best companies are the ones that can take that learning and again spread it across the entire enterprise to make it a stronger, more efficient, better or more nimble whole. The downsides of the acquisition strategy can be the up front cost incurred and the potential to purchase certain assets, revenue or human capital that is inconsistent with the needs of the national strategy.
Partner or Franchise. I have seen several companies employing a partner approach and even one company discuss a franchise approach. While the partner and franchise approaches can extend the company's footprint in the short-term, I believe that there are some inherent limitations to these approaches which will favor the pursuit of the first two, build and buy.
While partnering with existing service providers does provide the opportunity to extend a company's reach to new service locations, it does not increase your brand equity as much as direct sales and service and in some cases creates confusion in the mind of the customer about who their real service provider actually is. It is
harder to control quality, present a uniformity of approach, and even offer the same set of service offerings when using a stable of local partners, each of whom has different equipment, facilities, capabilities and skill levels. In addition, the partner may (generally inadvertently) disintermediate the national provider from their customer. It is a truism in service provision that you want to own the relationship with your customer and when the partner is the on-location service provider, it is hard for your relationship with the customer not to be affected. The upside is that you avoid the cost of acquisition and some start-up costs in new locations.
Similarly, the franchise model can extend a company's reach, but the downsides are several. While the franchise model does attempt to create standards for the franchisees, policing of those standards may be more difficult with independent franchisees than with employees. The usual disciplinary mechanism for franchisees is termination, but that is a limited option which may be necessary but rarely helps the franchisor much. Also, normally there is a franchise fee, potentially royalties and even advertising fees associated with being a franchisee and it is not clear how much appetite there is for paying to be part of a 3D scanning franchise. Further, time spent on creating a franchise model could likely be better spent on developing the national strategy and program for the consolidated entity. Finally, disputes over territory and customers may be harder to manage than with company employees.
Build vs. Buy
Ultimately, I believe the successful company(ies) will be the one that is able to establish a process to make a series of correct build vs. buy decisions. There are some obvious benefits on the build approach (the program can immediately mirror your other operations, you buy only what you need, etc.) and the buy approach (immediate customer relationships, immediate income) but it will take a careful, systematic weighing of the costs and benefits in each location to produce the best results. I have been putting together that build vs. buy analytical framework to facilitate what is almost always a very fact intensive analysis of the alternatives. There are many different variables that go into making the right build vs. buy decision. Some are quantitative, some are qualitative and even others will require plain intuition, experience and occasionally even some best guesses.
Conclusion
The successful company will need to be able to execute on a hybrid approach and then execute effectively on integrating those pieces. With a properly integrated group of locations, the company should then have the ability to provide uniform, high-quality and high value services to its customers across the country. That will be a very potent combination of capabilities, and will be particularly attractive to large national clients.
But just buying up or starting a bunch of offices around the country will not be enough in my opinion. In the end, I believe it will only be that company or companies who are willing to take the best of what they find through this build and buy and integration process and change their own companies to incorporate those best practices. As I have reviewed over 65 companies in the 3D scanning space, I have not seen the single one who does it all correctly. The winner will be the company (and specifically, the management team) not afraid to change as it encounters new ways to create value for its customers. The process of integrating best and better practices as a company grows and evolves is a challenging test of management's will to live the mantra of continuous improvement. Since 3D scanning is an industry that has both a good current business case and great potential for growth by using new technologies, software and techniques, a mindset of continuous improvement will be critical to the successful competitors.
Straw man Description of a national 3D scanning company
- National service footprint (ability to sell and service both locally and to large, multi-location national customers);
- Consolidated 3D modeling and CAD group (or two) for certain modeling and CAD services;
- Larger sales team(s) with local and national focus;
- Uniform service offerings and quality standards across all locations as well as a capability and process for providing high-quality, profitable custom offerings; and
- Access to a broader range of equipment (e.g., CT scanning, high-end metrology labs, UAV capabilities? etc.) to permit a set of service offerings more robust than achievable by competitors.
There are basically four ways to increase a company's reach and scope in an effort to create a national footprint for a 3D scanning company:
- Build out a new service location (from the ground up);
- Buy an existing 3D scanning company with location(s) in your target market(s);
- Partner with existing 3D scanning service providers; or
- Franchise your service model to local affiliates.
In addition to these four strategies, one could take a hybrid approach using several strategies simultaneously or over time, which may tease out some of the benefits of a couple of these approaches. Naturally each of these strategies has some strengths and weaknesses.
Pros and Cons of Build, Buy, Partner and Franchise
I am not attempting to provide the complete analysis of each of these approaches, but offer some of the main benefits and challenges of each of the key growth strategies.
Build. One of the principal benefits of a build approach is that it permits you to adhere to a specific national strategy and create a uniformity of approach. The company can hire only who it needs. You buy only the equipment and software that you need. There is no unlearning of poor habits, no awkward name changes, just create the plan and build to the plan. The downsides include that you must break into a new market and sell potentially without existing local customers or reputation. The expenses come potentially well before income. Also, a strong local competitor may have already locked up key customers.
Buy. One reason growing companies buy local companies to fill out their national footprint is to gain access to that company's established relationships. It can provide a revenue jump start that can help to smooth out and sustain the growth strategy. [It is worth noting, however, that not all revenue is equal. The revenue that is recurring is worth far more than when a company earns its revenue predominantly through one-off jobs.] Existing companies may also bring to the national effort some unique talent or capability that can be spread across the entire enterprise. Frankly, each acquisition should at a minimum be an opportunity to evaluate the new company's practices and the best companies are the ones that can take that learning and again spread it across the entire enterprise to make it a stronger, more efficient, better or more nimble whole. The downsides of the acquisition strategy can be the up front cost incurred and the potential to purchase certain assets, revenue or human capital that is inconsistent with the needs of the national strategy.
Partner or Franchise. I have seen several companies employing a partner approach and even one company discuss a franchise approach. While the partner and franchise approaches can extend the company's footprint in the short-term, I believe that there are some inherent limitations to these approaches which will favor the pursuit of the first two, build and buy.
While partnering with existing service providers does provide the opportunity to extend a company's reach to new service locations, it does not increase your brand equity as much as direct sales and service and in some cases creates confusion in the mind of the customer about who their real service provider actually is. It is
harder to control quality, present a uniformity of approach, and even offer the same set of service offerings when using a stable of local partners, each of whom has different equipment, facilities, capabilities and skill levels. In addition, the partner may (generally inadvertently) disintermediate the national provider from their customer. It is a truism in service provision that you want to own the relationship with your customer and when the partner is the on-location service provider, it is hard for your relationship with the customer not to be affected. The upside is that you avoid the cost of acquisition and some start-up costs in new locations.
Similarly, the franchise model can extend a company's reach, but the downsides are several. While the franchise model does attempt to create standards for the franchisees, policing of those standards may be more difficult with independent franchisees than with employees. The usual disciplinary mechanism for franchisees is termination, but that is a limited option which may be necessary but rarely helps the franchisor much. Also, normally there is a franchise fee, potentially royalties and even advertising fees associated with being a franchisee and it is not clear how much appetite there is for paying to be part of a 3D scanning franchise. Further, time spent on creating a franchise model could likely be better spent on developing the national strategy and program for the consolidated entity. Finally, disputes over territory and customers may be harder to manage than with company employees.
Build vs. Buy
Ultimately, I believe the successful company(ies) will be the one that is able to establish a process to make a series of correct build vs. buy decisions. There are some obvious benefits on the build approach (the program can immediately mirror your other operations, you buy only what you need, etc.) and the buy approach (immediate customer relationships, immediate income) but it will take a careful, systematic weighing of the costs and benefits in each location to produce the best results. I have been putting together that build vs. buy analytical framework to facilitate what is almost always a very fact intensive analysis of the alternatives. There are many different variables that go into making the right build vs. buy decision. Some are quantitative, some are qualitative and even others will require plain intuition, experience and occasionally even some best guesses.
Conclusion
The successful company will need to be able to execute on a hybrid approach and then execute effectively on integrating those pieces. With a properly integrated group of locations, the company should then have the ability to provide uniform, high-quality and high value services to its customers across the country. That will be a very potent combination of capabilities, and will be particularly attractive to large national clients.
But just buying up or starting a bunch of offices around the country will not be enough in my opinion. In the end, I believe it will only be that company or companies who are willing to take the best of what they find through this build and buy and integration process and change their own companies to incorporate those best practices. As I have reviewed over 65 companies in the 3D scanning space, I have not seen the single one who does it all correctly. The winner will be the company (and specifically, the management team) not afraid to change as it encounters new ways to create value for its customers. The process of integrating best and better practices as a company grows and evolves is a challenging test of management's will to live the mantra of continuous improvement. Since 3D scanning is an industry that has both a good current business case and great potential for growth by using new technologies, software and techniques, a mindset of continuous improvement will be critical to the successful competitors.