Business models and secret sauces

As mentioned in the last post, today's New York Times has an article of the good people at Talx. One thing that caught my eye was this account of the company's rise:

Talx entered the field brashly, buying the industry’s two largest companies on a single day in 2002. In the next few years, it bought five more. Until then, Talx had never handled an unemployment claim, and skeptics wondered how well it could blend seven companies in an unfamiliar industry.

The Federal Trade Commission argued in a 2008 antitrust complaint that the acquisitions, which cost $230 million, had allowed Talx to “raise prices unilaterally” and “decrease the quality of services.” Talx modified some contracts to settle the case, but admitted no legal violations.

Financially, the gamble paid off: Talx was acquired three years ago by Equifax, the credit-rating giant, for $1.4 billion. But work once done locally became centralized — at a loss, critics say, of responsiveness and expertise.

If this article had been written in 2007*, I suspect the proportions would have been reversed, with two or three paragraphs on complaints and ethical lapses and the rest focused on the company's rise to dominance. Shortly before the collapse, even sober institutions like the New York Times were more inclined to focus on success and less inclined to pay attention to the man behind the curtain.

These success stories were filled with wide-eyed descriptions of innovative business plans and nimble management. There were often vague, portentous references to sophisticated analytic tools and powerful proprietary models and algorithms that could only be appreciated by a handful of Nobel Prize winners.

But when you looked closely at these companies or, better yet, sat down and talked with the people who actually came up with this stuff, you usually found yourself in the position of the trainees at a fast food restaurant in Fast Times at Ridgemont High who learned that the mysterious secret sauces of two rival chains were, respectively, thousand island dressing and ketchup & mayonnaise.

On close inspection, most innovations and business models, including the heavily hyped ones, turn out to be mundane and unimpressive: switched to cheaper suppliers, dropped expensive features or services, introduced some basic statistical tool like logistic regression, marketed a high-fee product to an underserved segment. More than a few are based on creative accounting or a cozy relationship with various regulatory agencies.

Talx' strategy was based on two simple components:

1. Most big companies will be reluctant to work with a small companies so if you buy up most of your competition you can set prices like a monopoly;

2. The penalties for breaking the law are small and the penalties for bending it are negligible relative to the potential benefits.

Neither idea was profound. Neither required a team of Ph.D.s for implementation. They were, however, wildly successful for Talx, just as they have been for any number of companies with much better P.R. departments.



* Very few were. The company doesn't even have a Wikipedia page.