Why partnering is the key to successful diversification
When US-based small business loan provider OnDeck launched into the Australian market in 2015, it chose an online accounting software provider as its local distribution partner – and also teamed up with an Australian bank for referrals and wholesale funding.
“By combining the power of these brands, OnDeck immediately got more publicity and traction in a new market,” explains Brian Steele, Head of Commercial Origination for Macquarie Business Banking. “It also provided immediate efficiencies in processing a loan. Even though these loans are unsecured, they need financials.”
For any business considering a move into an adjacent market – whether across geographic boundaries or a neighbouring sector – the first question is whether you build the capabilities on your own, or partner with someone who already leads the way in that field.
For Steele, the most successful innovators consistently choose co-development.
“In the case of OnDeck, this was also an adjacent move for the partners. It might not seem obvious, but it brought together a tech platform, accounting and capital.”
So how could you apply the same logic to your growth strategy?
Just moving into a new market won’t automatically add value. And without value, you're just pushing more product and you’ll risk losing your valued clients.
Step 1. Put a customer lens on the opportunity
Any growth strategy can be visualised as a choice between four quadrants:
- core business
- new services, same clients
- new clients, same service
- new clients, new services
The first option is business as usual. But as markets mature or competition increases, organic growth in your core portfolio will inevitably slow.
Option two – providing new services to your existing client base – is the simplest adjacent move because you already have a trusted relationship with them. Option three may require a partnership with a like-minded firm who understands that new market (for example, by acquiring a business in another capital city). Option four is the most challenging, and may lead to a completely new business.
“If you’re thinking about a new segment, stick with the same client group,” advises Steele. “You already know that customer, and one of the key ingredients for success is a customer obsession mindset.”
While customer centricity is an often-cited business mantra today, Steele says few really get it right.
“If you’re starting from the point of view of your own revenue growth, you won’t succeed. You need to build every aspect of your operations around how the customer can benefit.”
The obvious answer is to ask your clients, but you need to distinguish between implicit and explicit needs – sometimes clients don’t know what they want, and you can play a role in expanding their requirements.
“I’d start by looking for inefficiencies in the way clients receive or experience your product or service. Invariably, there’s an opportunity to improve it,” suggests Steele.
The same is true if extending your business boundaries by looking for new clients for the same service offering. You still need to understand their needs first.
Step 2. Build the business case
Of course, it’s not just a matter of building a compelling customer proposition – you also need to make money.
“Mark Payne describes this as the ‘magic and the money’ in his book How to kill a unicorn,” says Steele. “You need to test the upside for your strategy – a lot of people back a shiny new solution before understanding what it might mean from an operational perspective.”
The best solutions meet a user experience need but also provide an institutional benefit.
“For example, Macquarie’s DEFT platform saves our clients so much time, and makes payments so easy for them – but it also has great back office benefits for us as well, and we can process their requests much faster,” comments Steele.
Putting the operational lens onto your strategy may also mean adapting your business model to make sure you can deliver value quickly and efficiency.
Deloitte modelled different types of growth in its recent global whitepaper, Growth in banking – unlocking the full potential. It highlights the difference between shifting into an adjacent market and truly innovating.
As you move towards transformational change, uncertainty (and risk) increases. According to the report, some examples of profitable growth opportunities in adjacent markets include defining new market segments based on client behaviour or socio-demographics (rather than more traditional segmentation) and developing online portals for standardised products (those that can be automated or don’t need a client-adviser interaction).
Step 3. Find the right partner
If you don’t have the capabilities in house, you will need to co-develop your solution with a partner. Whether you acquire them or create a new business with shared equity, this is not a relationship to take lightly.
“A shared mindset is critical,” explains Steele. “Before you look at products or capabilities, make sure you’re both working towards the same goal.”
He says one of the major benefits of co-developing is short-cutting the processes involved.
“Work with someone with more intellectual property in this area than you, and they’ll know what not to do. This also limits the number of new resources you need, and the risks and costs involved.”
Given the growing trend to bring accounting, financial planning and loan broking under one roof, Macquarie’s Relationship Managers are increasingly introducing potential partners – and then helping to fund the deal.
“We’ve seen a lot of rapid success with this model, where it's the same type of client base and similar (but complementary) services,” Steele comments.
A final word of advice? Make sure you have the capability to deliver before you move into that market. “If you don’t get it right, it can have a negative impact on your existing client relationships,” warns Steele. “Just moving into a new market won’t automatically add value. And without value, you're just pushing more product and you’ll risk losing your valued clients.”