Should you outsource IR?
It’s no secret that many smaller or newly public companies outsource their entire IR function to consulting agencies – yet many of those that rely almost exclusively on external IR help aren’t exactly advertising the fact. ‘Companies don’t want to stand up and say, I’ve outsourced one of my most important relationships,’ explains Greg Miller, associate professor of accounting at the University of Michigan’s Ross School of Business.
Outsourcing may, however, be the best option for getting seasoned advice and a wealth of experience at an affordable price. Erica Abrams, co-founder and managing director of the Blueshirt Group in San Francisco, says her firm has signed more than 10 clients in the past six months thanks to the uptick in the tech IPO market. ‘New or smaller companies face a quandary,’ she says. ‘A senior IR person is expensive but a junior person lacks expertise. An outside firm can give you both scale and a valuable outside perspective.’
Arguably, the propensity to fully outsource IR is being fueled by the economic downturn and the high fixed costs of adding even a single position to headcount. Don Duffy, president of ICR, says paying his firm an annual retainer generally costs half as much as a full-time IR person. ‘There’s been a trend toward [newly public companies] getting assistance,’ he says. ‘It speaks to the incredible value of IR.’
Nuts and bolts
Agencies like ICR, Blueshirt Group, CCG, KCSA Strategic Communications and Lippert/Heilshorn & Associates use roughly the same basic operating model. They assign public companies a senior-level point of contact, and then let more junior staff provide specialized services from market intelligence to writing conference call scripts.
Although the IR agencies charge an hourly or per-project fee for a stand-alone task, such as a perception study or a targeting exercise, they do the lion’s share of their IR work on a monthly retainer basis. ‘What you want is someone who looks and feels as much like an internal IRO as possible,’ says Mark Collinson, partner at CCG. ‘If the person is dipping in and out, it’s difficult to get that. But if you’re retained, you’re constantly keeping up with the competitive dynamics.’
Although most IR agencies are – unsurprisingly – convinced they can perform IR as well as their internal counterparts, some are unabashed in believing their model superior. ‘If you’ve been doing IR internally for 15 years, chances are the company needs a fresh face in that role,’ maintains Duffy. ‘Companies that hire us get tremendous industry knowledge.’
For some companies, the decision to outsource IR hinges on some very practical considerations. For instance, Unilife, a drug device supplier that went public in Australia but redomiciled in the US and listed on NASDAQ in 2010, hired KCSA for help understanding the intricacies of the US equities market.
‘We come from Australia and we recognize we don’t have the scope of relationships here that we did there, nor do we understand the subtle differences between how the two markets function,’ says Stephen Allan, vice president of marketing and communications at Unilife, which has a market cap of $300 mn. KCSA courts analyst coverage, organizes non-deal roadshow, and is even identified as the main contact on Unilife’s press releases.
Weighing the trade-offs
For micro-cap companies, the decision to hire an IR consultant may be a decision to do something, IR-wise, rather than doing nothing at all. Joe Flynn, CEO of Auxilio, a $15 mn-$20 mn company that manages print services for healthcare institutions and has traded on the bulletin boards since 2004, says hiring Lippert/Heilshorn in December 2010 represented a more serious foray into telling the Auxilio story to the market.
Flynn never seriously considered undertaking IR internally. ‘We’re pretty green in terms of what it takes to do investor relations,’ he admits. He looks to Lippert/Heilshorn founder Keith Lippert to learn the IR ropes, and now sets aside 25 percent-30 percent of his own time for IR activities.
The real question is: can an external IR agency do everything an internal IRO can do? Answers vary. Jeff Morgan, CEO of NIRI, for instance, advises companies outsourcing IR to make sure that the CFO or someone else on staff is acting as ‘point person’ for all matters with Reg FD implications.
One downside to IR agencies is that analysts and large institutions may balk at being routed to someone outside the company. Often, however, investors and analysts may not even realize they’re speaking with an employee of an agency. ‘For many of our companies, when we answer the phone, we say, ABC Corp investor relations,’ says Jeff Corbin, CEO and managing partner of KCSA. ‘So they don’t know we’re working elsewhere.’
Investors’ eagerness to meet senior management, especially at smaller companies, could be viewed as an argument in favor of outsourcing. ‘The largest institutions, before they accumulate a full position, ultimately want to see a CEO or CFO,’ explains Duffy. ‘They’re not going to stop with an internal or an external IR person.’
Ken Berlin, president and CEO of Rosetta Genomics, an Israel-based diagnostics company with $15 mn in market cap that has been listed on NASDAQ for just over four years, talks to analysts directly even though the company outsources IR to Lippert/Heilshorn. ‘The analysts just prefer talking to me,’ he says.
Berlin acknowledges that using an external agency involves ‘some heartburn’ because the company cedes control over meeting certain deadlines to an outsider. ‘[The agency] has other clients so you don’t always have all its time exactly when you need it, but the work gets done,’ he says.
In the final analysis, the most worrisome drawbacks to outsourcing IR might not be the prosaic ones, though. ‘[With an outsourcing model] I’m trying to build a relationship using someone not part of my firm,’ says Miller. ‘That’s where you start to see friction.’
CIRI CEO Tom Enright raises a similar point: ‘I’m not a big believer in completely abdicating the IR responsibility to a consultant.’ Although he maintains that IR agencies can deliver top-notch IR assistance, the company’s executives still need to be active and engaged with shareholders.
Outsourcing across the lifecycle
Outsourcing seems uniquely suited to start-ups or companies that have just gone public. Duffy notes that it’s often a way for companies to implement a savvy IR program post-IPO – when, arguably, expertise really matters. ‘Companies that miss a quarter post-IPO, tend to see harsh reactions in their stock prices,’ he maintains.
By the time a company reaches a market cap of $1.5 bn-$2 bn, it’s often ready for an internal IRO but that doesn’t mean agencies have no role. David Smith, senior vice president of IR at Agnico-Eagle Mines, a Canadian gold producer with an $11 bn market cap, supplements his IR team with a fleet of outsourcers that handle everything from designing the look and feel of the IR site to scheduling broker lunches with retail investors. Smith likes outsourcing because he doesn’t want his internal team of six to balloon to 60, but he still wants to run the most ambitious IR program possible. ‘We do need help, and we’ll take it anywhere we can get it,’ he notes.
The true beauty of IR agencies might lie in the myriad choices they offer public companies: by using a mix-and-match approach, executives can secure the IR help they need, whether it’s outsourcing the function until a certain milestone is reached or supplementing internal resources with specialized skills.
‘The outsourcing model gives a company flexibility,’ concludes Abrams. ‘And that’s important because it’s hard to find good IR people, and agencies typically have a lot of talent and specialized experience.’