One Source Communications CEO: Ops Focus an Edge in Agent M&A
"For us, buying the agent is not the endgame," CEO Tim Meng told Channel Futures.
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One Source Communications launched in 1996. And CEO Tim Meng said that at the time, the business essentially functioned as a “proto agent,” although the traditional understanding and nomenclature of a telecom agent was still developing.
“We can put a bunch of fancy labels, but we did agency work,” Meng said.
But as the company approached $1 million, it began expanding its value proposition, Meng said. It invested in operations and productions teams to ensure that it was retaining its customer base.
“We’ve come to appreciate data integrity as sort of the true north. Because otherwise we’re going be on a treadmill where we lose $300,000 every year and by the end of the decade, we’ll still be at million-dollar revenue,” Meng said.
Meng said that the crossroads One Source faced resembles what almost all agents experience.
He said agents, as they approach $500,000 in annual recurring commissions, find that they need to make investments to maintain their existing customer bases. Meng said the industry averages a revenue retention of about 75%.
“That means every year they’ve got to sell enough to back up the 25% that’s going to drop off,” he said.
Some owners hire analysts or operations people to take care of customers on the back end. But Meng said those partners may not benefit from “scale, automation or standardization.”
On the other hand, Meng said many agencies may simply stay small.
“There are very wise and thoughtful reasons they choose not to get involved [in operations],” he said. “It just that as we were investing the time to scale the organization, we came to appreciate that there’s a limit to a [sales-only] approach. And that’s why a vast majority of agents cap out around a $250,000-$500,000 commission. Or they bite the bullet and build a team.”
Operations for One Source means multiple things.
When it comes to the outsourced agency aspect the business, Meng said the company seeks to do more than procurement and contract management.
“It’s about the deployments, service delivery, support and management, all in the effort of not just putting a great piece of technology and signed contract, walking away and collecting that mailbox check. It’s really about, ‘OK, what happens on day two after the contract is signed?'”
And the operational aspect of running that vendor management, Meng said, is a grind.
“It’s not a glamorous job. You don’t get on jets. You don’t talk about eight-figure contracts. When a location goes offline at 7 p.m. on Friday, does that agent personally take that phone call and then call Comcast indirectly, or do you have a production that’s 24/7 fully staffed monitoring it?”
One Source also offers its own managed services. The company through its ITS and MSS service lines bills the customer for in-house customers.
“That’s not an agency relationship we outsource to somewhere else. That’s what we do in-house. That’s for a highly selective pool of customers and generally very security-centric,” Meng said.
Meng noted that the majority of One Source’s revenue does not come from commissions.
“That is not to say we have very little commissions, but that is to say that we are diversified organization, and our vision doesn’t start and stop with commissions,” he said.
As a result, he said that while the company is purchasing commission income from agents, it is more so buying customer relationships. And that’s because One Source believes it can expand those relationships, Meng said.
“We actually believe that beyond just procurement, most of the customers eventually have a desire for someone to fully manage it rather than just source it. So for us, buying the agent is not the endgame,” he said.
Agents agreeing to sell their customer bases to One Source sign a non-solicit agreement. They do not sign a non-compete, Zach Kahane, director of corporate development for One Source Communications, told Channel Futures.
While One Source does sell some of its own new logos, Kahane said agents going back into the market doesn’t present any competitive disadvantage.
“They go out and get new logo customers, start building their base again, and then come to us and say, ‘I’ve got these great customers. I’d like to sell. I’m having trouble maintaining them, and I don’t want to hire employees.’ Perfect. We’ll pay the little premium to get those customers in the door because we think we can do a lot with them once we have them,” Kahane said.
Kahane said other strategic buyers more commonly leverage non-compete agreements. And in the case of other strategy buyers in the agency space, he said earnouts essentially function as a non-compete.
“I would say a transaction like [One Source’s] is rare, where most of its upfront, and it’s a clean kind of transaction that doesn’t ask the seller for non-compete,” he said.
A key consideration for agent owners mulling a sale of their business is whether they want to work for a boss. Many of them left corporate environments at large carriers a decade ago. And many of them tell Channel Futures that they don’t want to be an employee again.
Kahane said One Source’s acquisition strategy will match the cultural mindset of those partners.
“Everyone’s got different motives when they’re approaching an exit and the sale … I’m not saying that you can’t go to a larger organization, fit in and be very successful,” he said.
“But a lot of these agents are fiercely independent, and they built these businesses by taking a big risk, going out and doing it their own way. And I think this deal structure, to be honest, kind of fits their personality.”
Meng and Kahane pointed out three common profiles of agents that sell to One Source. An agent may be seeking to retire. Others may wish to start a new non-agent business. Still, others want to continue working in the channel but want to offload existing customers. The latter returns to where they were when they started their business, hunting for new logos.
And in all three use cases, One Source emphasizes a timely transition.
“The No. 1 thing that we offer is that we’re able to take on the customer relationships at close. It’s an immediate transfer. We’re moving the relationships over to our team,” Kahane said.
Kahane added that the majority of One Source’s payments to agents upfront. A secondary payment may occur after the agent has faciliated handing off the customers to One Source, but that typically completes within 45 days of the sale, he said.
in certain cases the agent might retain an ongoing partnership with One Source, but generally One Source seeks to provide a clean exit.
“You’re maximizing the guaranteed compensation upfront. Ther’s not a long tail that’s required. You don’t have to become an employee of One Source,” he said. “… Basically they get paid for what they built and help stabilize it under our management going forward.”
Kahane said that when One Source acquires a customer base from an agent, it will consider the potential interest of those customers in purchasing One Source’s communications life cycle management (CLM) services. But he noted that One Source’s agency division operates independently of its CLM side. Therefore, while the agency business may leverage people and resources from the CLM side, Kahane emphasized that One Source is not under pressure to convert agency customers into CLM customers.
“We are not going in and hard selling these customers on our managed services.’ We continue to provide existing services, continue to help with procurement and implementation,” Kahane said. “And over time, if they have the need for it, we’ll cross-sell them our CLM services. We’ll explore security options. We have enough resources in-house and through partnerships where we can be that technology partner to them.”
In cases where One Source won’t layer on additional managed services, Meng said the company has built up the skills to maintain the existing customer bases.
“There is an innate advantage of being in the agency business for 26 years and growing up in the environment,” Meng said. “We’re not an investment portfolio, just buying agents, slapping them together and saying, ‘Hey, we’re better.'”
In cases where One Source won’t layer on additional managed services, Meng said the company has built up the skills to maintain the existing customer bases.
“There is an innate advantage of being in the agency business for 26 years and growing up in the environment,” Meng said. “We’re not an investment portfolio, just buying agents, slapping them together and saying, ‘Hey, we’re better.'”
One Source Communications leaders say agents who sell their businesses to them can solve the ever-present challenge of customer retention.
Greenville, North Carolina-based One Source captured media attention for its publicly announced acquisition of technology advisor Sumo Communications, but CEO Tim Meng said One Source has been quietly moving forward with agent M&A for multiple years. And in a time where multiple strategic buyers are vying for the attention of technology advisors, One Source leaders say their model compares very differently.
One Source Communications’ Tim Meng
Specifically, they say the company tends to emphasize upfront, one-time purchases of an agent’s book of business. These deals typically don’t involve the agent owner joining as an employee. One Source seeks to quickly take on an agent’s customer base, allowing the seller to retire or start rebuilding a new base. In the meantime, One Source leans on its operations resources to maintain those monthly recurring commissions and potentially layer in its own billable services.
“For us, buying the agent is not the endgame. Buying the agent is a step so we can better serve the customer that comes through that acquisition,” Meng said.
Operations Focus
One Source in many respects defies categorization. The company provides managed IT services, but executives lean away from lumping it in with the traditional managed IT services provider. The company also possesses a sizable agent business, but its emphasis on life cycle management and day-two support make it different from the traditional agency. Meng said about 90% or more of One Source’s approximately 300 employees work in production or operations.
One Source’s Zach Kahane
“We are a customer-first, and, frankly, an operations-centric organization,” Meng told Channel Futures. “We realized that in order to be a prominent and successful agent – or any evolution of agency – simply selling is not enough. You’ve got to do the real work to keep the customer.”
Meng and Zach Kahane, director of corporate development for One Source Communications, sat down with Channel Futures to explain One Source’s business model and acquisition strategy. They also shared their research on the challenges agents face in retaining customers. The conversation is in the slideshow above.
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