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Research Stock People-Based Businesses
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The people-based subsector includes companies that rely heavily on people to deliver their services, such as consultants and professional advisors (Accenture, Moody's), temporary staffing companies (Manpower, Robert Half), and advertising agencies (Omnicom, Interpublic). Investments can be attractive at the right price, but the model is generally less attractive than that of our technology-based subsector.

Industry Structure

People-based businesses make their money by leveraging an investment in their employees' time. The classic example of this model Is the consulting In­dustry. An analyst who is paid $50 per hour by the consulting firm may actually be hired out to clients at a rate of $250 per hour. Thus, the consulting firm makes a spread on the analyst's billed time. That spread has to cover other costs, such as overhead and partners' bonuses, so it's not pure profit for the firm. But marking up the cost of peoples' time is the basic way consulting firms make money.

As a result of this business model, growth for people-based companies comes mainly from finding and hiring more skilled workers to deploy. Training (or some might say, indoctrinating) new hires is important because it helps to ensure a somewhat standard level of service quality. Salary expense is essentially a big, fixed cost that must be covered for profits to be made. But when the economy slows and companies become more careful with spending, these firms' services (such as consulting and advertising) are normally popular places for cutbacks.

While most companies in this subsector operate in very fragmented industries, there are definite advantages to businesses with national and inter­national scale. Manpower, for example, has an advantage relative to smaller players "when competing for the largest companies' business because Manpower can staff workers around the globe wherever they're needed. Scale also fosters efficiencies in advertising and brand development that smaller competitors don't enjoy. For example, in 2OOI, Accenture spent about $150 million on image development to bolster its brand after splitting away from Arthur Andersen.

Relationships are also very important in this subsector. The very nature of the business—with a somewhat unique product for every client—makes it difficult to clearly differentiate one company's offering from the next. As such, relationships play a key role in driving business. Purchase decisions may be made because the project buyer went to school with the consulting partner or another division at the buyer's firm has used a particular advertising agency for years with success.

Although some people-based businesses, such as Moody's, have wide moats, economic moats for companies operating people-based models are usu­ally narrow at best. Brands, longstanding relationships with customers, and geographic scope can provide some advantages relative to competitors. But within most people-based Industries, there are usually multiple competitors with similar strengths in these areas, and they tend to compete aggressively with one another.

Hallmarks of Success for People-Based Businesses

Differentiation of offering: Differentiation can give companies an advantage and lead to superior financial results. Robert Half has successfully differentiated itself in the staffing business by focusing on professional labor for smaller employers and developing different brands for the different markets it serves.

Providing a necessary and/or low-cost service: When customers feel compelled to purchase the service and when the cost of the service is relatively

low, customers are less likely to spend time trying to negotiate a better price. Firms view Moody's, for example, as an important component of debt issuance because investors are familiar and comfortable with Moody's debt ratings. Furthermore, the cost of a Moody's rating is a frac­tion of the total value of the money raised through the debt issue. Organic growth: Look for internally generated growth instead of growth generated by acquisitions because it signals healthy demand for the firm's service. In addition, acquisitions don't always integrate as smoothly as planned, subjecting the business to integration risks.

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