Outsourcing has become one of the business school buzzwords. Across the global corporate landscape, organizations are contracting out businesses ranging from financial PR and information technology to the entire back office function. But should investor relations be part of this growing trend? Is it better for a company to use an agency or to have its own homegrown team?
It is not a black and white issue, according to Noga Villalon, a director of Citigate Dewe Rogerson. ‘One complements the other. We can act as the eyes and ears of the company in the wider market place but we encourage all our companies to have direct contact and develop their own relationship with the financial community. They should not be dependent on a third party for that.’
Moving on up
For many companies it depends where they are on the IR learning curve. As one European IR consultant points out, ‘It varies from country to country, but many continental European firms are way behind the UK, which itself lags the US in IR expertise. Many continental firms have neither an in-house capacity nor an agency working on their behalf and, if they do, they are still very hard to get a hold of. I think it will be a slow process but progress is being made.’
IR has long been part of the American corporate fabric and as a result, most large and medium-sized US companies have their own well-established in-house teams. ‘But it’s not just a big company, small company question,’ says Mary McAboy, whose own career has included both in-house and out-of-house IR roles (at Georgeson, The Vons Companies, Inc, her own small agency and now Kaufman and Broad Home Development in Los Angeles, which she joined as IRO in September).
McAboy concedes that it’s often the smaller companies that use agencies for arm-and-legs support, but not exclusively. ‘Frequently smaller companies just don’t have the resources for the logistics of organizing meetings, conference calls, getting releases out and so on,’ she says. ‘But the need for agency support can be the function of lots of different elements. Sometimes it’s just a question of time. An IRO at a large company may call on an agency to organize a trip not because they can’t do it themselves but because it makes good sense to delegate it. Investor relations takes a lot of time,’ she adds, with feeling.
Big companies – despite having a fully-fledged in-house function – also use agencies for help with more unusual IR activities. ‘They may have special challenges where they need input from a third party to bounce ideas off or for a fresh perspective,’ explains McAboy. She cites examples like an unusual hybrid security issue, an acquisition or a divestiture. ‘An agency may have seen such things for a range of clients, whereas it may be the only time the in-house team has ever come across them. The same can apply to things like a first trip to a particular city; or when venturing anywhere abroad.’
First stop shop
Even if they do use agencies, many companies want their in-house IR team to be the first port of call for analysts and shareholders, whether for routine conversations about earnings or queries about rumors. An agency may have to go through layers of bureaucracy before finding the appropriate response, where in-house IROs typically have direct access to top management. They have the answers at their fingertips and can immediately douse any fire by setting the record straight.
Roddy Child-Villiers, director of corporate communications at Rexam, a UK-based company which created the investor relations role as part of his job when he joined three years ago, concurs with this approach. ‘The company had a reactive relationship in terms of IR and I decided we should make it more proactive,’ he says. ‘I was keen that we should do the job ourselves and not rely on agencies. The IR part of my job covers the broad range, starting with inviting investors to our results presentations to taking a more fundamental look at what is going on in the marketplace. This allows me to look at our larger shareholders as well as those who are not on the list. I can develop a focused presentation targeted directly at the different groups. I also thought it was important to me that when investors rang with questions, they should be talking directly to us.’
Rexam also calls on outside help when dealing with analysts. ‘If I want to know something or vice versa, we will talk to the analysts directly,’ says Child-Villiers, who was formerly at London-based agency College Hill. ‘However, an agency has clients in different sectors and they are very useful as a sounding board if, for example, you are issuing a press release about your earnings or strategic plans. They may not add value on a day-to-day basis, but they can help spot things if you get it wrong. They provide the objective view.’
The agency versus in-house mix also depends on the nature of the work in question, too. If, as an in-house IR officer, you are intent on farming out some of your work then it may be easier to use an agency to help with financial PR and sell-side communication than bring them in for direct contact with the buy-side.
It is also easier to use one agency for all corporate communication needs. ‘In so many instances, a company’s activities need to be both IR and PR supported,’ says Charles Cook, chief executive of Grandfield, a London-based agency. Although this has always been the case in the US, ‘The difference in the UK is that in the past it was headed by financial PR but increasingly the responses are becoming IR led,’ he says, adding that the current market turmoil provides a perfect example of the changing tide.
Key financial commentators and reporters are still important audiences, but analysts have risen in the priority ranks and companies are beginning to realize they need to manage these relationships carefully. After all, their followers, particularly the star-studded ones, can wield great influence both in the marketplace and the financial pages; and it may prove more advantageous for an in-house IR department to rely on an external firm to help it develop ties with the analysts and journalists who cover it.
As Villalon at Citigate points out, one of the biggest tasks facing a company is to be clear and concise when communicating its messages either to the press or the financial community. ‘We encourage companies to provide easy access and clearly written information so that the analysts do not have to phone the company repeatedly for clarification. It is important for a company to manage correctly the expectations and meet set targets because the financial community hates surprises and they would hold it against a company for long period of time.’
Size matters
Ultimately, the exact mix of internal and external IR depends on the company. Small to medium-sized companies – outside the US, in particular – may need more hand-holding than their larger counterparts.
‘I think there are two main reasons why a company will use an external agency,’ says Susan Sissons, director at London-based agency Frew MacMaster, which employs a number of former portfolio managers as consultants. ‘Many in-house IR people do not come from a financial community or fund management background and they can draw upon the experience of people who have either worked in or covered the industry for a number of years.’
‘Also, consultancies can act as an intermediary between the financial community and the company,’ adds Sissons. ‘Analysts tend to be more open with an objective third party than they would be with the company itself and we can then feed their views back to the client. However, we do not work in isolation but with the financial public relations firms, the advisers, brokers and the in-house teams.’
Impartial view
An impartial view is one of the most important attributes an agency can bring to the table, according to one IR consultant, who also works with in-house teams at large and small companies. ‘An external agency is able to tell the company how fund managers perceive its IR program or what analysts think of its current plans. It may also learn that the financial community in general does not think much of the heir apparent for the chairman’s seat and then act accordingly. An in-house person would not be able to glean this kind of information.’
Villalon concurs, adding that an outside agency can also bring the advantage of a cross sector perspective. ‘For example, we work with many different clients in different sectors across the Continent which gives us an insight into what a company’s peers are doing and how it ranks alongside them. An in-house person will not be able to have this kind of perspective,’ she says.
But Mary McAboy disagrees. ‘Services like First Call effectively give you feedback,’ she says. ‘And anyway, a good IRO can get off-the-record comments, for example about the the way the CEO is handling something. After all, it’s in investors’ interests to let the company know their concerns, and they do that through the IRO.’
On the other hand, many would agree that it makes sense to use external firms for share register analysis, pinpointing who is under or overweight in the sector or the company. And more formal, arms-length market research is useful for ascertaining what are deemed to be a company’s strengths and weaknesses. ‘On an anonymous basis, we conduct a benchmark study that asks analysts to rank the company on key investment criteria as well as its IR program,’ says Villalon. ‘This helps identify any misperceptions and assists companies in formulating their IR strategy. We repeat this study again 18 months later to see how successful they have been. We know clients have gotten their objectives across if analysts give them a higher rating.’
