IR outsourcing: taking it outside

Almost all companies outsource at least some part of their IR program, from conference calls to the IR website or investor perception study, and IR Magazine research shows that globally, the amount spent on external IR services hit a three-year high in 2015, with small and mid-cap companies allocating the highest amount (a third) of their budgets to outsiders.

At the same time, the average small-cap team has been cut in half over the last five years to comprise just 1.4 people in 2015, while mid-cap IR team numbers have dropped by a third. In many ways, these figures explain why outsourcing is often more important to teams at smaller companies.

But what about companies without an IRO at all? A senior IR professional doesn’t come cheap, while a more budget-friendly IRO might be too junior; choosing to fully outsource the IR program could give you access to a whole team of experience along with flexible contract options, depending on your needs. As with all things, however, there are some potential drawbacks to consider.

‘There are many different situations where [fully] outsourced IR makes sense,’ says Jim Cudahy, president and CEO of NIRI. One example is the smaller-cap company where the CFO might be wearing multiple hats. ‘In this instance, the company may be growing, but might feel it is not economically or organizationally ready for internal IR,’ says Cudahy. ‘So the outsourced team provides the benefit of expert IR staff without the long-term commitment of additional headcount.’

Pre-IPO companies might also opt for the fully outsourced option. ‘In many instances, these companies will engage an IR consultant in the months leading up to going public in order to establish their investor relations programs, and to begin conforming to the communications routine and requirements of a public company,’ explains Cudahy.

Adding bench strength

As Cudahy points out, there are a number of reasons a company might choose to fully outsource the IR program: some firms are looking to move into a new market but lack the local knowledge and contacts, others might be looking to learn the IR ropes from an outsider before taking on a greater role internally.

Then there’s the experience a consultant can offer. Cudahy says the right consultant will bring sector-specific expertise, ‘which is helpful in understanding a firm’s peers, and appropriate analysts/investors.’

There are several agencies to choose from: ICR, Sharon Merrill, Blueshirt Group, KCSA Strategic Communications, Lippert/Heilshorn & Associates and Citigate Dewe Rogerson, to name but a few. The services these companies offer tend to be similar from one consultant to the next, covering strategic counsel, messaging, investor outreach, non-deal roadshows and more. But while one might tend to work more with pre-IPO companies, another might specialize in certain sectors, so it’s important to assess the strength of different firms and choose your IR consultant wisely.

Of course, IR is not just about the big things. Joseph Teklits, managing partner at ICR, notes that consultants will also handle the administrative side of investor relations, such as news gathering, research, analyst estimates and investor profiles.

For Lisa Conte, president and CEO at pharmaceuticals company Jaguar Animal Health, the decision to hire IR support came shortly after the firm’s IPO in May 2014 (see Case study: Jaguar Animal Health, below). ‘We needed a tailored corporate narrative and strategic content development that could be introduced to the institutional investment community and subsequently built upon as the company prospered,’ she says.

Given that Jaguar Animal Health was a new company, Conte continues, the focus needed to be on managing relationships with existing and prospective investors, particularly as Jaguar’s management was almost entirely focused on bringing products to market. ‘Insofar as these efforts are concerned, investor relations efforts would likely have fallen by the wayside had we not outsourced this function,’ she explains.

Cost and contact

Unsurprisingly, IR agencies are quick to point out the benefits of the services they provide. But there are several things to take into consideration before you farm out what is arguably one of your most important and sensitive relationships. Certain decisions could make your outsourcing experience better but making the wrong choice could have negative consequences.

Team chemistry: The company you choose to outsource to will typically assemble a team composed of a mix of senior and junior professionals with some level of industry expertise, explains Jeffrey Goldberger, managing partner at KCSA. He says companies need to ask the right questions before hiring a firm: ‘Who’s going to be on the account? Will this team remain with me throughout the relationship? What are the backgrounds of the individuals? What are the responsibilities of each team member? An informed buyer will result in a stronger, longer-term relationship with your agency.’

Even if everything works on paper, chemistry also comes into play. ‘[Your consultant] will be in very regular contact with company management members and in constant discussions with them over strategic issues,’ says David Calusdian, executive vice president and partner at Sharon Merrill. ‘Management needs to feel comfortable that it’s getting the best advice. Chemistry is very important.’

Level of service: The main challenge, says Arwa Goussous, corporate communications manager at Qatari firm Aamal Company, was establishing the level of service needed (see Case study: Aamal Company, below). Internal minds in particular needed switching on to the potential power of an established IR program, particularly when launching on the then-nascent Qatar Stock Exchange.

The IR firm Aamal hired ‘helped to educate us in the area, steering us through not just what was needed in order to have effective IR and PR programs, but also why in terms of the potential benefit,’ she explains.

Point of contact: When IR Magazine looked at outsourcing back in 2011, Greg Miller, associate professor of accounting at the University of Michigan’s Ross School of Business, said ‘companies don’t want to stand up and say, I’ve outsourced one of my most important relationships.’

At ICR, Teklits says around a third of companies using the firm’s IR services have the company listed as their point of contact. But there are some in the investment community that might not be so keen on getting through to a consultant. And then there are those that are looking to go straight to the top and want to talk only to senior management.

Sometimes a company will want to take a certain type of investor call internally, leaving others to the consultant, explains Calusdian. ‘Sometimes the company will take calls from the sell-siders, and we will take the rest – or at least do the first calls with the buy-side community,’ he says. ‘Other companies might take all of the institutional calls and we might take the retail. It really depends on personal preference, internal resources and time.’

Cost: Cost is, obviously, one of the big attractions for outsourcing advocates but the way you use your consultant could work out more expensive than anticipated. If the investor relations work is not continual, a company might choose to hire an agency on a per-hour or per-project rate, explains Calusdian, but this can soon add up. ‘It’s usually more cost-effective for the client to outsource on a retainer,’ he says.

Location of IR support: Even though your consultant will be in regular contact and should – to all intents and purposes – operate as if it is part of the company, the external team is very unlikely to be embedded at the company. ‘And a CFO might want the IR support to be in the next office,’ notes Calusdian.

Two-way education: The learning curve should not be underestimated on either side of the consultant-company relationship, notes Conte; while demanding, this makes for a transparent approach to collective problem solving. ‘The biggest challenge we faced was that, while Jaguar’s CEO has extensive experience navigating the public markets, much of the management team comprises professionals with backgrounds in healthcare and the life sciences,’ she explains.

For management to become familiar with the world of buy-siders, sell-side research and retail investor outreach required substantial education – and the same went for the agency when it came to specialized animal pharmaceuticals.

Getting outsourcing right

As with most arrangements, ‘when it comes to IR outsourcing it’s usually what you fail to anticipate that can lead to problems,’ says Cudahy.

So the key is to set out exactly what your expectations are from the start. You should consider the reputation of the firm and thoroughly vet candidates, but finding the right consultant is also about the specific needs of your company in relation to the strengths of the consulting firm, Cudahy adds. You need to make sure everyone internally is on board with the same message, too.

Goldberger agrees. ‘It’s important from the get-go to establish roles and responsibilities,’ he says. ‘It’s also important to establish goals and how management will determine whether or not this is a successful relationship.’

Once the search is over and you’ve found an external IR firm to work with, you should ‘adopt the mind-set that it is now your internal IR team. Connect it with key business unit heads and plug it into your communications infrastructure,’ says Cudahy.

Finally, he advises firms to be sure any consultant used is expert in securities law compliance, particularly as it relates to communicating material information. ‘Companies should always consider that they are ultimately responsible for their own communications, regardless of whether those communications come from the company itself or from its agent,’ he warns.

This article appeared in the Spring 2016 issue of IR Magazine