KreditInform: Ivor Jones

Ivor Jones, MD of KreditInform, South Africa’s biggest business credit management company, started the business in1982 with R30 000 that he borrowed from the Small Business Development Corporation and a couple of thousand extra that one of his partners loaned from a family member. With several years of credit management experience under their belts, he and a few colleagues from what was then Dun & Bradstreet had had enough of working for someone else – they wanted to do it on their own, and do it properly.

But they also knew they were going up against a monopoly they themselves had helped to create. “They’ll last six weeks,” the opposition said.What started out as an outsourced research capability has morphed into an integrated supplier of business credit information: the company consults to clients, helps them set up policies and procedures, provides the software that runs credit departments, produces client-specific research, supplies analytics about how credit departments are performing – it literally covers every single aspect of credit management.

Narrow margins

“Our own intellectual capital had helped to build Dun & Bradstreet so we had to come up with solid differentiators,”says Jones. “Because money was tight, we developed a business model that enabled us to employ home-based staff which meant our overheads were low. We also went national from day one with a product that was ground-breaking at the time as it provided clients with a thoroughly researched assessment on the credit worthiness of the organisations they were planning to do business with.On top of that, we took the product to market at a dramatically reduced rate.”

Within the first few years the business literally doubled and tripled in size. But to achieve this growth,KreditInform’s founders had set extremely competitive prices at almost non-existent margins.“Our goal was to go in and secure market share by turning competitors’ customers into ours,” says Jones. “Pricing was and still is a determining factor in our environment. Even though we had a different and better product than our competitors, we still had to be price competitive. Because we had pumped so many resources into developing the product, we ended up with a superior offering that cost the client less, but ate into our own profit.”Jones knew from day one that margins relative to turnover would soon become a problem for the business. “The very survival of KreditInform was determined by the model we adopted then and still continue to use to this day. Our clients contract with us for a number of research reports per year and they pay upfront – back then, as long as we were growing the client base, we had an ever increasing cash flow. However, we also had an ever growing deficit in profit.”

Making adjustments

Common sense dictates that you cannot allow a business to run at a loss for too long, but it does take a certain amount of nerve to up your fee by 100%. Can this be achieved without losing a single customer? Yes, says Jones, provided you are able to justify the increase. “In our case we knew our input, production and sales costs down to the last cent.”

The KreditInform team also knew from the outset that the only way they would eventually turn their losses around would be to radically change their pricing structure. Having secured its share of the credit management sector, KreditInform launched a price-correction strategy over a period of 18 months, doubling the costs of its product.“Not only had we established the business and created a name for ourselves in the market, but we were also producing many more reports than our closest competitors,” says Jones. He is adamant that the move would have failed without the support of the company’s customers. “They are at the heart of our success. We had a great rapport with them and many ofthem knew us for over a decade already from our days at Dun & Bradstreet.They wanted us to survive. Some even paid us earlier to make sure we would.”Jones recalls how the company consulted with each customer on a one-to-one basis prior to rolling out its new pricing structure. “We played open cards with them.

As a result, they knew they were getting a great product for below cost and that it was not a sustainable way to operate a business. We had little resistance and because of our product and level of service, pricing was a secondary factor for clients.” This is where the company achieved what many an entrepreneur dreams of: its product had ceased to be a commodity and was now a customised service. “It’s at this level that people are prepared to pay what you are worth,” says Jones.He cautions against competing on price alone. “Doing so gives you only a certain amount of room in which to move. A sustainable business is built on client buy-in and the provision of value for money.”

A steady stream of cash

While it took KreditInform six to seven years to start turning a profit, cash flow was never tight. When a business grows like his did, Jones explains, growth can be financed by bringing more customers on board.“We have always been a sales-driven organisation and we knew there was a huge market out there, so we simply convinced them to give us a try.”Once the company changed the pricing, the expansion of its customer base began to erode the deficit.

Doing it over

Jones acknowledges that he took a great risk in starting the business. He also admits that he and his partners were incorrect in their financial assumptions, making greater losses in those first years than they had ever anticipated. “The losses resulted from the massive growth. We had no idea that it would take off as quickly as it did and the fact is that growth requires cash.”

He also notes, however, that it was never the intention of the business to remain small and reap a tidy profit. “If you want to own the market, you have to take calculated risks and move out of your comfort zone.”Under the circumstances, Jones believes his strategy was correct. “There’s no doubt that the financial model we applied could have been more scientific, but we were lacking financial skills at the time because we simply could not afford them. However, our sales and marketing drives, as well as the level of customer satisfaction we were able to maintain,kept us going.”

Flexibility is fundamental

KreditInform has had an elastic cost model and production capability from the outset. The company did not at first have the money to employ a big team, which is why the “home worker” model was developed. Around 20% of its workforce is based at home, giving it flexibility and resulting in major competitive advantage. “Our model gives us the ability to respond quickly to changing market forces.”