By Amanda Gome
Andrew Banks heads the winning HR firm Talent2, and has built a highly successful and lucrative career from making canny calls on recruitment trends.
Entrepreneur Andrew Banks, founder of recruiter Morgan & Banks is building yet another highly successful business, Talent2.
In a sea of red this reporting season, the four year-old HR company Talent2 stood out, posting good results that included a 49% jump in revenue to $229.3 million and 29% rise in EBIT to $20.3 million for 2007-08
Banks tells Amanda Gome about how he created the strategy, reflects on recent mistakes, outlines the trends creating new opportunities in recruiting and managed services and gives his predictions for the economy. And the millionaire, on the BRW Rich List for $282 million in 2008 with business partner Geoff Morgan, shares some tips on what he is doing with his money.
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Amanda Gome: Did you ever expect Talent2 to be this big, this fast?
Andrew Banks: Frankly, yes. We pulled an experienced team of people together and we did a back door listing with a public company. We knew we’d do a couple of small acquisitions. But, no, we didn’t start out to make Talent2 a backyard player.
What’s the trend behind the recent growth?
As an entrepreneur it’s interesting, forgetting our business. I think to have significant growth (and we’ve had sort of about 60% top line growth year on year) you really have to have a number of different engines of growth, so if one of them splutters, the rest keep going.
So the short answer to your question is, we’re now in 16 countries and 37 offices, and we have four different product lines. We have recruitment, high end recruitment, and then we have three forms of outsourcing; payroll outsourcing, outsourcing of training and development and outsourcing of recruiting for big projects. So when you’ve got four different product lines in 16 countries, that’s how you get fast growth.
When you started off, how did you put that strategy together?
It’s like a lot of things; all your best ideas come from your customers. Morgan always used to say “Two ears, one mouth; do everything in that proportion.” Which means, listen and look at your customer. And we just went out and talked to companies, and we could see CFOs and CEOs all wanted to make HR departments a bit leaner and have the HR people working on the strategic stuff, the important stuff, and outsource a lot of things. Strategic consultants were telling companies, “What the hell are you doing in all these non-core activities?”
Asia was our backyard for fast growth, so that was logical. And then at the high end, we could tell that with shortages of good people, you were always going to have demand for executive search and high end, because those mission-critical people make a difference.
So you could see all those opportunities at the beginning. How did you structure the company, and basically not kill yourself and get distracted, which is what so many entrepreneurs do?
Well, first we did the platform. So we bought a business that was in payroll outsourcing. Our payroll business now will be approaching $60 million this year in the region, and it was $16 million four years ago. So, we’re paying about 1.5 million people, so that gives you that steady income. And then you put someone in charge of that; they’re accountable.
So we have a great CEO in that business and she runs that team, and then you start a division in recruiting and in outsourcing of training, and then you have country managers. So basically, it’s about putting a team together; everybody knows what their job is, they know what their goal is, they know how they’re going to get rewarded, and they’re obviously capable of doing the job – and then you get the hell out of their way.
How do you work the revenue, so you can fund such rapid expansion? You made sure that some is transactional, some recurring right from the beginning…
The business is self-funding. We’ve been throwing off cash pretty well since we started, and that’s partly because we’ve come through four or five years of good growth, and we kept our costs under control.
The recurring revenue is more about longer-term contracts. It was interesting initially as we had to tell a whole bunch of people that were used to selling software and getting a big hit. So we had to change, not to sell it, but rent it, and actually take a smaller amount up front, but really develop a longer term relationship with the client, which is really what they wanted.
Clients didn’t want to buy things but did want to rent it. Why do you need to own your own payroll department? I don’t know. Most people are realising they don’t. We also had a good facility with Westpac and they supported us, but frankly we haven’t needed much of it, except when we bought businesses.
What did you do that didn’t work?
You could argue last year in our results we would have made another $3 million if we hadn’t expanded into the UK. We bought a small business in London and expanded into Birmingham and Manchester, just as the UK downturn hit. So that made the whole process a bit more prolonged; in other words we lost money for longer than a start-up normally did. And we also opened in Japan last year, which is expensive. So, theoretically, they weren’t wrong decisions; they’re now both starting to trade profitably and they’re moving in the right direction… sort of breakeven to profit. But looking back as an entrepreneur, you probably could have waited a year. Timing’s everything isn’t it?
What about the United States?
We only have a small representative office in the US. Our view is that Asia and the Middle East is our backyard, and London and the States are really there just to talk to big customers who want to grow in Asia.
Managed services will soon be more than half your revenue. Does that change your company?
It was always part of the plan. I think the people on the transaction side of the business; the recruiting business, often find leads. You know, they go and do a CFO search and then they say “our payroll system is not working” or “we spend all this money on training and don’t know where it goes, can you please help us sort it out?” So they tend to feed each other with leads, but each division sort of runs their own thing. So it’s not like there’s a huge cultural change.
The only thing that changes is it gives us a bit of comfort when you’ve got a lot of cyclical earnings going on; we’ve got a bit of a buffer against that. So, even the people in the cyclical business kind of get that, and they go, “oh, this is good, I’m working for a strong company and if the recruiting business suffers a little bit this year, payroll and outsourcing will help us.”
And how do you get them to work across teams, so they don’t develop into silos?
You’ve got to recruit people of the right value set and we tend to place a lot of emphasis on recruiting people who have the right value set, who think the right way.
How do you judge that?
Well, we judge that by asking them about their past history, and what’s their approach to things. And generally the person that’s all about ‘I’ and not about ‘me’ and ‘we’ often stands out. Plus, you look at actually what they’ve achieved. You know, a lot of people have shown that they can achieve results through teams, you know, they’ve collaborated. In other words, whenever you get people who say, “Well, it’s a bit too fuzzy, it’s too grey, I don’t really like this matrix, I want to own everything I do” that’s a bit of a warning sign, because these days everybody should understand no one person can be responsible for success in a company. You need a matrix, you need to collaborate.
The second part is rewards; we make sure that there’s a combination of rewards that are around individual performance and then company-wide performance for our leadership, and that’s not just equity plans, but also part of their bonus. It depends on how the company as a whole does.
So if managed services talks to executive recruitment, how do you really get them passing on leads and cooperating?
We very publicly do a yearly announcement called a ‘long term incentive’, and we give shares to people, very ceremoniously, and those shares are escrowed over two years. So, if someone passed a lead on to payroll, and that deal turned into a payroll contract worth half a million dollars a year, and it’s signed and sealed, that person might get a cheque of $20,000 of fully paid stock, escrowed over two years, and so on.
And we have a very clear system of lead generation. It’s kind of like an honesty system; everyone tracks what they’ve done, and then at the end of the year, we see whether their leads turned into money, because you can tell – you just look at the invoice register. So it’s a very simple system, its very open and everyone knows it’s arbitrary, it’s not an arithmetical process. But it’s symbolic, and it works.
What are the trends in recruitment? There are a lot of niche players really struggling.
It’s a really interesting time. I’ve been through two downturns; the 1990s was the worst, but even in 2002, there were still generally people surpluses. You know, there was still fairly flexible demand. The Financial Review says companies are retrenching and laying off staff, but you know, they’re doing it very selectively and not in big numbers.
There may be a few big announcements, but if you actually look at the numbers, they’re not huge, and that’s because we have a huge demographic time-bomb going off. I mean, never before has unemployment been at record lows, never before have there been so many people eligible to leave the workforce and retire, and that’s globally, and you’ve also never had all the engines of growth working.
So clearly there’s troubled times ahead; we’re in the middle of them, and clearly there’s a bit of lack of confidence, and therefore the pace of hiring has slowed a bit.
But I’m personally very optimistic, particularly if this Government wants to get a second term, that with the dropping of interest rates and a lot of infrastructure spending, we will not see unemployment tick up to the sort of levels we saw in previous downturns – no way.
Do you think we will come out of this earlier than the pessimists predict?
Well ‘earlier’ is hard to say, I think sector specific, but I’m not in the pessimist’s camp. I think Australia is in pretty good shape. We know that our banks are in relatively good shape. We went into the interest rate firming before everyone’s cycle, so… it’s hard for the US and the UK to raise interest rates – it’s impossible. So we can start to reduce interest rates now; we took the pain a bit earlier. So I think if the Reserve Bank does the right thing and dropped interest rates by 50 basis points not 25, or keep going, and with infrastructure spending, we’ll see the worst of it over.
We’re all depressing ourselves by watching CNBC every day and live news, and all that stuff. I think we’ll be passed it by Christmas, and I’m confident that as ’09 develops, the recovery will accelerate. We won’t be in the bubbly, frothy days of ‘06/’07, but you know, we’ll be having steady growth, and more importantly, certainty will return.
You’re looking for acquisitions now. What are looking for?
The market’s given us a very strong signal, they want us to acquire more in Asia, and they want us to acquire more in HR outsourcing. So, I think, frankly apart from selective boutique organisations that might fit a niche for us, we’re probably not a big acquirer of recruiting companies in Australia; we’re pretty well developed there, so it’s more in Asia, and more…. in Australia, if we did buy something, or in Asia, it will be more likely to be things related to HR outsourcing. Things that help CEOs run a better company, by doing things that their HR department can’t do as efficiently as us.
And what trends are you seeing in outsourcing? What are the new things?
The biggest issue when we first started, I can even remember you asking me Amanda: “Aren’t you going to alienate HR? Aren’t they going to feel like it’s a threat?” And you know what? Most of our clients now are HR directors; they love it. They see that this is an opportunity finally to make line managers accountable, because they often get blamed for everything….
The market punished you a few months ago … Yeah! … the share price… was that down to $1 and now it’s back to $1.50?
Well, it’s a classic case. We were rewarded for a very high growth rate, and so we had a very high multiple, but when confidence evaporates, particularly in small caps, it goes. And I mean, frankly there were two small cap funds that owned our stock that had redemptions, and it had really little to do with us. It had to do with the fact that if people are taking money out of a small cap fund, and they happen to own your stock, they’re going to sell it, no matter what. And, frankly, along with a whole bunch of other stocks, we just got dumped, you know. I’m philosophical about it. The market does what it does, we get on and run our business and the share price will look after itself.
Where should the share price be?
Hah! I never make comments about that. I think the market will work that out, but I can tell you, you know, we’re a major shareholder, Morgan & Banks Investments. We’ve already told the market that by 2013, we think we can get to a billion dollars in revenue, and I think, worry about what you can control. I can’t control the market; I can only control our company, our customers and what we do for them, and if we get that right, the share price will work it out.
On your role, how much time do you spend in this business?
A hundred percent of time. Geoff Morgan runs our investment business, Morgan & Banks Investments, so this is my gig, and together with John [Rawlinson], our CEO.
So is this mainly strategy and putting the deals together?
I actually make placements; I think I’ve helped place three CEOs in the last six months. I travel a fair bit, so I’m off to the Middle East where we have five offices in the Middle East and London. I tend to work with the offshore managers a bit more than John, who focuses on the bigger business here, but we really just work as a team. I do a bit of everything.
What do you say to entrepreneurs who say they shouldn’t actually be placing the CEOs, working in the job?
Well, I think everyone’s different. I think mostly the job of an entrepreneur is to be strategic and work on the business, not in the business. I happen to think that talking to CEOs and placing them in jobs, keeps me in tune with the market. But if I was making plastic widgets, I probably would be doing things that are more strategic and on the business. We’re in a services company, hence I’m more involved.
Just on a personal level, is it time to buy shares or property?
Both, but it’s about the asset. So, I would buy income-producing property that has come down, not so much through a trust, but you know, directly. I think there’s some areas where income-producing properties are showing some nice yields. And I like the look of some stocks now that are again very robust businesses. And they’re the obvious ones, where if you take a five-year view, you just know they’re going to be more valuable than they are today.
Well, I think resources, mining, I like energy and I like staple sort of stocks, you know, stocks that are all about putting food in people’s stomachs. I’m involved with a private equity firm, and we’ve just got involved in two different food companies.
I think, you know, the world is getting crowded; water, clean air, energy, all those things are going to get more and more expensive, and the great thing about Australia, and something we should all be pleased about, is we’ve got all of it in abundance.
This is an edited transcript