March 16, 2017
Vertical integration is something you’re hearing about more these days. It’s a concise way of explaining an arrangement in which the supply chain of a company is owned by that company. Usually, each member of the supply chain produces a different product or (as in the case of S&N Communications) service, and the products or services combine to satisfy a common need.
You hear a lot of reasons why companies choose to vertically integrate — differentiation, blocking a competitor’s access to a market, optimizing resource use or avoiding wasted costs. Around here, we prefer to keep things simple. In 2014, when S&N decided to acquire three subsidiary companies, we had two strong reasons for doing so: profit motivation and service motivation.
Here’s what may surprise you: Our motivation wasn’t necessarily in that order.
Don’t get me wrong. We’re running a business, and that means keeping a close eye on the bottom line. The more profit we realize, the more we’re able to expand; pay our workers; invest in new training, processes and equipment; and sleep soundly at night.
But the initial reason S&N looked into becoming vertically integrated was because we sought to improve service. We wanted our customers to have a better experience from beginning to end. That couldn’t happen if we weren’t controlling the whole process.
Vertical integration isn’t for everyone. Certainly it takes vision, but beyond that, it takes time, money and resources. You may realize a loss before you see a turnaround and earn a return on investment. But I’ll tell any CEO that no matter your industry, if you have a stake in the game and a desire to do more and be better, vertical integration can be a fast path to transformation.
The S&N Story
As an industry leader in wireline infrastructure construction, we knew we excelled at what we did. But, we recognized we were just one cog in a much bigger process — one that involves wireless networks, site development, underground utility locating and tower construction.
From our vantage point, we too often witnessed — in this larger process — shoddy work being done, mistakes being made, duplication of efforts, and wasted time and money. We thought we could do better.
When our construction customers, also disappointed in the locating services being provided by their current contractors, came to S&N and asked if we could do the job, we replied with our mantra: “We’ve Got This.” By applying the same values and processes to locating that we had done for construction, S&N soon became known for high-quality work in both facets of the business.
In 2014, we acquired three companies — Stake Center Locating, SCE and Tower16 — each of which handles a portion of utility construction and maintenance. Since vertically integrating, our customers can call on us for each step in the process, from site development and planning, to constructing wired or wireless utility infrastructure, to locating underground utilities, to keeping that infrastructure maintained throughout its existence. We’re able to plan and build cellular towers and connect homes, high-rise buildings, stadiums and any other structure to reliable cellular coverage. We call it cradle-to-grave services.
Although we’ve been fortunate that our new structure has worked for us and that in turn it has benefited our customers, not all vertically integrated companies can claim the same success. If you’re considering this route for your company, here are a few things to think through.
Strengths and Weaknesses
Vertical integration is not for the faint of heart — and I’m not even talking about the actual integration itself. Perhaps the most painful part of the integration process came early on when S&N leadership was forced to sit down and look in the mirror. All companies have strengths that are celebrated and weaknesses that generally are downplayed. But areas of weakness can quickly become amplified during a vertical integration. What was once a nuisance can quickly roll up into a logistics or management nightmare.
It’s essential you and your team make an objective assessment of exactly where your company excels and where it falters before you move forward with plans for any form of vertical integration.
Guard Your Reputation
Acquiring any company requires an immense amount of planning and forethought. (And, if I may say so, a seemingly endless amount of paperwork.) After all, the reputation and your chosen subsidiary partners’ quality of work will directly reflect on your parent company. If your company chooses to acquire companies simply for the purpose of becoming vertically integrated, and if you fail to perform your due diligence to make sure the acquired company meets the standards of service for which you’re known, it can negatively influence your company’s reputation.
Make sure your company’s standards for quality are shared by the companies you choose as partners in your vertical-integration strategy.
My guess is that most companies underestimate the amount of organization needed to manage vertical integration of services from end to end. I say that because my company, S&N, did an immense amount of prep work, and yet I believe we still underestimated resource needs.
Other companies dilute their core business by putting too much focus on the new ventures at the expense of their core competencies. Or, some companies go too far afield, where their core competencies or vertical industries are simply too different. The learning curve overwhelms them, and service suffers as a result.
Bear in mind that people, from the field to the executive suite, are already going to be nervous about any integration. In the early days, it’s all too easy for nerves to translate into territorialism as departments, managers and individuals all battle to prove their value. Take this with a grain of salt because it’s natural for people to be worried about their jobs as well as the jobs and careers of those who work for them. Your job is to recognize that internal strife is coming and put processes in place so that your employees feel heard and you’re able to address their concerns. This may mean forming new or temporary teams that oversee anything from employee concerns to benefits and reviews.
Before determining if vertical integration is right for you, take inventory of your team. Knowing who will handle new needs that will occur due to change in the company’s structure will save you time and heartache.
One reason I believe S&N has been successful at our leap into vertical integration is because we are — let’s just admit to it — control freaks.
Control isn’t always a bad thing. You’re going to want to develop new levels of control for the oversight of everything from quality, safety and supply assurance to technological capabilities and coordination of efforts. In a nutshell, you need to control your processes so your customers see your integration as a success and don’t have to waste time, money and resources double-checking behind you to make sure you’re doing the work and doing it right.
You’re going to need to keep your ear close to the ground and your finger on the pulse of all company activity to ensure quality standards are met — without coming across to employees like Big Brother.
Merging Corporate Cultures
“We’ve Got This” is more than a tagline for S&N — it’s our rallying cry.
Knowing the expectations we set for our work and ourselves, we naturally had concerns onboarding three new companies, and rightly so. No matter how well aligned we are, there will always be differences in corporate culture and processes. Our aim going in, then, wasn’t to just assimilate the three new companies. Instead, we’ve taken the time to explore the strengths and challenges of each.
We encourage you to do the same. Sure, you’ll change some things about how your newly acquired subsidiaries do business, but the flipside of that coin is that they will more than likely also change your company for the better. Given the chance, your acquisitions can expand your world, making you more perceptive and on top of what’s occurring through the ranks.
Don’t adopt a rigid stance that there’s only one right way to do things. Be open to new ideas, even if they conflict with existing processes or aren’t easily assimilated. Be open to change over time.
The Real Bottom Line
What I’ve outlined here are only broad considerations — the tip of the iceberg of things to mull over, should you be looking at vertical integration.
Certainly, with hindsight, we perceive things we would have done differently while onboarding three new companies. However, we have never wavered in our conviction that vertically integrating in order to offer end-to-end services was the right decision for our company. Better service, more profit. We’re not perfect, but we do strive for 100 percent of whatever it is we’re doing. We’re here to make sure our customers make money and have the best possible experience with our team, at all levels, while doing so.
I hope these points give you a solid foundation for considering whether or not you should vertically integrate. If you do decide to, keep in mind that successful integration is a process, not an event. Stay open, make changes and adjustments, and soon you’ll be operating as one cohesive entity.
Allen Powell is president and CEO of S&N Communications.