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The Race to The Bottom: Perspective from a Third Party Platform Provider

March 13, 2019

deverus is a third party technology and platform provider for background check companies (CRAs). At a minimum, CRAs use technology to drive fundamental parts of their business. I would argue that it plays a fundamental role in everything they do. Regardless, no one would argue that it’s not a critical part of surviving and for sure thriving to grow and get ahead of the competition. And being one of the four major companies providing technology to over three quarters of the industry, deverus has a unique perspective on the technology trends driving this industry.

One not so obvious but prevailing trend is that the industry as a whole is rapidly being divided into two categories: high growth CRAs doing double digits and thriving to the top, and the rest, those in the single digits, or with flat growth on an endurance race to the bottom.

Rise to The Top

It’s undeniable that high growth CRAs have made significant investments in technology and innovation. It is THE driving force behind their growth. They’ve made these investments principally to keep up with: (1) the new demands of user experience brought on by newcomers and advancements in expectations on ease-of-use, (2) the out of control ATS referral madness through integrations, (3) the mobility of the workforce, and (4) complex, cloud based, infrastructure requirements for scalability. But most of all, they’ve made these investments to keep up with the other thriving CRAs and to take market share away from the rest.

Most of these high growth CRAs chose to build and maintain their own platform. They own their own roadmap. They have capable teams who develop new products and required features, make the necessary system configurations for new client onboarding, while still meeting enterprise client custom workflow expectations. These capabilities are born from the fact that again they own the roadmap, the code, and thus their own destiny.

Unlike the rest of the CRAs who didn’t choose this route and went on a third party platform, the high growth CRAs are not beholden to a platform with legacy code, competing roadmap items, disparate client needs, and a lack of innovation DNA or an unwillingness to make R&D investments. These high growth CRAs understand that technology is an investment to achieve their aggressive growth goals. Some analysts believe that a technology company, and I submit that a CRA meets the criteria of a technology company, should be spending at least 15% on research and development of new products and services alone. Remember this number is above what it costs just to operate and maintain their technology. The high growth CRAs get the cost of operating a platform and the need for R&D. They see it as a competitive advantage, make the investments, and as a result, are pulling away from the competition. Good for them. They will continue to see tremendous growth as they take the lion’s share of valuable customers from the other declining CRAs who do not invest in technology.

The Race to the Bottom

The race to the bottom, on the other hand, actually contains those CRAs who have not made significant investments in technology. They are mostly on one of the four major third party platforms like deverus. Combined we have over over 700 out of 900 total CRAs on our platforms! That’s a huge number of CRAs and businesses using third party based platform technology.

The Third Party Platform Conundrum

Third party platforms have been around since 1996. deverus started in 1997. In the beginning, platforms were successful in allowing smaller CRAs and startups to get up and going with very little upfront and ongoing costs. After all, it is a pay as you go model. We all say, “Use what you need, We do everything for you”. It worked great for a long time. So good that now over 700 companies are using third party platforms! We helped all of these small companies service millions of businesses that otherwise didn’t have the resources or wherewithal to develop and maintain the technology that drives their businesses.

Fast forward to today. The huge problem now is that in most cases, the platforms are buried in legacy code, with disparate custom workflows, competing client needs and an overwhelming amount of customization requests, not to mention the pressure of managing numerous small and unsophisticated customers who drain support time from the larger ones.

The difference between high growth and platform CRAs is that while the former understands the costs of technology investment, the majority of the 700 platform CRAs truly believe that paying click fees is an investment in technology. They are more focused on driving down the cost of those clicks than investing in technology. The critical fallacy committed is that a platform click fee to operate the software is not an investment in technology, it is merely paying for the cost to operate it! But many platform CRAS have a, “how much can I get for as little as possible” mentality while not understanding the long term consequences. The vast majority don’t see us as a technology investment, nor allow us the margins to create better technology. On the contrary, they see us as a click fee that must be driven down. This is at their own peril. The growth companies should appreciate this point because that means an overwhelming number of CRAs clearly do not have a growth mindset, thus the race to the bottom.

That said, there are 5 to 10 companies on platforms, with revenue over $30M, growing at a fast clip. Unfortunately for them, time, resources and the essence of the platform business model are against. These CRAs have worked hard for market share using the right sales, service and market penetration strategies but are now plagued with being on a third party platform stifling their growth. Indeed, the platform they chose is now actually keeping them from growing by being: (1) on 20 year legacy code, (2) treated like any other customer and waiting in a queue for even simple support and changes to the system, (3) by not having the architecture and infrastructure capabilities to truly help them scale, (4) limited integration capabilities and prioritization discipline, and finally, (5) the simple fact that they look like at least 250 other CRAs.

The trap is that once a platform is chosen, it’s very difficult to impossible to switch. What’s more, what’s the true sense in switching if all the platforms have the same problems with no possibility of owning their own roadmap much less their own destiny.

Finally, one huge elephant in the room is that at the end of the day, they don’t own the code or a license to the software. We do. This means they don’t control their own roadmap, but more importantly they don’t control their own destiny. Ask any PE firm, when platform CRAs look to sell, they will take a humongous ding on their valuation for not owning their own technology. Don’t let anyone tell you different.

The Way Forward

If you decided early on to build a home-grown system and own your roadmap and destiny, good for you. You understand the costs of technology and obligingly make the investments necessary to grow and scale. By most accounts, you made the right decision! You are growing faster than the rest and stand poised to win even more market share. And when you are ready to sell, you are going to maximize your valuation.

If you are a CRA on one of the four third party platforms, you really need to ask yourselves some hard questions: Will I survive? Does this platform have the ability, means, road map and desire to separate me from the rest, and help me scale to my goals? Am I willing to make the true technology investments that will help me grow my business? How can I get out of this box? Is there a 3rd party platform strategy that meets my long term goals and objectives?

deverus is the Exception

deverus has seen first hand the limitations of being on a third party platform. We know the good, bad, and ugly. That said, our mission from day one has been to help CRAs grow and reach their full potential. But over the last 20 years, we’ve found there’s definitely a resource limitation on who we can truly help grow and those CRAs who truly want to take the risks and make the investments to grow. That’s why we currently have only 50 CRAs on our platform while our nearest competitors’ have more than two hundred and fifty. We decline most CRAs looking at our platform because they do not understand what investments are truly necessary to compete. They don’t have true growth strategies. They are looking for the lowest cost solution. They are cost cutting their way to the bottom.

In the past 2 years, deverus has invested more than $2 million in bringing our select clients onto Amazon Web Services’ latest cloud based infrastructure. We spend an estimated $1 million annually to maintain and expand on it. In the same amount of time, we invested over $2.5 million on integration technology and $2 million on mobile, and millions annually maintaining them. We continue to invest heavily on research and development for the “what’s next?” to make sure we stay out in front for our clients. We understand technology costs and we are willing to make the investments and we look for partners who can appreciate our value and who are also willing to make the investments.

Yes we are still a platform and we own the source code and the roadmap. We have some of the same challenges as the other third party platforms, but we have worked tremendously hard to innovate, to scale, to stabilize, all while creating a whole new model to help these larger companies scale, take control of their own destiny, own their own roadmap and own license to the source code with managed services to maximize their valuations.

If you find yourself in the position of being a high growth CRA, but limited by your current platform, give us a call and let us talk about a model that fits your growth plans.

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