Online Extra: CEB: A Collector--and Seller--of Knowledge
Thirty-seven-year-old James J. McGonigle's mantra for his successful consulting business is simple: "Keep companies from reinventing the wheel every time they have a problem." It's a stunningly simple idea that the CEO of Corporate Executive Board (CEB ) -- a disenchanted former bank-turnaround specialist at blue-chip consultant McKinsey & Co. -- has refined into a steady moneymaker. Moreover, that idea has managed to boost CEB's growth at a time when big-name consultants such as KPMG and PricewaterhouseCoopers are seeing their businesses sag.
It works like this: CEB gets its large corporate customers to give it the solutions they have developed for various business problems, such as boosting employee retention or minimizing government regulatory costs. It then acts as the middleman that collects this management wisdom, adds its own insights, compiles it all into reports, and sells it to subscribers -- which are usually other large corporations.
The model has worked well enough to land CEB in the No. 5 spot on this year's Hot Growth companies list. In the three years from 1998 through 2000, the company's revenues have grown at an average annual pace of 35%, while profit growth over the same period averaged a blistering 153% annually. CEB's average return on capital over those years was an awesome 61.4%. Reflecting that, the company stock, a split-adjusted $9.50 at its initial public offering in 1999, recently closed at $33.
SHOW AND TELL. By any account those are stellar numbers. But there were plenty of doubting Thomases a few years back. Analysts were highly skeptical that managers would willingly share their best corporate strategies with companies that would likely include their competitors. After all, many corporations that share data are not anonymous in the CEB system. The company supplying information is named in the report. Apparently, that's of little concern to the 1,745 companies -- including IBM, General Electric, Alcoa, and most of the largest public U.S. companies -- that have signed on as CEB subscribers.
They do so because they can get state-of-the-art information at a rock-bottom price. For a $30,000-a-year subscription, the company gains access to 5 to 10 "best practices" research studies each year. The studies are put together by CEB consultants, who discuss with company execs early each year what topics they're interested in. The CEB folks then go and ferret out the material from other contributors. While CEB issues general reports, the material is often customized to fit the needs of a particular subscriber. And the $30,000 also includes executive conferences with CEB researchers, conferences, short-answer research briefs, and searchable online archives.
Altogether, paying for an answer through CEB is less expensive than tackling a problem internally and certainly cheaper than a major-league consultant's six- or seven-figure fee. And, of course, subscribers reap the benefit of years of accumulated business wisdom.
WRITE ONCE, SELL OFTEN. Executives are flocking to CEB programs to swap survivor stories. Today, CEB offers 16 distinct research programs, up from nine three years ago. Each focuses on a specific corporate discipline. Human resources, finance, and sales are among the most popular. And because reports can be sold several times to different clients, CEB can boost revenues with little need to beef up its staff.
And as additional corporations subscribe, CEB gets more product to sell. The result? In the latest 12-month period, the company had earnings, before extraordinary items, of $16.3 million, on revenues of $103.9 million. By contrast, 1997 profits were only $1.1 million on revenues of $38.7 million.
McGonigle says he isn't trying to compete with name-brand consulting operations. "We're going to remain focused on best-practices research," he says. That's smart, say analysts. And because the network of executives who contribute to CEB can't be easily duplicated, the company faces little competition. "This is a really defensible niche," says Brandt A. Sakakeeny, an analyst with Deutsche Banc Alex. Brown in New York.
GOOD ADVICE. McGonigle, a Princeton undergrad and Harvard Law School alum who never practiced law, was recruited as chief executive by company founder David Bradley in 1995, at a time when Bradley was already building a media business with The National Journal, a weekly political magazine. McGonigle, who had grown to intensely dislike the selling aspects of his job at McKinsey, took Bradley up on the offer because, as he says: "I reached the point where I felt if my own advice is so good, I should be willing to take the risk of running my own company."
Bradley, a Harvard Business School MBA, started CEB in 1979. At first it undertook esoteric business research: He once gauged the size of the European fountain-pen market for a client. But he eventually developed CEB's current niche, and when the company went public, he sold his shares for $142 million. Bradley used the money to buy another media property, The Atlantic Monthly, and left the business.
So McGonigle carries on, overseeing a staff of over 300 researchers, many thirtysomethings who, like McGonigle, have also gotten fed up with the life at traditional consulting firms. He keeps his employees cosseted in posh Pennsylvania Avenue digs, complete with cappuccino bar, massage chairs, and a pool table. But winning at eight ball during lunch hour isn't McGonigle's only passion. He says he desperately wants to supply executives with the solutions to the problems keeping them up at night. As long as he can, McGonigle himself will sleep soundly.
By Nicole St. Pierre in Washington, D.C.