June 4, 2020 | COVID-19

COVID-19 and CRAs: The Case for Industry Diversification

Note: In December 2021 SJV and Wholesale Screening merged to become InformData.

This is the first article of a new point/counterpoint series here on the SJV blog. In this series, we will debate both sides of an issue to provide CRAs with some clarity. For this first entry, the subject is—you guessed it—COVID-19.

Specifically: how should CRAs respond to COVID-19 to better inoculate themselves against risk?

The COVID-19 pandemic has revealed deep issues worldwide, and America in particular is feeling the pain. One of the most substantial pain points is a fear that this is “the new normal” and with that comes an uncomfortable understanding that we were all operating under far more risk than we thought. 

There are some clear and obvious ways that consumer reporting agencies can respond. They should be using more automation in background screening, expanding into other segments of the talent acquisition and development process, and even adding subscription revenue models with something like continuous criminal monitoring that will still bring in revenue even during a time of furloughing or heavy temporary unemployment. 

But these considerations also extend to your industry strategy. Which industries do you choose to work with? Do you focus on specific industries, or do you work with a large mix of them?

Industry Depth vs. Industry Breadth

Conventional wisdom for business strategy is to pick a niche within your industry segment and focus on it. In other words, don’t just be a consumer reporting agency, but be one of the best CRAs for the transportation industry.  

As HBR found in their study of new entrants into crowded (but profitable) industries, the key was to focus on a niche, gain market share under the radar and expand from there. 

For some consumer reporting agencies, particularly brand new ones, this makes sense. But if you’ve already established a foothold in the industry, it’s more important than ever to diversify

5 Reasons to Diversify Your Industry Strategy

In fact, I can think of five immediate reasons to consider this strategy. 

1. It reduces risk.

Putting all your eggs in one basket is an inherently risky proposition. If your firm is focused on the fast food restaurant sector, for example, your future growth and stability is subject to not only the whims of government policy (such as the minimum wage), but also technological advances.

2. It's a good investment strategy.

Your company is more than just an investment vehicle, but it still is an investment. In financial investing, it’s long been a beneficial strategy to hedge your bets and diversify your investment. The classic example is in retail. During a period of economic  prosperity, being invested in a luxury brand is a good move. But during an economic downturn, being invested in a budget brand like Wal-Mart is the right move. By investing in both, you level out the fluctuations and your investment grows in all economic environments. 

3. Helps reduce seasonal cash flow fluctuations.

Many businesses have seasonal hiring cycles. Since their hiring cycles drive a CRA’s revenue model, working with different industries with alternating seasonality can level out your company’s cash flow.

4. Inoculates you from industry fluctuations.

Every industry will struggle for some reason or another, whether it be new technology, regulations, bankruptcies, or other factors. Industry diversification can ensure that your fortunes don’t rise or fall with those of your chosen industry niche. 

5. The only response in a post-COVID world.

For those CRAs focused on industries that were particularly hard-hit by the pandemic, their own revenue has suffered hand-in-hand as their customer base freezes hiring. COVID has exposed the risk of focusing on a narrow niche of industries. 

What if you’re focused on “essential industries” already?

There are some industries that are doing well during this pandemic. CRAs focused on logistics and essential retail stores are doing very well during this; those focused on healthcare are about even—while triage and COVID-related services have exploded, other healthcare services have receded (which is precisely why more than a million healthcare workers lost their jobs.)

The problem is this: the next disaster scenario will likely come in a different form, and may affect these industries and accelerate hiring in others. 

What is the “next” COVID-19. Are you prepared?

The next economic strain won’t be identical to COVID; it may not even be a pandemic. But the one certainty is that something will happen in the future that will harm industries, and diversifying the industries you work with will increase your ability to weather future calamities.