During my schooling days, I preferred to seek assistance from my peers, and not private tutors, when I faced difficulties with my academic work. I felt that peers understood the problems I faced from a similar perspective. Corporate executives are thinking in a similar fashion, ditching expensive external consultants for access to the wisdom of peers through member networks. The Corporate Executive Board Company (NYSE:CEB), a member-based advisory company providing subscription-based best-practices research to corporate executives, is a beneficiary of this trend.
Network economics where the strong get stronger
Corporate executives are able to access research published by The Corporate Executive Board Company (NYSE:CEB) based on actual case studies of similar problems that others have encountered, and how they solved the problems. In addition to useful desktop research and analysis, Corporate Executive Board also helps to link its members with other consenting members. Like stock exchanges and social networking sites, the value of Corporate Executive Board’s networks grows with additional members, as they contribute to an increasing body of information, knowledge, and experiences.
Critics will cite the example of how Facebook Inc (NASDAQ:FB) replaced MySpace as the top social network in the U.S., to support the argument that network effects are rarely sustainable. While there are low switching costs involved with changing to another social network or having multiple social network accounts, there is much more at stake for high ranking white collar executives. Corporate Executive Board counts more than 10,000 organizations, and over 200,000 executives, among its members. For corporate executives, switching to an inferior network could mean losing your job if you fail to make the right decisions.
Substitution effect not significant as alternatives are less appealing
There are two reasons why organizations and executives prefer subscribing to The Corporate Executive Board Company (NYSE:CEB)’s membership program over other alternatives, such as hiring external consultants.
Firstly, the cost of subscribing to Corporate Executive Board’s membership program is small, relative to fees that consultants charge. According to a 2006 Fool.com article, membership cost about $35,000 per program then. Also, Corporate Executive Board charges a fixed annual fee, as opposed to out-of-pocket expenses and other one-offs that consultants include in their bill.
Secondly, no single individual wields significant influence over the value of the program under Corporate Executive Board’s model. Any individual member who drops out of the program is going to have a minimal impact on the overall value of the program membership. On the contrary, if one or two ‘stars’ leave the consulting team, the quality of the advice offered by external consultants might drop by more than just a notch.
The Corporate Executive Board Company (NYSE:CEB) is targeting long term annual growth rates of between 8%-13%, by increasing customer accounts and expanding geographical scope. Currently, close to 90% of Corporate Executive Board’s client base are Fortune 500 companies, suggesting that it has the ability to price discriminate and target smaller sized companies with lower fees. There is also room for growth in certain geographic regions such as Southern Europe, which accounted for less than 2% of its turnover.