Who says compliance has to be boring?

Compliance was once seen as the boring segment of the business services market, however, more recently the sector has seen growing interest from investors, with a number of business growing to a size that is attractive to both mid-market private equity and trade buyers. August Equity has recently made two investments into the compliance services space and this article explores the underlying market dynamics, trends in the sector and why August Equity sees it as an exciting space for investing.

A growing landscape of red tape

Businesses across all sectors are facing a continually growing and changing regulatory market, as governments and regulatory bodies issue new regulations and update requirements frequently. As well as affecting traditionally heavily regulated industries (such as financial services and healthcare), regulatory stringency is increasingly impacting a broader cohort of businesses. As consumers demand greater transparency and more control around the provision products and services, regulators are increasing the compliance burden on businesses in order to meet these growing expectations and ensure proper processes and regulations are adhered to. Consequently, a number of increased and harsher penalties have been introduced by regulators in recent years to drive compliance with new regulations (for example in 2015 the CQC brought in a more comprehensive and regular inspection cycle for dental practices), and examples have been made of businesses found to be non-compliant.

As the complex and continually developing world of regulation is challenging for businesses to keep up to date with (particularly in smaller businesses), it has led to the development of an industry providing specialist compliance management tools. August Equity’s most recent investment into CODE, a dental-specific provider of compliance and HR software and services, is underpinned by these sector trends.  CODE supports dentists and dental practices to be compliant, by providing up-to-date information and easy-to-use templates, guidelines and workflow management tools via a SaaS platform. This enables practices to navigate the increasingly stringent and changing regulatory environment in dentistry, including the CQC requirements and inspection regime. Similarly, in an industry facing growing workforce challenges (including recruitment and retention of a highly-skilled workforce) and changing workforce regulations (for example around dentists’ self-employed status), CODE’s HR tools and support line are valuable.

Businesses such as CODE exist to focus solely on providing the information and tools for companies to follow in order to remain compliant. The time and cost involved with doing so is then shared across a user base of thousands, rather than individual businesses having to commit dedicated time, resources and spend in-house to do so, enabling businesses to focus on their core operations. As the complexity and rigour of the regulatory market increases, outsourced solutions such as these will continue to become ever more popular for businesses, particularly as industries undergo professionalisation and consolidation (such as in the dental sector). The ongoing nature of compliance requirements mean the revenue streams for compliance services providers are typically long term and recurring in nature.

Doing more than just ticking a box

As well as helping businesses ensure that they are compliant with regulatory requirements, best-in-class compliance can now act as a differentiator for businesses when competing in their marketplace.

For example, The British Assessment Bureau (“BAB”) provides ISO certification to its customers across four key areas – quality management systems, environmental safety, information security and health and safety. Having a UKAS accredited ISO certification in these areas not only helps businesses remain compliant with industry specific regulations but also helps them participate in procurement tenders for government contracts or act as suppliers to large multinationals as they operate with a globally recognised accreditation which can be relied upon by these organisations. In addition, ISO certification underpins best practice and drives productivity and competitiveness. Once certified, the business is required to be audited every year, providing a high quality and visible stream of earnings for BAB.

This differentiation by working with a business partner adds most value in the SME space (the segment of the market where most of CODE and BAB’s customers sit) as compliance tends not to exist as a separate function (but instead is likely to fall under the remit of the CEO/ MD/ CFO). Customers of BAB can benefit from training through a combination of e-learning and face to face sessions to help them and their employees keep up to date and compliant on topics ranging from GDPR and information security to environmental awareness, areas in which regulatory compliance is a bare minimum requirement.

User friendly technology can make complicated regulations easy to navigate

Technology has an important role to play in enabling businesses to navigate the regulatory and compliance landscape. For businesses providing compliance management tools, technology is becoming increasingly central: it enables systems to be quickly and automatically updated to reflect the most up-to-date changes in compliance requirements, allows evidence of compliance adherence to be stored and accessed by regulators, provides more accurate audit trails and supports increased accountability with delegation tools and online tracking.

There are also significant opportunities for regulators and certification bodies to benefit from technology. BAB recently acquired myActiv a software solution that provides their customers with automation tools that enable them to embed the ISO certification requirements into their day to day processes. It also reduces the resource required to prepare the evidence needed for presentation for at each ISO Certification Audit. Additionally, the software has available add on module that notifies and updates users of changes in relevant legislation. This significant time saving and value-add through a technology platform lets SME business owners focus on growing their business whilst remaining compliant with the relevant regulations which impact their industry. For BAB, the software not only generates incremental revenue but increases the stickiness of the customer as the software forms a tool which becomes ingrained in the day to day activity of the business.

Alongside current technology, the future development of machine learning and AI will provide powerful tools for companies to automate elements of compliance, such as implementing regulatory requirements that replace manual time-consuming processes and reduce the risk of human error. For example, this might include utilising programmes to scan systems in order to ensure data is stored and recorded in the correct places, which is a key element of GDPR compliance. Developments such as these are likely to offer not only offer businesses time efficient modes of compliance, but increase the accuracy and extent to which regulations are complied with correctly.

Conclusion

The regulatory and compliance landscape has developed in a disparate and sporadic manner and is continually seeing changes and developments from within.

Whilst businesses in the sector may once have been classed as boring, they possess a number of characteristics that make them attractive to August Equity – low customer concentration, high levels of recurring revenue and strong organic growth potential, against a backdrop of a market with consistent underlying growth. As regulatory landscapes continue to become more rigorous and evolve continually, and businesses look to professionalise their compliance management and use accreditation to stand out in a competitive market place, outsourced compliance services businesses have an opportunity to develop further and become increasingly important and valuable.

This, coupled with a high level of fragmentation in the compliance service sector (due to the evolution of a market where a multitude of small businesses have grown within specific sub-sector niches), creates the opportunity to create, consolidate and grow businesses to act as a “one stop shop” compliance solution within their specific end markets.

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