Trigg: Four criteria define durable economic moats in outsourcing businesses
Mike Trigg · Mike Trigg – Defying the Fade at WCM (Capital Allocators, EP.162) · Nov 2, 2020 · at 25:00
Mike Trigg, portfolio manager at WCM Investment Management, breaks down the analytical framework WCM uses to evaluate economic moat expansion in outsourcing companies across different industries.
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“The first thing we would look for is we want a runway of outsourcing. You don't want to invest in outsourcers when the majority of the market has already been outsourced. And that can take a really long time to be honest with you. These things are actually pretty slow moving. Even in some of the other industries that we're involved in today, things like outsource clinical trials or outsource pharma manufacturing, you're looking still at well under 50% of those markets being outsourced. And then the second piece is you want the outsourced service to be Relatively small part of the customer's P&L, but the cost of failure to be really high. So if it's a really high piece of the expense line, oftentimes you don't get the pricing. It becomes a little bit more contentious, and so you want more of a cozy relationship, and it's easier to achieve that when the actual service cost is relatively small. And then the other one is a fragmented customer base. And that too is pretty apparent. You don't want an outsourcer that's largely relying on two or three customers. That can become also something that's not going to lead to the same amount of durability or not the kind of durability, at least that we're interested in. So you want some level of customer fragmentation and high barriers to entry. And then the last one, and this is probably the most important one, is you want evidence that the outsourcer is continuing to move up the value chain.”
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