Making political risk a better industry to work in
Announcing the Two Lanterns Platform Part 3
In the first part of this series on the rationale behind the Two Lanterns Platform, I spoke of the difficulty in the political risk industry addressing the long tail of questions. In the second, I talked about how difficult it is to handle uncertainty.
In this section, I’ll talk about what might be the hardest aspect of all: the business side.
Fragmented Market
If you ask anyone who has worked in political risk, they’ll tell you how difficult selling their analysis is.
The problem is often not the product, it is connecting the right client and the right consultant at the right time for the right price.
Imagine that Company X has operations around the world. This month, they need to know about what’s happening in the Syrian Civil War. Next month they’re concerned with tax policy in the EU. After that, it’s what’s going on with Bolsonaro in Brazil.
All three of those questions fall within the broad category of “political risk analysis” but all of them would require a different consultant.
This means that there’s friction in the market. Every project must begin with a search for the right expertise for that moment. Every consultant must always be searching for what client needs them at that particular moment.
Political risk is a topic that is still not adequately understood by many organizations. Condoleeza Rice and Amy Zegart published a book entitled Political Risk in 2018. This paragraph from their Harvard Business Review article captures the thesis. They start their work on political risk by stressing to the readers that it’s something they should pay attention to.
Considered in isolation, many 21st-century political risks seem like low-probability events. If you’re American, the chance that you’ll be killed by a foreign-born terrorist is about one in 45,000—far more remote than your odds of dying from a heat wave or by choking on food. Unlike Blackfish, most social-activism documentaries don’t become viral sensations. Cumulative risk is a different matter, however, and is easy to underestimate. While the probability that a single political risk will affect a company’s business in a particular city tomorrow may be low, the probability that over time some political risk somewhere in the world will significantly affect its business is surprisingly high. Add up a string of rare events, and you’ll find that the overall incidence is not so rare after all.
Political risk consultants and firms are in a market that is fragmented, with friction, and where many of your potential clients don’t realize they need you. Not a recipe for an easy sales process.
Irregular work
Perhaps even harder for the consultant is the lumpy nature of the business.
In 2011 at the height of the Arab Spring, Middle East experts were in high demand. Then in 2012 when the Eurocrisis was flaring it was monetary policy experts and Greek-speakers. In the time since, we’ve seen spikes for those who comprehend British politics, US trade policy, Chinese diplomacy, and populism.
The trouble is, as I discussed with Kerry Boyd Anderson in this podcast episode, it takes time to develop expertise. After 9/11 and the Iraq War, it took the US government more than a decade to train enough Middle East experts for their needs and that was with a nearly unlimited budget.
Political risk is not like a restaurant that can switch from burgers to steaks depending on the tastes of customers. There needs to be a supply of experts ready for when their expertise is needed. Clients want a “just-in-time” business model in an industry that can only operate with a “just-in-case” model.
How it’s done now
There are a few solutions to this dilemma.
The first is to bundle expertise into one product.
A larger firm can offer global coverage, and bill itself as a one-stop shop for its clients. No need to jump around looking for different experts each time - just call up your regular salesperson and they’ll direct you as needed. This also has the advantage of smoothing the work out, since those companies not reliant on a single region or topic for work, but are always addressing what’s in highest demand.
The problem, however, is that you have a large number of employees with steady paychecks dependent on a constant flow of work. You have to keep searching for the next project to pay the bills and can’t afford too many down months or projects with high sales costs and low margins.
This isn’t a secret - every medium to large consultancy faces this - but it’s a challenge. It’s why only a few firms have been able to thrive in this industry and build up a brand that can sustain a large workforce. If those frictions didn’t exist, the total market would be larger than it is now, likely to the benefit of those firms as well as other new entrants.
The second approach is to make your business subscription-based rather than project-based. Your revenue becomes more predictable and you can work without the concerns about how to balance up and down months.
The downside is that subscription products have to appeal to a wide audience. As discussed in Part 1, political risk is a long-tail market. Some topics, like the US presidential election, will be read by everyone. Others are only appealing to one client. Subscription products are great for the popular questions, but the niche ones are only suited to single projects.
You may try to sell a client on an annual retainer, but will they agree to a large fee before knowing what their needs will be? With such an unpredictable field, the clients may wish to stick to an informal working arrangement, even with the higher sales costs that entails.
The third approach is to develop other revenue lines, like business intelligence, security services, or corporate advisory work. Political risk becomes one arrow in the quiver, rather than the only service line. That’s a perfectly reasonable decision, but it doesn’t help those that want to focus in this field.
How to Address This
Making the political risk market a better place requires us to do one or more of these three things:
Help new potential clients realize the benefits of political risk
Reduce sales costs for existing products
Create new product lines for political risk
The Two Lanterns Platform aims to help with each of these aspects of the market. Some of it is already available and other features will be rolled out as they are developed.
The goal is to build a platform that benefits consultants as well as clients. This market is full of frictions and inefficiencies, often because the work itself is not easily commodified (as Parts 1 and 2 of this series argue). But our belief is that it does have to have so many hurdles to working smoothly and easily.
For this industry to thrive, we have to help the people and companies in it to thrive. This platform won’t take away the need for hard work and intelligence to be successful, but it will, hopefully, make the business side of the job less of a headache.
Be in touch if you want to join this platform and be a part of helping it grow.