Business Planning For Mediators


by Robert W. Simmons MA, MA, MBA

Introduction

The fact that thousands of businesses fail each year,(2) and that most small business fail within their first few years(3) should serve as a warning for mediators currently in business or thinking about it. And though quite revealing, these facts do not tell the whole story. Imagine the number of under performing firms or firms barely hanging on, the so-called "living dead."

Avoiding the premature death or chronic under-performance of your mediation business requires the exercise of the managerial arts, of which perhaps the singly most valuable is planning. The benefits of planning, which include improved commitment to company goals and objectives and better monitoring of financial performance, are more easily attained if each planning cycle results in a written business plan or the revision and updating of the existing plan.(4)

I do not intend to offer another treatise on the writing of business plans, there is plenty of good information available elsewhere.(5) Instead, I thought it would be more useful to point out some areas where planning can substantially and immediately benefit your mediation practice.

Goals

Before you do anything else, answer this question: what is the purpose, the goal, of my mediation business? Of course, there are as many answers as there are mediators, but based upon my experience, some of the more common goals are:

  • Mediation is a full time business, the primary income generator.
  • Mediation is a part-time activity that supplements income.
  • Mediation is a secondary service, such as when marketed as part of a law practice.
  • Mediation is part of a governmental of community service.
  • Mediation is a means to further other business objectives.

Whether your goal is one, none, or some combination of the above, the way you organize, operate, and market your business follows directly from your goals and objectives. For example, it shouldn't come as surprise when you don't make a lot of money if your goal, unconscious or otherwise, is to operate the business as a subsidized community service enterprise.

Services

Once your goals have been defined you need to take stock of the "capital" available to transform them into reality. In addition to the material capital you bring to the business (cash, equipment, etc.) you also bring a significant amount of capital in the form of your experiences, temperament, and talents. Thus, an important component of planning is matching your background to your services. This process of personal assessment should generate two lists: your service mix, the services you plan to market, and your firm's distinctive competencies, its unique skill-set.

A "disconnect" between your distinctive competencies and service mix must on some level effect the quality of your work and thereby degrade the firm's financial performance. Your level of enthusiasm for the work you do is readily apparent to prospects and is an effective marketing tool. Therefore, it's important not to confuse the ability to offer a service with the desirability of offering that service.

This leads us to the issue of service specialization. As far as I am concerned, concentrating on mediation, and probably a few types of mediation at that, offers a competitive advantage. I recently reviewed a number of marketing brochures from mediators in my area (Colorado) and was struck by the extent to which they promoted a broad service-mix. In addition to mediation, the mix included coaching, conciliation, arbitration, mediation training, Myers-Briggs, paralegal services, team building, meeting and retreat facilitation, negotiation workshops, parenting coordination, and management consulting. Consider:

If you're the only mediator for miles around you could probably use the jack-of-all-trades approach (marketing a wide range of services.) But in areas where there are lots of mediators, many of them offering similar services, it might make sense to differentiate yourself from your competitors through service specialization.

You are probably more likely to use a neurosurgeon for brain surgery than a general practitioner? Why? For one thing you might assume that a specialist is better trained and experienced to handle the case. (Do specialist fees have anything to do with this?) The point here is that our preconceptions about the relationships between cost, training, and experience may not always be valid, but they nonetheless influence our purchase decisions. I suggest that what is applicable to physicians is also applicable to mediators.

Organizational structure

Businesses are organized in a variety of ways, including sole proprietorships, partnerships, and corporations. Despite the popularity of sole proprietorships, they account for 75% of U.S. businesses,(6) I prefer some form of corporate structure. Corporations have a number of advantages, including a degree of legal protection. Corporations do, however, have their downside, for example, "double taxation" and the maintenance of corporate records. In addition, the legal protection afforded by corporation, the "corporate veil," is not absolute.

Perhaps many mediators and other consultants opt for a non-corporate structure because of the size of the business and a desire to keep the operation as simple as possible. These are certainly legitimate considerations. And comparing the cost of liability insurance between physicians and mediators at the present time, one could certainly conclude that the risk of being sued is far less for mediators. But remember that suits can come from a variety of directions other than clients, including current and former employees, directors, advisors, vendors, and landlords. My personal preference is to keep my personal assets as far away from potential litigants as possible.

As concern about professional liability grows I believe the corporate structure will become more popular among mediators. Whatever structure you choose, remember that each form has legal and tax implications, so this is an area where good legal and financial advice is worth the money spent.

Management

The quality of a company's management is probably the most critical element in its success. As Mancuso points out, "92% of all business failures are a direct result of poor management."(7) And one means of promoting good management is to know, in advance, as much as possible about your key personnel. I recommend that all officers, directors, partners, etc. complete a Directors and Officers questionnaire. A good D&O questionnaire elicits information concerning such things as:

  • Past or present criminal or civil proceedings
  • Financial status
  • Employment history
  • Significant ownership in other concerns

This is not mere paranoia as even people you have known for years may have marital, financial, or legal difficulties that can cause trouble down the road. In addition, the company's ability to obtain financing, or conduct everyday business, such as opening checking accounts, may be adversely effected by the credit history of others.

Management of a sole proprietorship is complicated by the fact that one individual is responsible for all aspects of company operations from accounting to marketing. And since few people are expert in all functional areas, you may benefit from some outside expertise.

One of the ways to beef-up your management team is to put together an "advisory board" composed of outside individuals willing to offer their advice. Such individuals could include legal, accounting, and marketing professionals. Note, however, that these individuals typically are advisors only, not a formal Board of Directors.

Financing

The amount of financing required to operate your business can be estimated in a number of ways. One method is to prepare a set of financial projections, from start-up through several years of operation (3 to 5 years out is not unusual.) The difference between your projected revenues and expenses represents the amount of financing required at any given point. When putting your projections together remember one of the "rules" of capital acquisition; your income will usually be less than projected and your expenses greater.

Another method is to compile a list of your expenses for the following 12 months. The total of these expenses should be sufficient to carry the business for the year assuming no revenue, and represents the necessary financing for the period. The idea, of course, is to reach break-even in your first year. But even when you reach the break-even point you may not be making the kind of money you would like. As Leonard points out: "for the first two or three years you will probably not be able to make a living."(8)

While the first method is probably the more accurate, since it takes into consideration both revenues and expenses, the second approach makes a virtue of safety. (This is one of those points where your risk tolerance becomes an important consideration.) In theory, I prefer method one. But in my experience things never go as planned. Therefore, I recommend that for the first year you finance the business on a zero revenue basis, and make adjustments as time goes on.

Once you determine your financing requirements you must obtain the capital. There are seven basic sources of funding:

Angels. Private parties who invest their own capital.

Banks. Loans or lines of credit not secured by the government.

Cross-pollination: Using revenue from one business to finance another.

Family. Loans, investments, or guarantees from family members.

Government. Includes Small Business Administration-backed loans.

Personal assets. Borrowing against or liquidating personal assets.

Venture capital. Unrelated, outside, institutional investors.

The more you can utilize your own funds the less expensive the capital generally is. Moreover, the vast majority of start-ups cannot generate sufficient returns to interest angels or venture capital firms.(9) As a result, you will probably be relying on your own credit, or that of your family, to get going.

Marketing

There are three basic steps in formulating your marketing program:

  • "finding out what consumers want,
  • then planning and developing a product or service that will satisfy those wants,
  • and then determining the best way to price, promote, and distribute that product or service."(10)

Finding out what consumers want entails conducting secondary and/or primary market research. Secondary research utilizes materials generally available to the public, such as articles and books. Primary research is typically original, proprietary, information developed for a specific client.

While considerable information on mediation is available its usefulness is limited because it is not specific to your situation. Specific information on your market and clients requires primary research. This information includes such things as the number of mediators in your service area, the types of services they offer, how much they charge, and their gross income. One of the best vehicles for obtaining primary "market intelligence" is to join a mediation trade group. You would be amazed how much information you can obtain from your colleagues. Some of the information you should obtain from your clients includes demographics, how the client found you, their satisfaction with your services, and suggested new services or areas of improvement.

The second major step in the development of your marketing plan can be further subdivided. Product development involves such planning points as mediation training and plans for new services. Determining the price of your services means analyzing such things as your fixed and variable costs, income objectives, and the competition. Distribution means getting the service in the hands of the client. You will need to plan for such items as where mediations will be conducted and geographic service boundaries.

Promotion refers to activities, such as advertising, "used to inform and persuade the market regarding a company's products."(11) One practice many mediators include under the heading of promotion is "educating the market," that is, promoting mediation to the general public, not to specific target markets.(12) Some go so far as to consider education a duty: "The problem is that millions of people do not even know that mediation exists. You have an obligation to educate the world about this new and wonderful way of resolving disputes."(13)

From the point of view of the individual mediation firm I believe there are two basic problems associated with educating the market:

A market is composed of people "with needs to satisfy, money to spend, and willingness to spend it."(14) So even though I may be "educated" about mediation, if at this time I lack the need, money, or willingness to utilize it, I am not part of the mediation market. Therefore, educated individuals do not, in and of themselves, constitute a market.

Educating the market is inefficient and thereby increases your marketing costs by consuming time and resources that could be directed towards your own target market.

Does this mean you shouldn't promote mediation to the public? Not at all. Public education ultimately benefits all mediators (the old saw about a rising tide raising all boats applies here.) But while you're waiting for the tide to come in you need to eat.

In Conclusion

Darwin was right on the mark:

"As the species of the same genus usually have much similarity in habits and constitution, and always in structure, the struggle will generally be more severe between them, if they come into competition with each other, than between the species of distinct genera."(15)

Mediation businesses belong to the same genus and competition between its "species," its firms, is severe. What traits promote the survival of some firms and the lack thereof the failure of others? I believe one such trait is planning.

The most efficient tool of planning is the business plan. It should be formulated before your doors open and updated regularly. And since even small details can have huge consequences, care should be given to planning all aspects of your company's operations.

Most importantly, planning gives you a Darwinian edge: it makes your business proactive rather than reactive, which can be the difference in your own contest of survival of the fittest.


REFERENCES

Darwin, Charles. The Origin of Species by Means of Natural Selection, or, The Preservation of Favored Races in the Struggle for Life. New York: Random House, Inc., 1993.

Leonard, Sam. Mediation: The Book. A Step-by-Step Guide for Dispute Resolvers. Evanston: Evanston Publishing, Inc., 1994.

Mancuso, Joseph R. How to Write a Winning Business Plan. Englewood Cliffs: Prentice-Hall, Inc., 1985.

Raising Venture Capital. 3rd printing. New York: Deloitte Haskins & Sells, 1984.

Santon, William J. Fundamentals of Marketing. 7th ed., New York: McGraw-Hill Book

Company, 1984.

Statistical Abstract of the United States 1997. 117th ed., U.S. Department of Commerce, Bureau

of the Census, October 1997.

Thompson, Arthur A., Jr. and Strickland, A.J., III. Strategy Formulation and Implementation:

Tasks of the General Manager. Revised edition. Plano: Business Publications, Inc.,

1983.

2 Approximately 71,000 in 1995. Statistical Abstract of the United States 1997, 117th ed., (U.S. Department of Commerce, Bureau of the Census, (October 1997), p. 547.

3 Approximately 55% of small businesses fail within five years. Joseph R. Mancuso, How to Write a Winning Business Plan, (Englewood Cliffs: Prentice-Hall, Inc., 1985), p. 104.

4 A business plan serves as "a guideline for what entrepreneurial and competitive approaches will be taken and as a roadmap for getting the organization where it wants to go and achieving what it wants to become." Arthur A. Thompson, Jr. and A.J. Strickland, III, Strategy Formulation and Implementation: Tasks of the General Manager, revised edition, (Plano: Business Publications, Inc., 1983), p. 16.

5 Several sources of information on business plan preparation are found in Mancuso, pp. 73-75.

6 Mancuso, p. 105.

7 Mancuso, p. 104.

8 Sam Leonard, Mediation: The Book. A Step-by-Step Guide for Dispute Resolvers, (Evanston: Evanston Publishing, Inc., 1994), p. 145.

9 "Common return on investment (ROI) objectives range from 10 times their investment in five years for start-up companies to as low as 5 times their investment in five years for more mature (less risky) companies." Raising Venture Capital, 3rd printing, (New York: Deloitte Haskins & Sells, 1984), p. 56.

10 William J. Stanton, Fundamentals of Marketing, 7th ed., (New York: McGraw-Hill Book Company, 1984), p 7.

11 Stanton, p. 38.

12 "A target market is a group of customers at whom the organization specifically intends to aim its marketing effort." Stanton, p. 74.

13 Leonard, p. 161.

14 Stanton, p. 74.

15 Charles Darwin, The Origin of Species by Means of Natural Selection, or, The Preservation of Favored Races in the Struggle for Life, (New York: Random House, Inc., 1993), p. 104.

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