Thursday, July 5, 2012

Insight Into Dun & Bradstreet's Switching Costs

As Pat Dorsey argued in his book about competitive advantages, one of the strongest advantages a firm can have is high switching costs. Recently, Dun & Bradstreet (DNB) was discussed on this site as a potentially cheap company with what appears to be a strong moat. Thanks to a find by Taylor, we can get a pretty good look at what perhaps the company's largest (at over 1% of DNB's revenue) customer sees when it ponders switching from Dun & Bradstreet.

This government report shows just how ingrained Dun & Bradstreet has become within the government's own data systems. As per the report:

"GSA identified approximately 80 data systems that contained DUNS information extracted from CCR and would therefore have to be modified in the event of a transition to a new numbering system."

As a result, DNB has been able to charge the government quite a bit more than competitors have bid:

"Dun & Bradstreet effectively has a monopoly that has contributed to higher costs."

Part of the challenge is also that DNB's database has network effects that make it the most comprehensive source of information:

"DUNS contracts have been sole-source awards because of the FAR requirement that all government contractors obtain a DUNS number, and because they have been unable to identify an acceptable alternative."

But even though DNB charges high prices thanks to its market position, and the government knows it, it can't just pull the plug:

"A key factor in deciding whether to replace DUNS numbers in government data systems is the cost of switching. In the event of a change, GSA and dozens of other agencies would have to modify their data systems, replace all DUNS-related data in those systems, and update policies and procedures that refer to DUNS numbers. GSA officials have said switching costs could be substantial."

It doesn't look like this customer is happy! Nevertheless, it appears to be stuck with DNB for at least a few more years. Dun & Bradstreet would probably be wise to find more ways to provide additional value to this and its other customers (i.e. widen its moat) during this period.

You can read the full report here.

Disclosure: No position

No comments: