New kids, old heads on the block

Over the past couple of years, we’ve been actively tracking M&A amongst consulting firms – and there’s been plenty to track.
In the US alone, we estimate there’s been an average of 5.5 deals every month for the last 2+ years. In some deals, the aim is to acquire a specific technical capability – digital being particularly popular right now. In others, it’s to build scale and extend reach, fuelled by globalisation.

But it’s not just consulting firms making these acquisitions right now, and our US briefing identified three categories of ‘new kids’: private equity, insurance brokers, and advertising/marketing services firms. Together they accounted for about 10% of deals by number, much more so in volume terms. Publicis Groupe’s acquisition of Sapient to create an integrated digital capability that will be able to support transformation of client businesses globally: valued at $3.7bn, this deal was a statement of serious intent.

Given all the challenges facing consulting firms (strong growth, yes, but what about the underlying business model?), why would any sane organisation want to buy one, let alone invest massive amounts in the process?

For advertising and marketing companies, that’s not too hard a question to answer: digital. Consulting specialists in digital marketing and technology are like gold dust at the moment and WPP, one of the busiest buyers, views the application of technology to marketing as an essential USP in helping clients create, manage and deliver content over all online channels with real-time precision more easily. Firms that offer a consulting capability alongside design and marketing skills are particularly valuable for helping get the message (and the benefits) across to clients quickly and easily.

For the insurance brokers, the story is about HR consulting and benefits management. Insurance broking is an increasingly competitive market, often with low margin business, so there is real appeal in adding a consulting component because it means a more diverse revenue stream coupled with the potential to build relationships earlier in the buying process and offer more of a one-stop-shop solution for clients.

Amongst the private equity firms, the attraction of consulting firms appears primarily financial, driven by the relatively high margins consulting firms can command and their cash-rich business model. Mostly PE firms appear to be interested in consultancies with a clear niche focus. Two examples are architectural and engineering specialists Vidaris & LPI, and UK-based asset and wealth management consultancy Alpha FMC.

So, what are we to make of this trend?

We think the new kids are here to stay and that, if anything, the volume of deals driven by non-consulting firms will grow, putting traditional consulting firms (and buyers of other firms) under pressure. The new entrants are after consulting margins (which, for all consultants’ complaints, look healthy compared to other sectors), access to a different and often broader client base (especially attractive if you’re a software business), as well as a significant source of revenue growth in its own right (particularly if the firm being acquired specialises in a popular area such as cyber or digital) – none of which are likely to disappear in the short-term. But will these deals succeed? The most obvious issue is the one most likely to be overlooked – cultural fit. Almost every analysis of M&A failure highlights this issue – and it’s particularly relevant in an industry such as consulting where a firm is only as good as its people. Non-consulting firms will need to invest significant effort in winning staff over if the deal benefits are to be realised. Otherwise consulting will remain a small, marginal part of the business and the new kids, well, they’ll never move beyond being just that.