All or something: A different approach to M&A in the consulting industry?

We’ve written elsewhere on this blog about the extent to which clients are disaggregating traditional consulting services (strategy, operational improvement, etc.) and paying more attention to the more basic building block—the capabilities a firm has. But could this approach provide a different way of thinking about investment and inorganic growth in the consulting industry? 

I think there are four reasons why it’s worth considering: 

In the first place, the shift to a more granular level of buying services is largely motivated by clients’ search for innovative solutions, a point that comes through again and again when we discuss with them what they’re looking for from a consulting firm. Existing services won’t—their reasoning goes—provide an answer to the new, more complex challenges and opportunities they’re facing. Innovation therefore depends on bringing together different capabilities: We move to a world in which the solution isn’t to hire some strategy consultants, but to design a consulting project that weaves together different capabilities and perspectives. This effectively lowers the minimum size threshold for acquisitions and/or a strategy that involves taking small groups of people, with their IP, out of larger firms. 

Second, most consulting firms struggle to innovate. That’s not in the sense that they don’t have good ideas—they do and are applying them with their clients on a daily basis—but because they find it hard to convert work for a specific client into scalable products that can be sold to others. Ironically, a solution that’s customised to the needs of one client feels generic to the market. If we need proof of this, we only need to look at how new, multidisciplinary services launched by consulting firms over the last few years have been “seeded” by an acquisition (Fjord at Accenture, Seren at EY, Quantum Black at McKinsey). 

A third reason is that, if the basic building block of a transaction is smaller and more specialised, then this opens up a wealth of new options and possibilities. Much acquisition activity swims in the same gene pool: Everyone is seeking firms of a similar size and breadth. Although the amount of work around closing smaller deals is relatively high compared to larger ones, their smaller scale means that the post-deal operational and cultural integration should be much easier. 

Finally, breaking a consulting business down into its component capabilities creates an opportunity for both sides—the buyer and the seller—to maximise value. One of the irritatingly consistent rules of acquisitions in the professional services space, our experience has taught us, is that the most attractive targets are almost always those hardest to buy. They’re successful, so why should they even consider selling? (And, surely, if they wait a bit, they’ll be even more successful and so will be able to sell for even more in the future.) Equally, most of those eager to sell or even willing to discuss the possibility of doing so with a potential acquirer have problems that have either hit them or are coming down the road towards them. Being able to carve out a part of a firm, even a relatively small one, means that the acquirer only pays for what it wants and leaves the seller to sell other assets to other firms where the fit is better.

As always in this space, there isn’t a single hard-and-fast rule that will work for everyone; but entertaining the idea that less could in fact be more seems sensible. A case of one minus one equalling three, perhaps.