A new reason to acquire

Big firms are growing faster than smaller ones.  They’re using their scale to deliver work across borders, their brand to cement relationships in uncertain times, and their financial muscle to keep prices low.  But because none of these things will deliver the level of growth they need, they’re also making acquisitions.  A plethora of small and even mid-sized firms have been snapped by the Big Four firms over the last couple of years and there’s no sign of a let-up.

What may change, though, is the reason for acquisition.  Most deals are justified on the grounds of capability and/or capacity.  Big firms constantly struggle to keep their greatest experts: the personal brand of the latter means that they can command high fee rates whether they work for a firm or for themselves.  As our recent client research demonstrated, they also face a challenge articulating the expertise that they do have in a world which assumes that big equals generalist and small, specialist.  Acquiring a boutique firm counters that attitude by bringing enough subject-matter experts and intellectual capital into the business to create a sustainable, visible critical mass in a particular field.

The bigger the acquisition, the more it also brings the benefit of brand – at least in theory.  ‘Aha’, clients are supposed to say, ‘if Firm A has acquired Firm B, and Firm B is famous in its field, then my perception of Firm A has changed: they must be serious about this field.’  But that only works while clients remember the brand of Firm B and, in any case, most clients are cynical about the acquirer’s motives: ‘Big firms buy niche firms to remove competitors,’ is a typical comment we hear.

PwC's approach to its PRTM acquisition is interesting because the firm has decided to continue using the PRTM name around the world.  Take Germany, for example.  Operational excellence accounts for a quarter of all consulting in the region, compared to a fifth across Europe as a whole.  As Germany was a significant part of PRTM’s European business it was essential to leverage the firm’s brand as well as its capability.  "This will continue for the foreseeable furture,’ says Martin Scholich who’s head of PwC’s advisory business in Germany.  It's a point echoed by PwC's Global Consulting Leader, Tony Poulter: "Clients recognise the strength of the two brands together, so it makes a lot of sense, and not just in Germany.

Acquiring a firm that’s big enough, at least conceptually, to have a recognised brand inevitably raises difficult questions about sub-brands, but, as clients increasingly look for specialist skills, I can’t believe that we won’t see other firms following PwC’s lead in this respect.

However, the next phase in the evolution of M&A in the consulting industry is likely to be even trickier.  One of the other things clients say is how frustrated they are at the extent to which the consulting business model hasn’t changed.  The pyramid model (which dates back to the 1960s if not before) means that every consulting team is a pyramid team. The size and shape of the pyramid may vary, but it still involves a combination of senior and junior people.  Increasingly, however, clients are saying that they want one or the other and to pay accordingly.  Splitting out the different elements of an existing pyramid would be difficult, but acquiring a firm which specialises in just one part of that pyramid could make a lot of sense.  Thus, a big generalist firm might buy an expert database or a virtual firm; a strategy firm might acquire a business focused on selling the time of junior, bright but inexperienced people.

Combine this move with sub-brands and you’ve got an acquisition strategy which could generate vastly more value for clients as well as for the consulting firms themselves.