In this third and final part of the “Consulting Merger Game” I would like to give a little bit more background on what might happen and why. To be honest, it took me so long to write this, because of the sheer diversity of opinions and models applicable out there. Hence I decided to keep this post brief and rather indicate sources for further reading.
Two years ago, during a strategy project in the chemicals sector, I came across A.T. Kearney’s Industry Consolidation Curve. The model’s rational is that every industry will, as time goes, undergo a certain degree of consolidation, until only two players remain. It also caters for the possibility of a following reduction of consolidation or something like a double dip before the highest level is reached. Some of the professionals I spoke to over the last weeks have similar ideas. They remembered the Big4 selling of bits of their consulting units (such as KPMG’s unit became Bearning Point) and favor the idea of a continuous back and forth. I however, think there is a merit in ATK’s theory and found some evidence in management consulting’s cost structure.
As John Gapper (FT) states:
“The firms being squeezed are the midsized consultants that lack scale but have higher costs than specialist boutiques.”
He continues and proposes that a global consulting company would need annual revenues of at least USD 2 billion in order to pay partners and conduct investments. In 2011 this hurdle was only reached by McKinsey, BCG and Bain, according to Kennedy Consulting Research and Advisory. In details these numbers are made up by partner salaries of USD 1.2 M to USD 1.5 M, and roughly USD 500 K per partner for development of personnel and product offerings. After all, ATK, Berger and Booz did not make the numbers. (FT)
As Gapper concludes, only the big players, and due to a different cost structure, the smaller boutiques will survive and even profit from the squeeze-out of the mid-sized firms. I expect, that as consultants will earn less (due to a shift of supply and demand, refer to 5 Forces) talent will eventually join the customer companies at a higher rate, thus increasing pressure on the industry even more.
Before I conclude this blog entry, I want to briefly come back to the Big4 and tech conglomerates (IBM, Accenture, etc.). Some boutiques seem to comfort themselves with the thought that clients will soon be confused with the offering of big firms, because they can never be sure of the quality they receive and who to talk to. I can definitely relate to this, since consulting is and most likely will continue to be a people business, with trust as a huge factor in the relationship between client and consultant. In terms of transactions, Gapper adds to these considerations by assuming that some old partners of the firms would be willing to sell out to the tech firms, while young partners are not willing to sacrifice their status and become glorified sales people (FT). This did not work too well in the past. A beautiful “protagonist” angle on the topic, to paraphrase my strategy professor. So, maybe the large players will be a rather temporary appearance.
Finally, even when faced with all these thoughts, many players in consulting do not seem to see any ongoing change neither the need to transform their own business model. Christensen summarizes this in his article and compares it to the change nobody wanted to see in the steel industry, which posted record profits just before completely collapsing. After Christensen made the case, I understand why consultants would argue in favor of being too big, established and after all too agile to be disrupted. Only time will show which steps would have softened the potential blow. For those of you interested Christensen’s article offers guidance for self-disruption, in light of one of his older works.
RichStrategy 