Acquisitions of consulting firms skyrocketed last year, particularly in North America and with many of the deals done by technology consultancies and Big Four firms, according to a new report.
Consulting firm acquisitions grew to 384 in 2015 and 300 in 2016, compared to 143 in 2014, with 63 percent of the firms that made the acquisitions in 2015 based in North America. Approximately one-fifth of the acquisitions were made by Big Four firms, although the percentage declined slightly last year from 23 percent in 2015 to 20 percent in 2016.
Last year, technology firms made a third of all acquisitions, but this year their share has climbed to 41 percent. The most significant shift has been the reduction in deals carried out by niche firms—typically small firms acquiring other small firms—which has declined from 15 percent of the total in 2015, to only 3 percent in 2016.
While 56 percent of clients globally said they benefit from these consulting firm M&A deals, 62 percent indicated their access to expertise can get lost in the new organization.
The report, from Source Global Research, is based on a survey of nearly 3,000 users and buyers of consulting services. The report found that while clients understand the reasons why consulting firms often buy other firms, they believe they also lose expertise, either because good people leave the acquired firm, there are fewer specialist firms to choose from, or the acquiring firm is a generalist, into which niche skills are absorbed.
“It’s true that clients aren’t uniformly or overwhelmingly positive,” said Source Global Research director Fiona Czerniawska in a statement. “Even those who view these deals benignly are quick to agree that they have a price, usually in terms of the loss of choice and/or access to specialist expertise. For most, though, especially those who see this type of activity as the norm, the advantages just about outweigh the problems.”
CFOs and heads of finance indicated they understand the thinking behind the deals, and 52 percent said their companies benefited from the deal. The report found this group was more optimistic about getting continued access as clients to good people at the consulting firms. It is important for firms to keep their clients informed about the changes.
Both KPMG and Deloitte participated in the study. “Some firms take a very monolithic approach: they just broadcast information and expect the front lines and account managers to relay this to clients,” said Stephanie Schnabel, a principal and corporate development lead at KPMG. “But we try to make the communication two-way. Yes, we want to explain the value of a deal from a client’s point of view, but we also want to hear from them about what they need and discuss how this deal could benefit them.”
“At a macro-economic level, the number of deals may be slowing at the moment, partly because there have been some big acquisitions, as well as many smaller ones, and these take time to digest,” says Deloitte principal Sid Abrams. “However, another factor is that, especially in the digital space, valuations are high—typically two or three times revenue—yet the economic environment feels more uncertain. Sellers still believe that they're worth more at the moment, and any adjustment to that will take time to work its way through the system.”
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