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Will private equity firms re-shape the consulting industry?Tuesday 23rd May, 2017By Fiona Czerniawska. One of the big questions in consulting at the moment is where the industry starts and ends. Digital transformation, big data & analytics, and cybersecurity—the three biggest sources of growth for consulting firms right now—all challenge the boundaries of what we’ve conventionally called consulting. Software specialists, data scientists, and even close circuit TV companies all have a role to play in consulting if recent acquisitions by consulting firms are anything to go by. But all of this activity—I’d argue—has been aimed at assimilating new services into the consulting model, not at changing it. The largest consulting firms are creating ecosystems in which they decide who’s in and who’s out based on their vision of the market, as they see it evolving from a consulting-centric viewpoint. If we want to see an alternative ecosystem, we need to look at private equity. Historically seen as only occasional investors in the consulting industry, PE firms have increasingly been investing in the broader professional services space. Carlyle Group may have decided to sell its remaining share in Booz Allen Hamilton, but it still has a 51% stake in PA Consulting Group. And it counts several financial advisory-related businesses (such as Duff and Phelps) in its portfolio, alongside INC Research (which does clinical trials and regulatory consulting services); KrolLDiscovery (an e-discovery business working for law firms, government agencies, and corporations); and DBRS, a credit-rating agency. Bain Capital has a stake in Genpact (a provider of business process management and technology services); Apax in TRADER Corp. (which provides automotive advertising solutions); and General Atlantic in Mu-sigma (a data and analytics business)—to name just a few examples.
The ecosystem from the PE viewpoint is defined in terms of future money flows rather than historical relationships. Seen through that lens, professional services divide into two main categories, both of which have long-term revenue streams: regulatory-related businesses—most of which are focused on financial advisory work or legal services and make money on the back of the world’s apparently unending process of regulatory intervention and change; and managed services of various kinds. Consulting services haven’t been viewed as an attractive investment because they don’t generate annuity income. Except, of course, this isn’t an ecosystem, because most PE firms haven’t looked for synergies between their portfolio businesses. But what would happen if they did? They’d be able to combine the lessons they’d learned in the automation and digitisation of the legal services market with their expertise in process redesign, software, and managed services. If PE firms were to start investing more seriously in the consulting market, you would get a fairly heady brew. Consulting firms—while they recognise the growing pressure on them to automate—may find themselves overtaken by a new breed of PE-funded competitors who see the world very differently.
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Paul Hobcraft replied on Permalink
Ecosystem creation in Consulting firms
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