EQ + KPMG = ?
EquaTerra, or “EQ” as they are commonly known in the trade, has formed part of the heartbeat of the sourcing industry over the last eight years. When three frustrated TPI consultants had finally despaired of their employer ever “getting” BPO, they snuck off to set up their own shop, coined a goofy name, convinced all their buddies to take a leap of blind faith with them, before stripping off at a Luau and shaking their booties at their unsuspecting followers. Yes, these guys were clearly on a path to building a multi-million dollar global advisory outfit that would be submerged into a highly respected auditor and management consultancy.
What was amazing, was the sheer speed with which EQ caught up their industry to become, initially, the leading advisor for HRO and F&A BPO engagements, while quietly developing its competency in ITO. From there, the firm had excited Glen Davidson so much, he publicly resigned from his Accenture job during an awards dinner acceptance speech to announce the establishment of “EquaTerra’s Public Sector” organization. From that moment on, the firm knew no bounds, establishing its software process evaluation tool, EquaSiis and taking over Morgan Chambers’ European advisory organization. They even reached the spectacular heights of doing some research with us!
Meanwhile, the leading management consultancies were still raking in so much coin selling shared services advisory engagements, it was easier for many of them to advise their clients against outsourcing, than actually help them through a sourcing evaluation process. Why risk your $20m-a-year engagement doing shared services improvement for a $1m project to look at outsourcing?
However, the boom in outsourcing had really taken hold by 2006, and the management consulting firms realized they were not equipped to deal with these complex, stressful operational deals (to quote the CEO of one of the boutiques, “This is real workman’s consulting”). AT Kearney, Deloitte, KPMG, PwC – to name a few – started hiring consultants in earnest to win outsourcing advisory work, hoping their superior brands would be enough to swat away these pesky boutiques and their fancy methodologies. “We’re focusing on the strategy side” said one management consulting partner, “And leaving the transactional work to the specialists”. However, the management consulting firms quickly were discovering they could rake in a cool $1m-$3m+ managing an outsourcing transaction cycle,whereas a “Phase 1” strat evaluation rarely netted them more than $500K. Plus, there was never much action with the governance work, as buyers were not resourcing for “change management” (more on this topic to follow soon).
So the management consultancies realized they need to poach the specialists from the boutiques, but were in for a rude awakening when they discovered how much the top talent at Alsbridge, EQ, Everest, TPI et al. were raking in. Plus, these guys were a unique breed – they actually liked the boutique culture, along with the specialism and IP their firms were generating. Bottom-line, these boutiques didn’t fit their compensation models or their cultures. Add to this the fact that “outsourcing” had always been something of a dirty word, and poorly understood by the other consulting practices. Hence, it was pretty clear, as long as five years’ ago, that the best route into the outsourcing game for some of the management consultants was to do the unthinkable and actually acquire one of these boutique firms.
So why didn’t any of them bite the bullet and snap-up up a boutique?
Quite simply, the top consulting brass have struggled with the “build versus buy” decision for the following reasons:
They have persisted with the MBA-model, which just doesn’t work with complex outsourcing deals. Several management consultancies have struggled to understand why they can’t stick a team of 26-year old MBAs onto their clients to crunch through a deal, while the boutiques have a cost structure that enables them to put experienced “workmen” with genuine deal experience, whose rates are often cheaper. And while you can get away with some juniors on ITO deals, with BPO you actually need experienced process experts – not kids.
Outsourcing is still something relatively new and foreign to their classical consulting practices. Outsourcing of IT, and more recently business processes, has grown rapidly over the last decade and many of the consultancies have been slow to adjust. Only now are they recognizing they need this competency, or risk getting edged-out of long-standing clients who are morphing into global outsourcing operating models.
The “hire the leader” tactic to build competency has largely failed. In years gone buy, if niche consultancies were overpriced, the large shops would simply hire the top one or two partners, safe in the knowledge their main delivery guys would follow. This just hasn’t worked too effectively with boutiques, as the top outsourcing advisory talent is well-paid and happy in their boutique environment. Plus the fact there are literally only a couple of dozen real “market makers” in the outsourcing advisory space worth hiring.
The boutiques have wanted too much money. Some of the boutiques today will be wishing they took offers on the table before the Recession, as the consolidating and commodotizing market has knocked down the market value considerably. However, with EQ now out of the frame, there are only a small handful remaining with sufficient scale and IP, and these firms will have renewed hope they can cash-out sometime soon.
So… has KPMG made a wise move purchasing EquaTerra, and how will this impact the industry?
*The outsourcing advisory business is all about talented people, experience and relationships. What has impressed me most about this deal is the fact that KPMG has created 17 new partners from the EQ organization. These people have stuck together for years, have considerable IP, experience and relationships, and are moving over to this new environment together.
*It would have been extremely messy if KPMG had tried to hire away these folks one-by-one. They have retained the top talent and have created careers for them within their organization.
*Quite simply, there is a really bad (and worsening) talent shortage in our industry, and KPMG has just snapped up a good portion of it in one full swoop.
*Now their challenge is to integrate EQ and create a culture the new partners and their teams can get used to. Retaining the core team is critical to the success of this venture. If they can do that well, they will likely have recouped their investment in a few short years, not to mention the new client relationships they can forge as a result of their extended competency.
*If KPMG can’t keep it’s new partners happy and there is a mass exodus, then this acquisition will have failed. Having hired a close-knit group, it does run that risk, and needs to work hard to integrate the EQ people. This merger is all about talent and IP – and they are intertwined.
*KPMG is also very excited about this and took a long, hard look before they took the plunge – it is a big, big deal to them and they have put a stake in the ground to show how serious they are about this business. The firm has clearly chosen this space as the one they want to lead, and should be applauded for making a bold move that none of their competitors have (so far) chosen.
What will be the competitive reaction and new market landscape?
The one “prize” boutique left on the market is TPI, even though it can hardly be called a boutique anymore, with its new-found alignment with Compass. The outsourcing market will have a solid year and its valuation should start to pick up, so I would surprised if any of the large consulting firms, such as Deloitte and PwC, makes a serious move this year.
My prediction for 2011: we now have 4 major players, and they’re no longer boutiques: Deloitte, KPMG, PwC and TPI. Providers will have to re-evaluate their influencer strategies, as more intricate and finessed relationships are required. The old “referral” model is pretty much dead. The remaining boutiques, namely Alsbridge and Everest, should be able to pick off more business, now they have less competition, and can take better advantage of their more flexible cost structures. Yes, we have a sea-change in the industry, but the buyer still has choice and we have better integration of the traditional consulting model and the boutique methodology.
Posted in : Business Process Outsourcing (BPO), Finance and Accounting, HR Outsourcing, IT Outsourcing / IT Services, Outsourcing Advisors, Procurement and Supply Chain, Sourcing Best Practises
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Phil – good article on EQ and KPMG..and one point that you might want to think about which you aluded to at the start of your article is the “Capative Shared Service versus Outsourcing”… as if you are doing the advisory work up front – like the case for change, and you are inside an organisation like KPMG – there is pressure to go with a “make” decision – as then you get follow on consulting work.. if you recommend “outsource”.. then where does KPMG make its money? One of the things I worry about…
Good thoughtful article – thanks for writing
“Providers will have to re-evaluate their influencer strategies”…
Not always, if providers influence end-users directly with repeatable success…
Lucky Balaraman
CEO
TMG, India
Providers of engineering, architectural and publishing services
http://TheMagnumGroup.net
/////////////////
Thoughtful and interesting piece. Question: what about the long term for TPI? With Compass, it now has what the management consultants want to get hold of – benchmarking data. Does TPI remain as is or is it being fattened up for sale by its owner? The feature of the sourcing consultancy landscape Phil hasn’t been able to cover here is how fragmented that market has become in Europe and probably elsewhere in the bigger outsourcing markets. So you have KPMG, Deloitte, PwC and TPI at the one end, and you have an awful lot of singleton independent consultants and much smaller boutiques (e.g. Robert Morgan’s and Jean-Louis Bravard’s Burnt Oak) at the other. And these solo consultants and boutiques have big corporate relationships. Even the biggest corporates are price sensitive, and in my experience they have found the EquaTerras and TPIs to be too pricey even for business critical projects. So, yes, they go to a McKinsey for strategy, but are they going to pay Big Four prices for the transaction advisory/execute piece? I wonder. That is partly why the singletons and boutiques are doing well: they have the experience you cover very well, as they are out of EquaTerra, TPI, etc., anyway, they have the relationships with CIOs and CPOs, and they are generally more affordable. BTW, what has become of Alsbridge and Everest in Europe?
This is the best – and most well thought-out – synopsis of the advisory business I’ve ever read. Thanks for putting together!
Alain
Hi Mary Sue,
You hit the nail on the head with the core issue affecting this business: “how do these firms make money once the client has outsourced”
Essentially, some clients are going to outsource regardless, and advisors who want to “stay” with them post-transaction need to sufficiently up their game to provide ongoing value to clients. The consulting opportunity for a client after outsourcing is HUGE:
**Think about the impact on their processes, people and technology;
**Think about the potential to introduce Cloud Computing;
**Think about the opportunity to help the client focus on core value, and less on administrivia;
**Think about the opportunity to develop smarter service integration strategies;
**Think about the chance to help them develop innovation roadmaps;
**Think about the ongoing support to help them develop effective social business models in a globally distributed environment.
Both EQ and TPI (as examples) have put investment and talent into developing governance and relationship management services for their clients. However, they’ve learned quite quickly that it’s hard to monetize these services without providing real “business support” beyond help around the contract itself. This is why the potential of integrating the traditional consulting world and the niche knowledge of the outsourcing boutique is potentially dynamite (if they can get the integration right)
PF
Great article, Phil. I appreciate the insights and historical perspective of the advisory business. Having had the pleasure of working with quite a few folks from EquaTerra over the years, I agree whole-heartedly that the experience they bring to the table is the real value. Nothing replaces the knowledge/perspective that comes with having lived through outsourcing deals from all sides (buyer, provider, advisor), which the folks I worked with all had. Thanks again and keep up the great work!
Mary Sue asks – Where do Advisory firms make their money post outsource decision?
Great Question – particularly if you have just bought one.
There are many opportunities for Advisors to add value to both service consumers and suppliers post deal.
– Ongoing deal governance needs to evolve.
– Service delivery needs to me more flexible than even the best contractual based relationships can provide for .
– Cloud means sourcing models are becoming more ‘open’ – not a case of either outsourcing or build but bits of both plus some enhanced technology and automation.
– Innovation…….don’t start this one again
So the opportunity is – whisper it – very much like good old fashioned change management consultancy
What may be difficult for the bigger players is these change management opportunities may well be more suited to the rising group of niche players coming through to take on the established specialists – especially beyond the traditional US / UK heartland of BPO advisory.
RB
Just wanted to chime in with Alain… this was fantastically well written piece. It’s a breath of fresh air to get this kind of detailed analysis.
One of your best ever posts, Phil. This made my day – such a good analysis of the situation,
Stephen
You couldn’t have nailed this one any better. A big sea change is happening with the consulting business and this is a bold move by KPMG to exploit the expertise needed to take advantage of it.
Am sure the EQ people made out pretty well too 🙂
James
Some really good comments in terms of the article as well as the responses. Each of us has our pet favorites but any wise person will make use of all data points in order to glean the current realities. From my workings with Equaterra & KPMG, they have held my respect on both a quantitative and qualitative base. Whereas others treat analysis as a commodity and in a changing market place this creates a weak foundation for expert advisory. The issue is that you can have an office in a foreign location but that does not mean is has a keen sense on the local pulse… especially when hindered by Western command and control operations.
So… where does this leave advisory??? I believe that the consumers need to start demanding more from those that are providing insight and guidance. Maybe be willing to engage qualified boutique organizations that don’t simply measure what is happening but can engage at both a tactical and strategic level. At the end of the day buyers have a business to run and do so in a sound and responsible fashion.
I have a slightly different take on 2 aspects of this article:
1) I dont think advisory firms make the margins from putting together outsourcing deals as they used to be able to. The buyers are much more sophisticated than they used to be, and the suppliers too are better at demonstrating greater value to prospective buyers directly. The role of the advisor is more limited, especially in the current round of contract renewals which form a fair chunk of new outsourcing work. I think it is too simplistic to believe the advisory firms want a bigger chunk of the growing outsourcing pie, and therefore, the justification for this and potentially other mergers.
2) I dont believe advisors in this space can afford to be either only outsourcing or only shared service advisors as this article and some comments seem to suggest. In fact advisory in this space is evolving to help clients think of the wholistic service portfolio approach of how to best deliver services. It is about helping the client develop and manage the operating and delivery model that is best for them, and use shared services and outsourcing as elements of that model, not just one of the other. So, good advisors will continue to play a role whether clients outsource or build shared services, and is happening in many cases, do both.
It will be interesting to see if KPMG can leverage this model to Asia Pacific. To date it has been a very difficult market for Outsourcing advisors. Several have entered, most have left. Even Australia one of the most mature ITO markets globally has struggled to sustain providers.
If they can get the model correct, KPMG may have a chance.
@AV: completely agree on both points. The boutiques are overly-focused on the transaction (even though some of them claim not to be, but that’s how they make more of their money). The consultants need to offer the blended expertise of all sourcing areas across shared services, captive, outsourced and inhouse operations. Plus they need the finessed client skills of the classical consultants blended with the hard-nosed operational knowledge of the outsourcing experts.
The big problem is that as the contractual process, (the price benchmarks, the Tc and Cs etc) becomes increasingly standardized, and the skills of the buyers’ procurement and governance staff increase, the fees the advisors can command go progressively down. For example, why bother using an advisor when outsourcing a very established outsourced service such as payroll, or even ADM? All the providers have standard service cards now – it’s more a case of the buyer having decent negotiation skills…
PF
@PF
Exactly. In fact, I think the demand for advisors as this space evolves will continue to blend with the more traditional performance improvement, and business effectiveness consulting, with shared services, outsourcing, insourcing, being tools in the consulting toolkit. I think we will continue to see the big 4 build strategy and performance improvement skills, and the traditional strat firms get better at using the sourcing toolkits. I believe there is a lot more to come in this space.
[…] week’s outsourcing advisory bombshell wedding between KPMG and EquaTerra may well prove to be a turning point in the way buyers are serviced in […]
Well summarized article Phil, I have always wondered why I don’t see Big Four Firms on many of the outsourcing deals in my space. This proposes at least one motive for them to not push for outsourcing services and connected advisory services. I’ll give you another one they might not have though of: How many large enterprise businesses want extremely well networked big four leadership and board members to know how much and what they are sending offshore? If I innovate with partners that IS my secret sauce and I don’t want to share how and who is doing it with me, so the answer is, I think, not many. It may be interesting for clients to use small and private boutiques for that exact reason, the old adage: if a tree falls in the forest does it make a sound?
Well summarized article Phil, I have always wondered why I don’t see Big Four Firms on many of the outsourcing deals in my space. This proposes at least one motive for them to not push for outsourcing services and connected advisory services. I’ll give you another one they might not have though of: How many large enterprise businesses want extremely well networked big four leadership and board members to know how much and what they are sending offshore? If I innovate with partners that IS my secret sauce and I don’t want to share how and who is doing it with me, so the answer is, I think, not many. It may be interesting for clients to use small and private boutiques for that exact reason, the old adage: if a tree falls in the forest does it make a sound?
Phil – great article and dialogue on this key topic! As I look at this I wonder when the Advisors will realize that the next goldmine is for them to also take on Change Management programs to help their client drive the huge change opportunities outsourcing offers to them. This is so under valued and missed by many. As this marketplace continues to evolve with increasing speed, those that can execute on the many improvement initiatives teed up by outsourcers and keep pace with the continued advancement in innovation and maturity will find not just cost savings but better ability to compete and grow!
[…] became the only “Big 5″ management consultant to buy a boutique sourcing advisor… The outsourcing advisory business is all about talented people, experience and […]
[…] team from 10 people to 65 professionals including myself. That’s when we acquired EquaTerra (see post). We brought in about 250 consulting professionals around the world in 2008 and since then we’ve […]
[…] team from 10 people to 65 professionals including myself. That’s when we acquired EquaTerra (see post). We brought in about 250 consulting professionals around the world in 2008 and since then we’ve […]
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