The flightless Adélie penguin travels thousands of miles across the frozen tundra of Antarctica. Band-tailed Godwits must fly nonstop for days across landless oceans. And the salmon swim and swim against the current, traversing rapids, climbing waterfalls and dodging the open mouths of hungry bears.
When I graduated in biology, I was desperate to become a documentary filmmaker. These days I have to make do with the work of Sir David Attenborough. Those hours of nature documentaries, however, gave me an unlikely (some might say tenuous) transition to this month’s topic.
Fear of grouping
All industries undergoing consolidation fear that their customers will experience perilous migrations and disruptions. The consulting industry is no different.
A survey of Money Marketing last year, readers found that 86% feared consolidation would lead to better outcomes for consumers.
I think there is a short-term component and a long-term component to these concerns. In the short term, it’s about whether customers will transition to an acquirer smoothly and in a way that meets the high standards of service they expect and deserve. In the longer term, we wonder if consolidation offers the best possible relationship and financial planning results.
I am not a financial adviser. Nor am I an expert in running a consulting firm. But I’ve worked in industries that have undergone significant consolidation, from the beverage industry to fintechs being taken over by big banks.
A survey of Money Marketing last year, readers found that 86% feared consolidation would lead to better outcomes for consumers
The thing is, consolidation has been a recurring theme in financial advisory for some time, and while the volume of business fluctuates up and down, in any market where there are so many small players, we should expect what he continues.
Successful consolidation
Fortunately, I believe the industry can continue to consolidate and still deliver brilliant results to its clients. That is, whether to learn lessons from where consolidation has worked well and hasn’t worked well, both within the industry and elsewhere.
I’m really encouraged to see early progress in the consulting industry, where consolidation is evolving from an exercise in financial engineering to something that uses scale to actually improve the lives of clients.
The biggest caveats for me are that consolidation can crush entrepreneurship and, even more worryingly, reduce customer focus.
So here are three things I think financial advice can do to make sure consolidation works for clients.
- Emphasize values and fit
Number one is always culture.
Buyers and sellers must share a vision of the future and be passionate about the same mission. It is extremely important that the cultures of two companies are aligned so that customers remain at the center of the conversation. It’s critical that the people working for the buyer wake up every day solving important customer issues, and that the company has a vision that you and your team are passionate about.
Ultimately, an acquirer needs your team and customers to stick around, and the seller needs to trust that their team and customers will be taken care of.
How can this happen if the two parties do not share the same values?
Part of the value of financial advice is that advisors and their clients have a very long-term relationship, often spanning generations.
Plan for successful mergers and acquisitions over the same lifespan as that customer relationship. They resist the temptation to plan around shareholders’ timelines. Understanding how a buyer’s shareholders think and what they want is critical to your future and your customers.
I’m really encouraged to see early progress in the consulting industry, where consolidation is evolving from an exercise in financial engineering to something that uses scale to actually improve the lives of clients.
I think the company will be even more valuable the moment a shareholder wants out of it, because the underlying value is determined by championing customers more than anything else.
- Make sure you really own the customer
Managing the short-term pain of consolidation is much easier if you truly own the customer and are confident that their service will not change under a new business structure.
One way to do this is to operate your own platform. Not only does this give you a legal relationship with the client; most importantly, it gives you more control over their experience.
It’s not just about your platform, however. How you manage your investments can also reduce disruption, with model portfolios being much easier for an acquirer to match than bespoke portfolios. Reducing short-term pains like these will help customers enter the next phase of a company’s life feeling as positive as its employees.
I believe consolidation, with the right approach and mindset, can work in the interests of consumers, providing long-term resilience and economies of scale.
Perhaps more than in any other industry, the value of a consulting business is derived from its clients. That’s why I think valuation multiples going forward will be determined more by the longevity of a client portfolio than by a multiple of revenue or earnings.
All parties should therefore have a mutual interest in avoiding arduous migrations “à la Attenborough” and maintaining high standards of care.
Ruth Handcock is CEO of Octopus Investments
