Transformation in the Consulting Industry

4. Achieving Growth Ambitions

4. Achieving Growth Ambitions

As client demands evolve and technological innovation creates new lines of work and requirement for expertise, there has been a definite shift in the growth agenda of many consultancy business to acquire or invest in new teams and services.

Acquiring market expertise

For the universal consultancies this has included branching out into other professional services sectors, notably with the ‘Big 4’s’ push into the legal market. Others, such as Accenture - with the launch of Accenture Interactive and acquisitions including that of Droga5 and agency Karmarama - have made a strong play into the communications and marketing industry.

M&A activity, clearly, is an effective tactic for growing or achieving scale within an emerging subject area or discipline for which there is growing client demand and an absence of internal skills or available talent. Overall, according to Equitec Advisors’ most recent M&A in the consulting industry report, M&A deal volumes have increased 5% year on year, and this is showing no signs of abating in the near future.

This is particularly true in the technological sphere with, according to the same Equitec report, many of the leading management consultants investing heavily to increase digital capability.

This trend may continue in line with consultants’ rationalisation of services and as small to mid-size firms seek to achieve the scale necessary to effectively compete for bigger work and procurement-led consulting contracts.

Online or international?

Bolt-on acquisitions of smaller and / or specialist practices can often be a low risk way for businesses to enter a new or growing area but also, importantly, a new territory.

Technology has in many ways made the world a smaller place, with digital connectivity facilitating international communications and economic exchange. The online retail world and social media, for example, have blurred jurisdictional boundaries – resulting in significant regulatory challenges.

For some businesses, including in the professional services industry, this has changed the requirements for entering into a new geographical market with there being far less of an imperative to operate a fully-fledged physical office – beyond a basic marketing or client liaison function. With so much work being completed remotely or on the move, businesses can be lean and efficient with a single centralised location for operations delivered by a flexible and internationally mobile team.

However, technology has not negated the importance of the human factor in the consulting industry and, in a globalised economy, maintaining person to person interaction and building trust is critical for consulting businesses.

There may be the potential to utilise contract workers to fulfil a specialist need but, just as with launching into new market / service areas, there is a point at which there is little or no cost-benefit to this model.

Further, to a large extent, clients expect consultants to be on-location to deliver on projects and, critically, to build rapport. In most circumstances this means that some level of permanent local workspace will be required, which has a range of implications including regarding the tax position of the business. Meanwhile, for the strategy or change management projects which consultants are often engaged on, there is a need to have the people that can advise on cultural-specific issues that will differ from location to location.

While some professional services may, then, be thinking of scaling back on international expansion plans (in terms of on-the-ground capabilities) there is likely to be a continuation of international M&A activity in consulting which, according to Equitec, saw cross-border deals account for 24% of all M&A deals in 2017. North America led the way in overall deal volumes (415, up 5%. 16% of which were cross border), but Europe saw the largest increase in volumes (322, up 14%.31% of which were cross border).

Of course, the other side of the M&A coin is that of the selling firm, with M&A remaining a tactical option for business owners seeking an exit from a venture which they have built up as far as they can. In particular, for entrepreneur-owners, unlocking a portion of the value that they have created through the business is a key consideration. Importantly, though, there are now many more options on the table than simply selling to a larger firm - which often runs counter to many entrepreneurs ideals for succession.

Scale vs agility

While a business’s growth strategy may be driven by a need to achieve scale, that is not always the case.

Scale is of course an imperative for certain types of assignments, particularly at the top end of the market, but there are key benefits to maintaining a smaller but organically growing practice – not least the agility that comes from not being part of a larger machine, with clients benefiting from the experience of a smaller senior-led team versus a commoditised service system delivered by a large and often disparate junior team.

The key for consulting businesses is to have a robust understanding of the types of clients and work that will fuel growth, and develop an effective long-term strategy to achieve it.

Five tax questions when opening an international office

Operating in a new jurisdiction may be a necessity to win a new client, enter a new market or deliver on an expanded project. However, businesses need to understand the associated costs of the international engagement. Looking specifically at tax, key considerations include:

  1. Are the activities sufficient to create a local tax filing obligation?
  2. Are withholding taxes applicable and how do these impact the commercial position?
  3. If required, what will be the corporate operating structure i.e. local subsidiary or creation of a branch and how does this impact the overall effective tax rate?
  4. How will employment taxes for staff on-location be managed, including maximising available reliefs, equalisation policy?
  5. What is the value chain of operations and what is the tax strategy over the agreed local profits?

Tax is of course only part of the decision-making process. Other key considerations include: insurance, banking arrangements, the domestic rules on employment, liability exposure, and local regulation, to name but a few. 

Up next: 05 Realising value

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