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July 14, 2008

Consolidating targets and the impact on consultants

I read with interest a recent story about Dow Chemicals buying rival petrochemical producer Rohm and Haas. A typical big deal at the big end of the market, with the closing figure being around $18 billion USD with players like Warren Buffet and the Kuwait sovereign wealth fund taking an active part.

This comes ont eh back of other large scale consolidations in the Petrochemical industry after SABIC, the Saudi petrochemicals group, successfully acquired GE Plastics in a move worth a reported $11 billion USD.

For me, in my area and industries - this is big news. And it starts the race for the consulting works that will be required to
  • Determine and implement the leading practices across both companies
  • Integration of information technology platforms
  •  Pushing processes into the acquired company, or reviewing their practices and driving them into the new parent company
And all sorts of other newly merged stuff. Nothing out of the ordinary, good revenue generator for strategy consultants, and a good way to get a surprise boost to the bottom line.

Unfortunately...its only a temporary opportunity.

The Case of UK Utilities

Prior to privatization the British utilities market was dominated by major government managed institutions for water electricity and Gas. When this was the case the number of Economic Decision makers was significantly low. Or if there were many, then most of them had relatively low levels of decision authority.

More to the point they were bureaucrats with a lot of power to drive the fortunes of private industry companies; and the level of innovation, expansion and improvement was driven in large part by their ability to focus on many issues at one time.

Since privatization into its current regulated state, the British utilities sector is a hive of activity for consulting firms. While there are a few who have made good inroads, nobody dominates the sector totally, and there is always room for new players to make a space for themselves.

There are many reasons of course, the regulated framework being one of the major ones, but also because there were now dozens of economic decision makers where before there were only a few. There was also different budgets, income streams, and spending generally was able to become a lot more freer.

The View from Down Under

In my country of Australia we saw the same dynamic, but in reverse. The Aussie economy is one that, to this day, is driven chiefly by resources prices and in particular any resources related to the mining and processing sectors.

Prior to the 21st century there were five major major players in this space, with a number of mid sized players and a bunch of small outfits. The companies I continually had in my sights included:
  • BHP 
  • Anglo American
  • North Ltd
  • Western Mining 
Today, this list is now represented by three major players. BHP (Now BHP Billiton), Anglo American, and RIO TINTO. And of these three Anglo American has started on what appears to be a downward slide, or a move into other economies aside from Australia. (No clue actually, I'm not in that sector right now)

So instead of a range of decision makers across a number of Australian states and with a number of different drivers behind them, the nation is now managed by two sets of decision makers. And right now BHP is vying to purchase RIO TINTO, reducing the entry points for consultants even further.

The Upshot of all this...

Mergers, acquisitions and the reduction of economic buyers seems to be the norm now in all but a very few market sectors, even the technology space. This does bode well for short term revenue generation for a few strategy type consultancies, but it does not bode well for consultancies in the long term.

As economic decision maker numbers dwindle, the war for attention will intensify and the skills of opening a door will mean the difference between survival and failure for many consultancies.

Big statement, why? Because people go to trusted sources. Period. If you have been working for the acquired company. And you are not on the radar of the acquiring company, then you have to work to get in their field of vision, meanwhile - their suppliers are well aware of this dynamic and are doing whatever they can to shore up their own positions.

There will always be a robust secondary market for consulting services. By this I mean the lower level $30 - 50k bite sized projects where volume = profitability. But these are not the contracts that dreams are made of are they? And they generally take more efforts to deliver, more efforts to win, and often with less profit margins in them.

There are ways through this, there are useful strategies that you can employ to reduce the likelihood of losing ground, but it will take an extra dose of vigilance and effort. We'll look at some of these in later posts.

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