17.02.2016 : Matt Ensor

A garage that doesn’t fix cars?

Car owners know that diagnostic ability is important but value is only achieved when the car is fixed and guaranteed. The same goes for professional services firms.

The market for mechanics that expertly diagnose problems with your vehicle and then leave it to you to fix it yourself just hasn’t taken off. There’s an understanding among car and fleet owners that diagnostic ability is important, but value is only achieved when the car is fixed, guaranteed and any problems are followed up.

Clients expect large professional services firms to deliver them true value, and trusted consulting brands are built on the delivery of this. I am seeing a progressive change in clients’ expectations. Similar to the expectations corporate fleet managers have of their service suppliers, CEOs and CFOs are starting to demand full value from an integrated business performance consultant. Consultants must not only recommend changes but understand the business assets sufficiently to implement change and deliver the savings. In the same way I don’t have the time or skill to fix my car, many organisations no longer have the internal capacity to implement even the clearest recommendations.

To fill this growing market, professional services firms who have their origins in engineering design and consulting are expanding to provide services that cover the full asset lifecycle - from feasibility right through capital expenditure to operations and replacement. They know ’how things work‘ and can mix this seamlessly with financial modelling and analysis of business performance.

The purchase of URS by AECOM has seen the formation of a large integrated professional services firm of almost 100,000 employees – are we seeing now the 'Big 5'?

While we may see the decline of the 'Big 4' accounting firms as the integrated engineering and management consultants expand their brands and market share, it more likely that we’ll see them adjust to be part of what I am calling the 'New 12'.

With AECOM's nearest rival now being much smaller, I expect to see accelerated consolidation driven by successful consultancies such as Aurecon to create firms with over $10 billion of annual revenues. This ‘New12’ will provide full value to clients which translates into real cost savings. Giam Swiegers, the new Group CEO of Aurecon, has said he will "Grow the company even further around and beyond its excellent core design and engineering business."

For firms such as Beca who are already expanding their integrated offering in the prosperous Asia-Pacific region, the next five years will be transformational.tthew Ensor
About the Author

Matt Ensor

Business Director - Advisory Services

Matt Ensor is a leader in business strategy and an expert on the future of professional services. He’s focused on our ongoing growth in integrated business advisory, design and asset management services throughout the life-cycle of our clients’ assets.

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Matt Ensor · 17/02/2016 10:01:38 a.m.
Here's a recent relevant quote from Giam Swiegers (Global CE of Aurecon): "While engineers lagged the accountants in their recognition and response to technological disruption and globalisation, they are closing the gap faster, and will quickly overtake the number-crunchers."

How long is it before we see something similar to a Deloitte - Aurecon merger?

Matt Ensor · 3/07/2015 3:48:22 p.m.
Hi Matt, yes that overlap will increase to the point of some big chunky inter-sector professional services M&A in the coming years. My observation is that the Big 4 are targeting "digital" in priority for growth over "engineering". The recent launch of the 'PwC Digital' brand is a sign to the market of the growing breadth of PwC's services. One of the challenges I've observed at Beca, is that while we already have a substantial software development, information security, and data analytics business within the company, the strong single "Beca" brand means that even current clients assume we don't offer those services.

Matt Elgin · 3/07/2015 12:09:25 p.m.
Hi Matt, I agree and I think it will be interesting to see how the big 4 respond. I think you can draw some interesting parallels between the IT industry and engineering consulting. Accenture are probably the best long term example. In Australia at least, we are seeing PwC and Deloitte making strategic purchases of IT capability (particularly high value digital and user experience companies) and in the case of EY, key personnel from some of the largest global players. Don't be surprised if you see a strategic engineering player gobbled up to bolster their capability!

Matt Ensor · 10/06/2015 3:56:56 p.m.
Hi Simon - you make very important points, particularly about that balance between developing in-house expertise and giving continuity of work to an adviser. The answer will be different for each organisation, although there can be a compelling commercial advantage to 'outsource' the entire life-cycle. A professional services firm's business model is a trade-off between net profit margin on rates and the cost of winning work. Where the cost of winning goes to zero, then significantly lower rates can be possible. The challenge remains to make sure that there's a great way for asset information and IP to be shared between the client and consultant.

Simon Gough · 10/06/2015 10:59:28 a.m.
Hi Matt, Nice article.

I think the long term relationships are important. My analogy is when you want to do an IT project and the IT department send you a Business Analyst to document your 'requirements'. The problem is so often you have to spend more time teaching and explaining your business to them than on the requirements itself.

As a trusted adviser (like Beca and AIAL) then you already know their business and assets so you are already up to speed and can hit the ground running when the client needs you.

With my client hat on, the challenge becomes how do you maintain the right balance of workload for your adviser so that they are available and continue to know your business vs. creating in-house expertise vs. starting from scratch each time.

All the best,
Simon

PS: It's time we had a catch up :-)

Matt Ensor · 29/04/2015 9:39:52 a.m.
Hi Chi Ling, thanks for your comments. I of course love your continuation of the use of the car analogy! I agree that most car producers make their profit through the integration and assembly of components manufactured by others. They sustain profits because it's too complex for people to buy the bits themselves and build their own. I see a parallel with professional services - sustained profitability will come from firms being able to integrate what are in themselves commodity services and take on the risk and liability from that integration. Whether AECOM and the like decide to in-house (or automate) the commodity part of the services is a strategic choice.

Chi ling · 29/04/2015 1:39:00 a.m.
Hi guys, thanks for the article and comments.

Interesting comments. But I'd like to add....

1) the bigger they are the harder they fall.
2) all companies have to grow and they do this inorganically like pwc, if what you are saying is going into engineering or law, will most likely struggle as they have to buy the subject matter expertise, and integrate it into a non core business
3) meh... to imply that only the big 4 and engineers don't know how to strategise and account plan better.

I'd say broaden your services but keep it within your subject matter expertise. You can't know it all....else you will become a big global giant who doesn't do anything very well.

So based on your analogy....What I see are car makers, trying to mine metal, make tyres and run petrol stations. Some CFO will probably strategically plan that :p

Matt Ensor · 8/04/2015 5:28:24 p.m.
Hi Keith, I agree that large engineering consulting firms are under more threat than before - if they don't change. My observation has been that the barrier for formerly engineering consulting firms to offer strategic corporate services is that many don't have the strong personal trusted networks with the C-levels of client organisations that the Big4 do. Similarly the barrier for a PwC to expand through infrastructure asset management and O&M is being able to mitigate their risk through a depth of engineering expertise. So my view is that we may see an acceleration of consolidation of professional services firms where advisory/management consultancy firms merge with engineering consultancy firms, perhaps even to match the market scale of AECOM. This will bring C-Level relationships together with asset life-cycle services; I think we agree the bigger challenge will perhaps be 'merging' the business models and cultures!! To finish with the analogy, the future may be more "Lamborghini - Audi - VW - Skoda" type organisations, even if the risk is they go the way of Daimler-Chrysler.

Keith Dugdale · 8/04/2015 4:42:20 p.m.
It is indeed going to be an interesting ride for all professional services. Yes AECOM and URS will be huge, but their service offerings are somewhat similar. I see the consulting engineering firms if anything being under more threat than ever. For example for PwC to come second in the recent client choice awards in Infrastructure advisory category is a shift in their offerings. Also as they and others build full blown global legal practices they will challenge the established law firms. Generally speaking the big 4 are also ahead of most engineering firms when it comes to strategic thinking, account planning etc. Aurecon with Giam at the helm possibly, along with maybe ARUP and Worley Parsons / Advisian I see as best positioned strategically to challenge the big 4.

Certainly what we see is clients, especially the C-Suite wanting trusted advisors who can pit themselves in the client's shoes. To do this does not mean building a business that can solve every problem, but having people who have the mindset and skills to really understand where the client is trying to get to and then bring in trusted experts to provide answers. Those trusted experts however do not need to be employed by the same firm. Unfortunately we see a broadening of offerings but little change in behaviour. So to extend your analogy it is like Jeep merging in BMW so they have more vehicles to sell - but still employing smart but pushy forecourt salespeople.

Matt Ensor · 8/04/2015 11:23:15 a.m.
Hi PAT, thanks for the comment. To use the analogy, by showing that you make a client's car go faster (and charging for the only effort that takes), you will likely build a strong repeat business of that client and their network, and make it more difficult for competitors.
I look at it from the perspective of a sustainable business model for professional services, where profitability can be maintained even where there are low-cost competitors. As a client, I want value and so pricing does matter and the pressure we see on professional services rates and profit margins will continue. I advocate that to live comfortably with those margins long-term, professional services firms need to reduce their costs of winning each piece of work. For example, if both profit margins and cost of sales drop from 10% of revenue to 5% of revenue each, then the net effect is unchanged profitability.
Key to reducing cost of sales is through creating long-term relationships over a range of services for their client. This is helped if they can offer a "one-stop shop" throughout their clients' business cycles. I see firms like AECOM developing this integrated business model. They will likely be very successful and there is room in the market for numerous firms to use this approach.
I am interested in your thoughts on what I see a key challenge: where clients' procurement policies work against this by encouraging competition and choosing the cheapest complying tenderer?
P.S.: I often hear of consultants wanting to value-price improvement projects, where savings are shared and reward is not based on effort. I would be happy to compete with those consultants using the business model above!

Pat · 7/04/2015 6:56:52 p.m.
Good article, Matt but the challenge is getting the risk/reward balance acceptable to all parties...to continue with the analogy....what if the car is running Ok, but there is an opportunity to make it go faster, more efficientlyl how is the benefit shared?