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George & Bell Perspectives.

Better off Bigger?

Better off Bigger?

July 9, 2015. Category: Actuarial, Consulting, Merger. No Comments on Better off Bigger?.
Written by Greg Heise.

With apologies to the 1985 John Cusack film “Better Off Dead”, this past week’s announced “merger of equals” between Willis Group and Towers Watson brings to mind a question I have been thinking about a lot over the past couple of years. Are we better off in bigger firms?

The answer to that question very much depends on who the “we” is.  In the public company model, there are three stakeholders at play: the client, the employee, and the shareholder. Depending on which group you fall into, your view of these types of mergers can be very different. My point of view is that of a consultant or the client that requires consulting services. “Consulting” services are typically just one of a number of lines of business in a big firm. For the most part, these services are advisory in nature and delivered by experts in return for an hourly rate; they typically include actuarial work on health & welfare and pension plans, plan design, small plan administration, and investment consulting (in the strictest definition, not the expanded role of “implemented” investment consulting). The outlay of capital required to provide these services is not significant; it comes down to a modest investment in systems and infrastructure supporting the expertise of a group of professionals.

So, from this “consulting” view, who exactly is better off?

Let’s start with the shareholders. Senior management at these firms are there to deliver value to their shareholders in the form of growth and profit. This has always struck me as somewhat odd. Most shareholders are external, non-employees and non-clients. They have very little skin in the game; they can buy shares on Monday and sell them on Tuesday. As a result, delivering value to shareholders seems to be quite the short term goal. This result tends to manifest itself in a greater focus on the budgeting process, forecasting, analyses of monthly and quarterly results vs. budgets, etc. Reading the press release on the “WTW” deal, you will see phrases like “enhanced growth profile”, “global growth company”, “profitable growth”, “substantial efficiencies”, and the old standby, “cost synergies”.  [Seriously, can’t we retire that word already?] Yes, I acknowledge that these phrases are interwoven with thoughts of “integrated solutions” and the “value proposition” for clients, “development opportunities” for employees, etc. In recent years, you can look to the mergers of Aon Hewitt, Morneau Shepell, and Towers Watson and likely see the same language in the same context.  It makes me wonder if the press release for the acquisition of William M. Mercer by Marsh & McLennan in 1959 used these same words …

I don’t intend to get into the specific pros and cons of these mergers from a shareholder’s point of view.  Instead, the Wall Street pundits can carry out their analyses and we can assume that these companies’ management teams are doing what they are paid to do: deliver value to shareholders.  Are shareholders better off – next week, next month, or next year?  Only time will tell. If shareholders aren’t happy with their returns, they can sell and exit the relationship quite easily. The same can’t be said for, in my view, the two more important stakeholders in the consulting relationship: the clients and the employees in the consulting lines of business of the firms serving these clients.

For clients who require consulting services, most expect that their needs should come first.  They expect that their consultant will provide services and design their practice effectively so that those needs are satisfied.  The challenge comes when the consultant is also being asked to deliver value to shareholders by delivering growth and profit.  Essentially, two masters need to be served: the client and the shareholder.  Which master gets priority likely varies significantly from firm to firm, and individual consultant to consultant.  But there is certainly an underlying conflict there that needs to be managed. That other line of business that the firm wants the consultant to introduce to the client, that change in team make-up to improve profitability, that contemplated change in location of resources for providing the client deliverables, that renegotiation of a contract because it isn’t profitable enough – these are just some of choices that need to be made.  Some decisions might truly be in the best interests of the client; others might not. But figuring out what work you need to “sell” to your clients to satisfy growth and profit targets that have been set for you is a very slippery slope. Client needs can often take a backseat to shareholder needs, at least at the higher strategic level in the firm. I trust that most consultants still do what they think is best for their clients, but sometimes that means fighting with one hand tied behind your back.

What about the advantages that a big, multi-national firm might provide to their client?  You will often hear benefits such as global capabilities, more investment in technology and systems, more research and development generating ideas for clients to hear, etc.  Granted, for some clients, these benefits will truly make a difference. But for many clients, especially smaller or regionally-focused organizations, these benefits won’t be realized or, in some cases, they don’t even exist. Some points that further illustrate the discussion are:

  • Research and development: Clients should expect better access to research and innovative ideas with bigger consulting firms. Unfortunately, in my experience, it is the individual consultants who are the primary developers of the ideas delivered to clients. It really comes down to the quality of the individual consultant and I have seen great ideas come from consultants at smaller firms over my career.
  • Corporate function efficiencies: Does the size of bigger firms allow greater efficiencies regarding corporate functions? Do they free up the consultant to spend more time on client-related issues? The answer is likely no. I have found that larger firms tend to have more time-consuming processes in place because of the very fact that they are large and can’t necessarily take the more efficient routes that smaller firms can enjoy. Just ask a consultant at a larger firm, especially one in a leadership role, how many internal meetings they attend and whether these meetings meaningfully impact the services delivered to clients; you might be surprised by the answer.
  • Multiple lines of business: Another point you often hear is the advantages for a client of having multiple lines of business with the same firm. An example of this often noted is actuarial services and administration services provided by the same firm resulting in advantages on the efficiencies of the valuation data process. Having worked in both environments, where data comes from internal versus external sources, I actually have found that external sources are just as efficient, in some cases more so. For example, if an actuary doesn’t get her data in time or it isn’t accurate or complete, there is less accountability with an internal versus external source. And, interestingly, the client likely won’t end up knowing about it as the actuary is unlikely to go and complain to the client about the data received from her own firm!

And now to the stakeholder that often gets the short end of the stick as the battle rages between “serve the shareholders or serve the clients”: the employee.  What makes “bigger” better for an employee of one of these mega firms? We see in the WTW press release “development opportunities”.  OK, granted, if a consultant has aspirations for senior management, and giving up focusing most of her time on “consulting”, then perhaps there is a more business-focused role for her within the swelling ranks of directors, vice-presidents, executives, strategists, business developers, etc. at these mega-firms.  But what if a consultant just wants to be … a consultant? And that does not mean that they don’t want to grow – they just want to grow in the knowledge, skills, relationships that take up a consultant’s day. Personally, I know that this growth is very rewarding. Do the big firms see it that way? Or do they instead place more value on that consultant who wants to be more business or management-focused? While I can’t speak for all firms, my sense is that the consultant who steadily builds up skills and relationships over the years will be rewarded less than the person who moves into the more business-focused roles. In some cases, these large firms don’t place enough value on the client-consultant relationship. My feeling is that consultants finding themselves in these positions will begin to disengage. And then the relationship with the client is affected (strike up another negative for the client).

It is important to acknowledge that my view is obviously biased. I admit, of my 22 years, my first 15 were spent at a smaller private company. That said, the roles I have had throughout my career at the very least qualify me to have an informed opinion. And I won’t begin to profess that I can sum up the pros and cons of working for a mega firm vs. a non-public, national, regional or boutique shop in a short article. I completely understand the attraction of these mega-firms – I have good friends and colleagues there who I know are intelligent consultants for whom I have a lot of respect. Many of us graduated from cooperative education programs and wanted a summer job with the big firm, a firm where you could brag about the name and people knew it instantly and were impressed. Many got those jobs and stayed, never contemplating what it would be like to work in a different sort of practice. Top that off with personality traits that many of us in our profession share, one such trait typically being a risk-averse nature, and you end up with consultants starting and ending their careers with big firms. Some believe that there is less career risk at a larger firm. I think that view is debatable depending on what your goals are.

I consider myself lucky that there were no jobs at the “big” firms when I graduated university and I was hired by a smaller, regional firm. That experience formed the “biggest” part of the consultant that I am today.

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