What is the optimal balance between permanent and contractor staff in a professional services business?

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A significant challenge for any management team of a professional services firm is pursuing the most efficient way to grow the business. A company will look to expand by growing current clients and securing new business, but new business projects need balancing against available resources. Having a large percentage of consultants sitting on the ‘bench’ is a drain on overheads and impacts profitability. Thus the question is raised: What is the optimal balance between permanent and contractor staff to help drive growth for a professional services firm?

Certainly, there is a definite trend in the use of more contractors in the industry. This follows the increasing number of consultants who are operating as freelancers, taking more responsibility for their own careers. This trend has had a noticeable knock on effect within the buyer community where there is now less emphasis on the need for permanent staff.

In the past our valuation models would have assessed a firm operating with a larger number of contractors negatively, impacting on the value of a firm. However as industry sentiment has changed, our valuation model has evolved to reflect a more positive view of contractors. In recent times we’ve witnessed firms made up of 75 per cent of contractors realize full value when sold and whilst some buyers are still very negative, the scales are tipping in favour of a balanced employment model.

Of course this still doesn’t help us as we ask what the appropriate split is between permanent and contractor staff. In reality there is no right or wrong answer to this, it is a subjective decision belonging to those in charge, but there are definitely certain roles which should be held by permanent staff if value is to be optimized.

A professional services firm absolutely must own its business development, client relationship management, intellectual property development and practice management. If all of these are firmly held within permanent roles in the organisation then remaining work can be delegated either to contractors or other permanent staff. In the case of contractors, a firm – and clients – can benefit from access to a broader range of skills and the cost flexibility they offer.

Naturally, it’s still important to bring in the right kind of contractor and that’s not just to do with the skill set. Making sure that a contractor is not only skilled enough but also a good cultural fit for the organisation is of paramount importance.

As far as the industry is concerned we’re moving away from the notion of just two camps of permanent or contractor. Now we see organizations categorize operations in a wide array depending on how consultant compensation is structured, something which we believe is healthy for the future of professional services firms.

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Consulting Sector M&A Deals for week beginning 16th February

businessman doing handstand on the beachInfosys Ltd. (India) signed a definitive agreement to acquire Panaya, Inc. (Israel)
Deal Size: Unspecified Industry: IT consulting Date: February 2015
Infosys, a global leader in consulting, technology and next generation services, announced a definitive agreement to fully acquire Panaya, Inc., a leading provider of automation technology for large scale enterprise software management, in cash, for an enterprise value of USD 200 million. This acquisition reflects Infosys’ execution of its Renew and New strategy to enhance the competitiveness and productivity of current service lines by leveraging automation, innovation and artificial intelligence. Panaya’s CloudQuality™ suite uniquely positions Infosys to bring automation to several of its service lines via an agile SaaS model, and helps mitigate risk, reduce costs and shorten time to market for clients. Commenting on the acquisition, Dr. Vishal Sikka, CEO and Managing Director of Infosys said, “The acquisition of Panaya is a key step in renewing and differentiating our service lines. This will help amplify the potential of our people, freeing us from the drudgery of many repetitive tasks, so we may focus more on the important, strategic challenges faced by our clients. At the same time, Panaya’s proven technology helps dramatically simplify the costs and complexities faced by businesses in managing their enterprise application landscapes.” Infosys Limited provides business consulting, technology, engineering, and outsourcing services worldwide. Panaya Ltd. provides cloud-based quality management solutions for enterprise applications worldwide. Its solutions include change impact simulation, automated code remediation, collaborative test management and test-execution, and ALM acceleration.

Jannsen & Company SC (USA) acquired TechXpress Consulting, LLC (USA)
Deal Size: Unspecified Industry: IT consulting Date: February 2015
Pewaukee-based Jannsen + Company has acquired Oconomowoc-based information technology solution provider TechXpress Consulting LLC for an undisclosed price. The acquisition, which closed Feb. 1, will provide more experience and availability, leading to more efficient service, Jannsen said. Jannsen offers information technology services, tax and accounting services and payroll processing. TechXpress, which was founded in 2005, has closed its office and moved its two employees and its network and support operations into Jannsen’s offices. Jannsen now has 35 employees. Brice Smith, who founded and owned TechXpress, will stay on with Jannsen in a leadership role. “I will remain as a resource to ensure continuity for all clients,” Smith said. “With the additional resources provided by Jannsen + Company, our clients are positioned for future growth and success.” This is Jannsen’s third acquisition in the past two-and-a-half years. “This is an exciting time,” said Timothy Beine, CPA, executive vice president of Jannsen. “The acquisition of TechXpress is a perfect fit for our company values and vision for growth. We are excited to welcome Brice and his clients to the Jannsen family.” TechXpress Consulting, LLC provides information technology solutions and services. Jannsen + Company, S.C. is a certified public accounting and business advisory firm.

The Customer Experience Group (USA) acquired ECCA Consulting (Singapore)
Deal Size: Unspecified Industry: Marketing consulting Date: February 2015
CX Group LLC, a customer experience software and services leader announced the acquisition of ECCA Consulting, a regional consultancy based out of Singapore offering customer experience advisory services. ECCA Consulting is a rapidly growing company, guiding large and medium sized enterprises to build more customer centric organisations and develop customer experience as a competitive advantage. ECCA serves customers across South East Asia and in China. The CX Group already has an active user base in Asia of its platform CXQuest that provides a framework for companies to improve customer experience plus to analyse in real time customer experience metrics and through the acquisition aims to scale its ability to better serve its customers with outsourcing and consulting services. “We are very happy about joining the CX Group and look forward to take a broader, combined solution spectrum to our client base and to the Asian market. The CXQuest platform is a great way to harness customer Experience best practices and will help us accelerate our growth even further in Asia” said Eng Hock Chong, Managing Director of ECCA Consulting and now VP Asia Pacific for the CX Group. Said Paul Chirdaris, COO of CX Group, “ECCA has a proven track record in delivering great results for its customers across Asia. The appetite for higher standard of customer service is growing rapidly. We are very proud to have them join the CX Group and are happy that we can service our existing and new customer with a stronger team and a wider range of services ”. The Customer Experience Group helps businesses develop knowledge, attentiveness and speed in their communication with customers to reduce customer churn and increase customer referrals. The company is the developer of the award winning Customer Experience solution platform CXQuest that provides a framework and metrics and serves customers globally. ECCA Consulting is a specialised consulting firm that enables businesses to develop tangible competitive advantages through a better customer experience. Continue reading

Three years to multiply the value of your firm

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The eventual price that a buyer agrees to pay for your firm is based on many factors. But ultimately it boils down to how hungry they are to get the benefits of future profits they see being generated from the merging of the two companies and their mutual strengths. A significant difference between consulting firms compared to most non-services businesses is that the assets are not physical plant or machinery, but people, client relationships and intellectual property. On the face of it, these assets are risky. If someone buys your firm today, could all the value in it evaporate tomorrow?

Achieving a valuation that financially exceeds what you could earn by continuing to run your business independently is predicated on a number of factors, but convincing the buyer that future profit growth is sustainable is critical. If you provide a credible, robust profit forecast three years into the future, and are then able to also show the additional profits that will come from synergies over the same period of time, then premium valuations are achievable.

So having said that most of the value of a consulting firm is based on future profit streams, why are the three years leading up to a sale critical to securing a rewarding valuation and deal structure?

Take a look at these four profit growth profiles leading up to a buyer negotiation. Imagine you are the buyer of your firm and ask which case generates the most belief in the future in the mind of the buyer?

Past and future forecast scenarios

It’s interesting to note that nearly every firm we talk to forecasts that they have a great three years ahead, no matter what the past looks like! This is why buyers look at forecasts of potential acquisitions initially with extreme skepticism. What the seller wants to do is quickly eliminate any negative thoughts about financial instability and move the focus onto the future profits that will come from the synergies of the two companies. But the weaker the past performance is, the more difficult this is to achieve.

So let’s put this into real world context. For argument’s sake, let’s assume your firm is a good fit for a buyer, it is generating, say, $7.5m EBITDA (net profit) and for illustrative purposes we assume a mid-point valuation of five times EBITDA (the average multiple in the consulting sector). It doesn’t matter whether your EBITDA is $5m or $20m, the scenarios below illustrate the possible impact of buyer confidence in the future. Don’t read into the actual multiple figures or percentages as absolute or accurate at all, they are just there to show the dramatic variations that can occur.

Scenario 1 may get you 5 x $7.5m = $37.5m with 40% up front and the rest in a 3 year earn-out based on performance

Scenario 2 may get you 1 x $7.5m = $7.5m with nothing up front and all in a 3 year earn-out based on performance

Scenario 3 may get you 3 x $7.5m = $22.5m with 30% up front the rest in a 3 year earn-out based on performance

Scenario 4 may get you 8 x $7.5m = $60m with 60% up front and the rest in a 2 year earn-out based on just remaining in the business

As these examples illustrate, there is a lot to play for. If planning to sell your business in the future, significant value enhancement is possible if you build in the operational characteristics that will assure growth in revenue, profits and equity value. And by showing a potential buyer steady growth in the business over the past three years, it gives them much more confidence that they will realize value from synergies if they were to buy your business.

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Consulting Sector M&A Deals for week beginning 9th February

businessman doing handstand on the beachMiraMed Global Services, Inc. (USA) acquired On Call Consulting, LLC (USA)
Deal Size: Unspecified Industry: Healthcare consulting Date: February 2015
MiraMed Global Services, LLC (MiraMed), headquartered in Jackson, Michigan, is pleased to announce the acquisition of On Call Consulting, LLC (OCC). OCC is the latest addition to join the family of MiraMed Global Services. OCC is a leader in health information management (HIM) consulting, offering services in clinical documentation improvements, oncology data management, coding, recruiting and case management. MiraMed, a full-service healthcare business process outsourcing (BPO) provider, believes this strategic move will result in synergy for both companies. Tony Mira, MiraMed President and CEO explains, “MiraMed stands as the premier global provider of BPO solutions to healthcare organisations nationwide. MiraMed strives to provide a broad portfolio of customisable solutions, uncover and capitalise on hidden financial opportunities, improve productivity and ultimately increase value for our clients. The addition of On Call Consulting allows us to offer our clients even greater efficiencies.” This sentiment is shared by Ron Manzani, MBA, President of On Call Consulting. Manzani continues, “In these challenging times of decreased financial and staffing resources, the increased need for healthcare providers to collect and submit accurate data to ensure they receive total and correct reimbursement is more vital than ever. OCC is excited to be part of the MiraMed family. This is a great opportunity that will allow us to better service our clients and build a stronger company together.” MiraMed Global Services, Inc. provides business process outsourcing solutions to healthcare organisations in the United States. On Call Consulting, Inc. provides onsite and remote coding professionals to address temporary vacancies, backlogs, vacation coverage, and seasonal volume increases in the healthcare sector. It also offers oncology data management solutions, which include onsite and remote certified tumor registrars; and clinical documentation specialists, trauma registrars, and case management consultants.

Exova Group plc (UK) acquired Environmental Evaluation Limited (UK)
Deal Size: Unspecified Industry: Environmental consulting Date: February 2015
Exova Group plc, the global testing, calibration and advisory services provider, has acquired UK-based environmental testing specialist Environmental Evaluation Limited (EEL). EEL is recognised as a leader in asbestos management services for the nuclear decommissioning industry. The company also provides specialist asbestos testing and inspection to a range of private and public sector customers, along with stack emissions testing, occupational hygiene advisory services and health & safety training. EEL is based in Oldham and employs 83 staff. The deal extends Exova’s geographical reach and capabilities within the UK, as well as opening up growth opportunities in new market segments. Demand for environmental testing has increased as organisations aim to meet increasingly stringent national and international regulations. Exova is now well positioned to capitalise on this demand through its comprehensive range of services. Ian El-Mokadem, chief executive officer of Exova, said: “Acquiring Environmental Evaluation Limited not only brings new, scalable capabilities to our existing environmental testing business, but also furthers Exova’s ambition to provide a wider range of services to existing customers and to access new markets.” Environmental Evaluation Limited provides consulting and monitoring services in Europe. Exova Group Limited provides laboratory based testing, calibration, and related advisory services worldwide.

eCargo Enterprise Limited (Hong Kong) to acquire Amblique Pty Ltd. (Australia)
Deal Size: $4.6 million Industry: Marketing consulting Date: February 2015
eCargo Holdings Limited has announced that its wholly owned subsidiary, eCargo Enterprise Limited, has entered into a Share Purchase Agreement to acquire 100 percent of Australian e-commerce consultancy Amblique Pty Limited, providing an expanded service and solution offering to eCargo’s existing retail and fashion merchants. Founded in 1999, Amblique is one of Australia’s most prominent e-commerce service providers of omnichannel strategies, retail practice and site optimisation services to help retailers and brand owners sell more. We are hugely excited about the opportunities this new partnership will enable for our customers.” said Justus Wilde, founder of Amblique. “E-commerce success is driven by customer experience. We are now able to combine our Demandware storefront solution with logistics and marketplace automation on a global scale. Every merchant is chasing growth and we expect the China e-commerce market to be five times larger than the summation of the next five markets by 2020. Our China entry solution will make this opportunity accessible and provide local expertise and resources.” Amblique Pty Ltd., a digital agency, provides online strategy, e-commerce (EMS), and Web development/design solutions to advertising, media, finance, insurance, distribution, technology/software, medical, education, and non-profit industries. eCargo Enterprise Limited provides ecommerce technologies. Continue reading

Six key principles for a value-driving compensation structure

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As owners or founders of consultancies, how we pay people through salaries and bonuses, as well as how we dilute our equity ownership, can have a dramatic effect on the results produced.

If we get it wrong by making compensation overly complicated, it could not only drive the wrong behaviours but could also be extremely difficult to unwind when the time comes to sell.

By structuring compensation in the right way, it’s possible to accelerate growth by having everyone pulling in the same direction. It will also help the business retain its best people and ultimately will make the company more attractive to acquirers because of the culture and drive within the business.

These are the six key principles to adopt to create the motivational engine that will help put the business into overdrive and create realizable equity value:

1. At the very top, the CEO, MD, or Managing Partner should be focussed entirely on shareholder value. Partnerships often use profit per partner but this is an inferior measure and reward structure, because profit growth does not always equate to equity value growth

2. At very senior levels there should also be an equity element to the compensation package linked to long-term equity value creation. Beyond founder shareholders or partners, who will have equity by default for starting the firm and investing ‘sweat equity’, best practice is to link the issuing of equity to the growth in overall equity value

As total equity value increases there should be a policy that shares the increase in equity value with those senior staff who help build it. These are likely to be those senior people who drive gross margin in their parts of the firm

3. Don’t fear dilution and operate share schemes intelligently to drive growth. 50% of $100m is worth a lot more than 100% of $10m! Aim to make 25% of equity value beyond the founder shares available to qualifying staff. However be selective as junior staff are often not motivated by share options

4. At director level, strike an equal balance between the annual gross margin achieved by individual divisions or operations and the overall company level earnings. This will reward personal effort and interests as well as collectively aligning everyone at the company level

5. Graduate the fixed and variable proportions of compensation to reflect the level of control over the outcomes achieved with the different tiers of responsibility. At the partner/director level it should be 50% fixed salary and 50% variable bonus based on performance. At junior levels it should be 80% fixed and 20% variable

6. The variable bonus should be linked to both overall company performance and individual personal performance. The most common way of achieving this is to set a policy, visible to all, which shares a percentage of company profits to all employees as an annual bonus

That ‘profit pool’ is split amongst employees based on a ‘value to the company’ factor. The variable percentage could be linked into personal performance for important measures like utilization, project margin, sector gross margin, or linked to a balanced scorecard of personal objectives. There are pros and cons of each method of linking to personal performance but the basic principle of starting with a profit pool and splitting that profit pool based on personal value to the firm is our recommended best practice

Adopting these principles, while tailoring them to fit your firm’s particular circumstances, will help get everyone working together towards achieving the right business goals. Furthermore, your future buyer will recognise the quality of the business culture, which will make you a more compelling acquisition for which it’s worth paying a premium price.

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Consulting Sector M&A Deals for week beginning 2nd February

businessman doing handstand on the beachColumbus A/S (Denmark) merged with InterDyn Business Microvar, Inc. (USA)
Deal Size: Unspecified Industry: IT consulting Date: February 2015
InterDyn BMI (InterDyn Business Microvar, Inc) and InterDyn CFO Consulting, two leading providers of Microsoft Dynamics business solutions are pleased to announce they are joining forces effective immediately. The combined, privately-held company will be called InterDyn BMI. The merger of InterDyn BMI, which has a solid representation in the north and south central regions, and InterDyn CFO Consulting, with a strong presence in Florida, will create a formidable regional firm with software and services for Microsoft Dynamics Enterprise Resource Planning (ERP), Microsoft Dynamics Customer Relationship Management (CRM), Microsoft SharePoint, IT managed services, IT Networking and Infrastructure, and custom application development. “The experienced management team of InterDyn BMI stepped in to provide executive leadership to our Tampa and Orlando locations since May 22, 2012. This leadership will continue to ensure consistency in both customer and employee relations. Our customers will have access to the familiar local support, as well as many enhanced services through this merger. We look forward to providing continued and seamless ERP and related services to our existing Dynamics customers,” said Kyle Lublin, owner of InterDyn CFO Consulting, Inc. InterDyn Business Microvar, Inc. provides software and Web solutions for various organisations in the United States. Columbus A/S develops and markets business applications to the retail, food, and manufacturing industries worldwide.

Oliver Wyman, Inc. (USA) acquired TeamSAI, Inc. (USA)
Deal Size: Unspecified Industry: Engineering consulting Date: February 2015
Adding to its existing aviation and aerospace technical advisory expertise, international consulting firm Oliver Wyman has acquired TeamSAI, a US-based leader in the maintenance, repair, and overhaul (MRO) space. Atlanta-based TeamSAI provides consulting and technical services to the global aviation and aerospace industry with a specialisation in maintenance advisory, supply chain, certification and compliance, and technical support services. Along with consulting, TeamSAI provides a full service, turnkey technical service offering known as M&E Solutions that supports various carriers under multi-year agreements. The company also produces the industry-leading Global Fleet & MRO Market Forecast Commentary report and relatedbetterinsight™ data products by leveraging its proprietary database, a key intellectual asset. The group will integrate into CAVOK, Oliver Wyman’s aviation technical services and consulting practice. The combined entity creates a deep source of expertise with over 130 dedicated, full-time specialists who assist airlines, MRO providers, lessors and other aviation and aerospace stakeholders with mission-critical issues surrounding certification, safety, and performance and execution support for technical operations. Chris Doan, TeamSAI’s CEO, adds, “Joining CAVOK and Oliver Wyman’s Transportation Practice allows us to scale up our consulting, advisory and technical services in a differentiated way and offer our clients a slate of new and valuable offerings.” Oliver Wyman, Inc. offers management consulting services. CAVOK Group, Inc. operates as an aviation services and consulting company. TeamSAI, Inc. provides consulting services to the aviation industry.

Mazars Group (France) acquired Global Intelligence Partners (Morocco)
Deal Size: Unspecified Industry: IT consulting Date: February 2015
Mazars Group completed the acquisition of Morocco-based consulting firm, Global Intelligence Partners, specialising in Business Intelligence, and leader in this segment within the West African Market. This merger with a firm that carries expertise in this fast-growing strategic business will enable Mazars Group to strengthen its consulting offer, which experienced in recent years significant growth. Through this operation, Mazars is also expanding its presence not only in Morocco but also in West Africa, where many of its clients have growing interest and where Global Intelligence Partners scored a significant expansion over the last five years. “This acquisition is in line with our vision. It will significantly enhance our offerings in Business Intelligence, Strategic Watch, and Knowledge Management,” commented Kamal Mokdad, Managing Partner of Mazars Morocco, who led the merger between the two entities. Nabil Bayahya, Executive Partner in charge of Consulting operations in Mazars Morocco, added: “This operation illustrates our ability to integrate new services and reflects the development strategy that we have been set from many years”. Mazars will “benefit from the exclusive expertise developed by Global Intelligence Partners consultants, who now join our 14,000 employees worldwide,” said Denis Grison, group Senior Partner in charge of French speaking African countries. Mazars is an international, integrated and independent organisation, specialising in audit, accountancy,tax, legal and advisory services. Global Intelligence Partners (GIP) is a company specialising in Strategy Consulting, Information Monitoring and Business Intelligence. Continue reading

Why do consulting firms with capable leaders get stuck?

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In our report “What stops consulting firms from smashing the growth Glass Ceilings?” we highlighted how few firms manage to continue to grow and scale successfully. There is only a 12% chance of breaching the $5m barrier, a mere 4% will smash through $10m and only 1% will grow bigger than $20m.

The conundrum is that consulting firm owners are by nature extremely bright and capable people. They have no trouble intellectually knowing and understanding the challenges and issues holding their firms back. But they still get stuck! Working daily with consultancy owners to grow their businesses for sale, we understand the different change requirements that come with each stage of growth. But we also have insight into the different mindsets that can hold growth back, whether through a conscious or unconscious resistance to change. As a rule there are three different mindsets which lead to consultancies failing to scale as they should.

1. The vicious circle scenario

When sales are increasing and the firm is busy, scaling up is not top of mind. People are working hard, everything is going well and it’s assumed that this momentum will continue.

Conversely, when times get tough the priority is selling more, not scaling. People become so focused on securing a deal that they fail to see the bigger picture and how other activities, such as marketing, could help the company.

In both scenarios, whether a business is busy trying to service work or busy trying to sell work, owners become focused on solving the pressing problems before worrying about future plans or the overall strategy for the business. In fact taking a step back from the vicious cycle and having a holistic view could help them immediately.

2. The Johari window scenario

You may be familiar with the Johari window which is used to help people better understand themselves and others. Consultancy owners can fall into the trap of not knowing what they don’t know – the upper right quadrant. As experts in their fields, they believe they know how to grow a consultancy practice, when in fact growing a consultancy comes with unique challenges at each stage. Many would extol the virtues of hiring in specialist skills, yet when it comes to their own businesses, may overlook the benefits this brings.

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3. The misalignment scenario

The third situation is where the ingredients may be there, but the dish does not turn out as we would like. For example, the team may know what they need to do but have different opinions on what takes priority, leading to endless discussions and paralysis. Or we do the right things in the wrong order, meaning we don’t get the results we were aiming for.

These problems can be resolved by having confidence as to the likely outcomes resulting from changes made. Understanding the cause and effect of suggested changes on value growth, and the dependencies those changes have on each other, will enable owners to make decisions and execute them with confidence. For example, investing in marketing when the market proposition and unique value proposition have not been properly developed may lead to a wasted investment that did not deliver the anticipated results. It would result in a mismatch in the message to the market, or get lost as a ‘me too’ amongst the messaging of competitors. If you’d like to find out more about the best sequence of events and priorities in a consulting firm, our 8 levers of equity value show how to ratchet up growth.

Growing a consultancy is not easy; there is a reason only 1% ever break the $20m barrier. Each stage of growth in a consultancy brings with it a particular set of challenges, but the mindset of the owner is something that can remain the same – to the consultancy’s benefit or detriment – throughout.

The first step to overcoming problems caused by a particular mindset is recognizing that it’s there in the first place. It’s then possible to shine a light on issues that it may be causing, address them and move on to growing the business.

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