Buyers’ view: Hot sectors update March 2015

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We spend a lot of time talking with buyers of consultancies and listening to their strategic growth needs. We also track several markets in consulting and monitor acquisition activity across the world. In doing so, we develop a good sense of hot spots for consultancy M&As. So as we head towards the end of the first quarter of 2015, what are the areas that buyers are the most interested in?

IT consulting

IT consulting continues to make up the largest proportion of deals in the management consulting space, as it has done for many years now. IT consulting covers a large and disparate set of firms, horizontally across technologies and vertically along a ‘value stack’ in IT. From IT strategists to system integrators, SAP to Workday consultants, business intelligence and data analytics specialists to IT transformation advisors; this space is broad and continues to evolve at a rapid pace.

The fact that IT is driving change in so many other industries, such as media/marketing (digital), telecoms, healthcare and financial services, amongst others, means that this section of the consulting market will, somewhat unsurprisingly, continue to evolve and change in line with demands from various different industries. As this happens, not only does it drive the need for increased IT services and advisory, it also begins to drive acquisition demand from the industries becoming increasingly dependent on IT.

Subsectors in this category where we are seeing particular acquisition interest include the so-called ‘SMAC’ areas (Social, Mobile, Analytics and Cloud), as well as cyber security. For IT consulting firms, these areas have become a necessary focus, given the new IT deployment models and the heightened threats that come with them. Our next sector insight will be on cloud computing and the various areas of consulting within it, so check back next week for a more detailed analysis on this area.

Engineering / environmental / energy

Engineering has long been a popular area for M&A activity and is seeing a particular demand for firms that deal with infrastructure change. As well as this, demand is also being driven by the general developments occurring in emerging markets.

Environment and energy are becoming more topical as concern about global warming moves up the business agenda and the demand, supply and price of oil continues to have significant economic and political influence. These issues mean businesses seek advisors in this space, hence the uptick in demand in this sector. There is also the constant flow of civil design and architectural firms acquired each year.

As this part of the market is constantly being replenished with new engineering consulting firms coming to market and a fair bit of consolidation across the board, in addition to a growing global population, significant environmental factors and changing energy needs, we expect engineering consulting to remain as one of our hot areas.

Media and marketing

Media and marketing has always had a strong advisory component and the move from print to digital has seen this sector transformed, particularly in the past two years. While print is still represented, the new digital channels are where all of the change and activity is happening. The amount of customer data generated – and the opportunities afforded by effective analysis and monetization of this – make consultancies in this space hot property. We are seeing particular demand for analytics, mobile and social media marketing, which as mentioned earlier is driving change in both the media and IT markets.

To ensure they remain competitive, big media firms need to have the right skills or access to customer channels. As these areas can take time to develop organically, media firms continue to look for acquisitions in these areas to quickly gain access to new skills and intellectual property. Otherwise, they will continue to see their market share eroded as innovative and agile companies take bites from their customer base.

Technology companies are also buying into this space as it is very IT reliant. Customer analytics for example is critically important for predicting future customer behavior and therefore how best to reach them. As this is mostly about analyzing data, IT plays a key role and large IT firms with these skills are increasingly important to the media sector.

These three areas have seen a lot of activity in the past couple of years and we expect them to continue to be hot in 2015. We regularly produce market intelligence reports on these and many other sectors. If you would like to find out more about what reports we have available, please contact us at info@equiteq.com.

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Consulting firm M&A market intelligence on cyber security

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Cyber security never seems to be far from the news these days. Whether it’s the attacks on Sony or President Obama’s rally for increased cyber security legislation (just before accounts belonging to the US Central Command were targeted), the ubiquity with which we hear about this topic demonstrates how important it is to our lives.

As consumers, we’re becoming increasingly reliant on technologies such as smartphones and social media. Organizations are also becoming more dependent on their data for operational and strategic management. With datacentres split across continents and storage of data increasing in the cloud, personal and company information is also becoming increasingly exposed to cyber threats.

In response to these dangers, businesses of all sizes need help improving and strengthening IT security systems, and cyber security consulting services are increasingly in demand.

Innovation in this space is critical, as threats often evolve more rapidly in the cyber sector than the pace of solutions. This can in turn drive acquisition activity in cyber, as larger firms look to acquire skills and intellectual property (IP) rather than refreshing or building these in-house, which can often take longer.

In line with this, in 2013-2014 we have seen deal volumes of firms being acquired in cyber security consulting growing at over 20% per year, well ahead of the global IT consulting sector which saw growth of just under 10%.

Specific drivers of this M&A demand include the following:

  • Innovation driven by small-scale firms offering niche cyber security services and products. As they gain market share they become attractive targets to larger cumbersome corporates
  • As businesses become ever more connected, often through less secure devices such as mobile phones, the amount of damage cyber threats can cause increases. Threats include potential loss of IP, reputation and customers
  • Regulations and standards relating to individual privacy and data privacy are increasing as the public becomes more aware of data scandals
  • Global adoption of poorly secured cloud-based IT services has made cyber attacks more attractive. As companies move critical business data from more secure in-house databases to cloud-based networks, businesses must try and defend themselves against attacks

We’ve analyzed transaction data from 2006 to understand who have been the key buyers of cyber security consultancies, as this trend has evolved:

  • IT and research consulting firms have been prolific buyers over this period, with IBM, All Covered Inc. and CGI Group among the top
  • Technology firms, including IT software, hardware, data processing, internet service firms and IT distributors have also been consolidating this market. Frequent buyers of cyber consultancies in this group include CA Technologies and Dell.
  • Private equity firms are typically frequent buyers in growing market sectors such as cyber. Within cyber consultancies, we have seen Providence Equity Partners, Apax Partners and Thomas H. Lee Partners making several acquisitions in this space.
  • Beyond these key buyer groups, we also have seen telecom firms making cyber consulting acquisitions as Voice over Internet Protocol (VoIP) has driven the industry towards digital technology. Industrial and manufacturing firms have also been acquiring cyber consultancies, as front-end sales and back-end supply chain processes are becoming increasingly dependent on data and online systems.

Geographically, acquisition activity in the cyber security consulting market has been gaining significant momentum since 2011 in both the US and UK. The UK cyber security consulting sector is currently growing faster than in the US, but the US sector is larger and more mature. Within cyber, Identity and Access Management (IAM), data loss prevention and recovery, device management, and encryption are key areas of focus.

The importance of cyber security skills and IP to tech-related and non-tech sectors is likely to continue going forward, and we expect this acquisition trend, particularly for consultancies with cyber skills, to continue in 2015.

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Survivability of IT consulting firms

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There are huge opportunities for IT consulting firms, which is reflective of the dynamic nature of the IT industry and the current heat in the market. However, the opportunities are not without risks associated with advising in a fast-paced market. Consulting in a hot sector like IT means that competition is stiff and firms need to keep up to date with and adapt to changing technology trends. The rewards are great indeed for those that can navigate their firm to remain successful as the industry changes. How do firms ride the wave to ensure they stay relevant and grow real value? The answer is not the same for all, but an understanding of how these changes impact the ‘saleability’ of a firm is important.

The rapid changes transforming the sector are giving rise to three particular areas of interest to buyers.

1. Cloud

What’s happening?

Cloud offers a new and attractive delivery model for IT. Companies that adopt cloud-based software or platform delivery minimize the upfront infrastructure and ongoing IT staff costs, and can also improve the scalability issues typically associated with IT. Buying IT as a service can be cost and cash flow efficient, and it offers the flexibility to scale up or down according to requirements.

What does this mean for consulting firms?

Cloud creates a new context for IT delivery, and this brings with it new challenges to common IT issues of integration, data management and scalability. It will be critical for IT consultants to keep updated on new architecture models and best practice changes as technologies mature. As cloud based software, infrastructure and platform vendors take stage in the market, IT consultants will need to either place bets on winning technologies or keep up to date with a wide variety of vendors to be able to advise on the pros and cons of each. Whilst IT has always been a dynamic industry, the industry changing nature of cloud as an IT delivery model requires IT consultants to step up the pace of their research, and to develop or strengthen their strategic partnerships, in order to remain relevant in this space.

2. Cyber security

What’s happening?

IT security has been an issue since the birth of the IT industry. However, the implication of computing, data and channels of business moving online results in new and heightened threats to business operations and data security. Cyber or online security attacks that disrupt operations or result in a loss of data can have huge repercussions on a business, as this can immediately affect a company’s brand and the perception of its customers. As such, cyber security has become a significant issue that all companies now need to manage in line with their online presence.

What does this mean for consulting firms?

Cyber security is a highly specialized topic that requires deep domain knowledge. It’s also fast moving as new threats constantly evolve. Consultants must be confident that they have the skills, knowledge and intelligence to be effective in this challenging environment. In some cases, traditional IT security approaches are still relevant, but new cyber security models will also need to be applied to effectively address the different nature of threats. Keeping updated with new security standards and the latest research will be an important new driver for IT consultancies to remain updated.

3. Data analytics

What’s happening?

As companies become increasingly more dependent on IT, so too does the volumes of data they amass through their use of IT systems. The intuition is that having a lot of data should be useful, however extracting insights from the analysis of this data requires highly specialized expertise. Data is like a new goldmine. Mining it effectively is the new challenge. Consulting firms that can help organizations put the data they have to use are therefore in very high demand.

What does this mean for consulting firms?

Analytics is an area where everyone knows it is useful, but very few know how to do it properly. Consulting firms must be able to find new ways to collect, store, and structure, analyse and report on data stored to get the most out of it. However, not all IT consultancies that have expertise in traditional IT areas of data management and business intelligence are able to address all of the complexity that data analytics typically involves and the predictive insights that can come from it. So IT consultancies need to keep pace, but they must build the skill before they can sell it. Research and thought leadership papers can be a great way to start. Building partnerships with key vendors that specialize in analytics can also be helpful in landing those first few projects.

Even if keeping up with IT industry changes, the fundamentals of selling an IT consulting firm remain unchanged.

As the IT market matures so too does the requirement for consulting firms to have deep domain knowledge and specialized skillsets. Evolving IT areas like those above still require deep expertise in order to stand out from the crowd to be attractive to buyers.

Demonstrating you have securely imbedded your intellectual property (IP) internally, is essential. If your firm’s knowledge, experience, tools and techniques exist solely in the minds of individuals within your firm, those assets may walk out the door!

Finally, consultant loyalty remains key. IT consulting skills change at a rapid pace in line with the industry. If your IT consultant’s skills and knowledge is in demand, so too is your firm’s services, but retaining talent is also a key challenge. Taking measures to ensure you attract, develop and motivate the best quality staff is a necessary investment in time and resource. Consider linking some compensation to profit growth and ensure any knowledge gained through contract professionals is retained with your staff. If you’re entering into an M&A process, we recommend you read our recent blog on effective communication in an M&A deal in order to keep your people onside and engaged.

The IT sector is an exciting sector to work in. No doubt the landscape will look very different again in 5 years time, but the principles of building a consulting firm of value are likely to still be true. Read our 8 Levers of Equity Value to find out more.