Clients give knowledge-intensive services firms such as consulting, IT services and media agencies difficult and constantly evolving problems to solve. Markets change, competitors emerge and macroeconomics shift, all of which have an impact on what’s hot and what’s not when it comes to M&A.
That means buyers are attracted to firms with a clear value proposition that transcends service offerings and the capability to respond and deliver a relevant service portfolio in a changing environment. Simply put, a firm is worth more when it is bought for its strategic capability rather than just offering the buyer additional service capacity.
Achieving a relevant and effective service portfolio means more than investing in new service lines, because it’s also important for consulting firms to phase out what is no longer working for the future value of the business.
David Ogilvy explained in his “principles of management” (which took his firm from a start-up to generating billions) that dropping services that have become unprofitable must be driven by management:
“To keep your ship moving through the water at maximum efficiency, you have to keep scraping the barnacles off its bottom. It is rare for a department head to recommend the abolition of a job, or even the elimination of a man; the pressure from below is always adding. If the initiative for barnacle-scraping does not come from management, barnacles will never be scraped.”