Tuesday’s announcement that KPMG has acquired EquaTerra came as no surprise to many industry observers, but raises more questions than it answers as the advisory industry matures and consolidates.
For KPMG, the global network of audit, tax, and advisory services providers, the long-rumored acquisition of the second largest outsourcing advisory services firm signals an attempt to provide a deeper set of specialized sourcing services to its global clients.
At the same time, it gives EquaTerra’s Fortune 500 client base access to a broader spectrum of services to meet their needs in the rapidly evolving outsourcing and shared services markets. EquaTerra’s key principals become KPMG partners and gain access to KPMG’s existing clients, whose firms will continue to expand their outsourcing requirements. And the advisory services sector of the outsourcing industry sees more evidence of the maturing of outsourcing and the integration of outsourcing into generally accepted business operations.
In late August, the Computer Weekly (UK) Inside Outsourcing blog reported on talks between the KPMG and EquaTerra asking the question that many are asking today:
Is there a future for specialist sourcing advisers such as Equaterra, or is it inevitable that the market will come to be dominated by the big consultancy firms?
“The buyers need advisors with a wide range of capabilities. With that in mind, the announcement of this relationship makes good business sense and could be the first of many such deals” – Dawn Evans, CEO – Sourcing Interests Group
End of the boutique?
For outsourcing advisory providers, KPMG/EquaTerra represents the next chapter in the transformation of their specialty services from highly valued boutique offerings to standardized capabilities of the world’s largest professional services organizations. And it creates an even larger gap between the leading firms and their smaller competitors.
For KPMG, the smallest of the Big Four accounting networks in revenues, this is another step in their effort to become a one-stop services provider for the world’s largest companies and to leverage the KPMG network’s strengths in key growth areas, such as outsourcing and shared services.
Last summer, in a similar corporate transformation service-expertise resource grab, KPMG expanded its restructuring capabilities through acquisition of the Supply Chain Advisory Services practice of Grant Thornton LLP, U.S. member firm of Grant Thornton International Ltd.
Dawn Tiura Evans, President and CEO of Sourcing Interests Group, a membership organization for sourcing and outsourcing professionals, told me this week that she’d heard early in the fall that something was brewing between KPMG and EquaTerra.
“Over the past few years, we’ve seen outsourcing deals getting smaller, but their complexity has increased,” she said. “The buyers need advisors with a wide range of capabilities. With that in mind, the announcement of this relationship makes good business sense and could be the first of many such deals.”
A head start
The acquisition of the largest independent outsourcing advisory boutique gives KPMG a head start towards being able to lead broad transformative projects, especially as traditional labor and process driven outsourcing projects evolve towards more scalable cloud-based technology-driven engagements.
KPMG’s technological expertise, systems integration, and project management capabilities are likely to complement EquaTerra’s transactional skills and resources in sourcing vendor selection, governance, and change management, making them a formidable competitor as outsourcing deals get smaller in dollar value, cross more borders, and get more complex in terms of scope and technological requirements.
In a blog posting on The Future of Sourcing Advisory just days before the deal was announced, Stan LePeak, EquaTerra’s Managing Director, Global Research (and Nearshore Americas contributor), may have foreshadowed the new combination by saying that in the future, buyers will look to outside advisors for these activities:
- Service integration, or the co-ordination of people, processes, tools and technology across multiple third party service providers
- Risk management and other ancillary services such as IT strategy, systems integration, project assurance, tax and legal advisory services
- Relationship management (i.e., buyer and service provider prenuptials, pre- and post-marriage counseling and dispute mediation)
- Market comparisons and analytics interpretation (i.e., helping buyers interpret their deal terms, pricing, performance levels, etc. in context with current market norms)
- Software tools to support sourcing and outsourcing governance efforts as an extension to core enterprise systems
- Traditional sourcing advisory services delivered in non-traditional ways (i.e. lighter weight and more self-service forms of market assessments, benchmarks, contracting support, service provider profiling, etc. designed for the more experienced buyer).
With one glaring exception, this list of a capabilities sounds like the core of a new KPMG marketing brochure and demonstrates the potential of the combined KPMG/EquaTerra entity. KPMG adds world-class risk management, IT strategy, software, and service integration capabilities to EquaTerra’s strong transactions, governance, and general advisory expertise.
But noticeably absent in the post-acquisition KPMG is a source for the benchmarking and analytics that has become so important as the industry matures and sourcing buyers require real data for operational expertise, performance improvement, and, of course, deal evaluation.
TPI, owned by Information Services Group (NASDAQ – III), gained access to benchmarking and analytics through the acquisition of UK-based Compass Management Consulting by ISG in January. At the time, that deal created the strongest global brand for sourcing advisory services and benchmarking data.
Monday’s announcement enables KPMG to leapfrog TPI in terms of global reach, diverse capabilities, and pedigree, but leaves KPMG without the fact-based data many clients will be looking for. It also leaves Deloitte, PwC, and Ernst and Young, the other Big Four global audit, accounting and advisory networks, without many options when it comes to meeting KPMG’s outsourcing challenge.
Almost certainly, they have been looking at the potential of acquiring the TPI/Compass combination, which is the cornerstone of ISG’s strategy of becoming a premier global information-based services company. The company’s stock hasn’t suggested that the market has been excited about the acquisition. Following the Jan. 4 announcement, ISG stock dropped as much as 17%, but a recent runup has recouped those losses. The stock closed at $2.28 on February 22 (Tuesday) or about 1% lower than its Jan. 4 post-acquisition close. The recent uptick could have something to do with the KPMG announcement.
TPI remains a likely target of the remaining Big 3, since few alternatives exist that offer anything approaching the potential of TPI/Compass. In sourcing advisory, consulting and benchmarking services, TPI, Alsbridge, Everest Group, and Hackett Group (NASDAQ – HCKT), would be considered the remaining leaders with enough mass and breadth to be considered acquisition targets, according to Dawn Tiura Evans. “I have the utmost respect for all of these companies and each has strength in certain areas, but I believe TPI has immense potential, especially if partnered with a Big 4 firm. “
Global networks Deloitte, PwC and E&Y must reevaluate their strategies and plans for the market, as outsourcing revives with the improving global economy and evolves with more cloud-based services and virtualization fast approaching on the horizon.
Deloitte recently stated that it plans to hire over 250,000 globally over the next 5 years including more than 10,000 in the US in 2011 as it fights to retain its market leadership. Acquisitions can accelerate growth plans and make companies more attractive for incoming employees while creating new opportunities for existing staff. The EquaTerra acquisition defines KPMG’s strategy for growth in this sector and challenges competitors to react.
“I believe this will be the first of many such acquisitions,” said Evans. “And I would not be surprised to see TPI in the headlines before the end of the year.”
Eric Hochstein is Managing Director of Highstone Associates, Inc., a Barrington, IL-based business and economic development consulting firm, focused on strategy and business development, site selection, and marketing for public and private sector organizations involved in technology and knowledge-based commerce. Mr. Hochstein has been a long-time observer of the outsourcing industry.
Eric, thanks for a solid analysis of the KPMG/Equaterra deal and for putting it into context. As a veteran of two of the Big Four and a follower of sourcing, I am very interested in this development. Another area that may be covered in bullet #4 but I heard about while covering an IDC Outsourcing Summit [http://globalhumancapital.org/?p=61] is that outsourcing capabilities are increasingly taken into account during M&A, after which significant consolidation takes place. What better way that to "life and shift" rather than integrating two firms' processes? Very interesting in some cases. Obviously, this is a sidelight, but it could synergize mightily with Corporate Transactions. Thanks again for a great piece!