Merging Professional Services Firms: Mixing Oil and Water

The recent failure of two leading management consultancies – A.T. Kearney and Booz & Co. – to merge highlights a common challenge facing these types of transactions.   Namely, why do so many mergers and acquisitions among service firms fail to create meaningful value?  This question is of particular interest to professional services firms – consultants, lawyers and accountants – who look to M&A as a good way to grow revenues, increases capabilities and undertake succession planning. 

A considerable body of research shows that most mergers fail to generate incremental shareholder value.  With PSFs, M&A deals may be even tougher to pull off and harder to make work.  Why?  Talent and cultural considerations, important in any transaction, are even more challenging in an industry where so many talented individuals are central to the delivery model, client relationship and brand image.  In particular, the impressions and actions of the partners is often the difference between transaction success and failure. These factors play out in many ways:

Culture mismatch

Each firm goes into a deal with its own unique culture that influences and guides its activities day-to-day and over the long run. In many cases, each firm pays insufficient attention to how different cultures would meld especially as it impacts partner compensation, core values and employee roles.  If cultural considerations are not addressed before the deal is consummated, there is a greater likelihood that norms, beliefs and work practices will never meld in the new entity.  The result will be disastrous for the new company in terms of falling employee morale, lower productivity and higher client attrition. 

Clashes over control

By their nature, PSFs are populated with successful and aggressive ‘Type A’ individuals, who possess healthy egos and an emotional need for control.  Post transaction, which individuals exert control and maintains a public face becomes a fundamental question. For example, if the top management of one firm is under-represented in key operational roles and committees (e.g., the income/compensation committee), the deal could come undone. 

Different retirement schemes

Problems can arise when Firm A has more retired (or soon to be retired) partners who are paid more generously (e.g., 50% of current partner income) than Firm B’s partners. The partners who never got this benefit will want it (raising the transaction price and future financial obligations) or they’ll want to remove it from the other firm’s partners and retired partners compensation plan(unlikely once granted).

Bloated headcount

It is common for the new entity to have too many employees and partners even after staff rationalization schemes.  Retaining too many people occurs for many reasons including the need to protect client relationships or to maintain skills depth.  However, problems will inevitably arise due to skills & role overlap, a lengthening of the partner track and the probability of a higher than expected cost structure.

Client risk

Unless clients believe they will gain tangible benefits from the merger, they will – at best – view it as neutral.  In many cases, their impression will quickly turn negative as they perceive integration activities as distracting, risky (e.g, they lose their relationship and delivery teams) and potentially more expensive (e.g., higher costs needed to support the transaction).

Merging professional service firms doesn’t have to end in divorce.  Once the parties start the courtship, they would be prudent to closely review cultural, people and compensation issues in order to minimize business risks and maximize the potential of attaining the desired synergies.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.


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