The recent moves among consulting firms show their industry is facing a process of maturation similar to what has been rocking investment management for most of the decade.
Insiders say as pension consulting matures, some functions are becoming low-fee commodity products - akin to index management - while expensive functions such as technology become increasingly important. Both trends favor large organizations with ample resources, say industry observers.
Among the recent sales and expected transactions:
This summer's acquisition of RogersCasey & Associates by BARRA Inc.;
Buck Consulting Inc.'s search for a partner and its talks to acquire consultant W F Corroon;
The expected sale of SEI Corp.'s Capital Resources consulting unit to Alexander & Alexander Consulting Group; and
The recent sale of The Hannah Group to Advest Inc.
Consulting is ripe for consolidation at the top layer, driven by advanced technology, such as risk assessment systems, said Todd Doersch, president and CEO of RogersCasey Sponsor Services, the pension consulting unit of RogersCasey & Associates, Darien, Conn.
In the BARRA acquisition of RogersCasey, both sides had lauded the combination of the Berkeley, Calif., firm's technical savvy with RogersCasey's staff and relationships. However, Mr. Doersch also noted the industry is still very fragmented, with no one consulting firm overwhelmingly dominating the market.
Many consultants feel the market is glutted and wonder if the profit margins from consulting fees will begin shrinking soon, said Perrin Long of Darien, Conn., an independent consultant to the financial services industry.
"Everybody is tripping over everybody else. There's just too many consultants out there," said Mr. Long. "Somewhere along the line, there's going to be so many of them, you're not going to be able to maintain fee structures. The fee pressures would be too great."
Gregory Hazlett, director of research at Investment Counseling Inc., West Conshohocken, Pa., noted some institutions are doing consulting-related work themselves, thanks to new technology that puts the power in the sponsor's hands, said Mr. Hazlett.
"You put a proprietary database in their desk and they can conduct a (manager) search from their own offices, as opposed to hiring a consultant," he said. "It's the commoditization of that part of the business."
Parts of the consulting business that lend themselves to simple screening, such as the initial portion of a manager search, are not places where a consultant can or should add more value, said Mr. Doersch. Portions of the consultant's work that are easily replicated will become more commodity-like, while some firms will use more sophisticated technologies, such as the risk-assessment tools, to build their specialties around certain segments, he said.
What could emerge are firms that concentrate on three or four areas of expertise in order to maintain sustainable fee structures in those areas, said Mr. Long. BARRA's technology orientation is one good example.
The successful firms will be streamlined and will have a disciplined management that keeps a tight rein on profit margins, said Mr. Long.
The apparent consolidation among large firms is begging the question: Is pension consulting headed the way of accounting and advertising? Will a group of Big Six firms head the industry, surrounded by one- and two-person firms?
Consulting works in a way similar to advertising and accounting; businesses are relationship-intensive and require staff growth as accounts grow. Unlike money management, where bringing in more clients results in economies of scale, consulting requires more staff expenditures as the firms grow larger, which causes what Mr. Doersch called "dis-economies of scale."
"The larger you are as an organization, the harder is it is to make ends meet," he said. The client's loyalty is associated with the individual consultant, not with the organization, so economies of scale are impossible in that area, he said.
"Somewhere down the road - because you're trying to be all things to all people - your margin of profit is going to decline. Even if you bring in more and more people, you're not going to add more revenue," said Mr. Long. "Consulting is a people business. In order to grow revenue, you need to bring in more people, but somewhere, things get top-heavy."
That dynamic will support consolidation in the top end, where companies can use technology to create efficiency in their internal operations, said Mr. Doersch.
As part of that maturation process, succession planning also is becoming an issue among consultants, as it has been in investment management, said John E. Angley, managing director of Capital Resources, Chicago, formerly SEI Capital Resources. The principals in many consulting firms are already in their 50s and beginning to face retirement, he said.
Transactions will be relatively more difficult to achieve among consultants than among money managers, however. Observers worry that consulting is a less profitable, saturated industry and reaching agreement on financial terms will be tougher than in money management. The observers note that putting a price tag on firms will be tougher, because that involves a business based on commission and project revenue.
Its true value is found more often in its staff and client list, which can be affected by reports of a sale, as was the case of SEI Capital Resources.
