Consolidation in the Outsourcing and Consulting spaces

Aon/Hewitt deal - One more consolidation deal in a services space heavily into M&A

Last week, I discussed the Booz & Co./A.T. Kearney merger that didn't go through and why deals like that are sometimes problematic. This week, we learn that Hewitt is being acquired for $4.9 billion by AON.

The Wall Street Journal reports that:

- Deloitte LLP is looking for acquisitions - PriceWaterhouseCoopers LLP is in talks to buy Diamond Management & Technology Consultants Inc. for about $50 million.

The Wall Street Journal also hinted that other firms may be in play to either acquire or be acquired. Why the sudden interest in wedding bells for these firms? The answer may simply be: scale.

In the outsourcing business, margins are narrow. Anytime you can grow the top line without measurably increasing administrative, sales or operations headcount, you improve profitability. Remember, Hewitt bought Exult, an HRO firm, a few years back. Convergys sold their HRO operation to Northgate Arinso recently. Scale is key in HRO. Scale is also helped along when an outsourcer can get all of its clients on the same solution set.

Scale also helps consultancies. Scale gives them worldwide coverage particularly in markets where one firm was thin or non-existent. It can also help them by allowing them to capture more market share with fewer top executives. That alone can increase bottom line profits overall and partner income.

A colleague of mine, Jeffrey L. Williams, and I were speaking of the market for shared services just a couple of weeks ago. We discussed how corporations built out internal shared service capabilities in the 1990s. He called that Shared Services version 1.0. Next, a number of these companies sold these captive operations to outsourcers. I call that Shared Services version 2.0. That phenomena helped the customers take advantage of the scale that outsourcers could get by aggregating the shared processes and systems across many firms. Now, we may be seeing a new version or evolution level occurring. The new level, consolidated outsourcing, hopes to chase the economies of scale further by creating larger, more leveraged solutions from these outsourcers.

There is a limit to how much efficiency can be wrung from additional market consolidation. We will probably see this when the current round of acquisitions and mergers is completed. At some point, large scale can become bureaucratic, slow-to-adapt and costly. But for now, we should expect more consolidation - not less.

Clients of these firms should note that consolidation isn't always good for them. You can expect:

- your 'account executive' could be changing - your service level agreement or the underlying software that you're used to using is going to change - your fee structure may need to be re-worked - new 'solutions' will be offered by the new combined entity - older 'solutions' will be retired even if you don't want them to be

Customers should always have a choice. If you haven't read the 'Material Change of Control' provisions in your old outsourcing agreement lately, find it and read it now. If you didn't have that clause in your deal, get to praying. Mergers and acquisitions often are money makers for the investment bankers, lawyers and advisers to the deal. Shareholders and customers don't always benefit as much.