Mergers and Acquisitions: Clients Deserve Better

2017 Saw a Frenzy of Digital Acquisitions; 2018 Is Likely to See More

Digital merger and acquisition activity went crazy in 2017. For a variety of reasons, providers invested heavily in bringing the capabilities, knowledge, and talent they needed to meet the ever-changing requirements of their clients. This trend will likely continue in 2018 and even expand – with market restructuring leading to further consolidation as vendors fight for market share of newly adopted technologies and mindshare of technologies on the cusp.

What’s Behind All the Activity?

Broadly speaking, we can categorize the cause behind a lot of the recent M&A activity as simply bringing in the capabilities needed to meet client needs. In Exhibit 1, we can see the plethora of investments categorized based on the main capability added by an acquisition. From here we can uncover some of the major incentives and trends at play in the market.
 

Exhibit 1: Primary Drivers Behind 2017 M&A Activity

Source: HfS Research, 2018

The main capabilities sought through M&A in 2017:

• Capability focused: Bringing in new capabilities was the most common primary driver for acquisitions made in 2017—with a particular focus on shoring up digital offerings.
  Customer experience and digital consulting made up the two largest subsets in this category, followed by other digital-focused capabilities such as cybersecurity, analytics, and big data. We are likely to see capability-focused acquisitions grow as the market pivots further away from traditional services and toward digital.
• Industry focused: We can also see that just under a fourth of acquisitions last year brought in industry-focused solutions and expertise—with the lucrative healthcare and banking sectors taking the lion’s share.
• Functional focused: Broader horizontal and functional based acquisitions are the final category, which took up the smallest proportion. Key areas of investment included marketing and application development and management.

It’s clear then that providers concentrated their efforts more and more on the acquisitions of capabilities—skewing activity toward capability-focused acquisitions and away from vertical and functional investments.

However, perhaps one of the most interesting outcomes from our discussions with providers, analysts, and clients is why these M&As were being sought, over and above traditional drivers of scale, diversification, and market share. We picked out two other drivers that are becoming more common and creeping under the radar:

• Defence focused: Disruptors abound in almost every market, which is causing some providers to acquire simply to avoid competition in the future, or perhaps avoid a later acquisition from a rival. While this often goes hand-in-hand with the benefits of bringing in new capabilities, the primary driver is defence.
• Proof focused: This primary driver is likely to be the root of many acquisitions we’ll see over the next few years, whether or not it’s the declared motive. The simple fact is that clients have had their fingers burnt too many times now, which is building a strong—and some would say healthy—degree of cynicism. Clients now demand more proof of delivery than ever before, which is often not a problem for traditional services. For cutting-edge digital solutions, though, it’s tough to bring client success stories to engagements. This is where the new form of acquisitions will come in—bringing in not only the delivery capabilities, but also the track record and proof that clients demand.

There Are Lessons to be Learned from Client Experiences in 2017

While the diversity of primary drivers and the extent of M&A activity in 2017 is an interesting topic to cover—it’s not the focus of this PoV. Instead, our purpose is to relay some of the messages from enterprise clients we’ve discovered through recent research, Blueprints, and other engagements. Many of these firms have been impacted by an acquisition at some stage in their engagements, most as clients of the acquired organization. And, to be frank, the experiences differ enormously, but many bring with them serious lessons to learn both for buyers and providers. We have packaged these into four client stories—each documenting a different acquisition experience.

From boutique to Leviathan

One of the toughest challenges, according to clients who have been on the journey, is moving from a comfortable and personal relationship with a boutique provider to a more structured and impersonal approach with one of the industry’s giants. For one of the clients we spoke to, this was both a challenging process and a negative experience.

Their biggest issue, and one mirrored by clients on the same journey, was that over the course of their relationship they had become very close and friendly with their boutique provider—something they had begun to value because it created a close and collaborative partnership that they believed could not be mirrored by a larger organization. In this particular example, they were right—as soon as their boutique provider was acquired, the close and personal nature of the engagement disappeared entirely. This cultural shift sapped some of the value from the engagement, and the client had begun to explore opportunities to change providers and return to a style similar to their original.

Talent disappearing into the machine

Another downside to acquisitions, according to clients, is the talent challenge. These buyers said that after the acquisition, the talent and teams they had been working with often disappeared entirely, either as casualties of the acquisition or because of relocation to other areas of the business. For clients, this resulted in a raft of issues from inconsistency and discontinuity to having to take a step back to consolidate their position. One described it as effectively starting from scratch when the professional services team they were working with changed over completely.

A harder and harder sell

Some acquisitions are all about access to clients, which results in a negative experience for some clients. After their original provider was acquired, several clients advised that their new account management team was only interested in upselling or opening up new revenue streams. What had been a lucrative engagement for their original provider—and one which had developed into a mutually beneficial partnership—was not as enticing for their new provider, who wanted to squeeze as much revenue out of the engagement as possible.

Stability and consistency are priceless

Not all stories of acquisitions ended badly. Many of us are aware that change, while often filled with opportunities, can bring the unwelcome side effect of instability and unpredictability. For some clients, the simple fact that an acquisition has barely been noticeable is an overwhelming positive. According to one client, not only did the original team to continue to work with them, but they were also better equipped to tackle the job. In their mind, as long as the new provider continued to deliver and meet their expectations, the working relationship could go on unimpeded.

So, Where Do We Go from Here?

With M&A activity unlikely to slow over the next few years, it’s clear that we need to set some ground rules to keep everyone happy—helping providers retain clients and ensuring buyers have a degree of control over their future:

• Change management isn’t just a service: Many of the large providers that are the culprits in this piece have sizeable change management consultancy capabilities to offer clients. Yet, there is little evidence to suggest they utilize the capability internally to smooth the journey for acquired clients. This needs to change in the future; clients deserve a better experience and providers have little to gain from frightening them off and tarnishing their own reputation in the market.
• Buyers hold your ground: One of the clients that described a more positive story had a very clear plan, which undoubtedly contributed to how smooth the transition was. They held their ground, made their expectations clear, and fought to ensure that what they needed was delivered. If more buyers fight their corner and make their new provider aware of their expectations, we may see a more positive experience for all.
• Budget for a period of investment: As a client transitions to a new provider’s culture, it’s likely clients will expect a degree of proof to dispel any illusions or perceptions they have about their new provider. Providers should work hard in the first few months to ensure clients are aware of their culture and approach, supported by a budget that allows them to invest in the new relationship from the outset.
• Nurture incoming talent and support ongoing relationships: One of the real concerns for many clients is the impact that acquisitions have on talent. They’ve built strong relationships with providers over the years, and if relationships just disappear, value is lost. Providers must work harder to ensure they not only nurture and retain key talent, but also build environments where they value ongoing relationships as much as their clients do.

Bottom Line: We will undoubtedly see more M&A activity in the future, but providers must put measures in place to ensure acquisitions are more positive and productive for incoming clients.