Charles-Edouard Bouée must restructure Roland Berger to ensure it’s independence

Headlining Bouee’s Challenge

Editorial Part I of II

Roland Berger came very close to being swept into the dustbin of management consulting failures as just another promising firm that petered out in an acquisition or the weight of unrealistic ambitions. A massive and expensive office expansion program implemented through the recession, to chase McKinsey and BCG, led the firm into cash flow constraints. That ultimately led to  acquisitions discussions with Deloitte.

Those discussions ended with the majority of partners voting “no” to Deloitte, while taking ~€60 million from the firm’s eponymous founder.

The initial act to remain independent, the founder speaking out against the merger, should be greatly celebrated; case studied actually, but has been offhandedly dismissed in the press.

The press routinely chooses to discuss crass financial data about the billions of revenue Booz and PwC would create through their marriage, the wonderful practical strategies Monitor and Deloitte would co-create, the joys of a newborn firm with audit and consulting eyes, and the market share that could be captured.

Honestly, which Fortune 500 executive wants to think of herself/himself as a market to be shared or even captured?

Business terminology at times seems to be a merry-go-round of euphemisms on violent innuendo . Does the business press not realize that profits and revenue are an outcome of doing the right things, and it is far more important to analyze the righteousness of those things firms claim to do?

Sadly, the press, typically staffed by business school graduates, oftentimes does not fully understand how to analyze a partnership of professionals. Lead indicators matter far more than lagging editorials. Since when does size, revenue and market share correlate to being the best at providing unbiased and useful client advice? Why does the press continue using the wrong lens to analyze this profession?

Values are a lead indicator for prestige and eminence in management consulting.

In the business of advising the world’s most influential leaders, large revenues and thousands of consultants does not imply a firm can produce strategy insights that are correct and effective. Values mean everything, but few write about it since many do not understand that it is the critical driver of success in this profession. That is worth emphasizing.

This is not a business.
This is not a sector.
This is not an industry.
This is not a market.

This is a profession.

This is what was so striking about the vote at Roland Berger. Dr. Roland Berger, as a significant shareholder of the firm, would have been one of the largest, if not the largest beneficiary from such a buyout. He would have profited handsomely. For him to stand up, speak out and be listened to when he had no real executive power speaks to his standing, his values, his vision and his commitment to protecting the firm’s independence. He placed independence before a large personal payday. In fact, speaking out resulted in an measurable personal cash outflow since he recapitalized the firm.

How many times have we recently read about such selfless behavior in the business press?

The ability to tell the truth as we see it is a management consultant’s greatest advantage. This is the key to being a successful management consultant. Effective advice is only possible with true and unfettered independence. Those beholden to none, are only beholden to the truth.

Independence allows consultants to do what is in the client’s best interests, especially if it means upsetting a client.
Independence is the essential building block to a long-term and trust-based client relationship, because it implies a recommendation can rarely be swayed by politics or financial considerations.
Independence allows sophisticated consulting analytic tools to be deployed on the right issues.

The value system to protect that independence is what Dr. Roland Berger preserved by scuttling the acquisition discussions with Deloitte 2010. This publication often cites great stories from the past where important leaders like Marvin Bower, John Mack and Sydney Weinberg did things that epitomized the legendary values of their firms. All of them at some point or another talked up against actions that were financially lucrative but professionally damaging.

Well, now there is no longer a reason to dust off old examples. We have one as recent as 2010 when Dr. Roland Berger spoke out against selling the firm, and its essence.

At a time when a great many partnerships like Booz and Monitor Company have traded their independence for money, this type of behavior is the clearest indication that some still view management consulting not as a tawdry business to make as much money as possible, but as a profession with the highest calling.

This glowing editorial needs to end at this point.

Everything above is what we would have written if we had faithfully followed the public relations message Roland Berger generated after their vote against the Deloitte merger.

Yet, our role is to teach clients how to critically evaluate business news and consulting firms so they may make decisions about their careers. We teach critical reasoning skills – the ability to see and understand vital clues that others overlook. This is exactly what we have done in the Barton, Mainardi and Canning editorials, and what we will continue to do. Picking the firm you will join is one of the most important decisions of your life.

Our role is to ask the tough questions, based on fact, that others would rather avoid.

Roland Berger positioned the vote against the Deloitte acquisition, where “close to 100%” of the partners chose to scuttle the deal, as a vote for their values. Roland Berger would have us believe that this grand and visionary intervention from the founder reinforced the firm’s commitment to its values and set them on the correct path. Let us understand the logic of what Roland Berger wants us to believe, by analyzing the self-reported chain of events.

First, Roland Berger progressed, and then chose to stick to their values and independence by scuttling the Deloitte offer in 2010.

Second, they had a change of heart by deciding about 2 years later to initiate conversations with E&Y, and even entertain another Deloitte overture.

Third, they could also have been speaking to PwC and even KPMG.

Fourth, they decided to end the discussions with E&Y before putting it to a general partner vote.

With this sequence in mind, their reason for aborting the acquisition presents some inconsistencies. It is more likely that Roland Berger was merely shopping around for the best offer, ran out of potential suitors who would pay a sufficiently high price and that is why they ended up independent. It was not by choice and probably not because of any reawakening of their values.

How do we infer this from Roland Berger’s self-reported sequence of events?

To start, lets examine the “close to 100%” quote by Roland Berger. At best, this seems like inadvertent misdirection by omission. Partnerships have an executive committee. The executive committee, consisting of the most senior partners, must have supported the acquisition for them to have have sent it to the general partners for a vote.

No senior partnership wants to be associated with an initiative that is unpopular. It creates the impression that the executive committee is out of touch. Therefore, senior partners do not just send any decision to the general partnership for a vote. They forward serious proposals that they support or at the very least has substantive merit. The vote is an administrative process that takes planning and time, and the wholly political nature within a firm means that the committee submits decisions that will likely get approved.

Therefore, it would be more accurate to say that close to 100% of senior partners supported the acquisition and close to 100% general partners voted against it. It mathematically could never have been “close to 100%” of all partners.

This means the the senior partners of Roland Berger have very different priorities from the general partners. The senior partners wanted to sell out and earn some measure of financial comfort from their hard earned work over many years building the firm, while the general partners probably felt they had not built sufficient equity in the business to earn a meaningful payout from the acquisition.

So, rather than being positioned as “close to 100%” voting to stay independent, it is possibly more correct to stay “close to 100%” voted to increase their equity worth.

If we examine some of the largest private partnerships going public /selling in the last 30 years, they have all had these debates and acted the same way for the very same reasons. This would include both consulting firms like Accenture and even storied investment banks. Goldman Sachs scuttled several attempts to go public, under Jon Corzine, since the junior partners did not have sufficient equity at the time of the proposed IPO to benefit substantially, while a simultaneous drop in the bond trading business also hurt the value of the little equity they did have.

It is often the truth that a vote to remain independent is actually a delayed vote to sell since  it ensures a sufficiently large percentage of young equity partners can build up their equity value to the point where it is meaningful for them to support the merger.

In the simplest terms, it would appear that Roland Berger general partners voted against the initial deal and took the equity investment from the founder since they believed this path would at the very least create more value, to them, than the deal offered by Deloitte.

How will this tension between the younger and older partners be managed?

Beyond the behavior of equity partners, the mechanics of an acquisition also raises questions about Roland Berger’s storyline. Partners of even the finest firms always act like rational economic players during a sale process. They will do what is possible to gain the best price. That is because a partner even considering selling his part of a professional partnership has already made emotional and philosophical peace with the fact that they can live without the partnership, and will do what is possible to seek the maximum financial return in exchange for handing over the assets of the prized partnership.

In the simplest terms, the more elite you think you are, the higher the asking price to relinquish the elitism. Despite this yearning to maximize returns, every partnership and every partner will aggressively and consistently tell you a sale is never about the money, but about enhancing their values and better serving clients.

Yet, if that where true, can anyone name a signal professional services acquisition, or any other for that matter, in the history of modern business that went to the much lower bidder with superior values?

Surely if the sale of a firm were about values and not the money, we would at least find some examples. This is another reason why it is unlikely Roland Berger rejected the acquisition merely to remain independent for it’s values.

The basic premise for selling anything successfully is to bid up the price for the asset being sold. To do this requires the presence of multiple bidding firms in play at the same time. At the very least, there must be the illusion the bidding firms are in play. The more publicly interested suitors, the better the process since this means Roland Berger can play off each suitor off the other to drive up the price.

Investment banks are essentially appointed for their ability to find sufficient bidders to drive up the price. When Roland Berger turned down Deloitte in 2010, there where sufficient suitors since all audit firms where in play and it made reasonable sense to assume a higher price could be found.

Roland Berger could never have known Deloitte would seriously act on Monitor Company, especially while Deloitte was pursuing Roland Berger. Furthermore, it was probably easy to turn down Deloitte because Roland Berger could have assumed Deloitte would have come back with a better offer. Which Deloitte tried to do again in 2013.

Yet, things changed quickly while this was happening. Deloitte acquired Monitor Company and PwC was about to acquire Booz & Co. The two most likely suitors were out of contention in mere months of each other. Even more damaging is the fact that they where publicly out of contention so E&Y and KPMG knew about it.

You could argue that E&Y and KPMG were still in the mix and Roland Berger could have sold itself. However, what do you think happens when a potential acquirer knows that the seller is running out of options? The buyer tries to drive down the price. That is the logical thing to do. This is likely what happened to Roland Berger. They had no choice but to remain independent since they would have made too little money selling the firm.

Roland Berger will likely assert that remaining independent was about preserving their fine values and had little to do with economics.

Given the facts, that assertion does not seem to work.

After all the due-diligence with Deloitte in 2010 and discussions around the different cultures, audit differences, liabilities, a boisterous full partner discussion, intervention from the founder and so on, we can reasonably assume that Roland Berger understood the full implications of being acquired by an audit firm.

Which begs the question; what was so different about E&Y / Deloitte, or any other firm they were talking to, that Roland Berger felt an acquisition discussion, even an exploratory one at that, was even worth having so soon after the scuttled Deloitte talks?

When you have eliminated the impossible, whatever remains, however improbable, must be the truth. The remaining answer is that Roland Berger leadership had probably placed a price on their values and culture, and believed E&Y, or someone else, could pay that price. Moreover, they assumed the price was so appealing that even the most reticent of the “close to 100%” partners would agree. This is especially true since the initial reticence was likely driven by the worth of their equity. When they thereafter determined that E&Y would not meet their asking price, or E&Y signaled it would no longer meet their price, Roland Berger ended the discussion.

Charles-Edouard Bouée’s role in those on-again-of-again acquisition discussions concerns us, in that he may very well have supported the sale, and may still do.

Why do we think this is the case?

Bouée would have been a senior partner and certainly part of the inner circle at Roland Berger during the Deloitte, PwC and E&Y discussions. Roland Berger is far too small a firm for there to be multiple camps of senior partners with diametrically opposed views.

Although such differing views is healthy, only the largest of firms have sufficient economic space to host competing ideologies. In a firm of roughly 200 partners, there are probably about 50 to 30 senior partners at most. In such a small firm, the CEO has significant power and will rarely ever surround himself with partners who disagree on core ideology. Why would he?

In a small firm, there is insufficient economic space to host competing ideologies.

This is especially true at Roland Berger where the outgoing CEO Burkhard Schwenker remains as chairman of the supervisory board. It is unlikely he would have remained in that position if he had a significantly differing viewpoint from the incoming CEO.

Therefore, there is likely a high degree of homogeneity at the top. Which implies that Bouée was in the camp that supported the acquisition by Deloitte and thereafter gave nascent life to the E&Y talks. This brings us to the current dilemma.

Is it possible that Bouée is merely holding Roland Berger together and sprucing it up with new offices in Calgary etc., to make it more attractive to a potential buyer? In other words, despite Bouée’s title, is he for all intensive purposes just a caretaker CEO merely working towards a sale?

Roland Berger would argue this is not true and they are committed to going it alone.

We would ask; how is this vociferous denial any different from the 2010 talk of independence, which quickly turned into E&Y and Deloitte acquisition talks by 2012?

The answer Roland Berger could never state for attribution is likely quite simple. The best way to drive up the price for a sale is to completely deny you will ever sell in the first place. That is why they would now deny they are considering a sale. This creates the illusion that Roland Berger has now found a way to create so much greater value from the firm that they no longer want to sell and this forces a potential suitor to present an offer that is richer than the alleged increased value of the company. When a company admits it is for sale, it is actually signalling that that all other options are closed and this lack of optionality ultimately drives down its price.

Despite this all being one big M&A game, this publication hopes Roland Berger remains independent.

With the struggles and collapse of firms like Monitor, Booz and AD Little, management consulting has consolidated at the expense of the markets’ needs. While consolidation is needed in a highly fragmented and oversupplied sector, which was not the case in high-end management consulting, too little competition does not spur sufficient investment in new ideas and clients ultimately suffer.

Monopolies, duopolies and or even triopolies never benefit clients. And management consulting is at best a pseudo-triopoly in that the 3 largest strategy firms are all American, all hire the same type of people from roughly the same schools, using the same laptops, accessing approximately similar databases and dressing roughly the same. In fact, the only differences are the culture and values, and to be fair, both Bain and McKinsey tend to have had recent problems in this regard. True competition is the fuel for rising productivity, smarter insights and innovative consulting ideas.

We should not be rooting for the consolidation of this profession. No one has ever benefited from monopolies, besides the monopolies themselves.

In effect, US firms continue to control management consulting and set the agenda for global issues. However, there is no single perfect model of business, which is why we need to see European, Asian and African interpretations of management. This is healthy for clients. It is very amusing, and slightly sad at the same time that the rest of the world relies on US business schools to produce case studies of foreign firms to train mainly US students in the art of advising foreign businesses whom then join US consulting firms and are shipped to the foreign country in need of expertise.

Does any of that seem efficient to you?

While it is fitting that one of the world’s toughest consulting markets has spawned the lone challenger to US domination of consulting, this cannot be Roland Berger’s only claim to fame. Roland Berger need only look west to Capgemini’s leafy Parisian head office to see how quickly that claim fades.

In fact, after a while such an historical fact merely sounds ridiculous: like that 60-year old waitress you will find in just about every Los Angeles restaurant who continues to recite stories about that single great role she had opposite a major movie star well over 40 years ago. The past counts for little.

Management consulting is a tough business where firms need to continuously invest in new ideas and research, while packaging them into bite-size morsels for clients. That is much harder to accomplish than it looks.

While Roland Berger seems to have remained independent through some unfortunate M&A luck, for now anyway, its problems largely lie on the operational side. Whether Bouee is making the firm attractive for a sale or changes his mind and decides to stay independent, these operational issues need to be addressed.

Bouée has three immediate challenges to prevent the firm from becoming a footnote in history.

First, he must frame a vision for Roland Berger, which is not dependent on the growth narrative, but on the narrative of helping the world’s preeminent institutions have an impact. Should he try to inspire Roland Berger purely on the back of a growth agenda, the firm will suffer the consequences of unhealthy growth, unprofitable growth, a diluted culture and, ultimately, inconsistent client work.

Should this happen, we doubt even Dr. Roland Berger would have another €60 million lying around, or want to share it, to bail out his namesake firm. This will eventually kill Roland Berger.

Or worse than death, it will be back at the negotiating table, eventually ending up as a strategy zombie within a barbed-wire audit enclosure: still going through the motions while dead and decaying on all strategy capability life signs.

Second, Roland Berger’s quest for growth has led to a measurable drop in recruiting standards as the firm has placed an emphasis on hiring consultants with either heavy consulting or industry experience. Both speak to a bias for lowering training costs and a propensity for pushing consultants as soon as possible onto a client study. Great firms spend an inordinate amount of time and effort finding capable individuals whom can be groomed to represent the firm’s values and solve problems using the firm’s unique approaches.

If Roland Berger continues drifting towards hiring experienced consultants and swiftly placing them on studies, we must ask, what unique value is the firm adding to the consultant’s skills? Are they not simply body shopping them in this current trend? Is this really the direction the firm wants to take in its quest for growth?

We would like to see Roland Berger invest more in a global training model whereby all new hires are brought together to learn the values of the firm and its core consulting approaches. The current regional model is a recipe for long-term mediocrity and obsolescence. At best, it just presents the illusion of investment and progress until an acquisition.

Third, Roland Berger is already experiencing these nascent growth problems and Bouée needs to reverse the decline as opposed to merely preventing a decline. Yes, Roland Berger grew too fast. This ability to fix versus prevent problems requires a different leadership mindset. Fragmented processes across offices, weak training, fragmented culture, and inconsistent hiring standards as well as importing external hires to boost sales have all led to the dissolution of the Roland Berger way.

The Chinese region was by no means a success story for Roland Berger. Yes, it was large but size does not equal success. As the man who led Roland Berger Asia, and still does, Bouée needs to demonstrate that he can raise the quality of the work, without embarking on unnecessary expansion. While it is far easier to glamorize a firm’s eminence on the back of a growth story, it is neither healthy nor sustainable.

Growth is not a strategy and it has never been in the history of business. On this 100th anniversary of World War I, Bouée should surely have learned the lesson that merely scooping up markets via far-flung trophy outposts of the world is not a recipe for greatness. It is simply a recipe for short-lived and expensive bragging rights.

The mere presence of consulting boots on the ground alone does not mean Roland Berger consultants have the skills, resources and training to beat BCG, Bain and the like across multiple markets.

Expanding offices worldwide at breakneck speed epitomizes the vanity of a firm that wants to use the term global in its marketing brochures, despite not having the requisite skills to actually be global. The skills to run a global business take time to learn and should not be rushed. In this case, the journey to globalization really is more important than the destination since it builds a cadre of accomplished and experienced partners, who do not dilute the quality of the work.

That should be Roland Berger’s ultimate goal: a formidable group of partners steeped in the firm’s ethos and who have the ability to operate interchangeably. The “no” vote for Deloitte and E&Y, irrespective of the reasons, says this may be possible, but their growth tendencies outline greater risks.

Roland Berger should enjoy being the relatively young adult of management consulting. It has plenty of time to live its life. For example, Mongolia is not going anywhere anytime soon. Roland Berger will have time to benefit from that country’s growth and should delay opening an office in that, and similar regions.

Besides the quest for growth’s tendency to unleash suicide in just about every major professional services firm’s collapse, do clients really care that Roland Berger does not have a presence in some exotic locale like Astana, Kazakhstan?
Has Roland Berger actually lost a client because it does not pay rent in 80 different currencies?
Is Roland Berger so in awe of the skills in its existing offices that it has the audacity to claim it does not need to invest its precious partner capital to improve the work for existing clients?

The Nays have it, and therefore breakneck growth is an illusory advantage.

An expansionary mindset simply overstretches the firm’s assets and training budgets, and distracts leadership. Bouée needs to be very selective in the theaters he wants to engage. The battle is always longer, more costly and messier than planned.

And like the Kaiser Wilhelm learned at Kiel, just because Roland Berger knows how to build the intellectual equivalent of a Dreadnought class ship, does not mean McKinsey or BCG cannot outspend them into obsolescence. And outspend Roland Berger they will. In other words, the ability to open a new office and consult in a new city does not imply Roland Berger will have the resources to be the best advisor to that client. Perfection in consulting is more important than merely having the presence to consult.

To grow, Roland Berger must not be seduced into competing on BCG’s terms. That will be suicidal. It needs to target selected offices to compete where it is strong and withdraw from those where it is not. Only the most important future markets should be invested in. At the moment Roland Berger seems to be going for a full-frontal attack. It wants to be everywhere while deploying focused resources nowhere in particular.

Focusing on better offices, as opposed to more offices, will be tough to do since slowing down the expansion, or even shrinking the firm, costs money and reduces a partner’s incentive to stay. Bouée may very well not be willing to see how many partners want to stay and see through such needed wrenching change.

Additionally, even if he wanted to shrink the firm, Bouée may very well not have the cash to buy back all the required equity to undertake a meaningful restructuring. The irony is that Bouée may need as many partners to stay to free up cash, but encouraging them to stay forces him onto the one path he must avoid. It forces the firm onto a strategy growth path because this is the easiest way to increase the equity worth of a partner who wants to leave, and increasing their equity worth is the only way to keep them at the firm.

In other words, Bouée needs partners to stay for their capital, but to keep them he needs to deploy that very capital in an unhealthy way.

Balancing these dual needs is incredibly tough and it is not clear how Bouée will manage the material tradeoffs. We therefore believe, in the absence of a drastic restructuring, the firm is at best keeping things together in the hope of a meaningful acquisition offer.

Despite it’s challenges, Roland Berger has some key advantages which could help it flourish provided they are leveraged in the correct manner. This is where Bouee can burnish his reputation as a visionary and proactive CEO.

First is the major macroeconomic trend around the re-emergence of Germany on the global agenda. While traditionally an economic powerhouse, Germans have by and large shunned any role to influence culture, politics or events worldwide. Chancellor Merkel is changing this and as Germany rises in prominence worldwide, Roland Berger need only ride that wave. As German MBA programs improve, schools improve in the rankings and more foreign students are exposed to Roland Berger through these schools, the firms standing will rise. It is on the right side of the economic wave.

It does not have to do much. It just needs to leverage this effectively and avoid its proclivities to be owned by an external party.

Second, Roland Berger grew in the ultra-competitive German management consulting market. In a country with high quality education, most business professionals tend to be very highly educated, implying that consultants serving them need to be exceptionally good. In this tough market, against both McKinsey and BCG’s significant local offices, Roland Berger thrived while Bain has barely registered if at all. This bodes well as Roland Berger enters foreign markets. If they could build such strong client relationships in the notoriously efficient German consulting market, they should thrive internationally.

A little known fact about both BCG and McKinsey is that the most successful nationality of partners setting up, managing and handing over foreign officers to local partners in the last 20 years is German. There is clearly something about the German style of successfully operating in foreign markets.

The test for Bouée is not whether he can leverage this. Rather it is whether he wants to go it alone and choose to leverage this skill.

That said Bouée’s stable approval ratings among his fellow partners, soon to be released in the rankings, points to a CEO who has not yet spent his honeymoon credit. He was just elected and has not started ruffling feathers yet. Roland Berger needs to change and unless Bouée is incredibly charming in getting his fellow partners to willingly change their minds, we will soon see a decline in his rankings.

In strategy firms where every single partner thinks they are a strategy guru, it is virtually impossible that any changes Bouée makes will be unanimously accepted. Therefore, declines in his rankings are expected and will be good for the firm. In fact, we know the change has begun once the rankings start to slide. A lack of decline in the rankings would imply, but not conclusively prove, that Bouée is making no changes and trying to please everyone.

Bouée can only spend his honeymoon credit once and should choose wisely where he will start with Roland Berger. It must be an initiative of merit.

Bouée’s recent decision to keep Roland Berger’s leadership team structure does raise a worrying concern. Consulting firms structured by geographies tend to have a silo mentality. The partner running Greater China, for example, may be measured on this regions financial success, even at the expense of collaborating with other regions to share revenue. This is enhanced at Roland Berger since the firm does place a far greater emphasis on financials when reviewing partners. Like every other bad management idea, Roland Berger will always defend this practice on the basis that it worked. Yes, it worked until it does not.

It is hard to know how Bouée will run the firm, but it is hoped he will move Roland Berger in a new direction. The firm has been on a manic diet to bulk up in the last few years. It now needs to do to the gym and convert that fat to muscle. It needs to make all the offices, partners and intellectual property work seamlessly together.

The sad fact about manically growing revenue, like Roland Berger as done, is that it is only of value if you have a plan to create profits from that revenue. And that can only happen if you can help clients more successful. Does Bouée have a grand plan to make clients more successful than if they used rivals? Does he have the ambition to drive through a needed and tough restructuring program?

We believe so.

Yet, there is a nagging feeling that Bouée is effectively a caretaker CEO who is holding the firm together just as long as possible to execute his one-sentence strategy: Finding an acceptable buyer at the right price.

Editor’s Note: At the date of publication Charles-Edouard Bouée had been Roland Berger CEO for just 2 months. Therefore, this editorial raises questions about his probable strategy, the problems he faces and the opportunities he could leverage. An editorial scheduled for early 2015 will critically evaluate his management decisions in responding to the issues above.

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