Deloitte Consulting & PwC Consulting’s flawed Booz/Monitor Acquisitions

The acquisitions of Monitor Company by Deloitte Consulting and of Booz & Company by PwC Consulting are exercises in doubling down on the wrong market.

The excerpt below merely condenses and paraphrases the brilliantly misleading press release trotted out by PwC at the time of the acquisition.

PwC Consulting is going to focus the majority of their consulting budget on the US consulting market. In essence, we will be making a game-changing merger announcement to buy the global practice of a leading consulting firm, which focuses on practical strategy and implementation, to bolster our US presence. The leadership of PwC Consulting and Booz believes these changes will position us in a category of one, and allow us to effectively meet our client’s needs.

There is a very critical but important sleight of hand going on with these acquisitions, almost indistinguishable to the untrained strategist.

Deloitte Consulting and PwC Consulting positioned the acquisitions as strengthening their global strategy practices. Yet, they were really efforts to buy into the now growing US market. Monitor and Booz had a mediocre global presence outside the US, and possibly one or two other regions, which implies the acquisition was never about global expansion.

In fact, the legal structure of both PwC Consulting and Deloitte Consulting means it could not have been about global expansion.

Despite how the deal may be positioned or even legally constructed, it is basically the US PwC and US Deloitte partnerships that bought the US Booz and US Monitor Company practices, and the rights to Booz’s global intellectual property. We infer the US practice is making the purchase since no other partnership in the PwC Consulting and Deloitte Consulting networks can afford such deals.

If this holds true, it is highly unlikely that Deloitte Consulting US and PwC Consulting US were even interested in Monitor’s and Booz’s global presence, outside of the US, since these markets are owned by other partnerships within the Deloitte and PwC alliance.

To be crystal clear, these were US market entry strategies.

Or should we say re-entry strategies. Audit firms do this a lot. Most audit firms pull back investment in consulting during bear markets, sometimes completely exiting them, and then rush back when the market begins to recover.

The UK partnerships and probably a few others supported the Booz/Monitor deals, but as separate global partnerships, there is no such thing as PwC Consulting global buying Booz global or Deloitte Consulting global buying Monitor global, since there is no PwC global or Deloitte global.

PwC explains this very clearly on their website.

PwC US places its brand and methodologies into a separate legal entity in the UK and all the other PwC partnerships take what they need from this. They do not make decisions as a group. When a deal is announced as a global group, it implies the largest practice, the US, is behind the deal, and other partnerships follow because, well, what choice do they have?

This structure has major implications for the deal.

Since the PwC Consulting US practice is putting their capital at risk, they will do what will benefit their market, the US, and not the global PwC Consulting practices. Why would the PwC Consulting US do a deal which lost money in the US but was financially lucrative in hot markets like China, Brazil, Russia or India? The PwC Consulting US receives no money from the PwC Consulting China, for example, and therefore would not invest in a deal to bolster those external practices.

In other words, all “global” PwC Consulting and Deloitte Consulting deals always benefit the US, and may sporadically benefit just a few other regions.

Understanding this is very important. It is the single biggest reason why our rankings penalize large consulting firms composed of fragmented legal structures.

Why does this matter?

It matters because these acquisitions were never about global growth or global ambitions; no matter how much corporate PR spin is attached to them.

The US PwC Consulting, the largest practice within the PwC Consulting alliance, essentially gutted Booz & Co worldwide by buying the firm and its global intellectual property to beef up its US presence. That is good news for Booz consultants and PwC Consulting clients in the US, but pretty sad for just about everyone else.

The US PwC Consulting practice is only exposed to profits in the US market because that is its legal jurisdiction. So while it owns the global intellectual property for Booz, it cannot do anything with Booz in any other part of the world. No one really notices this problem with these acquisitions since everyone is focused on the US market, where things more or less work because it was the US partners who hatched the deal.

For the rest of the regions it is a confusing mess.

While the US PwC Consulting bought the Booz partnership and its global intellectual property, the Booz Middle East partners cannot work with the US PwC Consulting partners since the US PwC Consulting partners have no legal right to operate in the Middle East.

Even if the US partners were allowed by PwC Middle East to work in the region, this would not help the Middle East Booze partners actually meet clients and do work in Dubai, Doha and Manama, since the US partners naturally will know little about the Middle East.

So, the Booz Middle East partners need to go hat in hand and negotiate a deal with the PwC Consulting Middle East partners to join that separate partnership that may very well not want the local Booz partners and quite possibly not have supported the merger in the first place. They are negotiating with little leverage since the deal is already announced.

What choice do the Booz Middle East partners have? If they refuse to merge with the local PwC Consulting office, they have their license revoked to use the Booz name and intellectual property. It is like negotiating employment contracts with a gun to one’s head.

Sometimes this hat in hand approach works out and sometimes it does not. If it works, the US PwC Consulting, which effectively owns all Booz intellectual property through the acquisition, will allow the Booz partners ensconced in the PwC Consulting Middle East offices to use the intellectual property via the UK intellectual property holding company.

If it does not work, and the Booz Middle East partners choose to join Deloitte Consulting, for example, those intellectual property rights are revoked.

This is why the sale of Booz and Monitor to accounting firms was a selfish gesture on the part of Booz and Monitor partners, yet perfectly logical to the US PwC Consulting and US Deloitte Consulting practices: they did what they needed to do to protect their P&L’s.

The average Booz US partner ended up very well off with a nice job and a good payout.

The Booz foreign partners may get a healthy payout from the deal but needs to negotiate a new job.

Carrying the brunt of the negative implications are local Booz consultants outside of US who have no idea what will happen to them since they get no payout, no guaranteed job and a whole lot of uncertainty.

The client ultimately loses the most, and all to allow PwC Consulting and Deloitte Consulting to strengthen the US presence in a market that is growing at an anemic rate on a good year. This was never about a global competition in management consulting. It was about deciding that foreign offices were acceptable collateral damage to rebuild a strong US practice as the US recovers from the recession.

Deloitte Consulting and PwC Consulting will argue this was a global deal. Yet, it cannot be a global deal when there is no global partnership. The legality of the structure matters far more than the corporate PR spin.

You do not need to go far to find the evidence of the local problems. Go to any Booz practice outside the US, or the sister practices like the UK, Canada and Australia who supported this merger, and see how those regions are doing.

As we write this editorial, numerous Booz practices around the world are struggling because they have not found safe havens in the unwelcoming arms of PwC Consulting’s supposedly welcoming local offices. Partners at Strategy& continue to severely penalize Mainardi in the rankings for this very reason. The Middle East, where Booz was arguably one of the dominant strategy firms, is in disarray. The rest of the offices outside of the US are not doing to well either. The same thing happened with Monitor Company.

These grand gestures from PwC Consulting and Deloitte Consulting to change the face of management consulting are merely tired attempts to grow in the world’s largest market while ignoring the world’s fastest growing markets.

Betting on a relatively declining market is a recipe for disaster. The US is growing but at a far slower pace than the rest of the world. The only way Deloitte Consulting and PwC Consulting can win in a relatively declining market is to take market share. Yet, that is still a pyrrhic victory at best since the combined emerging markets billings will eclipse US billings in our lifetime.

Brazil, Russia, India, China, Mexico, Indonesia, South Africa and Nigeria were not given sufficient consideration when these mergers were considered. The acquisitions were about the dominant US practices doing what is needed to preserve their profits, while essentially ignoring the fastest growing economies.

At its core, Deloitte Consulting US and PwC Consulting US are large and stable businesses spitting out cash yet do not have the mechanism to invest the money in the growth markets since their is no mechanism to repatriate their cash. On the flip side Deloitte Consulting and PwC Consulting’s businesses in hot markets like the Philippines and Indonesia are not getting the investments they need.

Cash cows always die and it is not clear what will then happen.

This is the problem with having separate P&L structures. There is no focus on the greater good.

Do you really think the CEOs of giant companies in these major emerging economies woke up, read about the acquisition and thought it will help them? Of course not! These were mergers to bolster the capabilities in the US for the US partnership.

And this is why these acquisitions will ultimately fail. When BCG, Bain, McKinsey and Roland Berger are falling over themselves to invest in the emerging markets, accelerate the promotion of partners in these vibrant markets and bet on the future consulting markets, PwC Consulting and Deloitte Consulting take all their capital, plunk it home and choose to ignore the rest of the world.

PwC Consulting and Deloitte Consulting are essentially betting against the largest single macro-economic trend of the last 300 years, the rise of the emerging markets. They have squandered much needed ammunition, capital, just at the time when they needed it for the war to come for client presence in China, India or Brazil.

In a twist of irony, it was Michael Raynor no less, a Deloitte Consulting S&O strategist, who co-wrote the seminal article about companies needing to invest where the money will be in the future. Sadly, the Deloitte Consulting and PwC Consulting executives never internalized this and continue to invest where the money was and may never again be.

The next time you read a Deloitte S&O or PwC Consulting article about the promise of the emerging markets, think about its underlying meaning. It may be sincere advice by the individual members of the firm who wrote the article, but not from the firm overall. As a result, it is merely marketing.

While the article is urging clients to invest their hard-earned capital in the emerging markets, these two firms have done the opposite, and that is what matters at the end of the day. It is hard to trust advisers who do not follow their own advice.