As far as CEO problems go, having to fend off repeated acquisition bids has to rank relatively lowly. While it may be distracting and, if the bids are hostile, potentially distressing, at least it’s a sign that you must be doing something right.
Such was the situation facing PA Consulting before 2015. Britain’s most prominent homegrown management consultancy was thriving, having recovered from a low-point in the early 90s, when it looked as though it would be squashed by American behemoths like McKinsey and Bain.
Its recovery, which focused on a unique blend of professorial technological innovation and traditional strategy consultancy, made PA hot property at a time when the self-same behemoths were losing their footing. Belts tightened generally in the financial crisis, but the management consultancy industry was facing a more serious problem, of how to stay relevant in the age of Amazon and Uber.
As PA’s CEO Alan Middleton puts it, these firms have made their bacon applying processes to problems - it is their entire existence - but now what the market wants is something much more fundamentally creative - ingenuity. Their solution, he says, was to attempt to buy this ingenuity fully formed.
“Our competitors all wanted a 3,000-person bolt-on to their organisations called PA. There were four or five approaches a year, from the Big Four, the systems integrators, traditional consulting and strategy firms, everybody.”
You can see why PA would fit the bill. There’s an eccentricity to the firm that gives it more of a boffin-in-lab than team-of-suits vibe. Much of it stems from the existence of PA’s technology and design arm, which complements its strategy and operational consultancy for private and public sector clients in the US, UK and continental Europe.
The tech team in the UK is based in PA’s vast Global Innovation and Technology Centre just outside of Cambridge, which looks like a warehouse but actually contains a warren of customisable labs working on everything from wearables for the pharmaceutical industry to alternatives to plastic for FMCGs, and which has spawned technologies from revolutionary foetal heartbeat monitors and 3D-printed glasses to seaweed-based water capsules designed to cut single-use plastics and a machine that produces circular kitchen towels at speed.
Middleton insists that PA’s aptitude for the kind of innovative, start-up style work that’s so in-demand today comes as much from good fortune as strategic cuteness - the world essentially caught up to what PA had been doing all along. He recalls a tale of his earlier days at the firm, when it was at the forefront of developing the next generation of LaserDisc, a forerunner for CDs and DVDs.
“The CD had kind of been invented but they couldn’t get the density of data required for video. So what we did was look at butterfly wings and how butterflies produce their colours, then successfully applied that principle to the LaserDisc. A lot of innovation can come from biomimicry.”
Middleton refers to this kind of off-the-wall thinking that PA encourages as ‘shed work’, and its incompatibility with most huge, process-driven multinationals is one of the reasons he and the other partners rejected the various acquisition offers. Instead, they made the surprising decision to take private equity backing, partnering with American giant Carlyle (which took a 51 per cent stake late in 2015), in large part in order to boost PA’s access to the lucrative US market.
It seems to have worked - 30 per cent of PA’s revenues now come from outside the UK, and the firm’s 2019 results will show global fee income of over £500 million, representing 35 per cent growth since Carlyle came on board four years ago. EBITDA, the company’s preferred earnings measure since it took on a private equity capital structure will be up some 50 per cent per cent in the same period.
Does the famous discipline of private equity mean the company is better run than before?
“Hugely,” is the immediate response from Middleton, who became CEO in 2007 and who still makes time to do front-line consulting. But besides the kick-up-the-backside discipline that generally comes with private equity involvement, the deal has also enabled PA to go on its own acquisition spree. In 2017-19, PA bought consumer insights company Sparkler, digital experience and design firm We Are Friday, aviation consultancy Nyras and in the US the innovation strategy consultancy Essential Design and the specialist innovation consultancy, 4iNNO.
“We’re in a position to be accretive now. No company’s perfect, and there are some bits of grey space around PA, mostly in capability and service areas, some geographically, so the acquisitions have been made to bolster that,” Middleton explains.
“That’s not to say we won’t make some degree of scale acquisition in the US over the next couple of years, but the difficulty is that as you start to get scale it swamps your existing business. When you have 300-400 person companies, they generally have aspects you’re paying for but you’re not actually interested in, whereas with smaller companies you get precisely what you want in the areas you want. And if you’re clear on culture you can integrate them in a far better way.”
PA’s healthy margins have not only enabled it to make strategic acquisitions, but also to cut down the debt it took out when it partnered with Carlyle. Could that be in preparation for the private equity partners to exit?
“Carlyle’s investment horizon is on average five years [they’ve been working with PA for over four now]. If PA wasn’t doing well, they’d be here for a while longer. As it happens, we’re doing pretty well.
“So Carlyle will likely exit, but really they’re a sidebar in the PA story. We’ll have another investor. We might have a more European-based partner next time. But our objective remains that we will have another cycle of private equity investment,” says Middleton.
In part that’s because of the urgency that private equity brings with it, but Middleton also says it’s because none of the other financing options are fit for purpose. A management buy-out would be too difficult owing to the value PA has created through recent growth, he says. Larger trade rivals remain interested, but this risks diluting PA’s uniqueness.
“But in rank order of distaste, number one is floating. Why would I want this firm, whose key purpose is to brilliantly serve clients and make the world a better place, to be on the end of a chain being thrown around by the capital markets? I have great respect for the capital markets, but I don’t want their chain around our neck.
“It creates short-termism and messes with your purpose. We can choose what we want to do, we can plan for the longer-term and we can stay true to our purpose - I can determine that we don’t deliver offensive weapons or work for tobacco companies to increase the rate of cigarette production, though we do work with them to minimise the negative impact of smoking. [As a public company] that becomes harder.”
Middleton himself shows little sign of letting Carlyle be the last chapter of his story at PA. Despite a lengthy tenure at the top, one gets the distinct sense from the way he talks about PA’s myriad projects that he’s found his ideal job.
“Being a leader in any professional services firm is really, really hard, because you’re surrounded by people who are almost always smarter than you - and I mean that sincerely. As a leader that’s difficult because it means your best assets are people who could just walk out the door, which comes back to addressing their personal ambitions and purpose.
“But the counter to it being hard is the energy and optimism that gets released when you get these people in the room who are fixated on opportunities not problems, who’ll finish the ‘day job’ and then hang out with friends looking at butterfly wings and figuring how to transfer the design principles to consumer goods. I mean, isn’t that exciting?”
Images: PA Consulting