In the mid 80s, management consulting firm Arthur D. Little recruited Mary Woodell, an expert in crisis communications who had previously served as head of the crisis practice at Hill & Knowlton, as a director in the firm’s environmental, health and safety practice. To some industry observers, the appointment suggested a worrying possibility: that management consultants were beginning to recognize the growing importance and value of corporate reputation, and that they had the financial wherewithal to cherry-pick top talent from the PR industry and thus skim off the most intellectually-demanding and lucrative public relations assignments.
The dreaded brain drain never happened, of course, which underscores the inherent difficulty with extrapolating a trend from a single data point and warns against reading too much into the acquisition this week of corporate and financial communications specialist Financial Dynamics by management consulting firm FTI—the first such deal, despite years of speculation about convergence between the two disciplines.
Nevertheless, the possibility that other management consulting or professional service firms might take an interest in public relations consultancies—particularly those at the high value-added end of the business—is intriguing, and many PR agency principals believe their firms have more in common with the consulting business than they do with the advertising business, which traditionally has been the biggest buyer of public relations agencies.
Charles Watson, chief executive of FD, says financial PR has more in common with consulting than with the advertising agency businesses and predicted that there could be “other similar transactions to come. There is a growing recognition on the part of the consulting business that reputation and risk management and communications are becoming more important issues for their clients at the CEO level.”
It’s clear from conversations with other firms in the same sector as FD—firms specializing in mergers and acquisitions, crisis communications, change management, litigation support, and public affairs—that FTI is not the only consulting firm interested in the communications sector. Says a partner with one prominent New York firm: “We are approached constantly by advertising agencies, by other public relations firms, by management consulting firms.”
And Brunswick Group, the London-based competitor to FD, enjoyed a lengthy and quite public flirtation with Accenture, back when that firm was known as Andersen Consulting.
And if consulting firms don’t buy, there’s still plenty of opportunity for them to encroach on the business by building their own capabilities.
Throughout the 1990s, management consulting firms continued to encroach on territory that public relations people had previously regarded as their own. McKinsey’s change management practice was not shy about offering companies communications advice to accompany their restructuring plans; Accenture has been known to offer advice on corporate branding; and PricewaterhouseCoopers created a “reputation assurance” practice headed by Glen Peters, author of the corporate reputation management book Waltzing with the Raptors.
Today, consulting firms are deeply involved in several areas of public relations, even though they almost always choose to call it something else. The change management solutions offered by consulting firms almost always involve some sort of internal communications to accompany a restructuring, and many consulting firms believe they can advise on communications just as effectively as they can advice on process—although results have been mixed.
In Europe, meanwhile, consulting firms are deeply involved in corporate social responsibility and sustainability issues, areas that are clearly of critical importance to the relationship between a company and its key publics. Initially, consulting firms focused on social auditing and reporting, but increasingly they are offering advice on stakeholder engagement, which is simply public relations by another name.
Consultants are also getting involved in corporate branding. Richard Edelman, CEO of the world’s largest independent public relations firm, Edelman, says that when client Deutsche Bank needed a global audit of its reputation, it didn’t ask Edelman, it asked McKinsey. “They saw us dealing with the results of the audit, but McKinsey was the firm they asked to do it.”
Having said that, there are signs that the public relations industry—at least at the high end—has matured to the extent that the top counselors now have a good deal in common, in terms of both their relationship with the chief executive and other senior executives and in terms of the fees they now demand.
StevensGould & Partners, which advises public relations firms on acquisitions, recently conducted a survey on hourly rates that showed increasing comparability between senior PR counselors and those in other professions, including management consulting, accounting and law. And principal Rick Gould says other surveys show a continual drift away from fixed-fee retainers toward the hourly billing model favored by other professional firms.
And Gould says his firm is currently involved in discussions between what he describes as “a major international consulting firm” and “a premier PR firm.” Other sellers, he says “have expressed interest in being acquired by a consulting firm,” and increasingly “consulting firms are seeing that the strategic services of a PR firm can be a natural and profitable fit.”
In terms of way they bill, the multiple points of contact within the corporation (CEO, CFO, legal and HR departments as well as marketing), do public relations firms have more in common with consulting and other professional service firms than others in the marketing services arena?
“If the PR firm is mainly a capital market, corporate reputation or change management specialist, the answer is clearly yes,” says Ralf Hering, chief executive of Germany’s leading corporate and financial communications specialist Hering Schuppener. “Like the consulting firms, they talk to the Csuite and have the same billing structures, and they drive the corporate value of the client. They are speaking the same language, and employ the same quality of talent”
Alex Sanberg, founder and chief executive of London’s College Hill, another corporate and financial specialist and a player in the M&A sector, agrees: “There’s a very wide spectrum of firms in the public relations business, between the consumer firms at one end at the corporate and financial firms at the other. These are very different types of business. This kind of deal might make a lot of sense for a C-suite business, but less so for a marketing services business.”
It’s possible, however, that the dividing lines are not quite so clear cut. The best of the consumer focused public relations firms on both sides of the Atlantic see themselves as brand consultancies first and foremost. The dividing line, they say, is not so much between corporate and consumer as between firms that deal with corporate reputation or brand strategy—often with an approach that is discipline or channel neutral—and those that focus on tactical execution, almost always involving earned media coverage.
So it’s no surprise that even beyond the financial communications realm, many public relations agencies see potential synergies between PR and consulting.
“Our working models for PR counseling of the future are more akin to management consultancies than traditional ad agencies,” says Mark Raper, chief executive of CRT/tanaka, formed last year when his firm Carter Ryley Thomas acquired New York creative boutique Patrice Tanaka & Co. CRT/tanaka has made it clear it plans to build a U.S. PR firm with fees of around $30 million from its current base of around $10 million, with further acquisitions likely. “PR firms are trying to get closer to the C-suite and they see the success of management consultants in this regard.”
“For both kinds of firms, intellectual capital is our greatest asset,” says Ken Makovsky, CEO of New York-based independent Makovsky+Company. “In many cases, our assignments at Makovsky have encompassed work that could just as easily have been assigned to a management consulting firm.”
Makovsky sees several advantages to a relationship with a management consulting firm, including an entrée to higher levels of client companies’ management; added value for clients in the form of new options for resolving intricate business issues; and intellectual cross-fertilization that could help attract and retain high quality employees.
So why has it taken so long for a public relations firm to hook up with a consultancy?
As the principal of one large firm succinctly put it: “You can only sell to people who want to buy.” He might have added that most people will sell to the companies that are prepared to pay the highest price. And in the past, those companies have been the large communications conglomerates like Omnicom, Interpublic, WPP, Havas and Publicis.
“PR firms have, in recent years, become big businesses—the largest with hundreds of millions of dollars in revenues,” says Lou Capozzi, who leads the public relations and corporate communications holdings of Publicis Groupe, and a potential buyer of PR agencies. “Those firms need capital to grow, and they have to get it from somewhere. Family businesses—Edelman and Ruder Finn—can decide to take it out of their pockets. But the vast majority have to borrow the capital. So, then the question becomes ‘where’s the best place to raise money?’
“Private equity is one option, but the financial demands are onerous, and the commitment is short-term. Going public is an option, but most PR firms are too small, and those that have gone public have not done too well. So getting capital from a large communications conglomerate looks like the best option. The firm gets the capital to grow, [the holding company] understands your business—at least better than a banker would—provides relevant infrastructure and back office support, and offers growth opportunities through collaboration with the other firms in the group.”
Among buyers, there is a (sometimes grudging) acceptance that the giant communications holding companies have provided some benefits to the PR firms they acquired.
“The large holdings have put communications on the map and made it an industry rather than the village business it used to be until consolidation in the 80s,” says Hering. “PR as an industry has benefited from this. But if you look into individual markets and industry sectors, you’ll find out that even in the U.S. and certainly in Europe, a lot of owner-managed PR agencies are top of the respective markets and sectors. The bulk of the market is in holdings company hands, but the top of it isn’t.”
That’s certainly true of the high-value, high-margin sector in which firms like Hering Schuppener and FD operate. The mergers and acquisition communications sector is dominated by independent firms like Brunswick, Kekst and Company, and Joele Frank Wilkinson Brimmer Katcher—with Citigate Sard Verbinnen soon to rejoin the ranks of the independents as it negotiates its separation from Huntsworth. But Huntsworth continues to own Citigate Dewe Rogerson in the U.S., Havas has its Euro RSCG C&O operation in Paris, Maitland Consultancy in London and Abernathy MacGregor in New York, and WPP owns Finsbury, a U.K. firm that recently expanded into the States.
“If you look at our business, at firms like Kekst and Sard and Joele Frank in the U.S. or FD and Brunswick and us in the U.K., we are independent,” says Sandberg. “We are not part of a global network.”
The biggest problem for holding companies interested in the M&A business is that it tends to be driven by personal relationships, a fact that shifts the balance of power in favor of individual consultants. Clients don’t really hire Citigate Sard Verbinnen, they hire George Sard and Paul Verbinnen—so if those key personnel decide to leave and strike out on their own, holding companies are left holding an expensive empty bag.
But that’s less true of FD’s business, which has expanded beyond M&A into broader business, corporate and financial consulting, as well as public affairs, and it’s less true of the largest M&A firms: consultancies like Brunswick, Hering Schuppener and Kekst are not dependent on any single individual for new business, having built a strong cadre of senior professionals, each of whom is capable of handling major transactions.
Still, Sandberg says, “The last frenzy of spending was holding companies buying up revenues so they could exaggerate their growth. The holding companies brought financial discipline and capital and reach. But that game is over. I would certainly question whether going into an agency environment would be effective for a business like ours.”
Today, though, the principals of most independent public relations firms regard the giant holding companies with skepticism. When we asked independent public relations firm in 2002 about their plans to sell, the majority indicated they would be more willing to sell to another PR firm than to a holding company. Asked why, they cited the desire for independence and concerns about the ability to retain their firms’ culture ahead of any financial priorities.
“My impression is that it sounds better than it really is,” says Makovsky, of PR firm-holding company hookups. “Everyone enters the marriage expecting terrific new cross-selling opportunities from their sister companies. The reality is that it does happen occasionally, but most of the time you’re on your own. Meanwhile, your profits go to the holding company. Moreover, profit pressure can really inhibit investment spending and innovation.”
Others are ambivalent.
“Individual PR firms have benefited from and been decimated by their alignment with ad agencies,” says Raper. “Most of the stories told about ‘selling out’ to giant holding companies are negative. Yet, I know some PR firms within the global holding company structures that leverage their positions to increase their revenues far beyond what they could accomplish as an independent.”
At the same time, some independent public relations agency leaders continue to regard management consultancies with the same kind ambivalence.
“I don’t think management consulting firms are necessarily much better aligned to PR firms than ad agencies,” says Raper. “Like advertising types, management consultants usually see PR professionals as serving a secondary need—although if they understood the value of our expertise, we could add a dimension to what they offer that could be very beneficial to both disciplines, and to clients.”
At the same time, he says, “management consulting firms also have grown accustomed to multiples (market value) far greater than PR typically delivers. Why would they want to take a hit on the bottom line?”
Others believe that consultants may need public relations firms more than PR firms need consultants.
“Management consulting is an industry in need of reinvention,” says Sandberg. “It was one of the mega-growth industries of the post-war era, but its image has been tarnished and people are beginning to question the value that management consultancies can add. The golden age was 20 years ago. Management consultants look like very attracting partners, but they have issues and they could be looking for us to be the solution.”
Elliot Solane, whose New York-based Sloane & Company is making inroads in the mergers and acquisition sector, takes the same view. “Our relationship is with the CEO,” he says. “If you are a consulting firm and that’s where you want to be to drive your business, it makes sense to look at an FD. My question is, if you are a client of a firm that is acquired, what are the consequences? I didn’t see anything in the press release that talked about the advantages to clients.”
While FD chief executive Charles Watson was quick to point to the potential synergies between his firm and FTI—internally, in terms of the emphasis on intellectual capital and externally, in terms of their shared expertise in restructuring, litigation and M&A work—some observers remain skeptical. They point to FD’s history (the firm has sold itself twice before, each deal ending a few years later in a management buy-back) and warn that the end of the earn-out will likely trigger staff defections as seen in similar deals.
And so independent firms—even those in the M&A sector—say they would still prefer independence to acquisition by a consulting firm.
“Maybe there is space in between the advertising agencies and the management consultancies that the larger strategic communications firms could occupy,” says Sandberg. “That would require us to bring in different skills or to polish some of the skills we already have, but it would allow us to retain our independence.”
The world’s largest independent public relations firm agrees.
“It doesn’t matter whether you sell to an advertising agency or a management consulting firm,” says Richard Edelman. “At the end of the day, you are still the junior partner. We would rather be on the other end of the deal. We would rather be an aggregator.”
So when they look at the potential consequences of the FD deal, many see a chance that the FD acquisition will spark more interest from private equity firms. Advent, which invested £8 million in FD three years ago, realized about £47 million in cash from the FTI deal. That has to be encouraging news for WindRiver, which helped public affairs firm APCO Worldwide buy itself back from Grey Worldwide three years ago—and might make other investors sit up and take notice of what is going on in the public relations arena.
Gould says his firm is “currently pursuing a private equity firm to back a roll-up,” and other midsize PR firms might now find it easier to persuade an investment partner that there is good money to be made in the sector. Certainly, many independent firms still see themselves as buyers rather than sellers.
As for the possibility that if they can’t buy, management consultants might simply recruit the top talent they need and start their own reputation units, no one seems to be losing sleep.
“Management consultants are already in the PR business,” says Capozzi. “So are law firms, accounting firms and others. I say ‘bring ‘em on.’ The PR business is a distinct profession with a distinct business model. It’s not as easy to manage as it might look from the outside.”
“I do not believe is that management consultants will successfully start up their own strategic communications units,” says Hering. “They lack the talent to keep the talent. We have seen this before. It all failed.”
At the end of the day, “FD’s decision to align with a consulting firm is a bold and interesting move,” says Capozzi. “We should all watch closely as the results unfold.”
It’s clearly too early to start talking about a trend, but if three years from now FTI and FD still looks like a marriage made in heaven, it will create some interesting possibilities.