Moving further afield
Entering a new market poses challenges. Nina Röhrbein assesses the factors required to make it a success
As more consultancies attempt to conquer new markets, the question arises as to what will make such a venture a success.
For Dominique Piermay (pictured right), head of the consulting network Abelica Global - formerly known as Milliman Global - and vice-chairman of French actuarial consultancy Fixage, the key is knowledge of the local markets. “You need global vision because you have to know what is going on worldwide,” she explains. “But in order to be able to consult with clients and provide tailor-made solutions local expertise is even more important, in particular in Europe with all its different jurisdictions. If you only consult with global vision you can only provide a standard answer.”
“The classic consulting business is based on local knowledge,” says Torsten Köpke (pictured left), investment practice leader at Watson Wyatt in Germany and previously with local consultancy Feri. “A lot of international consultants entered the German market but disappeared again quickly. They did not know the local laws and pension funds sufficiently well to be able to get clients here.”
“When a consultancy expands internationally, it has three possibilities to gain that local knowledge,” says Dirk Söhnholz (pictured below, right), managing partner at German consultancy Feri. “It can buy a - usually small - consultancy business, hire consultants or co-operate with local players.”
Watson Wyatt, for instance, initially opened an office in Germany focusing on actuarial work out of Munich with local consultancy Bode. Since ending the cooperation, it has started its own German investment consultancy business based in Frankfurt, which can tap its other international offices for help. “In manager research, for example, the ‘internationals’ are mainly responsible for the research, while the local consultants can tailor the advice for clients,” says Köpke.
For Piermay, physical presence in the market is an absolute requirement for a successful consultancy because it enables consultants to be ahead of short-term changes and new legislation.
However, international pensions expert Peter Kraneveld (picturd left) operates globally without having an office outside the Netherlands. He says this is possible by keeping up to date with pension developments across the world via the media, conferences, exchanges with various pension funds as well as through networking tools such as LinkedIn and Plaxo.
“The problems of pension funds are more or less the same worldwide,” he says. “It is just a question of priority. In other words, what is important in Belgium may not necessarily be important in Singapore.”
Felix Kottmann of Swiss-based Kottmann Advisory, an international consulting group with clients in Switzerland, Austria, Germany and the UK, agrees. He believes that, unlike in the actuarial space where local expertise is necessary due to legal constraints, investment consultants only need to be familiar with tax and investment restrictions.
But local market expertise is also important when it comes to the organisation of pension markets, according to Erik van Dijk (pictured right), CEO and CIO at Dutch consultancy Compendeon. “In the Anglo-Saxon markets, for example, consultants are a dominant force, while in the Netherlands they are part of a fiduciary relationship and more of a follower than a leader,” he says. “And a lot of foreign asset managers that have come to the Dutch market have struggled with this.”
As Swiss companies are not allowed to do advisory in EU countries, Kottmann says, he had to open an EU-domiciled sister office, which is based in Cyprus due to its use of British financial law, and which offers attractive working conditions and low running costs. But for large consultancies that want to expand, it is almost a necessity to have an office in every country, he says.
Multinational consultancy PricewaterhouseCoopers (PwC) has offices in more 120 countries and continues to expand in emerging markets, according to Marc Hommel (pictured left), partner at PwC UK. “The importance of local knowledge and physical market presence depends on the services offered,” he says. “If you focus on helping the clients implement solutions in the respective markets it is absolutely essential to have a physical presence and an understanding of local legislative tax, cultural-industrial relations and the competitive environment. But if you work with the head offices of major multinational organisations to help them exercise governance around managing their global benefits arrangements you do not need a local office. However, you need people who have the appropriate experience of working cross-border and understanding how to engage local management and their advisers on the ground in each territory.”
Does size matter?
The entry of large consulting houses in many markets has aggravated competition, in particular in view of the fact that some consultants can still acquire a large market share in many countries. But while Piermay believes that acquiring local knowledge is more difficult for large, expanding consultancies, while Kottmann thinks it is the big entities that have the advantages due to their global frameworks and economies of scale.
However, he says their disadvantage is their less flexible, plain vanilla one-philosophy approach, which cannot be tailored to specific needs.
Köpke says that the widespread accusation of inflexibility of large consultancies is theoretically true, although he adds that it depends on their individual organisational structure.
“Even large international consultants can have a flexible structure,” he says. “Like smaller consultants, I make independent investment decisions in my Frankfurt bureau and do not have to ask for permission elsewhere. However, other large consultancies may be more centralised in their decision-making.”
“There are some very good small boutiques around,” admits Hommel. “But most major multinationals these days need an advisor that has a breadth of expertise across various disciplines as well as the flexibility to provide advice around whatever particular challenges a client has.”
Although PwC has not co-operated with local players during expansion, more and more partnerships - like the one between Dutch advisory Compendeon and its German counterpart Feri - or consultancy networks such as Abelica Global have come to life over the past few years.
Piermay does not believe that consultant networks have only been introduced to protect small, independent consultants from larger competitors. “Even small consultants have to recognise that clients may cross borders,” she says. “The main reason for participating in an international network is to be able to serve the clients wherever they are. It helps consultants service existing clients - which was the reason for Fixage joining the network in 2000 - as well as gain new, international clients. It also allows the members to exchange information with each other. And so we are as well-equipped to give international advice as any integrated network,” she says.
“To us, our partnership with Feri is more like an asset, not a safety net,” says Van Dijk. “If you have a combination of freedom, flexibility and trust, cooperations are an asset. However, the moment you start formalising it similarly to the core-satellite model of the big firms you lose the advantage.”
The driver behind the Compendeon-Feri partnership has been the UK’s Paul Myners report from 2001, which says that pension funds should be advised by consultants with the appropriate expertise, in particularly referring to alternatives, according to Söhnholz. He believes that Feri’s implemented consulting services, especially customised multi-manager solutions in all asset classes, is of interest to other countries.
He says because both markets are relatively big, working together cross-border was not a problem.
“Generally the investment interests of institutional investors are the same everywhere: high returns and low risk,” Söhnholz notes. “Investor portfolios are also similar. The majority of differences can be attributed to regulations.”
“The world is now undergoing change from a two-bloc world - the US and Europe - to a three-bloc world that includes emerging markets,” Van Dijk adds. “In a changing and solutions-driven environment like this, large players are initially at a disadvantage to small, local players that are already big in that market. However, it is only a temporary disadvantage and soon they will benefit from the changes. Therefore players like us need to adapt by becoming more international and sharing expertise and resources.”
But Söhnholz is convinced that small, independent consultants can hold their ground over the next few years due to their personal relationships with clients. He expects some of them to co-operate with other consultants only when company succession, credibility or the leverage of resources becomes an issue.
“Previously, the hypothesis was that networks or co-operations were the only way forward for small, independent consultants,” says Söhnholz. “However, this does not necessarily need to be true. We do think that consultant networks are beneficial but we have not met much interest for these. No one appears to take time for information sharing networks. However, we still see a potential for co-operations on a project basis.”
In the partnership, the Dutch advisory deals with the classic parts, while its German partner is responsible for the alternative segments, according to Söhnholz.
At Abelica Global, which encompasses consultants in Europe, Japan, India and the Americas, new members for the network are carefully selected, according to Piermay.
“The solution in Abelica comes from the bottom-up, in other words it is the independent, local player that gives advice although the global vision comes from the network,” she says. “To ensure the quality of service across various countries is the same, we choose a new member by trying to find the local key player for that market according to very strict quality checks.”
Feri also had a checklist for its partner. Söhnholz ideally looked for a company of similar size and popularity for practical and level playing field reasons, which was open to alternatives.
“Because the investment themes and philosophy - such as Compendeon and Feri’s quantitative techniques - need to match, few cooperations or networks exist or have been successful in the past,” Söhnholz says. “Chemistry at the board level and the recognition that individually you are not the best at everything is also important for such partnerships,” adds Van Dijk.
But for Kottmann, consultant networks are not the answer to competition from the big consulting houses.
“I doubt that they are a good approach because at the end of the day each of these companies wants to benefit from the other and get information for free,” he says. “And agreeing just to work together without a legal structure behind it is not enough. Networks only work if the market is approached as one shop. Cross-border networks or partnerships, due to different market and investment attitudes, will never work, as ultimately you have to prioritise how and when to approach markets, which will lead to disagreement about who is in the driving seat.”
Köpke also views partnerships for companies with two different philosophies as difficult.
“Such co-operations are plagued by arguments over managers and responsibilities,” he says. “And even if they have great local expertise and client relations they need to rely on well-functioning support from abroad. At Watson Wyatt our British colleagues regularly visit clients with us in Germany to get an impression where they can support us and where not. Trust only evolves when companies in networks work together on a regular basis, which is not always the case.”
“Partnerships can be just a marketing strategy,” Köpke adds. “They are a way of implying to clients that the company has a sufficient number of employees to service them - in particularly if many consultants have just left - as it is difficult to find and retain talented consultants nowadays.”
Köpke admits that for smaller consultants it is tempting to join these networks. But he warns that US or UK companies with subsidiaries in Germany, for example, will only look for big international consultants. However, even then he says viewpoints on the type of consultant to choose can vary between regional offices.
“The only way it works to keep your clients is if you have very long-term personal relationships with all these people,” Kottmann adds. “But they are still very minor compared with internationally operating companies because they carry a lot of individual personal risk, which does not exist in the solution of the big houses. And from a client’s perspective, he either wants a big brand name or a real top guy so whether a consultant is in a network does not really matter to him.”
However, networks may be of help on other issues as well.
Kraneveld says Compendeon lent him its name when he first started out on his own.
“Compendeon was less of a network to me and more like a flag that I could hoist so that people would not just see me but also a structure behind me,” he says. “The advantage of such networks is that you already have a ready-made network. However, this can also be a disadvantage because as an independent consultant you want your own network.”
Piermay says that Fixage has benefited and received more work from its Abelica Global membership. Members can choose freely who they want to work with, she says, but admits that such networks require a lot of quality and dedication from their members to prove they are as good as the large consultancies with international offices.