Wednesday, November 16, 2011

The coming consolidation wave... for bank consultants.

Last year Millward Consulting merged with my firm. The combination gave Millward greater resources to serve clients, and my firm senior-level expertise to develop our talent, deepen our services, and expand our geography. At the time, I didn't think much about a trend developing in bank consulting.

A couple of months ago two other community bank consulting firms merged, Danielson Associates and Ambassador Financial Group. When I asked Dave Danielson about the combination, he expressed interest in having a mix of transactional business and recurring revenue business. The merger served to accomplish that.

Most recently, Stern Agee expanded its services to financial institutions by making the bold move of buying a bank. The reason: use the bank charter as a platform to offer correspondent banking services to clients. This gives Stern Agee the recurring revenue business Danielson mentioned as important to his combination.

Community bank consulting is highly fragmented, ranging from the larger firms to the one-person shops. Consultants are typically highly specialized, such as asset-liability management, and geographically focused. Indeed, when I attended the North Carolina Bankers' convention for the first time, I hardly knew the other consultants that attended. Last week I attended the New York Bankers' convention and knew most of them.

But the number of banks continues to decline, albeit slower than most investment bankers had hoped and predicted. For community bank consulting firms, this means expanding services or geography, or both, in order to thrive. My firm is doing both.

A logical means to accomplish expansion is through merging with other firms. This makes perfect sense, for the reasons mentioned regarding my firm's combination with Millward. Larger, more robust consulting firms can provide a greater depth of experiences for the benefit of clients.

Combinations can also expand geographic reach. Community bankers (and credit union execs) typically don't hire consultants from an Internet search. They hire consultants because they know them first-hand, through mutual aquaintances that are familiar with their services, or by reading articles, commentary, and/or speeches by them. Consulting rain makers must travel to more distant locales, requiring more rain makers. As the number of community financial institutions continue to shrink, this will become more challenging for the very small consulting shops.

The challenges of combining firms, however, rest in the attitudes of the consultants and investment bankers of the firms themselves. Horizontally integrated firms are commonly designed for thriving lines of business to carry struggling ones until they get back on their feet. Ideally, the once struggling business lines are then in a position to carry others when they struggle. Makes sense.

Except thriving lines of business' full of type-A personalities typically don't WANT to carry struggling ones. They want all the fruits of their labor to accrue to themselves. This attitude permeated one of my past employers. The business model made sense on paper, but was difficult to apply. This challenge must be recognized, but need not stop a consolidation wave.

The decline of community FIs will result in continued consolidation among community FI consulting firms, in my opinion. Some small firms may seek greener pastures in other professions. But the relatively larger firms (large consulting firms for community FIs may be 10 employees or more) have an opportunity to expand services, expertise, and geography to better serve clients. This can be positive for the firms' and the FIs they serve.

What are your experiences with community FI consulting firms or your opinion on their consolidation?

~ Jeff


  1. Interesting... My experience is that most consulting firm mergers fail... there are a few simple reasons for this. You mentioned one - culture clash, which is inevitable. Second - the biggest assets consulting firms own is Consultants themselves, and this asset has feet. As you indicated, Community Banks and Credit Unions tend to select consultants based on the reputation of the consultant, thus the lead partner / consultant "rents" his relationship to the firm. If he/she leaves, his/her relationships will typically follow.

    But your point is very appropriate - fewer clients require broader geographic coverage and deeper service offering (gee... almost sounds like the situation that Community Banks face!?). We'll keep our fingers crossed for more exceptionally successful mergers of consulting firms that generate the promised '1+1=3'.

  2. Good points Serge. I would add one other: The heads of consulting firms are generally good rain makers, maybe even good consultants, but are often not very good leaders or managers. These skills and attributes elevate in importance as the firm grows.

    Your second point, regarding consultants "renting" themselves is also true. The solution: elevate your brand beyond the individual. The most august consulting firms, BCG, Bain, McKinsey, elevated themselves above the value of any individual consultant, although their roots started with a single personality.

    ~ Jeff

  3. Jeff - great post. A question, though...

    While it is true that the number of banks (and therefore available clients) is shrinking, isn't it also true that banks are becoming increasingly reliant on consultants? This is especially true for community banks. Many pieces of their business have become vastly more complex and sophisticated over the last several years, including IT, marketing, credit risk, asset liability management, liquidity planning, strategic planning, payments, ATMs, phone systems, etc., etc.

    I find banks turning to consultants for help (or complete outsourcing) in many of these areas, and the trend seems to be for that to continue.

    Do you think new consulting firms will spring up around these needs, or do you think that these consolidated firms will adopt more of a "one stop shop" kind of approach?

  4. Dallas,

    I had this very discussion off-line with another consultant, opining that banks may look to take more services "off-payroll", such as the areas you mentioned in your comment.

    But I'm also sensing a trend that banks are trying to prune their list of vendors. Ironically, some consultants are advising them to do so. If this is a trend, it would benefit firms that have multiple lines of business, versus highly specialized shops, in my opinion. Something for us all to think about.

    Thanks for the comment.

    ~ Jeff

  5. I had to consult a Portugese to English dictionary for the above comment. I'm still a little unsure if consultoria rh agrees or disagrees with the post. But thanks for the comment!

    Eu tive que consulta um português ao dicionário inglês para o comentário acima. I' m ainda um pouco incerto se o rh do consultoria concorda ou discorda com o borne. Mas agradecimentos para o comentário!

    ~ Jeff

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